Understanding the Cost Accounting Standards. Bag Lunch Webinar May 9, 2018

Transcription

1 Understanding the Cost Accounting Standards Bag Lunch Webinar May 9,

2 Co-Presenter: Paul H. Calabrese Rubino & Company, CPAs & Consultants Senior Manager n Tel: n pcalabrese@rubino.com n

3 Co-Presenter: G. Chris Brown Aldebaron, Inc. d/b/a SYMPAQ Vice President n Tel: , Ext n n Cbrown@sympaq.com

4 Co-Presenter: Steven Shamlian, CPA Government Contract Compliance Management, LLC Founder n Tel: n sshamlian@gccm-llc.com n Firm Bio:

5 Sources q The Cost Accounting Standards (CAS) in FAR 9903 and 9904 q DCAAM , Figure 5

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7 Overview n CAS Applicability n Significance of CAS Thresholds n Application of CAS Thresholds 7

8 CAS Applicability 8

9 Purpose of CAS n Achieve uniformity and consistency in cost accounting practices among contractors and subcontractors n Prerequisite to contracting n Disclose cost accounting practices n Agree to downward price adjustment if non-compliance w/standard, disclosed or established practice 9

10 Contracts Exempt from CAS n Sealed Bid n Award values less than $750,000 n Small Business n Foreign Governments n Price set by law or regulation n FFP & FPEconomicPriceAdjustment, T&M, fixed labor hour contracts for acquisition of commercial items n Award value less than $7.5 million if not performing on CAS covered contracts valued at $7.5 million n Executed and performed entirely outside US n FFP with price competition and with no cost or 10 pricing data submitted

11 Exemption from CAS n Price or Costing Data Threshold n FAR (a1) n $750,000 n Exemption to CAS Coverage n $750,000 11

12 Exemption from CAS n Contracts or subcontracts having an awarded value of less than $7,500,000 n Provided that, at the time of award, the business unit of the contractor or subcontractor is not currently performing any CAS-covered contract or subcontract with a value > = $750,000 12

13 Exemption from CAS Definition of currently performing n a contractor has been awarded a contract, but has not yet received notification of final acceptance of all supplies, services, and data deliverable under the contract (including options) 13

14 Exemption from CAS n Initial $750,000 trigger n negotiated contracts and subcontracts not in excess of $750,000 tied to TINA threshold (Truthful Cost or Pricing Data) n The $7.5 million threshold applies only if there is not one, single CAS-covered contract currently being performed 14

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17 What is the significance of the CAS thresholds?

18 Assessing Cost Impact Complex Matrix n n n n n Contract by contract basis: exempt from CAS, modified or full CAS coverage Measure the potential value of applicable modified and/or full CAS contracts Compute impact from point of noncompliance or change to end of contract(s) Determine impact on a Business Unit by Business Unit basis (if more than one) CAS status (modified or full) may change from fiscal year to fiscal year 18

19 Definition of Business Unit n n Business unit means any segment of an organization, or an entire business organization which is not divided into segments. Segment means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The terms include Government-owned contractor-operated (GOCO) facilities, and joint ventures and subsidiaries (domestic and foreign) in which the organization has a majority ownership. 19

20 Application of Coverages n Types of CAS Coverage n FAR (b), Modified, (1) (3) n Modified status for a Business Unit (BU) that receives less than $50 Million (M) in net awards in the previous accounting period where no one contract award was greater than $50 M. n Modified coverage involves only 4 CAS standards 401, 402, 405 and 406, and not the entire 19 CAS standards 20

21 Application of Coverages n If one contract is awarded as modified CAS than all CAS contracts awarded thereafter during that fiscal period awarded to that B.U. have Modified coverage n Exception to prior rule n If B.U. receives one CAS covered contract that is greater than $50 M, then that contract and all other contracts thereafter receive Full CAS coverage during the same fiscal year. n Note: the contracts awarded with modified coverage before the $50 M award remain as having modified coverage 21

22 Application of Coverages n Principal regarding CAS Coverage n Once a contract has modified coverage, it will not change its coverage regardless if the B.U. has a change of status (type of CAS coverage) in subsequent accounting periods. n Likewise, once a contract is full covered, it is always fully covered. n Likewise, once a contract is exempt from CAS coverage, it is always exempt from CAS. 22

23 Application of the CAS thresholds

24 Application of Thresholds n Importance of CAS tracking system n Identifying contracts with CAS clause n FAR

25 Application of Thresholds n CAS tracking system must measure an award n Net awards n the total value of negotiated CAS-covered prime contract and subcontract awards, including the potential value of contract options, received during the reporting period minus cancellations, terminations, and other related credit transactions. 25

26 Example: CAS 418 Non-Compliance in FY 2018 n If B.U. has full CAS coverage in current fiscal period FY 2018 n Previous contracts remain exempt from CAS, such as executed and performed entirely outside the U.S. n Previous year s modified CAS contracts are not impacted by

27 Example: CAS 418 Non-Compliance in FY 2018 n If B.U. has full CAS coverage in fiscal period FY 2018 n Only contracts with full CAS would be impacted by the 418 non-compliance n Consideration of materiality n Compute impact from the date of the proposed change until the completion of each of the identified contracts with FULL CAS Coverage 27

28 Example: CAS 418 Non-Compliance in FY 2018 n Allocation can still be challenged on the modified CAS and exempt contracts n FAR Determining allocability n Cost adjustments would only apply in years with unsettled burden rates via incurred cost package n Cannot adjust FFP, only flexibly priced contracts n Unlike cost impact statements, it would not apply to future years until the end of those contracts, i.e. fiscal periods not yet started 28

29 Example: CAS 401 Non-Compliance in FY 2018 n If B.U. has modified coverage in fiscal period FY 2018 n Contracts with exempt status would remain exempt n Modified CAS contracts awarded would be impacted during FY 2018 n In the above scenario of modified coverage, a non-compliance would only apply to four CAS standards : CAS 401, 402, 405,

30 1/27/2018 Steve Shamlian / GCCM, LLC 30 COST ACCOUNTING STANDARDS A 30,000 Foot Review

31 1/27/2018 Steve Shamlian / GCCM, LLC 31 How many have CAS-covered contracts? How many want CAS-covered contracts? How many want to become successful businesses, with big Government contracts, providing goods and services that no one else can provide? How many want to continue as a small business making good money with little oversight?

32 1/27/2018 Steve Shamlian / GCCM, LLC 32 CAS Coverage Should Be A Strategic Business Decision

33 What could possibly go wrong?

34 1/27/2018 Steve Shamlian / GCCM, LLC 34 What could possibly go wrong. Failure to comply with standards Failure to consistently follow your established cost accounting practices Failure to timely disclose cost accounting practices Failure to appropriately represent your level of CAS coverage Exempt Modified coverage Full coverage DS Digression

35 1/27/2018 Steve Shamlian / GCCM, LLC 35 Consequences Failure to have contracts awarded. Retroactive price adjustments plus interest. Retroactive price adjustments without interest.

36 1/27/2018 Steve Shamlian / GCCM, LLC 36 Computation of Cost Impact (FAR (h)) Include all affected CAS-covered contracts and subcontracts regardless of their status (i.e., open or closed) or the fiscal year(s) in which the costs are incurred (i.e., whether or not the final indirect rates have been established) (FAR (h))

37 1/27/2018 Steve Shamlian / GCCM, LLC 37 Computation of Cost Impact (FAR (h)) Estimating Costs: When the negotiated contract or subcontract price exceeds what the negotiated price would have been had the contractor used a compliant practice, the difference is increased cost to the Government. Accumulating Costs: When the costs that were accumulated under the noncompliant practice exceed the costs that would have been accumulated using a compliant practice (from the time the noncompliant practice was first implemented until the date the noncompliant practice was replaced with a compliant practice), the difference is increased cost to the Government.

38 1/27/2018 Steve Shamlian / GCCM, LLC 38 Computation of Cost Impact (FAR (h)) Increased Cost to the Government: Flexibly-priced contracts the estimated cost to complete using the changed practice exceeds the estimated cost to complete using the current practice Fixed priced contracts the estimated cost to complete using the changed practice is less than the estimated cost to complete using the current practice

39 1/27/2018 Steve Shamlian / GCCM, LLC 39 Avoiding the Consequences - Exempt Exemptions:

40 1/27/2018 Steve Shamlian / GCCM, LLC 40 Avoiding the Consequences - Threshold Not CAS - Covered: Contracts less than $7.5 million prior to award of a CAS-covered contract of at lease $7.5 million Modified CAS Covered: Contracts greater than $750,000 after award of a CAS-covered contract of $7.5 million Full CAS Covered: Upon award of a CAS-covered contract of $50 million The year following $50 million in CAS-covered awards

41 1/27/2018 Steve Shamlian / GCCM, LLC 41 What is award value? a) The contract price the contractor is guaranteed b) The price including unawarded options c) The first year sales resulting from the contract

42 1/27/2018 Steve Shamlian / GCCM, LLC 42 Considering only the thresholds, how large does a contractor have to be to have CAS-covered contracts? a) Only the LockheedMartin, NorthropGrummans, etc. of the world. b) Significant contractors with at lease $100 million of annual sales. c) Contractors that are a lot smaller that the regulators were probably thinking

43 1/27/2018 Steve Shamlian / GCCM, LLC 43 Avoiding the Consequences - Compliance Fundamental Concepts: Cost accounting practices should be followed consistently Cost accounting practice: Measures costs Assigns costs to cost accounting periods Allocates costs to cost objectives (includes direct and indirect allocation) Allocations of costs are based on a causal or beneficial relationship of the costs to the cost objectives Homogeneous costs may be grouped into cost pools The enterprise will continue The life of the enterprise is divided into cost accounting periods Depreciation or amortization of assets or liabilities is over the useful life of the asset or liability

44 1/27/2018 Steve Shamlian / GCCM, LLC 44 Illustration of Consistency Estimating, accumulating, and reporting costs (CAS 401) Allocating costs incurred for the same purpose (CAS 402) Accounting for unallowable costs (CAS 405)

45 1/27/2018 Steve Shamlian / GCCM, LLC 45 Illustration of Homogeneity Costs from a home office (CAS 403) Standard costs (CAS 407) Allocation of G&A expenses (CAS 410) Material (CAS 411) Direct and indirect costs (CAS 418)

46 1/27/2018 Steve Shamlian / GCCM, LLC 46 Illustration of Continuity of the Enterprise Depreciation of capital assets (404 & 409) Cost accounting period (CAS 406) Cost of compensated personal absence (CAS 408) Pension (412 & 413) Cost of money (CAS 414 & 417) Deferred compensation (CAS 415) Insurance (CAS 416) IRAD/B&P (CAS 420)

47 1/27/2018 Steve Shamlian / GCCM, LLC 47 What will happen The Good: Better position to win larger contracts for goods and services only you can provide. The Bad: Increased compliance cost The Ugly: Increased Government oversight

48 1/27/2018 Steve Shamlian / GCCM, LLC 48 A Strategic Decision Anticipate or avoid coverage by knowing the exemptions and thresholds Follow the concepts applicable to your business Internal controls to document cost accounting practices and follow them consistently

49 Any Questions 49

50 The materials contained herein or discussed in the session or shown in the MS Powerpoint slides, are for illustrative and academic purposes only and should not be considered appropriate for your organization without careful adaptation by experts in the appropriate field of endeavor. DISCLAIMER