. 3
TEEL

Cost Accounting Standards Board
FOREWORD
This publication contains the rules, regulations, and Standards
promulgated by the Cost Accounting Standards Board as of July 1,
1976. It has been printed in a loose leaf format so that additions and
amendments can be easily incorporated. From time to time, such addi-
tions and amendments will be prepared as supplements for distribution
to subscribers.
Any questions or comments concerning the substance of the mate-
rial included in this publication should be addressed to Arthur
Schoenhaut, Executive Secretary, Cost Accounting Standards Board,
441 G Street, NW., Washington, D.C., 20548.
For sale by the Superintendent of Documents, U.8. Government Printing Office, Washington, D.C. 20402
Storage
Reference
KF
70
C84
попере
to

སཱ
Ret
strage
11-14/19
depos-us
小
​4-18-78
supp,
Cost Accounting Standards Board
COST ACCOUNTING STANDARDS BOARD
STANDARDS, RULES AND REGULATIONS
Supplement No. 3
·
FOREWORD: This supplement adds Part 332 Modified Coverage and Part
Adjustment and Allocation of Pension Cost. It also
contains revisions to Parts 331, 351, 400 and 403.
Pages currently in the publication should be removed and the
pages of this supplement should be filed as follows:
Remove
i - ii
19 - 21A
23 - 26
39D - 42
109 - 114
133 - 134
141 - 142
247-248
Index Page 2
File
i - ii
19 - 21A
23-26
39D - 42
109 114
133 - 134
141 - 142B
247-248P
1-2
Supp. No. 3
COST ACCOUNTING STANDARDS BOARD
Introduction
STANDARDS, RULES AND REGULATIONS
Legislation
Public Law 91-379 as amended by Public Law 94-152
Administration
Part
Title
301 General Information and Organization
302 Responsibilities and Conduct
303 Release of Information
304 Delegations of Authority
305 Cost Accounting Standards Board By Laws
Procurement Practice
Part
331 Contract Coverage
Supplement
Title
332 Modified Contract Coverage . . .
Supplement.
Disclosure Statement
Part
Title
351 Basic Requirements
Supplement
Cost Accounting Standards.
Part
•
Title
Page
•
... iii
1
. 3
….. 16
18
19
.. 20
27
. . 39 G
. . .39 J
40
94
400 Definitions
..110
401 Consistency in Estimating, Accumulating and
Reporting
……….115
Supplement
..118
402 Consistency in Allocating Costs Incurred for
the Same Purpose
..120
Supplement
…..126
i
Supp. No. 3
Cost Accounting Standards (Continued)
Part
Title
403 Allocation of Home Office Expenses to Segments
..129
Supplement
..135
404 Capitalization of Tangible Assets
..143
Supplement
……….147
405 Accounting for Unallowable Costs
•
..153
Supplement
..157
406 Cost Accounting Period
.164
Supplement
..167
407 Use of Standard Costs for Direct Material and
Direct Labor
..171
Supplement
..176
408 Accounting for Costs of Compensated Personal Absence
...179
Supplement
..184
409 Depreciation of Tangible Capital Assets
..189
Supplement
..196
410 Allocation of Business Unit General and Administrative
Expenses to Final Cost Objectives
..205
Supplement
213
411 Accounting for Acquisition Costs of Material
...225
Supplement
..228
Supplement
413
412 Composition and Measurement of Pension Costs
Adjustment and Allocation of Pension Cost
Supplement...
414 Cost of Money as an Element of the Cost of
Facilities Capital . .
Supplement
415 Accounting for the Cost of Deferred Compensation
Supplement
INDEX TO FEDERAL REGISTER
PUBLICATIONS OF CASB
STANDARDS, RULES AND REGULATIONS
•
.234
..240
•
248
..248 G
...250
..260
...266
.. 271
ii
Supp. No. 3
Cost Accounting Standards Board
DEFENSE PRODUCTION ACT AMENDMENTS
Public Law 91-379 adding Sec. 719
Public Law 94-152 amending Sec. 719(g)
"COST-ACCOUNTING STANDARDS BOARD
"Sec. 719. (a) There is established, as an agent of the Congress, a Cost-Accounting
Standards Board which shall be independent of the executive departments and shall
consist of the Comptroller General of the United States who shall serve as Chairman of
the Board and four members to be appointed by the Comptroller General. Of the
members appointed to the Board, two, of whom one shall be particularly knowledge-
able about the cost accounting problems of small business, shall be from the accounting
profession, one shall be representative of industry, and one shall be from a department
or agency
of the Federal Government who shall be appointed with the consent of the
head of the department or agency concerned. The term of office of each of the
appointed members of the Board shall be four years, except that any member
appointed to fill a vacancy in the Board shall serve for the remainder of the term for
which his predecessor was appointed. Each member of the Board appointed from
private life shall receive compensation at the rate of one two-hundred-sixtieth of the
rate prescribed for level IV of the Federal Executive Salary Schedule for each day
(including traveltime) in which he is engaged in the actual performance of duties
vested in the Board.
"(b) The Board shall have the power to appoint, fix the compensation of, and
remove an executive secretary and two additional staff members without regard to
chapter 51, subchapters III and VI of chapters 53, and chapter 75 of title 5, United
States Code, and those provisions of such title relating to appointment in the
competitive service. The executive secretary and the two additional staff members may
be paid compensation at rates not to exceed the rates prescribed for levels IV and V of
the Federal Executive Salary Schedule, respectively.
"(c) The Board is authorized to appoint and fix the compensation of such other
personnel as the Board deems necessary to carry out its functions.
"(d) The Board may utilize personnel from the Federal Government (with the
consent of the head of the agency concerned) or appoint personnel from private life
without regard to chapter 51, sub-chapters III and VI of chapter 53, and chapter 75 of
title 5, United States Code, and those provisions of such title relating to appointment in
the competitive service, to serve on advisory committees and task forces to assist the
Board in carrying out its functions and responsibilities under this section.
"(e) Except as otherwise provided in subsection (a), members of the Board and
officers or employees of other agencies of the Federal Government utilized under this
section shall receive no compensation for their services as such but shall continue to
receive the compensation of their regular positions. Appointees under subsection (d)
from private life shall receive compensation at rates fixed by the Board, not to exceed
one two-hundred-sixtieth of the rate prescribed for level V in the Federal Executive
Salary Schedule for each day (including traveltime) in which they are engaged in the
actual performance of their duties as prescribed by the Board. While serving away from
their homes or regular place of business, Board members and other appointees serving
on an intermittent basis under this section shall be allowed travel expenses in
accordance with section 5703 of title 5, United States Code.
"(f) All departments and agencies of the Government are authorized to cooperate
with the Board and to furnish information, appropriate personnel with or without
reimbursement, and such financial and other assistance as may be agreed to between
the Board and the department or agency concerned.
iii
Cost Accounting Standards Board
"(g) The Board shall from time to time promulgate cost-accounting standards
designed to achieve uniformity and consistency in the cost-accounting principles
followed by defense contractors and subcontractors under Federal contracts. Such
promulgated standards shall be used by all relevant Federal agencies and by defense
contractors and subcontractors in estimating, accumulating, and reporting costs in
connection with the pricing, administration and settlement of all negotiated prime
contract and subcontract national defense procurements with the United States in
excess of $100,000, other than contracts or subcontracts where the price negotiated is
based on (1) established catalog or market prices of commercial items sold in
substantial quantities to the general public, or (2) prices set by law or regulation.
"In promulgating such standards and major rules and regulations for the
implementation of such standards, the Board shall take into account, and shall report to
the Congress in the transmittal required by section 719(h) (3) of this Act, the probable
costs of implementation, including inflationary effects, if any, compared to the
probable benefits, including advantages and improvements in the pricing,
administration, and settlement of contracts.".
"(h) (1) The Board is authorized to make, promulgate, amend, and rescind rules and
regulations for the implementation of cost-accounting standards promulgated under
subsection (g). Such regulations shall require defense contractors and subcontractors as
a condition of contracting to disclose in writing their cost-accounting principles,
including methods of distinguishing direct costs from indirect costs and the basis used
for allocating indirect costs, and to agree to a contract price adjustment, with interest,
for any increased costs paid to the defense contractor by the United States because of
the defense contractor's failure to comply with duly promulgated cost-accounting
standards or to follow consistently his disclosed cost-accounting practices in pricing
contract proposals and in accumulating and reporting contract performance cost data.
Such interest shall not exceed 7 per centum per annum measured from the time such
payments were made to the contractor or subcontractor to the time such price
adjustment is effected. If the parties fail to agree as to whether the defense contractor
or subcontractor has complied with cost-accounting standards, the rules and
regulations relating thereto, and cost adjustments demanded by the United States, such
disagreement will constitute a dispute under the contract dispute clause.
"(2) The Board is authorized, as soon as practicable after the date of enactment of
this section, to prescribe rules and regulations exempting from the requirements of
this section such classes or categories of defense contractors or subcontractors under
contracts negotiated in connection with national defense procurements as it
determines, on the basis of the size of the contracts involved or otherwise, are
appropriate and consistent with the purpose sought to be achieved by this section.
"(3) Cost-accounting standards promulgated under subsection (g) and rules and
regulations prescribed under this subsection shall take effect not earlier than the
expiration of the first period of sixty calendar days of continuous session of the
Congress following the date on which a copy of the proposed standards, rules, or
regulations is transmitted to the Congress; if, between the date of transmittal and the
expiration of such sixty-day period, there is not passed by the two Houses a concurrent
resolution stating in substance that the Congress does not favor the proposed
standards, rules, or regulations. For the purposes of this subparagraph, in the
computation of the sixty-day period there shall be excluded the days on which either
House is not in session because of adjournment of more than three days to a day certain
or an adjournment of the Congress sine die. The provisions of this paragraph do not
apply to modifications of cost accounting standards, rules, or regulations which have
become effective in conformity with those provisions.
iv
Cost Accounting Standards Board
"(i) (A) Prior to the promulgation under this section of rules, regulations, cost-
accounting standards, and modifications thereof, notice of the action proposed to be
taken, including a description of the terms and substance thereof, shall be published in
the Federal Register. All parties affected thereby shall be afforded a period of not less
than thirty days after such publication in which to submit their views and comments
with respect to the action proposed to be taken. After full consideration of the views
and comments so submitted the Board may promulgate rules, regulations, cost-
accounting standards, and modifications thereof which shall have the full force and
effect of law and shall become effective not later than the start of the second fiscal
quarter beginning after the expiration of not less than thirty days after publication in
the Federal Register.
"(B) The functions exercised under this section are excluded from the operation of
sections 551, 553–559, and 701-706 of title 5, United States Code.
"(C) The provisions of paragraph (A) of this subsection shall not be applicable to
rules and regulations prescribed by the Board pursuant to subsection (h) (2).
"(j) For the purpose of determining whether a defense contractor or subcontractor
has complied with duly promulgated cost-accounting standards and has followed
consistently his disclosed cost-accounting practices, any authorized representative of
the head of the agency concerned, of the Board, or of the Comptroller General of the
United States shall have the right to examine and make copies of any documents,
papers, or records of such contractor or subcontractor relating to compliance with such
cost-accounting standards and principles.
"(k) The Board shall report to the Congress, not later than twenty-four months after
the date of enactment of this section, concerning its progress in promulgating cost-
accounting standards under subsection (g) and rules and regulations under subsection
(h). Thereafter, the Board shall make an annual report to the Congress with respect to
its activities and operations, together with such recommendations as it deems
appropriate.
"(1) There are authorized to be appropriated such sums as may be necessary to carry
out the provisions of this section.'
V
Cost Accounting Standards Board
ADMINISTRATION
PART 301-GENERAL INFORMATION
AND ORGANIZATION
Subpart A-Organization
General statement of the Board's
functions.
Methods.
Sec.
801.1
Purpose.
301.2
301.3
301.4
Offices.
301.5
Views and comments.
301.6
Public hearings.
301.7
Formal submission.
301.8
Final publication.
801.9
801.10
301.11
Transmittal to the Congress.
Organization and delegation of au-
thority.
Availablity of information and ma-
terials.
AUTHORITY: The provisions of this Part 301
are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168.
SOURCE: The provisions of this Part 301
appear at 36 F.R. 23916, Dec. 16, 1971, unless
otherwise noted.
§ 301.1
Subpart A-Organization
Purpose.
This part together with Part 303, Re-
lease of Information, and Part 304, Dele-
gations, of this chapter is published in
compliance with Public Law 90-23, sec-
tion (a) (1), 5 U.S.C. 552(a) (1), and con-
stitutes a description of the Cost
Accounting Standards Board.
§ 301.2 General statement of the Board's
functions.
In general, the Board promulgates cost
accounting standards designed to achieve
uniformity and consistency in the cost
accounting practices followed by defense
contractors. It also promulgates rules
and regulations for the implementation
of such standards.
§ 301.3
Methods.
In carrying out its functions, the Cost
Accounting Standards Board utilizes the
following methods.
(a) The Board employs a staff consist-
ing of various specialists dealing with
particular areas of administrative and
technical work, who advise the Board
and perform duties assigned to them
or which have been specifically delegated
to them
(b) Rules are published in the FEDERAL
REGISTER and codified in this Title 4 of
the Code of Federal Regulations. These
rules may be inspected in the Board's
offices or purchased from the Superin-
tendent of Documents, Government
Printing Office. The published rules in-
clude:
(1) Procedural regulations which gov-
ern the formal and informal methods
whereby persons dealing with the Board
can present information to the Board
to enable the Broad to promulgate rules,
regulations, and cost accounting stand-
ards and to perform other duties for
which it is responsible under section 719
of the Defense Production Act of 1950,
as amended (50 U.S.C. App. 2168).
(2) Rules, regulations, and cost ac-
counting standards which prescribe for
relevant Federal agencies and for de-
fense contractors and subcontractors
various substantive and procedural re-
quirements relating to cost accounting
standards for use in connection with
defense contracts.
(3) Regulations delegating matters to
the Board's staff and describing how the
public may deal with the Board in ob-
taining information.
(4) Board bylaws which govern Board
membership, meetings, and formal ac-
tion by Board vote.
(c) The Board may at its discretion re-
spond to requests for interpretation of
its rules, regulations, and cost account-
ing standards.
§ 301.4
Offices.
The Cost Accounting Standards
Board's offices are located in the General
Accounting Office Building, 441 G Street
NW., Washington, DC 20548. The hours
of business for the Board are 8:30 a.m. to
5 p.m., local time, Monday through Fri-
day, excluding holidays observed by the
Federal Government in Washington, D.C.
§ 301.5 Views and comments.
Proposed rules, regulations, or cost
accounting standards of the Cost Ac-
counting Standards Board shall be pub-
lished for comment in the FEDERAL
REGISTER. All parties affected thereby
shall be afforded a period of not less than
30 days in which to submit to the Board
their views and comments on the pro-
posal; but in exceptional cases, the
Board may provide for fewer than 30
days for the submission of views and
comments. When fewer than 30 days are
allowed, the Board notice inviting views
and comments shall state the reasons
therefor.
1
Cost Accounting Standards Board
§ 301.6 Public hearings.
Public hearings to assist the Board in
developing its rules, regulations, and cost
accounting standards may be held to the
extent the Board in its sole discretion
deems desirable. Notices of such hearings
shall be given by publication in the
FEDERAL REGISTER.
§ 301.7
Formal submission.
All formal submissions required or
permitted to be made to the Board under
the rules, regulations, or cost accounting
standards should be addressed to the
Cost Accounting Standards Board, 441 G
Street NW., Washington, DC 20548, in an
original and two copies, unless otherwise
provided by the rule, regulation, or
standard under which submission is
made. Where no form requirement is
there specified, submission in letter or
other reasonable form will be accepted.
§ 301.8 Final publication.
Any proposed rule, regulation, or cost
accounting standard required to be pub-
lished under section 719 (i) (A) of the
Defense Production Act of 1950, as
amended, 50 U.S.C. App. 2168(1) (A),
shall be published in the FEDERAL REGIS-
TER after the Board has considered views
and comments submitted pursuant to
§ 301.5 and any public hearing held pur-
suant to § 301.6.
§ 301.9 Transmittal to the Congress.
Transmittal to the Congress of any
proposed rule, regulation, or cost ac-
counting standard as required by section
719(h) (3) of the Defense Production Act
of 1950, as amended, 50 U.S.C. App.
2168(h) (3), shall be made simulta-
neously with final publication of the
proposed rule, regulation, or cost ac-
counting standard as provided for in
§ 301.8.
§ 301.10 Organization and delegation
of authority.
The Board, consisting of the Comp-
troller General of the United States who
is the Chairman and four Board mem-
bers appointed by him for terms of 4
years, acts to carry out the duties and
responsibilities of the Cost Accounting
Standards Board, established by Public
Law 91-379, 84 Stat. 796, 50 U.S.C. App.
2166, 2168. The Board's staff of profes-
sional, techncial, and supporting person-
nel is directed and supervised by the
Executive Secretary. Delegations of au-
thority to the Executive Secretary and
other staff members are described in de-
tail in Part 304 of this Title 4.
§ 301.11 Availability of information and
materials.
The Board publishes a regulation in
4 CFR Part 303 concerning the avail-
ability for inspection and copying of
Board records. That regulation states in
detail what information is available, and
what and where records may be in-
spected. Generally speaking, the follow-
ing records are maintained and available
(a) Minutes of Board meetings.
(b) Substantive regulations of general
applicability and general policy and
interpretation of general applicability.
(c) Rules, regulations, and cost ac-
counting standards issued pursuant to
section 719 of the Defense Production
Act of 1950, as amended, 50 US C. App
2168.
(d) A record of every Board proceed-
ing including the final votes of each
member of the Board participating in
the proceeding.
2
Cost Accounting Standards Board
PART 302-RESPONSIBILITIES AND
CONDUCT
Definitions.
Bec.
802.73 Employees not required to submit
statements.
802.74 Employee's complaint on Aling
requirement.
802.75 Where to submit statements.
802.76
802.77
When to submit statements.
Supplementary statements.
802.78 Interests of employee's relatives.
Subpart A-General Provisions
Sec.
802.1
Purpose.
802.2
302.3
302.4
Interpretation and advisory service.
Compliance.
802.79
302.5
Disciplinary and other remedia)
actions.
802.80
802.81
802.6
Effecting disciplinary and remedia
802.82
actions.
302.7 Release of information.
302.8
Distribution of regulation.
Subpart B-Regulation governing ethical and
other conduct and responsibilities of Board
Members
302.84
302.85
802.86
802.11
General provisions.
Subpart C-Regulation governing ethical and
other conduct and responsibilities
Employees
General policy on conduct.
Permissible gifts, entertainment, and
favors.
302.21
302.22
Proscribed actions.
302.23
Gifts, entertainment, and favors.
302.24
302.25
302.26
302.27
302.28
Gifts to superiors.
Gifts from foreign governments.
Reimbursement of travel and living
expenses.
Indebtedness of employees.
302.29 Reports on indebtedness.
302.30 Gambling, betting, and lotteries.
Use of Government property.
Misuse of information.
Prohibited financial interests.
302.31
302.32
802.33
302.34
Bribery, graft, and conflicts
interest.
of
Information not known by employees.
Information not required.
Confidentiality of statements.
Review of statements by the Chair-
man.
802.88 Review of statements by the Execu-
tive Secretary.
Findings of no conflict of interest.
Findings of conflict of interest.
Effect of employees' statements on
other requirements.
802.87 Specific provisions for special Govern-
ment employees.
802.88
Waiver of statements from certain
special Government employees.
802.89 Time for submission of statements by
special Government employees.
802.90 Circumstances requiring statements
from special Government
ployees.
em-
AUTHORITY: The provisions of this Part 302
are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168
SOURCE: The provisions of this Part 802
appear at 36 F.R. 23917, Dec. 16, 1971, unless
otherwise noted.
302.85 Conflicts resulting from assignments.
802.36 Disqualification procedure.
802.37 Nondisqualifying interests.
802.38 Outside employment and other
activity.
802.39
802.40
802.41
Articles and speeches.
File of articles and speeches.
General conduct prejudicial to the
Government.
802.42 Miscellaneous statutory provisions.
Subpart D-Regulation Governing Ethical and
Other Conduct and Responsibilities of Special
Government Employees
802.51
Use of Government employment.
302.52 Use of inside information.
302.53
802.54
Teaching, lecturing, and writing.
Coercion.
302.55 Gifts, entertainment, and favors.
802.56 Miscellaneous statutory provisions.
Subpart E-Prohibited Activities by Former
Employees
302.61 Prohibited activities.
Subpart F-Regulation Governing Statements of
Employment and Financial Interests
302.71
802.72
Form and content of statements.
Requirement to submit statements.
Subpart A-General Provisions
§ 302.1
Purpose.
The Government service requires the
maintenance of unusually high standards
of honesty, integrity, impartiality, and
conduct by Government employees and
special Government employees to assure
the proper performance of Government
business and the maintenance of confi-
dence by citizens in their Government.
This is especially true of service in the
Cost Accounting Standards Board be-
cause of the unique functions and special
trust placed upon the Board as an agent
of the Congress. Board members, em-
ployees, and special Government em-
ployees are, therefore, expected and re-
quired to exercise informed judgments
to avoid misconduct and conflicts of in-
terest and the appearance of conflicts
of interest. In accordance with these con-
cepts, this regulation sets forth the regu-
lations and policies of the Cost Account-
ing Standards Board which prescribe
standards of conduct and responsibilities
including guidance on conflict of interest
laws and the requirement for reporting
employment and financial interests for
3
Cost Accounting Standards Board
its Board members, employees, and spe-
cial Government employees.
§ 302.2
Definitions.
In this regulation:
(a) Board means the Cost Accounting
Standards Board, established by section
719 of the Defense Production Act of
1950, as amended, added by section 103
of Public Law 91-379, 84 Stat. 795.
(b) Chairman means the Comptroller
General of the United States or, in the
event of the absence or incapacity of
the Comptroller General or during a
vacancy in the office, the official of the
General Accounting Office acting as
Comptroller General.
(c) Board member means the Chair-
man and a person appointed by him pur-
suant to section 719(a) of Public Law
91-379.
(d) Executive Secretary means the
employee appointed by the Board as Ex-
ecutive Secretary pursuant to section 719
(b) of Public Law 91-379, or in the event
of the absence or incapacity of the Execu-
tive Secretary or during a vacancy in that
position, the employee delegated or des-
ignated to act as Executive Secretary.
(e) Employee means an officer or em-
ployee of the Board other than a special
Government employee.
employee
(1) Special Government
means an officer or employee who is re-
tained, designated, appointed, or em-
ployed to perform, with or without com-
pensation, for a period not to exceed 130
days during any period of 365 days, tem-
porary duties for the Board either on a
full-time or intermittent basis (18 U.S.C.
202).
(g) Person means an individual, a cor-
poration, a company, an association, a
firm, a partnership, a society, a joint
stock company, or any other organization
or institution.
(h) Former employee means a former
Board employee or former special Gov-
ernment employee of the Board, as de-
fined in paragraph (f) of this section.
(1) Words importing the masculine
gender include the feminine as well, and
words importing the plural include the
singular.
§ 302.3 Interpretation
service.
and advisory
The Executive Secretary, with the ap-
proval of the Chairman shall designate a
Counselor for the Board who shall be
responsible for providing counseling
services and authoritative advice and
guidance to Board members, employees,
and special Government employees who
seek advice and guidance from him on
conflicts of interest questions.
§ 302.4
Compliance.
are
(a) The Chairman shall be responsible
for seeing to it that this regulation is
fully compiled with and for issuing what-
ever supplementary instructions
deemed desirable. Except as otherwise
specifically provided for in this regula-
tion, any matter coming within the pro-
visions of this regulation arising in the
Board will be referred immediately to
the Chairman for appropriate disposi-
tion.
(b) Employees of another agency of
the Government who are detailed to the
Board for a period of time which is an-
ticipated to equal or exceed 1 year shall
submit a signed statement to the Execu-
tive Secretary that they are conducting
themselves in compliance with the stand-
ards, rules, or regulations of conduct
in force in their own detailing agency.
Since their own agency regulations cover
similar subject matter, they will not be
required to comply with this regulation,
except as to the necessity for obtaining
consent to certain outside activities in-
cluding teaching, speaking, and writing
for publication (see 302.38(b)).
§ 302.5 Disciplinary and other remedial
actions.
(a) A violation of any part of this
regulation by a Board member, employee,
or special Government employee may be
cause for appropriate disciplinary action
which may be in addition to any penalty
prescribed by law.
(b) When, after consideration of the
explanation of the employee or special
Government employee provided by
§ 302.85, the Chairman decides that re-
medial action is required, he shall take
immediate steps to end the conflict of
interest or the appearance of conflict of
interest. Remedial action may include
one or more of the following, but is not
limited to them:
(1) Changes in assigned duties;
(2) Divestment by the employee or spe-
cial Government employee of his con-
flicting interest;
(3) Disciplinary action;
(4) Disqualification for a particular
assignment.
§ 302.6 Effecting disciplinary and re-
medial actions.
Remedial action, whether disciplinary
4
Cost Accounting Standards Board
or otherwise, shall be effected in accord-
ance with applicable laws and regula-
tions.
§ 302.7 Release of information.
(a) The Board may from time to time
publish or release statements of practice
and policy, as well as those matters re-
quired to be published, or made available
to the general public by 5 U.S.C. 552 and
those proposed and final standards, rules,
and regulations required to be published
in the FEDERAL REGISTER by section 719
of Public Law 91-379.
(b) Proposals, working papers, staff
papers, and similar writings which have
not been so published or made available
to the general public shall be considered
as privileged internal Board matters, and
no publication of them or comments on
them shall be made to the general public,
and no information relating to them shall
be divulged to the general public by any
Board member, employee, or special
Government employee, without prior ap-
proval of the Chairman.
(c) The prohibition contained in this
paragraph regarding premature release
or discussion of internal Board matters is
not intended in any way to prevent or
hamper Board members, employees, or
special Government employees from cor-
respondence or discussion of Board mat-
ters and writings with others in the
proper discharge of their duties. It is,
however, designed to facilitate confiden-
tial discussions within the Board and to
prevent disclosure of confidential or non-
public information. It is in addition to
statutory prohibitions and other provi-
sions of this regulation (see §§ 302.32,
302.33, 302.38, 302.52, and 302.53) cover-
ing use of information obtained as a
result of membership on or employment
with the Board.
§ 302.8 Distribution of regulation.
(a) A copy of this regulation shall be
furnished each Board member, employee,
and special Government employee.
(b) Copies of pertinent laws and in-
structions relating to ethical and other
conduct will be made available in the
Office of the General Counsel of the
Board, upon request by Board members,
employees, and special Government
employees.
Subpart B-Regulation Governing
Ethical and Other Conduct and
Responsibilities of Board Members
§ 302.11
General provisions.
(a) A Board member who is also an
officer or employee of an agency or de-
partment in the legislative or executive
branch of the U.S. Government or of any
independent agency of the United States
or of the District of Columbia is subject
to the laws, regulations, and require-
ments affecting that office or employ-
ment and shall be subject to this
regulation only to the extent that it
establishes duties or responsibilities re-
lating particularly to service with the
Cost Accounting Standards Board.
(b) All other Board members are em-
ployees or special Government employees
as defined in § 302.2. They are subject to
the provisions of this regulation as em-
ployees or as special Government
employees, except in those cases where a
rule or requirement is stated herein as
applicable specifically to Board mem-
bers. (See §§ 302.5(a), 302.72(a), 302.75
(a), and 302.82.)
Subpart C-Regulation Governing
Ethical and Other Conduct and Re-
sponsibilities of Employees
§ 302.21
General policy on conduct.
The personal demeanor of employees
of the Board is subject to the closest pub-
lic and official scrutiny; and as repre-
sentatives of the Board, employees are
judged by their personal associates and
activities as well as by their official ac-
tions and conduct. In all their dealings,
employees of the Board shall so conduct
themselves as to permit no reasonable
basis for suspicion of unethical conduct
or practices. The obligation to protect
fully the interests of the Government as
a whole and the Board as an agency of
the Congress, demands the avoidance of
circumstances which invite conflict be-
tween self-interest and the integrity of
employment with the Board. Loyalty to
the Board and its programs and purposes
is a necessary attribute.
§ 302.22 Proscribed actions.
An employee shall avoid any action,
whether or not specifically prohibited by
this subpart, which might result in, or
create the appearance of:
(a) Using public office for private
gain;
(b) Giving improper preferential treat-
ment to any person;
(c) Impeding Government efficiency or
economy;
5
Cost Accounting Standards Board
(d) Losing complete independence or
impartiality;
(e) Making a Government decision
outside official channels; or
(f) Affecting adversely the confidence
of the public in the integrity of the Gov-
ernment or its operations.
§ 302.23 Gifts,
favors.
entertainment,
and
Except as provided in §§ 302.24 and
302.27 of this subpart, an employee shall
not solicit or accept, directly or indi-
rectly, any gift, gratuity, favor, enter-
tainment, loan, or any other thing of
monetary value, from a person who:
(a) Has, or is seeking to obtain, con-
tractual or other business or financial
relations with the Federal Government;
(b) Conducts operations or activities
that are subject to audit, investigation,
decision, or regulation by the Board;
(c) Has interests that may be sub-
stantially affected by the performance or
nonperformance of the employee's offi-
cial duty.
§ 302.24
Permissible gifts, entertain-
ment, and favors.
Despite the limitations established by
§ 302.23 of this subpart, the following ex-
ceptions are made:
(a) A gift, gratuity, favor, entertain-
ment, loan, or other similar favor of
monetary value may be accepted by the
employee when it or they stem from a
family or personal relationship. such as
those between the employee and his par-
ents, children, or spouse, and when the
circumstances make it clear that it is
those relationships rather than the busi-
ness of the persons concerned which are
the motivating factors.
(b) Food and refreshments of nominal
value may be accepted on infrequent oc-
casions in the ordinary course of a
luncheon or dinner meeting or other
meeting or on an inspection tour where
the employee may properly be in
attendance.
(c) Loans from banks and other A-
nancial institutions may be accepted on
customary terms to finance the proper
and usual activities of employees, such as
home mortgage loans.
(d) Unsolicited advertising or promo-
tional material, such as pens, pencils.
note pads, calendars, and other items of
nominal value may be accepted.
§ 302.25
Gifts to superiors.
An employee shall not solicit a con-
tribution from another employee for a
gift to an official superior, make a dona-
tion as a gift to an official superior, or
accept a gift presented as a contribution
from an employee receiving less pay than
himself (5 U.S.C. 7351).
§ 302.26 Gifts from foreign govern-
ments.
An employee shall not accept a gift.
present, decoration, or other thing from
a foreign government unless authorized
by Congress as provided by the U S. Con-
stitution and in Public Law 89-673, 80
Stat. 952.
§ 302.27 Reimbursement of travel and
living expenses.
Neither § 302.23 nor § 302.38 of this
subpart precludes an employee from re-
ceipt of bona fide reimbursement, unless
prohibited by law, for expenses of travel
and such other necessary subsistence as
is compatible with this subpart when not
engaged on official business. However,
this paragraph does not allow an em-
ployee to be reimbursed, or payment to
be made on his behalf, for excessive per-
sonal living expenses, gifts, entertain-
ment, or other personal benefits. When
traveling on official business, no reim-
bursement may be accepted from private
sources.
NOTE: Notwithstanding this paragraph,
the requirements relating to the acceptance
of contributions and awards, travel, subsis-
tence and other expenses in section 4111(8).
5 U.S.C. and the regulations thereunder in
Subpart G. Part 410. Book III. Supplement
990-1, Federal Personnel Manual, continue
to apply.
§ 302.28 Indebtedness of employees.
An employee shall pay each just fi-
nancial obligation in a proper and timely
manner, especially one imposed by law
such as Federal, State, or local taxes. For
the purposes of this paragraph, a “just
financial obligation" means one acknowl-
edged by the employee or reduced to
judgment by a court, and "in a proper
and timely manner" means in a man-
ner which the Board determines does not,
in the circumstances, reflect adversely on
the Board as his employer. In the event
of a dispute between an employee and
an alleged creditor, this paragraph does
not require the Board to determine the
validity of the disputed debt.
§ 302.29 Reports on indebtedness.
While the Board will not become a col-
6
Cost Accounting Standards Board
lection agency for private creditors of an
employee, each complaint of nonpayment
of a debt will be referred to the employee
concerned and the employee will be re-
quested to report in writing as to what he
proposes to do about the debt.
§ 302.30 Gambling, betting, and lot.
teries.
An employee shall not participate.
while on Government owned or leased
property or while on duty for the Gov-
ernment, in any gambling activity in-
cluding the operation of a gambling de-
vice, in conducting a lottery or pool, in
a game for money or property, or in sell-
ing or purchasing a numbers slip or
ticket.
§ 302.31 Use of Government property.
An employee shall not directly or in-
directly use, or allow the use of, Govern-
ment property of any kind, including
property leased to the Government, for
other than officially approved activities
An employee has a positive duty to pro-
tect and conserve Government property,
including equipment, supplies, and other
property entrusted or issued to him.
§ 302.32 Misuse of information.
For the purpose of furthering a pri-
vate interest, an employee shall not, ex-
cept as provided in section (b) of this
subpart, directly or indirectly use, or
allow the use of, official information ob-
tained through or in connection with
his Government employment which has
not been made available to the general
public.
§ 302.33
Prohibited financial interests.
An employee shall not:
(a) Have a direct or indirect financial
interest that conflicts substantially or
appears to conflict substantially with his
Government duties and responsibilities.
(b) Engage in, directly or indirectly,
a financial transaction as a result of, or
primarily relying on, information ob-
tained through his Government employ-
ment.
§ 302.34 Bribery, graft, and conflicts of
interest.
An employee shail not engage in acts
prohibited by chapter 11 of title 18,
United States Code. relating to bribery,
graft, and conflicts of interest as appro-
priate to the employee concerned. Three
of the more important "conflict of inter-
est" provisions are summarized as fol-
lows:
(a) An employee may not, except as
provided by law for the proper discharge
of his official duties, receive, agree to re-
ceive, ask, or seek any compensation for
services by him or another in connection
with any proceeding, request for a ruling,
or other determination before any Gov-
ernment agency or officer in which the
United States is a party or has a direct
and substantial interest (18 U.S.C. 203).
(b) An employee may not, except in
the discharge of his official duties, repre-
sent anyone else (with or without com-
pensation) before a court or Government
agency in a matter in which the United
States is a party or has a direct or sub-
stantial interest (18 J.S.C. 205).
(c) An employee shall not receive any
salary or anything of monetary value
from a private source as compensation for
his services to the Government (18 U.S.C.
209).
§ 302.35 Conflicts resulting from as-
signments.
An employee will not participate in any
audit, investigation, survey, examination,
ruling, decision or determination, con-
tract, claim, controversy, or other matter
before the Board in which he, his spouse,
minor child, partner, organization in
which he is serving as officer, director,
trustee, partner or employee, or any per-
son or organization with whom he is
negotiating or has any arrangement con-
cerning prospective employment, has a
financial interest, with the following ex-
ceptions:
(a) The employee need not disqualify
himself if his financial holdings are in
shares of widely held diversified mutual
funds or regulated investment companies
in which he does not serve as director,
officer, partner, or advisor. The indirect
interest in business entities which the
holder of shares in a widely diversified
mutual fund or regulated investment
company of stocks in business entities is
hereby exempted from the provisions of
18 U.S.C. 208(a) in accordance with the
provisions of 18 U.S.C. 208(b) (2) as being
too remote or inconsequential to affect
the integrity of the employee's services.
(b) If the employee first informs the
Chairman through the Executive Secre-
tary, in writing, of the nature and cir-
cumstances of the audit, investigation,
survey, examination, ruling, decision or
determination, contract, claim, contro-
7
Cost Accounting Standards Board
versy, or other matter in which he is
participating and makes full disclosure
of the financial interest and receives in
advance a written determination made
by the Chairman that the interest is not
so substantial as to be deemed likely to
affect the integrity of the employee's
services, the employee need not consider
himself disqualified (18 U.S.C. 208(b)).
§ 302.36 Disqualification procedure.
Where the employee, his spouse, minor
child, partner, organization in which he
is serving as officer, director, trustee,
partner or employee, or any person with
whom he is negotiating or has an ar-
rangement concerning prospective em-
ployment, has a financial interest in any
matter in which he is participating as
part of his official duties, he will so in-
form the Chairman through the Execu-
tive Secretary, in writing, and he will
thereupon be relieved of his duties and
responsibilities in that particular matter
unless the Executive Secretary, after
consultation with and the approval of
the Chairman finds that pursuant to
§ 302.35(b) of this subpart, the interest
is too remote or too inconsequential to
affect the integrity of the employee's
services, in which case the Chairman will
so notify the employee in writing. In
cases of disqualification of the employee,
the assignment of the employee will be
changed, or the matter will be reassigned
to another employee. A memorandum of
disqualification will be made and for-
warded by the Chairman to the employee
with copies to the Executive Secretary
and the Counselor for the Board.
§ 302.37
Nondisqualifying interests.
This subpart does not preclude an em-
ployee from having a financial interest
or engaging in financial transactions to
the same extent as a private citizen not
employed by the Government so long as
it is not prohibited by applicable law or
regulations.
§ 302.38 Outside
other activity.
employment
and
(a) An employee shall not engage in
outside employment or other outside ac-
tivity not compatible with the full and
proper discharge of the duties and re-
sponsibilities of his Government employ-
ment. Incompatible activities include but
are not limited to:
(1) Acceptance of a fee, compensation,
gift, payment of expense, or any other
thing of monetary value in circumstances
in which acceptance may result in, or
create the appearance of, a conflict of
interest;
(2) Outside employment which tends
to impair his mental or physical capacity
to perform his Government duties and
responsibilities in an acceptable manner.
(b) Employees may (subject to the
provisions of paragraph (c)(3) of this
section) engage in teaching, lecturing,
and writing that is not prohibited by law
or these regulations. An employee shall
not, however, either for or without com-
pensation, engage in teaching, lecturing,
or writing, including teaching, lecturing,
or writing for the purpose of the special
preparation of a person or class of per-
sons for an examination of the Civil
Service Commission of Board of Ex-
aminers for the foreign service, that
depends on information obtained as a
result of his Government employment,
except when that information has been
made available to the general public or
will be made available on request, or
when the Chairman gives written au-
thorization for the use of nonpublic in-
formation on the basis that such use is
in the public interest.
(c) This paragraph does not preclude
an employee from:
(1) Participation in the activities of
national or State political parties not
precluded by law;
(2) Participation in the affairs of or
acceptance of an award for a meritori-
ous public contribution or achievement
given by a charitable, religious, profes-
sional, social, fraternal, nonprofit, edu-
cational and recreational, public service,
or civic organization;
(3) Outside employment when permis-
sion has been granted in advance by the
Executive Secretary or his designee, and
the employee has been notified in writ-
ing of the approval. This permission will
be granted in accordance with the fol-
lowing policies, procedures, and limita-
tions:
(i) In considering requests for out-
side employment, the following criteria
will be applied-the provisions of ap-
plicable law, the regulations and policies
incorporated in this subpart including
the possibility of conflicts of interest, the
general attendance record of the em-
ployee, the nature of his official duties
in relation to the nature of the duties
which will comprise the outside employ-
ment; the financial need or other justi-
fication for such outside employment,
and the hours of work required by the
8
Cost Accounting Standards Board
outside employment;
(ii) An employee will request permis-
sion to engage in outside employment
by executing, in full, GAO Form - 256
(Rev. 10/67) and forwarding it through
his immediate supervisor to the Execu-
tive Secretary or his designee;
(ii) The Executive Secretary or his
designee will, upon receipt of a fully
executed GAO Form 256 (Rev. 10/67),
evaluate the request in light of existing
law and policies and regulations;
(iv) The Executive Secretary or his
designee will officially approve or dis-
approve the request, and the employee
will be notified. If the action taken on
the request is not agreed to by the em-
ployee, the request and all recommenda-
tions will be submitted to the chairman
for ultimate determination. The chair-
man will thereupon consider the entire
record, make the final determination.
and cause the employee to be notified;
(v) Grants of permission to engage
in outside employment will normally ex-
pire 3 calendar years from the date of
last issue, unless sooner revoked or modi-
fied. Permission to engage in outside em-
ployment which is about to expire will
be considered for renewal upon receipt
of a request on GAO Form 256 (Rev.
10/67). Procedures for renewal will be
the same as those for original applica-
tion and should be made, if continuity
of permission is desired, from 30 to 60
days before the expiration of current
permission;
(vi) Permission to engage in outside
employment extends only to the specific
employment described in the request con-
sidered. New requests must be made in
writing in accordance with these proce-
dures to cover any changes or modifica-
tions in outside employment;
(vii) An employee with permission to
engage in outside employment will not
hold himself out to the public as an at-
torney or accountant by such means as:
(a) Placing his name on an office door,
(b) Having his name listed in the clas-
sified section of the telephone directory.
or
(c) Using business stationery with his
name on letterheads or envelopes.
(viii) Permission to engage in outside
employment will not be granted for the
purpose of representing clients in court
or before Government agencies except in
rare cases when permission may be
granted for specific appearances;
(ix) An employee may be permitted
to engage in income tax work and to
sign income tax returns as a preparer,
provided:
(a) The taxpayer has no Government
contracts and has no business with the
U.S. Government,
(b) The employee does not in any
manner intercede with or appear for the
taxpayer before the Internal Revenue
Service, the courts, or other Government
bo
body.
(x) An employee may not use his em-
ployment with the Board as a means
of soliciting or obtaining outside em-
ployment;
(xi) An employee may not engage in
outside employment while he is on sick
leave from his duties. Deviations from
this policy may be permitted in rare in-
stances when prior approval is obtained
from the Executive Secretary;
(xii) Emplovees in grades equivalent
to GS-13 and higher will not, normally,
be given permission to engage in outside
employment. Exceptions will be made for
good and sufficient reasons, such as
where a critical need exists for addi-
tional income by the employee or where
the employment is found to be in the
public interest in terms of opportunity
for valuable experience beneficial both to
the employee and to the Board. Each
request for an exception under this par-
agraph shall be in sufficient detail to
permit a judgment that it is merited.
If an exception is made for employees
in grades equivalent to GS-13 and
higher, permission will be granted for
1-year intervals.
§ 302.39
Articles and speeches.
Employees who prepare, with or with-
out compensation, articles for publica-
tion and speeches for delivery shall sub-
mit drafts thereof to the Executive
Secretary or his designee prior to
publication or delivery when:
(a) Any reference is made or to be
made to the employee's employment by
the Board.
(b) The subject of the article or
speech concerns the work of the Board.
§ 302.40 File of articles and speeches.
The Board Library will maintain a
permanent file of all published articles
and speeches by employees of the Board.
In order that this file be complete and
current each employee who has had an
article published or has made a speech
shall send two copies thereof to the
library.
9
Cost Accounting Standards Board
§ 302.41
General conduct prejudicial to
the Government.
An employee shall not engage in crimi-
nal, infamous, immoral, or notorious dis-
graceful conduct, or other conduct preju-
dicial to the Government, nor shall he
conduct himself in such a manner as to
give rise to a reasonable belief that he
is engaging in criminal, infamous, im-
moral, or notorious disgraceful conduct.
§ 302.42 Miscellaneous statutory provi-
sions.
Each employee will acquaint himself
with each statute that relates to his ethi-
cal and other conduct as an employee of
the Board with particular reference to
the following:
(a) House Concurrent Resolution 175.
85th Congress, second session. 72 Stat.
B12, the "Code of Ethics for Government
Service."
(b) Chapter 11 of title 18, United
States Code, relating to bribery, graft,
and conflicts of interest, as appropriate
to the employees concerned.
(c) The prohibition against lobbying
with appropriated funds (18 U.S.C. 1913).
(d) The prohibitions against disloyalty
and striking (5 U.S.C. 7311, 18 U.S.C.
1918).
(e) The prohibition against the em-
ployment of a member of a Communist
organization (50 U.S.C. 784).
(f) The prohibitions against (1) the
disclosure of classified information (18
U.S.C. 798, 50 U.S.C. 783); and (2) the
disclosure of confidential information (18
U.S.C. 1905).
(g) The provision relating to the ha-
bitual use of intoxicants to excess (5
U.S.C. 7352).
(h) The prohibition against the mis-
use of a Government vehicle (31 U.S.C.
638a(c)).
(i) The prohibition against the mis-
use of the franking privilege (18 U.S.C.
1719).
(j) The prohibition against interfer-
ence with civil service examinations (18
U.S.C. 1917).
(k) The prohibition against fraud or
false statement in a Government matter
(18 U.S.C. 1001).
(1) The prohibition against mutilat-
ing or destroying a public record (18
U.S.C. 2071).
(m) The prohibition against counter-
feiting and forging transportation re-
quests (18 U.S.C. 508).
(n) The prohibitions against (1) em-
bezzlement of Government money or
property (18 U.S.C. 641); (2) failing to
account for public money (18 U.S.C.
643); and (3) embezzlement of the
money or property of another person in
the possession of an employee by reason
of his employment (18 U.S.C. 654).
(0) The prohibition against unauthor-
ized use of documents relating to claims
from or by the Government.
(p) The prohibition against proscribed
political activities—in subchapter III of
chapter 73 of title 5, United States Code,
and 18 U.S.C. 602, 603, 607, and 608.
(q) The prohibition against an em-
ployee acting as the agent of a foreign
principal registered under the Foreign
Agents Registration Act (18 U.S.C. 219).
Excerpts from the more important stat-
utes of general applicability are quoted
in Appendix A to Comptroller General's
Order No. 1.21.
Subpart D-Regulation
Governing
Ethical and Other Conduct and Re-
sponsibilities of Special Govern-
ment Employees
§ 302.51 Use of Government employ.
ment.
A special Government employee shall
not use his Government employment for
a purpose that is, or gives the appearance
of being, motivated by the desire for
private gain for himself or another per-
son, particularly one with whom he has
family, business, or financial ties.
§ 302.52 Use of inside information.
A special Government employee shall
not use inside information obtained as
a result of his Government employment
for private gain for himself or another
person either by direct action on his part
or by counsel, recommendation, or sug-
gestion to another person, particularly
one with whom he has family, business,
or financial ties. For the purposes of this
paragraph, "inside information" means
information obtained by reason of his
Government employment which has not
been made available to the general
public.
§ 302.53 Teaching, lecturing, and writ
ing.
A special Government employee may,
without prior approval, teach, lecture, or
write in a manner not otherwise incon-
sistent with §§ 302.32 and 302.38 of Sub-
part C of this regulation.
10
Cost Accounting Standards Board
§ 302.54
Coercion.
A special Government employee shall
not use his Government employment to
coerce, or give the appearance of coerc-
ing, a person to provide financial benefit
to himself or another person, particularly
one with whom he has family, business,
or financial ties.
§ 302.55 Gifts,
favors.
entertainment,
and
Except as provided in § 302.24 of Sub-
part C of this regulation (as in the case
of employees), a special Government em-
ployee, while so employed or in connec-
tion with his employment, shall not
receive or solicit, either for himself or
another person, particularly one with
whom he has family, business, or finan-
cial ties, anything of value as a gift, gra-
tuity, loan, entertainment, or favor from
a person who:
(a) Has, or is seeking to obtain, con-
tractual or other business or financial
relations with the Board.
(b) Has an interest that may be sub-
stantially affected by the performance or
nonperformance of his official duties.
§ 302.56 Miscellaneous statutory provi-
sions.
Each special Government employee
shall acquaint himself with each statute
that relates to his ethical and other con-
duct as a special Government employee
of the Board and the Government with
particular reference to the statutes cited
in § 302.42 of Subpart C of this regula-
tion and the following:
(a) A special Government employee
may not, otherwise than as provided by
law for the proper discharge of his offi-
cial duties, receive or agree to receive, or
solicit any compensation for any services
by himself or another, and may not, ex-
cept in the proper discharge of his du-
ties, represent or assist anyone, with or
without compensation, before a depart-
ment, agency, court, court-martial, of-
ficer, or any civil, military, or naval
commission, in connection with a par-
ticular matter in which the United States
is a party or has a direct or substantial
interest: Provided, however, That these
restrictions apply to a special Govern-
ment employee only in relation to a par-
ticular matter involving a specific party
or parties:
(1) In which he has at any time par-
ticipated personally and substantially as
& Government employee or special Gov-
ernment employee through decision, ap-
proval, disapproval, recommendation,
the rendering of advice, investigation, or
otherwise; or
(2) Which is pending in the depart-
ment or agency of the Government in
which he is serving, except that this pro-
vision (§ 302.56(a)(2) of this subpart)
shall not apply when he has served in
such department or agency no more than
60 days during the immediately preced-
ing period of 365 days. He is bound by
the restraint of this provision despite the
fact that the matter is not one in which
ne has ever participated personally and
substantially (18 U.S.C. 203, 205).
(b) A special Government employee
shall not participate in his governmental
capacity in any matter in which to his
knowledge he, his spouse, minor child,
partner, organization in which he is serv-
ing as officer, director, trustee, partner
or employee, or any person or organiza-
tion with whom he is negotiating or has
any arrangement concerning prospective
employment, has a financial interest (18
U.S.C. 208).
(c) After his Government employ-
ment has ended, a special Government
employee is subject to the prohibition
pertaining to a "former employee" in
matters connected with his former
duties (18 U.S.C. 202(a), 207).
(d) To the extent that the conflict of
interest statutes apply to a special
Government employee, they apply to his
activities on all days during the period
of his appointment to the Board, begin-
ning with the date on which he takes an
oath of office as a Government employee,
whether he works on a full-time or inter-
mittent basis. Similarly, the ethical
standards prescribed in this subpart ap-
ply to the special Government employee
during the full period of his appointment
as an employee, and not merely on the
days on which he performs services as
an employee.
Subpart E-Prohibited Activities by
Former Employees
Prohibited activities.
§ 302.61
A former employee shall not:
(a) At any time after his Government
employment has ended, knowingly repre-
sent anyone other than the United States
in connection with a matter in which the
United States is a party or has an inter-
est and in which he participated per-
sonally and substantially for the Govern-
ment (18 U.S.C. 207(a)).
11
Cost Accounting Standards Board
(b) For 1 year after his Government
employment has ended, appear person-
ally before any court or Government
agency as agent or attorney for anyone
other than the Government in connec-
tion with a matter in which the Govern-
ment is a party or has a substantial
interest and which was under his official
responsibility as an employee of the
Government at any time during the last
year of his Government employment (18
U.S.C. 202(b) and 207(b)).
Subpart F-Regulation Governing
Statements of Employment and
Financial Interests
§ 302.71
ments.
Form and content of state-
(a) The statements of employment and
financial interests required to be sub-
mitted by this subpart shall contain, as a
minimum, the information required by
GAO Form 310 (Rev. September 67) and
GAO Form 311 (Rev. September 67),
respectively.
(b) The submission of a statement of
employment and financial interests is not
intended to relieve the employee from
complying with other applicable provi-
sions of law or this regulation. In par-
ticular, the employee is not thereby per-
mitted to participate in a matter where
such participation is prohibited by 18
U.S.C. 208.
§ 302.72 Requirement to submit state-
ments.
Except as otherwise provided in this
regulation, statements of employment
and financial interests (GAO Form 310,
Rev. September 67) will be required from
the following:
(a) Board members and the Executive
Secretary and any staff assistant to a
Board member. Any Board member filing
equivalent statements of employment
and financial interests in connection
with his employment at another Federal
agency shall not be required to submit
this information in connection with em-
ployment at the Board.
(b) Employees in positions equivalent
to grades GS-14 or above under the Fed-
eral Employees Classification Act.
(c) Special Government employees,
subject to the provisions of §§ 302.87-
302.90, inclusive, of this subpart.
§ 302.73 Employees not required to
submit statements.
Employees in positions equivalent to
grades GS-13 and below under the Fed-
eral Employees Classification Act are
excluded from the reporting requirement
of § 302.72 of this subpart. The likelihood
of their involvement in a conflicts-of-
interest situation is remote or the degree
of supervision over them and the review
of their work is such that the integrity
of the Government is protected. This
paragraph does not in any way modify
or limit any employee's responsibilities
under §§ 302.33–302.36, inclusive, of Sub-
part C of this regulation.
§ 302.74 Employee's complaint on fil-
ing requirement.
An employe who feels that his posi-
tion has been improperly included by this
subpart as one requiring the submission
of a statement of employment and finan-
cial interests may obtain a review of that
requirement by filing a grievance with
the Chairman.
§ 302.75 Where to submit statements.
(a) The Chairman will file a statement
of employment and financial interests
(GAO Form 310) with the Director, Office
of Personnel Management, General Ac-
counting Office, who will retain it. The
other Board members, the Executive
Secretary and staff assistants will file a
statement of employment and financial
interests (GAO Form 310) with the
Chairman.
(b) Employees required to submit a
statement of employment and financial
interests will submit their statements
(GAO Form 310) to the Executive
Secretary.
§ 302.76 When to submit statements.
Each employee required to submit a
statement of employment and financial
interests shall submit that statement to
the appropriate officer designated in
§ 302.75 of this subpart.
(a) Ninety days after the effective date
of this regulation, if employed on or
before that effective date (unless the em-
ployee has already submitted a statement
as required by this regulation and that
statement continues to be accurate).
(b) Thirty days after his entrance on
duty in or after his promotion to a posi-
tion subject to this subpart.
12
Cost Accounting Standards Board
§ 302.77 Supplementary statements.
Changes in, or additions to, the in-
formation contained in an employee's
statement of employment and financial
interests shall be reported in a supple-
mentary statement as of June 30 of each
year in which the changes occur. If no
changes or additions occur, a negative
report is required. Notwithstanding the
filing of the annual report required by
this paragraph, each employee shall at
all times avoid acquiring a financial
interest that could result in taking an
action that would result in a violation of
the conflicts-of-interest provisions of
section 208 of title 18, United States
Code, or Subparts C and D of this
regulation.
§ 302.78 Interests of employees' rela-
tives.
The interest of a spouse, minor child,
or other member of an employee's im-
mediate household is considered to be an
interest of the employee. For the purpose
of this paragraph, "member of an em-
ployee's immediate household" means
those relatives by blood who are residents
of the employee's household.
§
302.79 Information not known by
employees.
If any information required to be in-
cluded on a statement of employment
and financial interests or supplementary
statement, including holdings placed in
trust, is not known to the employee but
is known to another person, the employee
shall request that other person to submit
information in his behalf.
§ 302.80
Information not required.
(a) This regulation does not require
an employee to submit on a statement of
employment and financial interests or
supplementary statement any informa-
tion relating to the employee's connec-
tion with, or interest in, a professional
society or a charitable, religious, social,
fraternal, recreational, public service,
civic, or political organization or a sim-
ilar organization not conducted as a
business enterprise. For the purpose of
this paragraph, education and other in-
stitutions doing research and develop-
ment or related work involving grants
of money from or contracts with the
Government are deemed "business en-
terprises" and are required to be included
In an employee's statement of employ-
ment and financial interests.
(b) An employee need not report on
his statement of employment and finan-
cial interests shares of widely held, di-
versified mutual funds or regulated
Investment companies in which he does
not serve as director, officer, partner, or
advisor. The indirect interest in business
entities which the holder of shares in a
widely diversified mutual fund or regu-
lated investment company derives from
ownership by the fund of investment
company of stocks in business entities is
considered too remote or inconsequential
to affect the integrity of the employee's
services.
§ 302.81 Confidentiality of statements.
Statements of employment and finan-
cial interests and supplementary state-
ments shall be retained in a confidential
file secured in an appropriate manner
by the Chairman or the Executive Secre-
tary. No persons other than the Chair-
man or the Executive Secretary, as to
employees or special Government em-
ployees under his direction, or the Coun-
selor for the Board shall have access to
such statements and then only to carry
out the purposes of this regulation. No
disclosure of information shall be made
from such statements except as specifi-
cally authorized by the Chairman for
good cause shown.
§ 302.82 Review of statements by the
Chairman.
The Chairman and the Counselor for
the Board, if requested to do so by the
Chairman, will review each statement
of employment and financial interests
and each supplementary statement sub-
mitted directly to the Chairman by rea-
son of § 302.75 (a) of this subpart, as
well as all relevant information from
other sources incident thereto to deter-
mine whether there are any conflicts of
interest or apparent conflicts of
interest. Where no conflicts of interest
or apparent conflicts of interest are
found, the cases will be considered re-
solved unless other pertinent informa-
tion becomes available. If questions of
conflicts of interest or apparent con-
flicts of interest arise, pertinent proce-
dures established for employees and
special Government employees elsewhere
in this regulation will be followed.
13
Cost Accounting Standards Board
§ 302.83
Review of statements by the
Executive Secretary.
The Executive Secretary, for other
employees or special Government em-
ployees, together with the Counselor
for the Board, will review each statement
of employment and financial interests,
each supplementary statement, and all
relevant information from other sources,
if any, to determine whether there are
any conflicts of interest or apparent con-
flicts of interest on the part of the em-
ployee or special Government employee
submitting the statement. If it is perti-
nent to a conflict-of-interest decision,
the Executive Secretary may request the
employee or special Government em-
ployee to supplement the information on
GAO Form 310 or GAO Form 311 by
stating the number or amount of shares,
stock options, bonds, and other securities
owned by him, his spouse, minor child, or
other members of his immediate house-
hold.
§ 302.84 Findings of
of no conflict of
interest.
If the Executive Secretary believes
that there are no conflicts of interest or
apparent conflicts of interest in individ-
ual cases, the matter will be considered
resolved unless other information on
the case becomes available or circum-
stances change.
§ 302.85
Findings of conflict of interest.
With respect to statements of employ-
ment and financial interests reviewed by
the Executive Secretary under § 302.83
of this subpart, when the Executive Sec-
retary or the Counselor for the Board
believes that the statement or informa-
tion from other sources discloses a con-
flict of interest or an apparent conflict
of interest, the employee or special Gov-
ernment employee concerned will be
asked to explain the conflict or appear-
ance of conflict. If his explanation is
satisfactory, the case will be considered
closed unless further information or
changed circumstances reactiviate it. If
there is believed to be a conflict or appar-
ent conflict of interest on the part of
the employee or special Government em-
ployee, a report will be made of the case
to the Chairman for final disposition.
This report will contain the views of the
Executive Secretary and those of the
Counselor for the Board, will point out
specifically the areas of conflict or ap-
parent conflict and the reasons why it is
felt that a conflict or apparent conflict
exists or does not exist, and will be
signed by both these officials. The report
will also contain a summary of the em-
ployee's explanation signed by him. The
Chairman will then consider the mat-
ter, afford the employee or special Gov-
ernment employee concerned an oppor-
tunity to explain the conflict or appar-
ent conflict, make a final decision, and
take appropriate action in accordance
with §§ 302.5(b) and 302.6 of Subpart A.
§ 302.86 Effect of employees' state-
ments on other requirements.
The statement of employment and
financial interests and supplementary
statements required of employees are in
addition to, and not in substitution for,
or in derogation of, any similar require-
ment imposed by law, order, or regula-
tion. The submission of a statement of
employment and financial interests or
supplementary statement by an em-
ployee does not permit him or any other
person to participate in a matter in
which his or the other person's partic-
ipation is prohibited by law, order, or
regulation.
§ 302.87 Specific provisions for special
Government employees.
Except as provided in § 302.88 of this
subpart, each special Government em-
ployee, by the use of GAO Form 211 (Rev.
September 67), shall submit a statement
of employment and financial interests
which reports:
(a) All other employment; and
(b) The financial interests of the spe-
cial Government employee as indicated
on GAO Form 311. A special Govern-
ment employee need not report financial
interests in widely held, diversified mu-
tual funds or regulated investment com-
panies in which he does not serve as di-
rector, officer, partner, or advisor.
§ 302.88 Waiver of statements from cer-
tain special Government employees.
(a) The provisions of § 302.87 of this
subpart are waived for special Govern-
ment employees who are employed for
the purpose of rendering advice, coun-
sel, or expert services on recruiting and
staff development including CPA review
courses, because such employment is of
a nature and at such a level of respon-
sibility that any financial interests that
they may have would be too remote to
affect the integrity of their services to
the Board and the submission of state-
ments would be unnecessary.
14
Cost Accounting Standards Board
(b) In addition, the Chairman may
waive the requirement of § 302.87 of this
subpart for the submission of a state-
ment of employment and financial inter-
ests in the case of a special Government
employee when he find that the duties
performed by that special Government
employee are of a nature and at such
level of responsibility that the submis-
sion of the statement by the special Gov-
ernment employee is not necessary to
protect the integrity of the Board.
§ 302.89 Time for submission of state-
ments by special Government em-
ployees.
A statement of employment and finan-
cial interests required to be submitted
under § 302.87 of this subpart shall be
submitted not later than the time of em-
ployment of the special Government em-
ployee. Each special Government em-
ployee shall keep his statement current
throughout his employment with the
Board by submission of supplementary
statements contained in his statement of
employment and financial interests every
90 days after his appointment until he
is no longer subject to § 302-87 of this
subpart. Upon reappointment immedi-
ately following separation, the special
Government employee shall file a new
statement or certify that the latest state-
ment on file is currently correct, which-
ever is proper.
§ 302.90
Circumstances requiring state-
ments from special Government em-
ployees.
In all cases where the employment of
a special Government employee to work
on a specific audit, accounting, legal, or
other problem is contemplated, or where
a special Government employee already
employed to render advice, counsel, or
expert services on recruitment and staff
development is to be assigned work on
a specific audit, legal, or other problem,
procedures outlined in §§ 302.83, 302.87,
and 302.89 will be followed.
15
Cost Accounting Standards Board
PART 303-RELEASE OF
INFORMATION
Exempted records.
Time and place where records may be
Sec.
303.1 Purpose.
303.2
Records covered.
303.3
303.4
303.5
303.6
303.7
303.8
303.9
inspected or copied.
Fees for copying.
Procedure for requesting records.
Production of board records.
Use of records.
Refusal to make record available.
AUTHORITY: The provisions of this Part
303 are issued under sec. 103, 84 Stat. 796;
50 U.S.C. App. 2168 and 81 Stat. 54; 5 U.S.C.
552.
SOURCE: The provisions of this Part 303
appear at 36 F.R. 23923, Dec. 16, 1971, unless
otherwise noted.
§ 303.1
Purpose.
This regulation describes the manner
in which records of the Cost Accounting
Standards Board shall be available for
public inspection and copying.
§ 303.2 Records covered.
(a) As used herein, Board "records"
include all interpretations, opinions, or-
ders, manuals, papers, files, letters, mem-
oranda, studies, reports, information, or
other documentary materials in being
other than documentary materials which
are in the possession of the Board but
which are records of another Govern-
ment agency. Not included within Board
"records" are objects, equipment, and
other nondocumentary materials.
§ 303.3
Exempted records.
As used herein, "exempted records” in-
clude those Board records which, pur-
suant to 5 U.S.C. 552(b) or other appli-
cable law or regulation, are not required
to be made available generally for in-
spection or copying. Notwithstanding
the fact that the Board is not required
to do so, an exempted record may be
made available when the Board in its
discretion determines that such action
is appropriate.
§ 303.4 Time and place where records
may be inspected or copied.
Records may be inspected and copied
at the Board's offices, General Account-
ing Office Building, 441 G Street, NW.,
Washington, DC, during the Board's
normal business hours, 8:30 a.m. to 5
p.m., local time, Monday through Friday,
excluding holidays observed by the Fed-
eral Government in Washington, D.C.
§ 303.5 Fees for copying.
(a) The fee for searching for and
duplicating Board records shall be $5.00
for each full hour of time required. No
charge will be made for fractions of an
hour.
(b) Any inquiry that appears to in-
volve a total of more than 10 hours of
search and duplication time will not be
regarded as a request for information
under this Part 303 unless this part is
specifically cited or the inquirer specifi-
cally agrees to accept costs necessary to
cover the estimated number of hours
involved.
(c) Notwithstanding the foregoing,
no charge or a reduced charge will be
made whenever the Executive Secretary
of the Cost Accounting Standards Board
determines that a waiver or reduction of
the fee is in the public interest because
furnishing the information can be con-
sidered as primarily benefiting the gen-
eral public.
[40 FR 18541, Apr. 29, 1975]
§ 303.6
Procedure for
records.
requesting
(a) A request to inspect or copy, or
have copied, the Board's records may be
made in person, by telephone, or in
writing.
(b) Requests for records shall be spe-
cific and must identify the precise rec-
ords or materials which are desired by
name, date, number, or other identifying
data sufficient to allow the Board's staff
to locate, retrieve, and prepare the rec-
ord for inspection or copying and to de-
lete exempted matter where appropriate.
Blanket or generalized requests need not
be honored, and may be returned to the
person making the request.
§ 303.7
Production of board records.
Every effort will be made to respond to
requests with reasonable dispatch. Re-
quests for the same record will be filled
on a first-come, first-served basis, but use
of a document by the Board or its staff
will be given precedence over any request
pursuant to this § 303.7.
§ 303.8
Use of records.
(a) If a person requesting a record
cannot view it at the Board's offices dur-
ing normal business hours, he may ask to
have the record copied and mailed to him
for which he will be charged the appro-
priate fee.
(b) Any record which is available for
inspection at the Board's offices may be
16
Cost Accounting Standards Board
copied.
(c) Under no circumstances may rec-
ords be removed from the Board's offices.
§ 303.9 Refusal to make record avail-
able.
(a) Where the material requested is
not in being, is not a record, is an ex-
empted record, or is otherwise unavail-
able, the request will be denied. The per-
son making the request will be informed
within 10 working days after receipt of
the request for the material of the de-
nial and the reason therefor.
(b) Not more than 20 days after a re-
quest for a record is denied pursuant to
paragraph (a) of this section, the person
making the request may appeal the de-
nial to the Chairman, Cost Accounting
Standards Board, who will make deter-
minations on such appeals. The appeal
shall be by letter, and shall identify the
material requested and denied in the
same manner as it was identified in the
initial request; shall indicate the dates
of the request and denial; and shall indi-
cate the expressed basis for the denial.
In addition, the letter of appeal shall
state briefly and succinctly the reasons
why the record should be made available.
(c) The Chairman may consult with
others in making his determination, and
shall by letter inform the requester,
within 20 business days after receipt of
the appeal, whether the requested ma-
terial will be made available in whole or
in part. If the request is denied in whole
or in part, the basis for denial will be
stated.
[40 FR 18541, Apr. 29, 1975]
17
Cost Accounting Standards Board
Sec.
PART 304-DELEGATIONS OF
304.1 Purpose.
304.2
304.3
304.4
AUTHORITY
Contracting authority.
Waivers and Exemptions.
Fees for copying records.
AUTHORITY: The provisions of this Part 304
are issued under sec. 103, 84 Stat 796; 60
U.S.C. App. 2168.
SOURCE: The provisions of this Part 304
appear at 36 F.R. 23924, Dec. 16, 1971, unless
otherwise noted.
§ 304.1
Purpose.
This part publishes all delegations of
authority by the Board, except delega-
tions dealing with internal administra-
tive matters which do not affect the
public.
§ 304.2 Contracting authority.
(a) The Cost Accounting Standards
Board hereby delegates to the Executive
Secretary of the Board authority to enter
into, administer, and settle contracts in
furtherance of the Board's duties and
responsibilities and designates the Ex-
ecutive Secretary as Contracting Officer
of the Cost Accounting Standards Board
(b) This authority, including author-
ity to designate successor contracting of-
ficers, may be redelegated.
(c) This delegation is effective the date
hereof and until revoked.
§ 304.3 Waivers and exemptions.
(a) The Cost Accounting Standards
Board hereby delegates to the Executive
Secretary of the Board, acting in consul-
tation with the Chairman of the Board,
authority to exercise the Board's au-
thority under § 331.3(c) of the Board's
Contract Coverage (4 CFR 331.3 (c)) of
its rules and regulations, providing the
Executive Secretary concludes that a
request for an exemption or waiver sub-
mitted pursuant to that § 331.3(c) must
be acted on before he can obtain the re-
quired number of opinions of the mem-
bers of the Cost Accounting Standards
Board on that request.
(b) This authority may not be re-
delegated.
(c) This delegation is effective Feb-
ruary 26, 1973, and until revoked.
[38 FR 5621, Mar. 2, 1973]
§ 304.4 Fees for copying records.
(a) The Cost Accounting Standards
Board hereby delegates to the Executive
Secretary of the Board authority to
exercise the Board's authority under
§ 303.5(a), release of information (4
CFR 303.5(a)), of its rules and regu-
lations.
(b) This authority may be redelegated.
(c) This delegation is effective July 25,
1973 and until revoked.
[38 FR 19831, July 24, 1973]
18
Cost Accounting Standards Board
Sec.
PART 305-COST ACCOUNTING
STANDARDS BOARD BYLAWS
305.1 Purpose.
305.2
305.3
Membership
Quorum.
305.4 Board action.
305.5
805.6
Meetings.
Executive sessions.
305.7 Minutes.
305.8 Amendments to these bylaws.
AUTHORITY: The provisions of this Part 305
are issued under sec. 103, 84 Stat 796; 50
U.S.C. App. 2168.
SOURCE: The provisions of this Part 305
appear at 36 F.R. 23924, Dec. 16, 1971, unless
otherwise noted.
§ 305.1
Purpose.
This part publishes the bylaws adopted
by the Board to govern Board member-
ship, meetings, and formal actions by
Board vote.
§ 305.2 Membership.
The Board is composed of the Comp-
troller General of the United States and
the four members appointed by him. In
the event of the absence or incapacity
of the Comptroller General or during a
vacancy in the office, the official of the
General Accounting Office acting as
Comptroller General
General shall serve as
Chairman of the Board. In the event of
the absence of any of the other four
Board members, a representative of that
member may attend the Board meeting.
but he shall have no vote, and his at-
tendance shall not be counted to estab-
lish a quorum.
§ 305.3
Quorum.
Three Board members shall constitute
a quorum of the Board.
§ 305.4 Board action.
Board action shall be by majority vote
of the members present and voting, ex-
cept that any vote to publish a proposed
standard, rule, or regulation in the FED-
ERAL REGISTER for comment or any vote
to promulgate a standard, rule, or reg-
ulation shall require at least three af-
firmative votes of the five Board mem-
bers. The Chairman may vote on all
matters presented for a vote, not merely
to resolve tie votes. The results of final
votes shall be reported in the minutes
of the meeting, and the vote of a Board
member may be recorded at his request.
§ 305.5 Meetings.
The Board shall meet at the call of
the Chairman. Agenda for Board meet-
ings shall be proposed by the Chairman,
but any Board member may request any
item to be placed on the agenda.
§ 305.6 Executive sessions.
Any Board member may request that
the Board meet in executive session, and
the Chairman shall thereupon order such
a session.
§ 305.7
Minutes.
The Executive Secretary of the Board
shall be responsible for keeping accurate
minutes of Board meetings and for main-
taining Board files.
305.6 Amendments to these bylaws.
These bylaws may be supplemented or
amended by the Board, but only after
notice of the proposal to supplement or
amend has been given in the call to the
meeting. Any change in § 305.2, Member-
ship, of this part must be in accord with
the provisions of section 719 of Public
Law 91-379, 50 U.S.C. App. 2168.
19
Supp. No. 3
Cost Accounting Standards Board
PROCUREMENT PRACTICES ¹
PART 331-CONTRACT COVERAGE
Sec.
331.10
331.20
Purpose and scope.
Definitions.
331.30 Applicability, exemption, and waiver.
Solicitation notice.
331.40
331.50
Contract clause.
331.60
Post-award disclosure.
331.70 Interpretation.
331.80 Effective date.
Supplement Preambles
AUTHORITY: Sec. 103, 84 Stat. 796 (50 U.S.C.
App. 2168).
SOURCE: 38 FR 30725, Nov. 7, 1973, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chronologi-
cal order to provide an administrative his-
tory of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4139, February 29, 1972)
is set forth in preamble A of the supplement.
The preambles to amendments affecting the
original publication of this part are set forth
in preambles B and C of the supplement.
The preamble to a complete revision and
republication of this part (38 FR 30725,
November 7, 1973) is set forth in preamble D
of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal
Register, National Archives and Records
Service, General Services Administration,
Washington, D.C. 20408.
§ 331.10 Purpose and scope.
The regulations contained in this part
are promulgated to implement the stand-
ards and the rules and regulations estab-
lished by the Cost Accounting Standards
Board pursuant to 50 U.S.C. App. 2168
(Pub. L. 91-379, August 15, 1970).
The requirements set forth herein shall
be binding upon all relevant Federal
agencies and upon defense contractors
and subcontractors.
§ 331.20 Definitions.
(a) A "relevant Federal agency" is any
Federal agency making a national de-
fense procurement and any agency whose
responsibilities include review, approval,
or other action affecting such a procure-
ment.
(b) A "defense contractor" is any con-
137 F.R. 4143, Feb. 29, 1972.
1
tractor entering into a contract with the
United States for the production of ma-
terial or the performance of services for
the national defense.
(c) A “defense subcontractor" is any
person other than the United States who
contracts, at any tier, to perform any
part of a defense contractor's contract.
(d) "National defense" is any program
for military and atomic energy produc-
tion or construction, military assistance
to any foreign nations, stockpiling, space,
and directly related activity.
(e) The definition of "established
catalog or market prices of commercial
items sold in substantial quantities to the
general public" set out in the Armed
Services Procurement regulation (32 CFR
3.807-1(b)), in effect at the date of the
contract, shall be used.
(f) A "negotiated subcontract" is any
subcontract except a firm fixed-price
subcontract made by a contractor or sub-
contractor after receiving offers from at
least two firms not associated with each
other or such contractor or subcontrac-
tor, providing (1) the solicitation to all
competing firms is identical, (2) price is
the only consideration in selecting the
subcontractor from among the competing
firms solicited, and (3) the lowest offer
received in compliance with the solicita-
tion from among those solicited is
accepted.
(g) A "Disclosure Statement" is the
Disclosure Statement required by Cost
Accounting Standards Board regulation
(Part 351 of this chapter).
(h) [Reserved]
(i) [Reserved]
(j) [Reserved]
(k) A "small business concern" is any
concern, firm, person, corporation, part-
nership, cooperative or other business
enterprise which pursuant to 15 U.S.C.
637(b)(6) and the rules and regulations
of the Small Business Administration
set forth in Part 121 of Title 13 of the
Code of Federal Regulations, is deter-
mined to be a small business concern
for the purpose of Government procure-
ment.
§ 331.30 Applicability, exemption, and
waiver.
(a) The head of each relevant Fed-
eral agency shall cause or require the
clause set forth in § 331.50 captioned
20
Supp. No. 3
Cost Accounting Standards Board
Cost Accounting Standards to be in-
serted in all negotiated defense con-
tracts in excess of $100,000, except as
provided in paragraph (b) of this sec-
tion, other than contracts entered into
by the agency where the price is based
on: (1) Established catalog or market
prices of commercial items sold in sub-
stantial quantities to the general public,
or (2) prices set by law or regulation.
Additionally, all solicitations, likely to
result in a contract in which the clause
set forth in § 331.50 must be inserted,
shall include the notice set forth in
§ 331.40 captioned Disclosure State-
ment Cost Accounting Practices and
Certification.
(b) The requirements of paragraph
(a) of this section shall not be applica-
ble to:
(1) Any contract or subcontract
awarded to a small business concern.
(2) Any contract or subcontract
awarded to a contractor for performance
in a business unit which is eligible to use
the provisions of Part 332 of the Board's
regulations and which elects to use that
part.
(3) [Reserved]
(4) Any contract made with a labor
surplus area concern pursuant to proce-
dures providing for a partial set-aside
for such concern as set out in ASPR 1-
804, 32 CFR 1.804; and FPR 1-1.804, 41
CFR 1-1.804.
(5) Any contract awarded to the Ca-
nadian Commercial Corp. in accordance
with the terms of the agreement of
July 27, 1956, as amended, between the
Department of Defence Production
(Canada) and the U.S. Departments of
the Army, the Navy, the Air Force, and
the Defense Supply Agency.
(6) Any contract awarded to Western
Electric Co. for materials, supplies, or
services which are standard items of the
Bell System. This paragraph 6 expires
on June 30, 1973.
(7) Any subcontract to be performed
outside the United States either by an
agency of a foreign government or by a
foreign concern in connection with the
class of hydrofoil guided missile ship
known as the "NATO PHM Ship."
(8) Any contract or subcontract of
$500,000 or less, unless it is awarded to a
contractor who, on the date of such
award, (i) has already received a con-
tract or subcontract in excess of $500,000
and (ii) has not received notification of
final acceptance of all items of work to be
delivered on that contract or subcon-
21
tract and on all other contracts or sub-
contracts awarded after January 1, 1975,
which were subject to the cost account-
ing standards clause. For the purposes
of this paragraph (b)(8), an intra-cor-
porate transfer shall be considered to be
a subcontract. Notwithstanding this ex-
emption, any contractor entitled to an
exemption under this paragraph (b)(8)
may elect to comply with the cost ac-
counting standards clause. The contrac-
tor may elect to comply in connection
with the receipt of its first contract or
subcontract awarded after January 1,
1975, which but for this paragraph (b)
(8) would be subject to the clause. A
contractor who does not elect to comply
with the clause in connection with the
receipt of the first contract or subcon-
tract, may thereafter make such an elec-
tion only if it receives a contract or sub-
contract of the type described, at a time
when it has no other contract or subcon-
tract of that type on which notificaion of
final aceptance of all items or work to be
delivered has not been received.
(9) Any contract or subcontract
made with a United Kingdom contractor
for performance substantially in the
United Kingdom: Provided, That the
contractor has filed with the U.K.
Ministry of Defence, for retention by the
Ministry, a completed Disclosure State-
ment (Form CASB-DS-1) which shall
adequately describe its cost accounting
practices. Whenever that contractor is
already required to follow U.K. Govern-
ment Accounting Conventions, the dis-
closed practices shall be in accord with
the requirements of those Conventions.
Such contract or subcontract shall also
contain the following provision:
CONSISTENCY IN COST ACCOUNTING
PRACTICES
The contractor agrees that it will con-
sistently follow the cost accounting prac-
tices disclosed on Form CASB-DS-1 in esti-
mating, accumulating and reporting costs
under this contract. In the event the con-
tractor fails to follow such practices, it agrees
that the contract price shall be adjusted, to-
gether with payment of interest, if such fail-
ure results in increased costs paid by the
U.S. Government. Interest shall be deter-
mined in accordance with the rules and reg-
ulations of the Cost Accounting Standards
Board. The contractor agrees that the Dis-
closure Statement filed with the U.K.
Ministry of Defence shall be available for
inspection and use by representatives of the
contracting agency, the Cost Accounting
Standards Board, and the Comptroller Gen-
eral of the United States.
Supp. No. 3
Cost Accounting Standards Board
(c) (1) Upon request of the Secretary
of Defense, the Deputy Secretary of De-
fense, or the Assistant Secretary of De-
fense (Installation and Logistics), or out-
side the Department of Defense, of offi-
cials in equivalent positions, the Cost
Accounting Standards Board may waive
all or any part of the requirements of
paragraph (a) of this section with re-
spect to a contract or subcontract to be
performed within the United States, or a
contract or subcontract to be performed
outside the United States by a domestic
concern. A domestic concern is an in-
corporated concern incorporated in the
United States or an unincorporated con-
cern having its principal place of busi-
ness in the United States. (In the con-
text of this subparagraph, "concern" re-
fers to a prospective or actual contractor.
Thus, a contract with a foreign subsidiary
or foreign branch or business office of a
U.S. corporation would not be a contract
with a domestic concern. Conversely, a
contract executed by a foreign salesman
or agent on behalf of a domestic concern
would nevertheless be a contract with a
domestic concern since the basic con-
tractual and legal responsibility resides
with the domestic concern.) Any request
for a waiver shall describe the proposed
contract or subcontract for which waiver
is sought and shall contain (i) an un-
equivocal statement that the proposed
contractor or subcontractor refuses to
accept a contract containing all or a
specified part of the Cost Accounting
Standards clause and the specific reason
for that refusal, (ii) a statement whether
the proposed contractor or subcontractor
has accepted any prime contract or sub-
contract with any Federal department or
agency containing the Cost Accounting
Standards clause, (iii) the amount of the
proposed award and the sum of all
awards by the department or agency re-
questing the waiver to the proposed con-
tractor or subcontractor in each of the
preceding 3 years, (iv) a statement that
no other source of the supplies or serv-
ices being procured is available to satisfy
the needs of the agency on a timely basis,
21A
Supp. No. 3
Cost Accounting Standards Board
By submission of this offer. the offeror
certifies that his practices used in estimating
costs in pricing this proposal are consistent
with the cost accounting practices disclosed
in the applicable disclosure statement.
[38 FR 30725, Nov. 7, 1973, as amended at
39 FR 44391, Dec. 24, 1974]
PREAMBLES: For preambles relating to
§ 331.40, see preambles D and F of the sup-
plement to this part. For preambles to
superseded regulations, see preamble A of
the supplement.
§ 331.50 Contract clause.
Except as provided in either § 331.30
or Part 332 of this chapter, the follow-
ing clause shall be inserted in all nego-
tiated national defense prime contracts
and subcontracts in excess of $100,000.
Cost Accounting STANDARDS
(a) Unless the Cost Accounting Standards
Board has prescribed rules or regulations ex-
empting the contractor or this contract from
standards, rules, and regulations promul-
gated pursuant to 50 U.S.C. App. 2168 (Pub.
L. 91-379, August 15, 1970), the contractor,
in connection with this contract shall:
(1) By submission of a Disclosure State-
ment, disclose in writing his cost account-
ing practices as required by regulations of
the Cost Accounting Standards Board. The
required disclosures must be made prior
to contract award unless the Contracting
Officer provides a written notice to the con-
tractor authorizing post-award submission
in accordance with regulations of the Cost
Accounting Standards Board. The practices
disclosed for this contract shall be the same
as the practices currently disclosed and
applied on all other contracts and subcon-
tracts being performed by the contractor
and which contain this Cost Accounting
Standards clause. If the contractor has noti-
fied the Contracting Office that the Dis-
closure Statement contains trade secrets and
commercial or financial information which
is privileged and confidential, the Disclosure
Statement will be protected and will not be
released outside of the Government.
con-
(2) Follow consistently the cost account-
ing practices disclosed pursuant to (1)
above in accumulating and reporting con-
tract performance cost data concerning this
contract. If any change in disclosed prac-
tices is made for purposes of any
tract or subcontract subject to Cost Ac-
counting Standards Board requirements,
the change must be applied prospectively to
this contract, and the Disclosure Statement
must be amended accordingly. If the contract
price or cost allowance of this contract is
affected by such changes, adjustment shall
be made in accordance with subparagraph
(a)(4) or (a) (5) below, as appropriate.
(3) Comply with all Cost Accounting
Standards in effect on the date of award of
this contract or if the contractor has submit-
ted cost or pricing data, on the date of final
agreement on price as shown on the con-
tractor's signed certificate of current cost
or pricing data. The contractor shall also
comply with any Cost Accounting Standard
which hereafter becomes applicable to a
contract or subcontract of the contractor.
Such compliance shall be required prospec-
tively from the date of applicability to such
contract or subcontract.
(4)(A) Agree to an equitable adjustment
as provided in the changes clause of this
contract if the contract cost is affected by a
change which, pursuant to (3) above, the
contractor is required to make to his estab-
lished cost accounting practices whether
such practices are covered by a Disclosure
Statement or not.
(B) Negotiate with the contracting officer
to determine the terms and conditions under
which a change to either a disclosed cost
accounting practice or an established cost
accounting practice, other than a change
under (4)(A) above, may be made. A change
to a practice may be proposed by either the
Government or the contractor, provided,
however, that no agreement may be made
under this provision that will increase costs
paid by the United States.
(5) Agree to an adjustment of the contract
price or cost allowance, as appropriate, if
he or a subcontractor fails to comply with
an applicable Cost Accounting Standard or
to follow any practice disclosed pursuant to
subparagraphs (a)(1) and (a)(2) above
and such failure results in any increased
costs paid by the United States. Such ad-
Justment shall provide for recovery of the
increased costs to the United States together
with interest thereon computed at the rate
determined by the Secretary of the Treasury
pursuant to Public Law 92-41, 85 Stat. 97, or
7 percent per annum, whichever is less, from
the time the payment by the United States
was made to the time the adjustment is
effected.
(b) If the parties fail to agree whether
the contractor or a subcontractor has com-
plied with an applicable Cost Accounting
Standard, rule, or regulation of the Cost Ac-
counting Standards Board and as to any cost
adjustment demanded by the United States,
such failure to agree shall be a dispute con-
cerning a question of fact within the mean-
ing of the disputes clause of this contract.
(c) The contractor shall permit any au-
thorized representatives of the head of the
agency, of the Cost Accounting Standards
Board, or of the Comptroller General of the
United States to examine and make copies
of any documents, papers, or records relat-
ing to compliance with the requirements of
this clause.
(d) The contractor shall include in all
negotiated subcontracts which he enters into
the substance of this clause except paragraph
(b) of this section, and shall require such
inclusion in all other subcontracts of any
tier, except that this requirement shall apply
only to negotiated subcontracts in excess of
$100,000 where the price negotiated is not
based on:
(1) Established catalog or market prices of
23
Supp. No. 3
Cost Accounting Standards Board
commercial items sold in substantial quanti-
ties to the general public, or
(2) Prices set by law or regulation, and ex-
cept that the requirement shall not apply
to negotiated subcontracts otherwise exempt
from the requirement to accept the cost ac-
counting standards clause by reason of § 331.-
30 (b) of Title 4, Code of Federal Regulations
(4 CFR 331.30 (b).
However, if this is a contract with an agency
which permits subcontractors to appeal final
decisions of the contracting officer directly to
the head of the agency or his duly authorized
representative, then the contractor shall in-
clude the substance of paragraph (b) as well.
NOTE: In any case where a subcontractor
determines that the Disclosure Statement in-
formation is privileged and confidential and
declines to provide it to his contractor or
higher tier subcontractor, the contractor may
authorize direct submission of that subcon-
tractor's Disclosure Statement to the same
Government offices to which the contractor
was required to make submission of his Dis-
closure Statement. Such authorization shall
in no way relieve the contractor of liability
as provided in paragraph (a)(5) of this
clause. In view of the foregoing and since
the contract may be subject to adjustment
under this clause by reason of any failure
to comply with rules, regulations, and
Standards of the Cost Accounting Standards
Board in connection with covered subcon-
tracts, it is expected that the contractor may
wish to include a clause in each such sub-
contract requiring the subcontractor to
appropriately indemnify the contractor.
However, the inclusion of such a clause and
the terms thereof are matters for negotia-
tion and agreement between the contractor
and the subcontractor, provided that they
do not conflict with the duties of the con-
tractor under its contract with the Gov-
ernment. It is also expected that any
subcontractor subject to such indemnifica-
tion will generally require substantially sim-
ilar indemnification to be submitted by his
subcontractors.
(e) The terms defined in § 331.20 of Part
331 of Title 4, Code of Federal Regulations
(4 CFR 331.20) shall have the same meanings
herein. As there defined, "negotiated sub-
contract" means "any subcontract except a
firm fixed-price subcontract made by a con-
tractor or subcontractor after receiving offers
from at least two firms not associated with
each other or such contractor or subcontrac-
tor, providing (1) the solicitation to all com-
peting firms is identical, (2) price is the only
consideration in selecting the subcontractor
from among the competing firms solicited,
and (3) the lowest offer received in compli-
ance with the solicitation from among those
solicited is accepted."
[38 FR 30725, Nov. 7, 1973, as amended at
39 FR 44391, Dec. 24, 1974]
PREAMBLES: For preambles relating to
§ 331.50, see preambles D and F of the sup-
plement to this part. For preamble to super-
24
seded regulations, see preamble A of the
supplement.
§ 331.60 Post-award disclosure.
(a) As specified in the solicitation no-
tice and contract clause set forth in
§ 331.50, Disclosure Statements must be
submitted by offerors required to make
disclosure prior to contract award un-
less the contracting officer authorizes in
writing post-award submission. As speci-
fied in the contract clause set forth in
§ 331.50, Disclosure Statements must be
submitted by prospective subcontrac-
tors required to make disclosure prior to
subcontract award unless the contract-
ing officer at the request of the contrac-
tor authorizes in writing post-award
submission.
(b) Post-award submission may be
authorized only when the contracting
officer has made a written determination
that such authorization is essential (1)
to the national defense, (2) because of
the public exigency, or (3) to avoid undue
hardship. Each determination shall set
forth facts which clearly support the
determination to authorize post-award
submission, and a copy of the deter-
mination shall be included in the con-
tract file. Authorization issued pursuant
to this paragraph shall specify the time,
not to exceed 90 days after contract or
subcontract award, by which disclosure
must be made.
§ 331.70 Interpretation.
(a) Increased costs paid by the United
States as referred to in paragraph (a) (5)
of the Cost Accounting Standards clause
in § 331.50 shall be deemed to have re-
sulted whenever the cost paid by the
Government results from application of
practices other than the contractor's
disclosed practices or from failure to
comply with applicable Cost Accounting
Standards, and such cost is higher than
it would have been had the disclosed
practices been followed or applicable Cost
Accounting Standards been complied
with.
(b) In negotiated firm fixed-price type
contracts, however, "increased costs"
cannot be interpreted in terms of a
higher level of costs reimbursed during
contract performance, since in such con-
tracts the price to be paid would nor-
mally be the price agreed to. That price
will have been based on the requirement
that the contractor use his disclosed
practices and comply with applicable
Cost Accounting Standards. Subse-
quently, if the contractor fails during
Supp. No. 3
Cost Accounting Standards Board
contract performance to follow his dis-
closed practices or to comply with ap-
plicable Cost Accounting Standards, any
increased cost to the United States by
reason of that failure must be measured
by the difference between the cost esti-
mates used in negotiations and the cost
estimates that would have been used had
the contractor proposed on the basis of
the practices actually used during con-
tract performance. (In cases where an
offset of decreased costs allocated to
firm fixed-price contracts against in-
creased costs allocated to cost reimburse-
ment type contracts may be involved,
the provisions of paragraph (f) of this
section shall apply.)
(c) The statutory requirement under-
lying this interpretation is that the
United States not pay increased costs,
including a profit enlarged beyond that
in the contemplation of the parties to
the contract when the contract costs,
price, or profit is negotiated, by reason
of a contractor's failure to use applicable
Cost Accounting Standards or to follow
his disclosed practices. In making price
adjustments under paragraph (a)(5) of
the Cost Accounting Standards clause in
§ 331.50, in fixed-price or cost-reimburse-
ment incentive contracts, or contracts
providing for prospective or retroactive
price redetermination, the Federal agency
shall apply this requirement appropri-
ately in the circumstances.
(d) The contractor and the contract-
ing officer may enter into an agreement
as contemplated by paragraph (a)(4)
(B) of the Cost Accounting Standards
clause in § 331.50, covering a change in
practice proposed by the Government or
the contractor for all of the contractor's
contracts for which the contracting offi-
cer is responsible, provided that the
agreement does not permit any increase
in the cost paid by the Government. Such
agreement may be made final and bind-
ing, notwithstanding the fact that ex-
perience may subsequently establish that
the actual impact of the change differed
from that agreed to.
(e) To facilitate agreements with a
contractor who has a large number of
contracts affected by a proposed change
in his disclosed cost accounting practices
or affected by application of Cost Ac-
counting Standards, contracting agen-
cies are urged to establish procedures
under which the contractor may seek,
and in proper cases obtain, agreement
with a single official concerning the im-
pact of the proposed change or applica-
tion of standards upon all such con-
tracts of that agency.
(f) In one circumstance an adjust-
ment to the contract price or of cost
allowances pursuant to paragraph (a)
(4) (B) of the Cost Accounting Standards
clause in § 331.50 may not be required
when an amendment to disclosed or es-
tablished practices is estimated to result
in increased costs being paid under a
particular contract by the United States.
This circumstance may arise when a con-
tractor is performing two or more con-
tracts, subject to Cost Accounting Stand-
ards Board rules, regulations, and stand-
ards, with an agency or agencies of the
United States, and when he proposes to
change a practice disclosed or established
for all such contracts. The amendment
may increase the cost paid under one or
more of the contracts, while decreasing
the cost paid under one or more of the
contracts. In such case, the Government
will not pursuant to paragraph (a)(4)
(B) require price adjustment for any in-
creased costs paid by the United States
so long as the costs decreased under one
or more contracts are at least equal to
the increased cost under the other af-
fected contracts, provided that the con-
tractor and all affected contracting offi-
cers agree on the method by which the
price adjustments are to be made for all
affected contracts. In this situation, the
contracting agencies would, of course,
require an adjustment of the contract
price or cost allowances, as appropriate,
to the extent that the increases under
certain contracts were not offset by the
decreases under the remaining contracts.
(g) Where, through inadvertence,
the contractor has failed to use appli-
cable Cost Accounting Standards or to
follow his disclosed practices and has not
notified his contracting officer or officers
of that failure, if the result of that fail-
ure is to increase costs paid under one
or more contracts, while decreasing costs
paid under one or more contracts, the
contracting officer or officers of the
agency or agencies concerned are urged,
in the interest of administrative con-
venience, to negotiate the adjustment of
the contract prices or cost allowances, as
appropriate, of the affected contracts by
requiring repayment of only the differ-
ence between the estimated price in-
creases and the estimated price de-
creases, together with any applicable
interest.
§ 331.71
Materiality.
(a) In determining whether amounts
of cost are material or immaterial, the
25
Supp. No. 3
Cost Accounting Standards Board
following criteria shall be considered
where appropriate; no one criterion is
necessarily determinative.
(1) The absolute dollar amount in-
volved. The larger the dollar amount,
the more likely that it will be material.
(2) The amount of contract cost com-
pared with the amount under consid-
eration. The larger the proportion of the
amount under consideration to contract
cost the more likely it is to be material.
(3) The relationship between a cost
item and a cost objective. Direct cost
items, especially if the amounts are
themselves part of a base for allocation
of indirect cost, will normally have more
impact than the same amount of indi-
rect costs.
(4) The impact on Government fund-
ing. Changes in accounting treatment
will have more impact if they influence
the distribution of costs between Gov-
ernment and non-Government cost ob-
jectives than if all cost objectives have
Government financial support.
(5) The cumulative impact of indi-
vidually immaterial items. It is appro-
priate to consider whether such impacts
(a) tend to offset one another, or (b)
tend to be in the same direction and
hence to accumulate into a material
amount.
(6) The cost of administrative proc-
essing of the price adjustment modifica-
tion shall be considered. If the cost to
process exceeds the amount to be re-
covered, it is less likely the amount will
be material.
(b) (1) A contract modification for
price adjustment or cost allowance under
paragraphs (a) (4) and (a) (5) of the
Cost Accounting Standards clause set
forth in section 331.50 is required only if
the cost impact is material.
(2) Where a contractor is in noncom-
pliance and does not change a cost ac-
counting practice because the cost impact
is immaterial, the contracting agency is
not relieved of its responsibilities to as-
sure that an appropriate price adjust-
ment is obtained if the cost impact of the
noncompliance subsequently becomes
material. The contractor shall be notified
that the Government's decision to for-
bear action for noncompliance is solely
because the cost impact at the time of
the notice is immaterial. If at any time
thereafter, the Government determines
that the cost impact of noncompliance
with respect to the practice in question
is material, the Government then must
require action under paragraph (a) (5)
of the contract clause for any cost ac-
counting period in which the cost impact
is material. The fact that the Govern-
ment does not pursue a price adjustment
does not excuse the contractor from his
obligation to comply with the Standard
involved.
(3) Whether cost impact is recognized
by modifying a single contract, several
but not all contracts, or all contracts, or
any other suitable technique, is a con-
tract administration matter. The Stand-
ards, rules, and regulations of the Board
do not in any way restrict the capacity of
the parties to select the method by which
the cost impact attributable to a change
in cost accounting practice is recognized.
§ 331.72 Relationship to Part 332.
Contracts subject to this part may be
performed during a cost accounting pe-
riod in which a previously awarded con-
tract subject to Part 332 of this part is
also being performed. Compliance with
the requirements established by this part
may compel the use of cost accounting
practices for contracts covered by this
part that are not required under Part
332. Under these circumstances, the cost
accounting practices applicable to con-
tracts subject to Part 332 of this part
need not be changed. Any resulting dif-
ferences in practices between the con-
tracts subject to this part and those sub-
ject to Part 332 of this part shall not
constitute violations of Standards 401
or 402.
§ 331.80 Effective date.
The Disclosure Statement requirement
at § 331.40 shall be included in all appli-
cable solicitations issued on or after
July 1, 1972, and all resulting contracts
shall contain the contract clause at
§ 331.50. In any event, any other contract
which is within the jurisdiction of the
Cost Accounting Standards Board and
which is awarded on or after October 1.
1972, shall contain that contract clause.
Relevant Federal agencies shall notify
the Cost Accounting Standards Board
not later than June 1, 1972, of the action
taken to implement this regulation.
26
Supp. No. 3
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 2–29–72
The material set forth below is the pream-
ble to the original publication of Part 331,
February 29, 1972, at 37 FR 4139. For the pre-
amble to the republication of Part 331 (No-
vember 7, 1973, 38 FR 37025), see preamble D
of this Supplement. Portions of this preamble
relating to Parts 351, 400, and 401 have been
omitted; they can be found in the supple-
ments to their respective parts. This preamble
to the publication of February 29, 1972, is
included as part of the administrative history
of Part 331.
General comments. The purpose of the
regulations promulgated today by the
Cost Accounting Standards Board is to
implement section 719 of the Defense
Production Act of 1950, as amended, 50
U.S.C. app. 2168, which provides for de-
velopment of Cost Accounting Stand-
ards to be used in connection with ne-
gotiated national defense contracts and
for disclosure of cost accounting prac-
tices to be used in such contracts. The
Board believes the materials being pro-
mulgated today constitute a significant
initial step toward accomplishing one of
its major objectives-improved cost ac-
counting and the proper determination
of the cost of negotiated defense con-
tracts. The regulations spell out con-
tract coverage (Part 331), disclosure re-
quirements (Part 351), a compilation of
Definitions (Part 400), and two Cost Ac-
counting Standards, one calling for con-
sistency in estimating, accumulating, and
reporting costs (Part 401), and the other
calling for consistency in allocating costs
incurred for the same purpose (Part
402).
Development of the material being
promulgated today began many months
ago with extensive research. It included
examining publications on the subject,
conferring with knowledgeable, repre-
sentatives of various Government agen-
cies, Government contractors, industry
associations, and professional accounting
associations, and identifying and consid-
ering all available viewpoints. From this
research, the initial versions of the mate-
rial now being published were developed.
As a part of the continuing research ef-
fort, these initial drafts were sent to 81
agencies, associations, and Government
contractors which had expressed interest
in assisting the Board in its work, and
their comments were solicited. Some na-
tional defense contractors field-tested
the material to see how it would ap-
ply to and affect their operations and ad-
vised the Board of their findings. In each
step of the research process, the Board
and its staff have urged and received ac-
tive participation and assistance by Gov-
ernment, industry, and accounting or-
ganizations. Their cooperative efforts
contributed in large measure to the ex-
posure draft published in the Decem-
ber 30, 1971, FEDERAL
FEDERAL REGISTER for
comment.
To better assure that all who might
want to comment had an opportunity to
do so, the Board supplemented the FED-
ERAL REGISTER notice by sending copies
of the FEDERAL REGISTER materials di-
rectly to about 175 organizations and in-
dividuals who had expressed interest or
had provided assistance in the develop-
ment of the published material. Also, a
press release was distributed announcing
the publication, which resulted in nu-
merous articles in journals. The Board
availed itself of all opportunities to pub-
licize the proposals and solicit comments
on them.
Written comments in response to the
published material were requested by
February 4, 1972. Comments were re-
ceived from 105 sources, including Gov-
ernment agencies, professional asso-
ciations, industry associations, public
accounting firms, individual companies,
and others. The Board appreciates the
obvious care and attention devoted by
commentators, and as will be seen below,
the Board has greatly benefited from the
comments received.
Many of the comments received were
addressed to all parts of the proposed
Board rules as well as to the question of
public availability of the Disclosure
Statements. All of the comments received
have been carefully considered by the
Board taking into account the require-
ments of section 719. Understandably,
many of the comments were addressed
to issues which recur in two or more of
the proposed parts while others dealt
only with specific sections. Comments
which dealt with 11 general issues are
discussed separately below followed by
a section-by-section analysis of other
comments. Appropriate changes have
been made in the material promulgated
based on the Board's disposition of the
comments received.
Those comments and suggestions re-
ceived which are of particular signifi-
cance are discussed below.
1. Public availability of disclosure
statement. In a special notice in the
notice of proposed rule making, the
27
Cost Accounting Standards Board
Board sought comments to assist it in its
determination of whether Disclosure
Statements submitted by defense con-
tractors and subcontractors should be
available to the general public, pursuant
to the Public Information Section of the
Administrative Procedure Act (5 U.S.C.
552) or whether such information was
properly within one of the statutory ex-
ceptions to the legal requirement for
public availability.
With few exceptions, both Government
and industry commentators urged that
the Disclosure Statements not be made
available to the general public. Numerous
arguments were presented. Among them
were that public disclosure by a Govern-
ment official would violate 18 U.S.C. 1905
(a provision in the Criminal Code making
it a crime for a Government official to
make certain matters public in certain
circumstances), thus making disclosure
improper under an exception to the re-
quirement for public availability set out
in 5 U.S.C. 552(b) (3); that the cost ac-
counting practices were trade secrets or
property of considerable value and that
disclosure would deprive the company of
their value without compensation; that
disclosure would reduce competition; and
that the public might be misled in that
it might construe disclosures respecting
the defense segment of a contractor's
business as representative of his entire
business organization.
An argument in favor of making the
Disclosure Statements available to the
public was made by a public interest
group. It argued that 5 U.S.C. 552 clearly
applies to Disclosure Statements, which
do not fall within any exception to public
availability; that the public requires ac-
cess to Disclosure Statements in order
to consider adequately and comment in-
telligently on any Cost Accounting
Standards proposed by the Board; that
public availability would enhance com-
petition; that Disclosure Statements
which are ultimately approved will form
a body of precedents to guide others in
complying with future Board Standards
and that public availability will enable
citizens and the Congress to hold both
the Board and contracting officials ac-
countable for implementation of section
719. A few commentators stated that they
favored, or could see no harm to com-
panies from, public availability of con-
tractors' disclosed practices.
The Board is especially impressed with
arguments that cost accounting prac-
tices have never been made public, that
companies have regarded and treated
them as confidential, and that a com-
pany's competitive position would be
damaged by public disclosure of its cost
accounting practices. Since disclosure
will be required of many companies or
divisions of companies whose principal
competitors are not subject to Board
regulations, the Board recognizes there
might arise competitive disadvantage to
the disclosing company or division if its
competitors may see its disclosure but
need make none themselves. The Board
has, in light of these latter arguments,
concluded that information received in
response to Disclosure Statements is
within the exception set forth at 5 U.S.C.
552(b) (4) and that the Board will not
make Disclosure Statements public in
any case when the company or segment
files its statement specifically conditioned
on the Government's agreement to treat
the Disclosure Statement as confidential
information.
A provision to this effect has been
added at § 351.4 (d) of Part 351. Addi-
tionally, paragraph (a)(1) of the con-
tract clause set forth at § 331.5 has been
modified to this effect, and a provision
added to it so that subcontractors may
submit Disclosure Statements directly to
the contracting officer.
While the Board has concluded that
public availability of the Disclosure
Statements of identified contractors is
not required, it will, nevertheless, imple-
ment its annouced intention of compil-
ing statistical summaries of disclosure
data and making those studies avail-
able to the public. The Board believes
that the creation of a data bank of cost
accounting practices will greatly bene-
fit the Board's own research efforts and
the formulation of Cost Accounting
Standards; summaries of these data or
studies of them should also prove to be
of great value to the public. Aggregated
information not identified to particular
contractors will, therefore, be made
available to the public.
2. Contractor-subcontractor relation-
ships. Several commentators, stating
that contractors cannot dictate the cost
accounting practices of their subcon-
tractors at any tier, urged that the Board
not hold contractors responsible for in-
creased costs to the United States aris-
ing from the failure of subcontractors to
follow Cost Accounting Standards or dis-
closed cost accounting practices. Several
commentators also urged that the con-
28
Cost Accounting Standards Board
tractor not be subject to the possibility
of a default termination by reason of
the actions or inactions of any of its sub-
contractors at any tier. Finally, some
commentators urged that the Board
establish a novel concept of privity be-
tween the contracting agency and sub-
contractors with respect to any concerns
stemming from Board rules, regulations,
and Cost Accounting Standards.
The Board has dealt with many of the
issues touched on by these commentators
in its conclusions, discussed below, re-
specting the phasing of applicability and
the proposed termination-for-default
language in the Contract Clause. The
Board is also mindful of the desirability
of its maintaining neutrality with respect
to contracting policies outside its juris-
diction; thus it should avoid establish-
ing a standard or policy which would
influence decisions of whether work
should be performed in-house or subcon-
tracted. A Board policy permitting con-
tractors to avoid responsibility for the
actions of their subcontractors
surely have such an impact.
could
The Board reaffirms the established
principle that prime contractors are re-
sponsible to the Government for per-
formance of
of their contracts in all
required respects and urges that contrac-
tors who are fearful of deficiencies in
their subcontractors' performances pro-
tect themselves by use of whatever means
they currently employ under other flow-
down contractual requirements.
to
3. Exemptions. Many commentators
urged the Board to provide exemptions
either to the requirement to file a Dis-
closure Statement or to both that re-
quirement and the requirement
follow Cost Accounting Standards. Ex-
emptions were urged for subcontractors
below the first tier,
tier, subcontractors
with small amounts of defense contract-
ing business, producers of basic or raw
materials, colleges and universities, con-
struction contractors, firms which would
qualify as small businesses, and others.
The Board has long been concerned
with the question of appropriate exemp-
tions. It has specifically requested in-
terested groups to offer suggestions for
criteria for use by the Board in consid-
ering exemptions. It also requested its
staff to study exemptions and has dis-
cussed the staff investigations at Board
meetings. In light of these studies and
the comments received, the Board has
found no persuasive reasons for issuing
blanket or class exemptions at this time.
The Board recognizes, however, that
individual Cost Accounting Standards
may by their nature be inapplicable or
inappropriate to certain classes or cate-
gories of defense contractors or con-
tracts. The Board will continue to
consider exemptions from individual
proposed Cost Accounting Standards as
appropriate.
With respect to the requirement to
submit a Disclosure Statement, the
Board's proposed regulation provides a
phasing of that requirement. The Board
remains convinced that a company which
together with its subsidiaries received
prime contract awards of negotiated na-
tional defense contracts including sup-
plemental awards during Federal fiscal
year 1971 totaling more than $30 mil-
lion should be required to submit a Dis-
closure Statement as soon as Part 351
of the Board's regulations becomes ef-
fective. In order to provide both to other
contractors and to Government agencies
adequate time within which to study
the use of Disclosure Statements, how-
ever, the Board will defer determination
of the date after which other affected
contractors and subcontractors may be
required to file Disclosure Statements.
From time to time, the Board will an-
nounce the dates of applicability to other
contractors and subcontractors.
4. Applicability date of standards,
rules, and regulations. A related issue
raised by many commentators is a re-
quest that Cost Accounting Standards
be made applicable 90 days after is-
suance or at the beginning of the con-
tractor's next fiscal year, whichever is
later. In order to provide the maximum
benefits from use of Cost Accounting
Standards, the Board has decided not
to adopt any rule which would auto-
matically delay the effective date of Cost
Accounting Standards beyond the dates
contemplated in section 719(h). That
section provides a minimum of 4 months'
notice from the date of promulgation, to
contractors of the likely applicability of
a Cost Accounting Standard. The Board
regards this as an adequate time for
companies to prepare for use of the
standard. The Board nevertheless recog-
nizes that certain standards by their
nature may require deferring applica-
bility to the beginning of a contractor's
fiscal year next following the effective
date, and in such cases that applicability
will be stated in the standards concerned.
29
Cost Accounting Standards Board
5. Agency administrative responsi-
bility. Many commentators, noting the
Board's statutory responsibility to pro-
mote uniformity and consistency in cost
accounting practices used in defense
contracting and subcontracting, have
suggested that uniformity would be pro-
moted by giving the Board or another
single Federal agency the sole imple-
menting responsibility respecting Board
regulations. Thus, some commentators
recommended that the Board itself issue
regulations prescribing the frequency of
submission of Disclosure Statements and
where they must be submitted. Other
commentators urged that the Board is-
sue a single regulation prescribing exact
methods by which increased costs to the
United States will be determined. Other
commentators urged that the Board pre-
scribe methods by which advance agree-
ments affecting more than one contract
shall be made, some commentators urg-
ing that the Board itself make those
agreements. Others urged that the Board
rule that the contracting agencies must
act to approve or disapprove Disclosure
Statements within a stated period of
time. And finally, some commentators
urged that the Board itself be the sole
agency to approve the cost accounting
practices disclosed through submission
of a Disclosure Statement.
The Board finds these recommenda-
tions cogent. It also recognizes that to act
pursuant to them would require a Board
regulation directed to the administrative
and contracting procedures of many
Federal agencies and in some cases-such
as the recommendation for Board ap-
proval of disclosed cost accounting prac-
tices-substitute a Board regulation for
the exercise of contracting officers
discretion.
The Board, therefore, has decided not
to implement at this time the suggestions
set forth in this connection. The Board
nevertheless will watch closely during the
early implementation by contracting
agencies of Board rules, regulations, and
Cost Accounting Standards so that it
may become aware of any diversity of
regulations or actions by contracting
ågencies. If the Board finds that an un-
acceptable amount of diversity has
arisen, it will be prepared to reconsider
the recommendations that the Board is-
sue its own regulations in many of the
areas left by Board regulations to the
discretion of contracting agencies.
Many commentators have expressed
concern about the problems which could
arise from inconsistent actions by differ-
ent Federal agencies respecting dis-
closed practices, changes in practices,
and equitable adjustment of contract
prices and costs. The Board has directed
its staff to work with representatives of
relevant Federal agencies with the objec-
tive of obtaining designation of a single
contracting officer for each contractor
or major component thereof in order to
achieve consistent practices within the
standards issued by the Board.
Several
6. Contract modifications.
commentators have urged that nego-
tiated contract changes and amendments
over $100,000 to contracts which are
theniselves not subject to Board jurisdic-
tion should not be covered. One commen-
tator pointed out that in a long-term
contract, most changes represent "in-
stead of" type changes with cost of price
adjustments only for the incremental ef-
fect of the change. This commentator
stated that there is no practical way
separately to identify these incremental
costs.
The Board is persuaded that for the
time being it should not cover negotiated
modifications to contracts exempt at
their inception. It has therefore, elimi-
nated coverage for the time being of such
contract modifications. In doing so, how-
ever, the Board intends that the annual
extension of existing negotiated con-
tracts and similar contract modifications
would not be exempt from the Board's
rules, regulations, and Cost Accounting
Standards.
7. Definitions. The Board is also per-
suaded of the value of one commenta-
tor's suggestion that the Board provide a
compilation of definitions of the words
or phases defined in individual Cost
Accounting Standards, making those
definitions applicable to all such stand-
ards. Consequently, a new Part 400 has
been added, and all terms defined in
Parts 401 and 402 have been placed in it,
although they also remain in the partic-
ular standards in which they are defined.
As more standards are added, any terms
defined in them will also be added to
Part 400. However, terms defined in Parts
331 and 351 are not included in the glos-
sary of definitions, nor are terms used
in those parts necessarily to bear the
meanings ascribed to those terms in
Part 400.
8. Application to individual contracts.
Several commentators urged that the
Board adopt the date of final agreement
30
Cost Accounting Standards Board
on a negotiated price as a cut-off date
for the disclosure of cost accounting
practices. The Board has reviewed the
merits of selecting that date rather than
the date of award to establish the date
as of which the contractor's Disclosure
Statement must accurately reflect his
cost accounting practices, at least with
respect to those contracts where cost or
pricing data have been submitted pur-
suant to Public Law 87-653. The Board
has decided to use the date of final agree-
ment on price, as shown on the signed
certificate of current cost or pricing data,
with respect to contractors who have
submitted cost or pricing data, and to
use the date of award of the contract for
all other contractors. In addition, the
Board has concluded that it is appropri-
ate to use those dates to establish which
Cost Accounting Standards shall be ap-
plicable to the proposal and to the con-
tract at its inception. Appropriate
changes in Parts 331, 351, and 401 have
been made to reflect this decision.
9. Price adjustments. Many commen-
tators stated that where a contractor's
departure from existing disclosed prac.
tices is occasioned by the contractor's
wish to adopt a newly issued Cost Ac-
counting Standard for all contracts, the
Government should be willing to provide
upward price adjustment whenever an
existing contract is rendered thereby
more expensive to perform. The view was
often expressed that contractors could
not maintain one accounting practice for
contracts subject to a particular Cost
Accounting Standard, but a different
practice for contracts not so subject;
therefore, it was alleged, once a contrac-
tor had to adopt a standard for any one
contract, he would of necessity adopt
it for all contracts and amend his Dis-
closure Statement accordingly.
The Board notes in this connection
that the Cost Accounting Standard at
Part 402 requires consistency in the al-
location of all direct and indirect costs
under all covered contracts. If a Cost
Accounting Standard were issued which
required a company to modify its dis-
closed cost accounting practices with re-
spect to its earlier practice of allocating
direct and indirect costs, Part 402 would
require emendment of existing disclosed
practices so as to meet that requirement.
In such a case, the Board believes it
would be unfair to deny an equitable
price adjustment arising from such
amendment.
Further, the Board has been persuaded
by the strong arguments from industry
commentators that companies with more
than one contract, subject to different
Cost Accounting Standards, cannot
maintain multiple records to account for
each contract related to its set of stand-
ards. Another industry commentator
stated that the vast majority of com-
panies must apply any required cost ac-
counting practices across their total
business, and that it would be impractical
if not impossible for companies to apply
different practice to different contracts.
The Board has accommodated this
view by enabling contractors to apply
uniform practices to all covered con-
tracts. Such application will also serve to
improve cost accounting practices for all
contracts.
The Board has consequently modified
both Part 331 and Part 351 to provide
three things: First, that a contractor's
practices disclosed for any contract shall
be the same as the practices currently
disclosed and applied on all other cov-
ered contracts and subcontracts being
performed by that contractor. Second,
that a contractor must amend his dis-
closure of cost accounting practices as
new standards are issued and become ap-
plicable to new contracts if a change in
practices is necessary, so that, at any
given time, the same practices prevail
under all of the contractor's existing
contracts and subcontracts subject to
Board jurisdiction. Similarly, contractors
must amend Disclosure Statements to
reflect any change in practices disclosed
under later contracts. Third, that for
those amendments of disclosed practices
applicable to a particular contract which
are occasioned by the issuance of a new
Cost Accounting Standard, the Govern-
ment will equitably adjust the contract
price in accordance with the changes
clause in the contract or reimburse any
increased costs under that contract.
In view of the phasing of the require-
ment to file a Disclosure Statement, the
Board has adopted a contract provision
that will provide equitable adjustments
in appropriate cases when a contractor
who has not yet filed a Disclosure State-
ment is required to change his estab-
lished cost accounting practices to
comply with newly issued Cost Account-
ing Standards. On the other hand, any
departure from disclosed cost accounting
practices which is not required by a newly
issued Cost Accounting Standard will
31
Cost Accounting Standards Board
not be subject to equitable price adjust-
ment, but only to price adjustment down-
ward in the event that that departure
would otherwise result in increased costs
being paid by the United States. The
Board wishes to emphasize that if the
parties to a contractual negotiation
mutually agree to a price based on ex-
clusion of costs which are allocable under
the contractor's disclosed cost account-
ing practices, such agreement shall not
affect the requirement for conformity
with Board rules, regulations, and Cost
Accounting Standards in the contractor's
allocation of costs between the contract
being negotiated and other work.
10. Materiality. The Board notes that
many commentators urged that a con-
cept of materiality be incorporated in the
Board's regulations, to the end that
minimal or insignificant modifications of
or failures to use disclosed cost account-
ing practices would not be subject to
price adjustment.
The Board agrees that the administra-
tion of its rules, regulations, and Cost
Accounting Standards should be reason-
able and not seek to deal with insignifi-
cant amounts of cost. Since this rule of
common sense is already practiced by
the Government, the Board does not
believe that there is any need to attempt
to formulate and state in acceptable con-
cept of materiality applicable to all
Board rules. regulations, and standards,
although the Board might consider doing
so if subsequent events indicate the ne-
cessity therefor. The Board does recog-
nize that in particular standards a
"materiality" statement may be useful,
and in such cases, it will include one. See
for example the addition at $ 402.50(e).
11. Additional requirements by agen-
cies. As a final general point. concern
was expressed that Federal agencies
might require submission of cost propo-
sals in ways inconsistent with the cost
accounting practices of some or all of the
potential offerors. The Board recognizes
that this has happened in the past, but
it notes that Board rules, regulations.
and Cost Accounting Standards are to
be used by relevant Federal agencies as
well as by contractors and subcontrac-
tors, and it believes that henceforth re-
quests for proposals must be fully
consistent with such rules, regulations,
and standards, although of course the
Federal agency may ask for supplemen-
tary information to accompany proposals
if this is needed to meet the agency's
requirements.
OTHER COMMENTS
Secton 331.2 Definitions. A few com-
mentators recommended modifying the
definition of "relevant Federal agency."
Their purpose was to assure that agen-
cies such as the General Accounting Of-
fice and the Renegotiation Board were
excluded from the definition of such
agencies. Those recommendations have
not been accepted, since the Board be-
lieves the General Accounting Office, the
Renegotiation Board, and other agencies
whose responsibilities include review, ap-
proval, or other action affecting national
defense procurements are within the
meaning of "relevant Federal agencies."
One Federal agency urged that the
definition of "national defense" be sup-
plemented at the end by adding the
phrase "including R. & D. and services."
The Board believes this addition unnec-
essary, in light of the definition at § 331.2
(b) of “defense contractor," and the de-
finition of "material" set out in 50 U.S.C.
App. 2152 as including "technical infor-
mation." The Board, of course, agrees
that contractors for research and de-
velopment as well as other services are
national defense contractors in light of
these definitions.
Several commentators urged that the
definition of "negotiated subcontract” at
§ 331.2(f) be broadened to reflect what
the commentators believed was the
Board's purpose in this definition, that
of precluding jurisdiction over subcon-
tracts made after adequate price com-
petition. That is not the Board's
intention; instead, the Board intended to
exclude from the term "negotiated sub-
contract" only a subcontract made under
conditions which are as close to the con-
ditions governing Federal advertised
contracts as possible. Accordingly, the
Board has not accepted these sugges-
tions, but it has added language to
clarify its intention.
In connection with this comment, the
Board notes that several commentators
urged that the Board exempt altogther
from its jurisdiction any contract made
after adequate price competition. The
Board believes that any such exemption
would be unwarranted and undesirable
in view of the legislative history of sec-
tion 719.
Section 331.5 Contract clause. The
major changes in the contract clause
urged by commentators have already
been discussed in points 2 and 9 of the
discussion of general comments. Com-
32
Cost Accounting Standards Board
mentators raised a number of additional
point with respect to this contract
clause. A great many commentators ob-
jected to the provision in paragraph (e)
for termination for default. Many com-
mentators urged that the requirement to
repay increased costs to the United
States should be deemed the sole rem-
edy for a refusal or failure to comply
with the requirements of the contract
clause. While that remedy may be ade-
quate for almost all cases involving a
failure to follow Cost Accounting Stand-
ards or disclosed cost accounting pract-
ices, it would not be adequate to meet
other possible situations, where, for ex-
ample, a contractor refused to make a
post-award submission of a Disclosure
Statement or refused to grant access to
records as required by the contract
clause. In view of the fact that breach
of any of the requirements of this clause
would be a breach of a material condi-
tion of the contract, the default clause
generally applicable to performance of
the contract provides adequate cover-
age. Consequently, the Board has deleted
the specific termination language in this
contract clause as requested by many
commentators.
Some commentators urged deletion or
modification of paragraph (c) of the
contract clause, which the Board has not
done, since that language is prescribed
by section 719(j). Other commentators
urged that the Board set forth a specific
period during which contractor and sub-
contractor documents, papers, or records
relating to compliance with Cost Ac-
counting Standards must be retained.
The Board believes that there is no need
to do so, since the general records re-
tention requirements of any particular
contract will establish that period.
One Federal agency requested that the
disputes language in paragraph (d) be
modified to accommodate that agency's
practice of permitting subcontractors
to bring contract disputes directly to that
agency's Board of Contract Appeals. The
Board has accepted this recommenda-
tion. Two Federal agencies recommended
deletion of the definitions in this con-
tract clause as unnecessarily duplicating
§ 331.2. The Board agrees and has made
the deletion, except that the definition of
"negotiated subcontractor" has been re-
tained in the contract clause for the
convenience of contractors and sub-
contractors.
Other suggestions were received in
which the Board was urged to modify
other language in the contract clause
which is taken directly from provisions
in section 719. Preferring to use the
statutory language, the Board has not
accepted these suggestions. It has how-
ever, modified its proposal in paragraph
(b) so as to adopt the statutory lan-
guage, as urged by one commentator.
Section 331.6 Post award disclosure.
Two Federal agencies urged that the
contracting agencies be authorized to
make awards whenever the head of the
agency concluded that it was impractical
to secure a Disclosure Statement from
a contractor or from a subcontractor.
Recognizing that any avoidable delays
in making procurements are undesirable,
the Board has accepted this recom-
mendation. The Board does not expect
that the authority thus provided to
agency heads will be abused, and it will
be informed of all actions taken pur-
suant to this authority.
Effective date and application. For the
convenience of readers, the following
summarizes the effective dates set forth
in § 331.8, § 351.4(e), and Parts 400, 401,
and 402, which were transmitted to the
Congress on February 24, 1972, pursuant
to section 719(h) (3) of the Defense Pro-
duction Act of 1950 as amended. After
the expiration of a period of 60 calendar
days of continuous session following the
date of transmittal to the Congress, the
regulations herein promulgated shall
take effect as set forth in those regula-
tions, unless there is passed by the two
Houses a concurrent resolution stating
in substance that the Congress does not
favor the proposed standards, rules or
regulations.
1. The provisions of § 331.4 are to be
included in all solicitations issued on or
after July 1, 1972 which are likely to lead
to contracts covered by standards, rules,
and regulations of the Cost Accounting
Standards Board.
2. The provisions of 331.5 are to be
included in all contracts resulting from
solictations covered by 1 above. In ad-
dition, these provisions are to be included
in any other contract which is within
the jurisdiction of the Cost Accounting
Standards Board and which is awarded
after October 1, 1972.
3. The provisions of Part 351 will be
applicable to any contractor who sub-
mits a proposal which results in contracts
containing the clause in § 331.5 and
whose net awards of negotiated national
33
Cost Accounting Standards Board
defense prime contracts during Federal
fiscal year 1971 totaled more than $30
million. Contractors whose net awards
were less than that amount may be re-
quired to complete or submit a Disclo-
sure Statement as the Board announces
extensions of this requirement to such
contractors.
4. Any contractor having a contract
awarded prior to July 1, 1972, which con-
tains a clause which already incorporates
requirements governing submission of
Disclosure Statements and application of
Cost Accounting Standards will be re-
quired to comply with the provisions of
that clause. In this connection, such con-
tractor and the respective contracting
agencies whose contracts contain such
a clause should review those contracts
to determine whether negotiations should
be instituted to make Parts 400 through
402 applicable to them.
B. Preamble to Amendment of 6-29-72
This amendment redesignated § 331.3 as
§ 331.3(a) and added a new § 331.3(b). The
preamble and amendment were published
on June 29, 1972, at 37 FR 12784. Although
Part 331 was subsequently republished and
revised on November 7, 1973 (38 FR 30725),
the preamble to the amendment of June 29,
1972 is included as part of the administra-
tive history of the regulation.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt a modification to § 331.3. Appli-
cability, of its rules and regulations. The
modification adopted today was initially
published in the FEDERAL REGISTER Of
May 23, 1972 (37 FR 10454). Comments
regarding that notice of proposed rule-
making were invited to be submitted
to the Board by June 23, 1972.
The prescribed period has passed, and
no comment opposing the proposed mod-
ification has been received. In view of
this and for the reasons set forth on
May 23, 1972, FEDERAL REGISTER, modi-
fication to § 331.3 of the Board's rules
and regulations is adopted and made
effective on July 1, 1972.
C. Preamble to Amendments of 2-12-73
This amendment adds a new paragraph
(c) to § 331.3, and deletes § 331.6(c). The pre-
amble and amendments were published on
February 12, 1973, at 38 FR 4237. Although
Part 331 was subsequently republished and
revised on November 7, 1973 (38 FR 30725).
the preamble to the amendment of February
12, 1973, is included as part of the adminis-
trative history of Part 331.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt a modification to Part 331, Con-
tract Coverage, of its rules and regula-
tions. The modification was published
initially in the FEDERAL REGISTER of De-
cember 8, 1972 (37 FR 26127). Some of
the material in the modification was also
published in the FEDERAL REGISTER of
October 6, 1972 (37 FR 21177). Com-
ments regarding the publication on De-
cember 8 were invited to be submitted
to the Board by January 15, 1973.
a
The Board received 14 comments from
wide range commentators. The
Board is grateful for their interest and
takes this occasion to thank them for
the comments.
One commentator urged the Board to
require certain additional information
to support waiver applications pursuant
to subparagraphs (1)(i), (1)(iii), and
(2)(i) of § 331.3 (c). The Board agrees
that such additional information will as-
sist it in deciding whether to grant a
waiver and therefore has adopted this
proposal.
Two commentators urged that the
signed, unequivocal statement by a pro-
posed contractor or subcontractor that
it refuses to accept a contract containing
the Cost Accounting Standards clause
might not be obtainable even when there
has been such a refusal. The Board
agrees and has consequently modified the
requirement at § 331.3(c) (1) (i) so that
the agency's statement of the fact of an
unequivocal refusal, and of the contrac-
tor's or subcontractor's specific reasons
therefor, will be sufficient to satisfy this
requirement.
A commentator suggested that the
Board provide for exemption from par-
ticular portions of the Cost Accounting
Standards clause, as well as providing
for exemption from all of it. The Board
agrees that it is helpful to spell out such
authority and has modified its proposal
accordingly.
The Honorable Wright Patman, Chair-
man of the Committee on Banking and
Currency of the House of Representa-
tives, noting that any extensive use of
the Board's proposed authority could
seriously weaken the objectives of sec-
tion 719 of the Defense Production Act
of 1950, as amended, requested that
within 30 days after acting on any re-
quest for an exemption the Board trans-
mit to him a full report of the
exemption request and its action thereon.
The Board is pleased to comply with this
request. A similar report will also be sub-
mitted to the Chairman of the Com-
34
Cost Accounting Standards Board
mittee on Banking, Housing, and Urban
Affairs of the U.S. Senate.
Another commentator urged in the in-
terest of assuring maximum access by
the public and the Congress to the
Board's actions that requests for waivers
be published in the FEDERAL REGISTER
and that comments on them be solicited
that the Board's action on a request and
an explanation of it be published in the
FEDERAL REGISTER, and, finally, that not-
withstanding any prior publication, that
the Board include in its annual report to
Congress a listing of every request for
waivers received during the year, to-
gether with an explanation of the Board's
action granting or denying the request.
This commentator, asserting that the
Board does not have unlimited discretion
to grant waivers or exceptions, urges
that the standards the Board will apply
in acting on requests for waivers be
stated.
The Board adopts the suggestion that
it include in its annual reports to Con-
gress a listing of the requests it receives
for waivers and its disposition of those
requests. The Board, however, does not
believe that it should publish a notice of
requested waiver and solicit comments.
As noted above, the Board will provide
full information to the Congress and to
the public through its reports on its ac-
tions on waivers. With respect to this
commentator's suggestion that the Board
publish the criteria which it will use in
acting on requests for waivers, the Board
is satisfied that those criteria clearly are
implicit in the information which the
Board is requiring to be submitted in
support of a request for a waiver.
Several commentators urged that the
Board delegate its waiver authority to
the procuring agencies, stating essen-
tially that waivers could thus be granted
more expeditiously. The Board has not
accepted this suggestion, since it believes
that it should retain control over a mat-
ter as important as a total exemption
from the requirements of section 719 of
the Defense Production Act of 1950, as
amended, and also because the Board is
convinced that its retention of its waiver
authority will not unduly delay action
on waiver requests. In this connection,
the Board reemphasizes its comments
published in the FEDERAL REGISTER for
December 8, 1972 (37 FR 26127) that,
"The Board * * is prepared to act
promptly in response to requests for
waivers but * * the Board's ability to
respond promptly will depend in very
large measure on whether or not the
agency's request for a waiver is in full
accord with the proposed requirements."
If experience shows that delegation of
this authority is warranted, the Board
will, however, reconsider this suggestion.
Some of these commentators also
urged that the level of agency officials
authorized to submit requests for waivers
to the Board be modified to include per-
sons at levels of responsibility below
those indicated in the Board's proposal.
The Board believes that the level pro-
posed will not unduly burden the pro-
curing agencies and will assure that any
request for a waiver of the Board's reg-
ulations will receive consideration at a
very high level within the procuring
agency before submission to the Board.
It, therefore, does not adopt this sug-
gestion at this time, although it may
reconsider this suggestion if experience
warrants.
Some commentators urged the Board
to expand its proposal to permit exemp-
tions on broader bases, instead of con-
fining the exemption authority to
particular cases of demonstrated need.
The Board does not accept this sugges-
tion, since it does not anticipate whole-
sale or, indeed, even very numerous
requests for waivers. Nevertheless,
should a need for broader exemption
action be justified, the Board can deal
with that need under its authority in
section 719 (h) (2) of the Defense Pro-
duction Act of 1950, as amended.
One commentator urged an outright
exemption for both foreign and domestic
concerns for work performed outside the
United States, and other commentators
urged the exemption of all subcontracts
performed in Canada. The Board has
adopted neither of these proposals, since
it believes that the arguments advanced
for them are unpersuasive in light of the
purposes of section 719. The Board be-
lieves, further, that the exemption au-
thority being adopted today provides an
adequate basis for waivers where they
are appropriate.
A commentator is concerned that the
phrase, "on a timely basis," in §§ 331.3
(c) (1) (iv) and 331.3(c) (2) (ii), if given
a narrow interpretation, might suggest
that timeliness of delivery is the only
condition for granting a waiver. That
commentator points out that other con-
ditions also may warrant consideration.
The Board agrees with the commenta-
35
Cost Accounting Standards Board
tor, but it does not believe that a modi-
fication of its proposal is necessary to
avoid the narrow interpretation feared.
In the interest of clarity, the waiver
provision in § 331.6 (c) is deleted from
that section and transferred to § 331.3
(c).
The Board has revised its proposal as
discussed above and has made minor
technical improvements. The revised
proposal is adopted today.
D. Preamble to Republication, 11-7-73
This publication (38 FR 30725, Nov. 7, 1973)
revised and republished Part 331.
The purpose of this publication by the
Cost Accounting Standards Board is to
amend Parts 331, 351, 400, 401, 402, 403,
and 404 of its rules and regulations. The
amendments, which are minor clarifica-
tions to the regulations, were published
in the FEDERAL REGISTER of September 5,
1973 (38 FR 23971). The amendments:
(a) Re-number Parts 331 and 351 to fa-
cilitate insertion of future modifications
to those parts; (b) clarify one section of
the contract clause at § 331.5; and (c)
modify certain definitions in Parts 400,
401, 402, 403, and 404 for the purposes
of uniformity among the various Parts.
Only one comment in response to the
September publication has been received
by the Board. This expressed agreement
with the proposed changes.
In view of the foregoing, the following
amendments to the Board's regulations
are being made effective November 7,
1973:
E. Preamble to Amendment of 9-19-74
This amendment revised paragraph (c) (4)
of § 331.30, and was published on Septem-
ber 19, 1974, at 39 FR 33681.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt a modification to Part 331, Con-
tract Coverage, of its rules and regula-
tions. The modification adopted today
was initially published in the FEDERAL
REGISTER of August 9, 1974 (39 FR 28645).
Comments regarding that notice of pro-
posed rulemaking were invited to be sub-
mitted to the Board by September 9,
1974.
The August 9, 1974, publication pro-
posed an amendment to § 331.30 (c) (4)
to permit, under certain circumstances,
submission of waiver requests from a
level below that of the agency head. No
objection to the Board's proposal has
been made. Therefore, the proposal has
been adopted for the reasons expressed in
the August 9, 1974, publication.
F. Preamble to Amendments of 12-24--74
This document amended § 331.30(a),
added § 331.30(b) (8), and amended §§ 331.40
and 331.50. It was published Dec. 24, 1974,
at 39 FR 44389.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt modifications to Part 331, Contract
Coverage, and Part 351, Basic Require-
ments, of its rules and regulations. These
modifications will provide an exemption
from Cost Accounting Standards Board
requirements for certain national de-
fense contracts and subcontracts of
$500,000 or less.
Public Law 91-379 requires that Cost
Accounting Standards must be used in
all negotiated prime contract and sub-
contract national defense procurements
with the United States in excess of
$100,000, with certain stated exceptions.
From time to time the Board refers to
contracts subject to its rules and regula-
tions as "covered contracts”. Section 719
(h) (2) of Pub. L. 91-379 authorizes the
Cost Accounting Standard Board to
prescribe rules exempting from its re-
quirements such classes or categories of
national defense contractors and subcon-
tractors as it determines, on the basis
of the size of the contracts involved or
otherwise, are appropriate and consist-
ent with the purposes sought to be
achieved by Pub. L. 91-379. The Board
has granted several exemptions to classes
or categories of contractors and sub-
contractors and also has established a
procedure under which waiver of the
Board's requirements may be granted
for individual contracts.
A proposed exemption increasing the
minimum contract amount requiring
compliance with Cost Accounting Stand-
ards Board rules, regulations and Stand-
ards from $100,000 to $500,000 was pub-
lished by the Board on September 27,
1974 (39 FR 34669). The Board received
82 responses to the September 27 pro-
posal. Comments were received from in-
dividual companies, government agen-
cies, professional associations, industry
associations, public accounting firms,
and individuals. All of these comments
have been carefully considered by the
Board, and the Board takes this oppor-
tunity to express its appreciation for the
helpful suggestions which have been
furnished.
The comments below summarize the
major issues discussed by respondents
in connection with the initial publication
and explain the Board's disposition of
36
Cost Accounting Standards Board
these issues.
Issuance of the exemption. Practi-
cally all the commentators expressed
concurrence in the proposed exemption,
giving either unqualified support or sup-
port with added comments that addi-
tional exemptions should also be con-
sidered. However, three commentators-
a consulting firm, a major aerospace
company and a Government agency—
disagreed with the proposed exemption,
stating that an increase in the threshold
for compliance with CAS requirements
was inconsistent with the Board's ob-
jective of establishing uniformity and
consistency among contractors doing
business with the Government.
The Board agrees that the adoption of
the proposed regulation will exempt a
substantial number of contractors and
subcontractors who otherwise would be
covered, and consequently will permit
such companies to follow accounting
practices other than those set out in
Cost Accounting Standards. However, the
Board is aware that compliance with its
rules, regulations and standards may in-
volve additional administrative effort,
particularly on the part of small com-
panies, which may not be commensurate
with the benefit to the Government or
the contractor resulting from such com-
pliance. The Board, after considering
the efforts required by both the Gov-
ernment and its contractors to assure
compliance on all covered contracts
in excess of $100,000,
$100,000, is persuaded
that maximum benefit to the Govern-
ment with minimum cost can be achieved
by limiting the mandatory application of
its standards to contractors who receive
awards which constitute a substantial
majority of the national defense pro-
curement dollars. As was stated at the
time the proposed exemption was issued
for comment, some 70 percent of the
prime contractors of the Department of
Defense did not receive one or more
negotiated awards in excess of $500,000
in Fiscal Year 1973. Thus, only 30 per-
cent, or approximately 750 prime con-
tractors, who received contract awards
totaling $20 billion, would continue to be
covered. The exemption would remove
coverage from only about 10 percent of
the dollar value of annual DOD awards.
In view of the foregoing, the Board
considers the proposed exemption in-
creasing the minimum contract amount
requiring compliance with the Cost Ac-
counting Standards Board rules, regu-
lations, and standards to be in keeping
with the purposes sought to be achieved
by Pub. L. 91-379 and to be an appro-
priate exercise of the authority granted
to the Board by section 719(h) (2) of that
law.
Increase exemption on all contracts to
$500,000. A number of commentators
suggested that the $500,000 single con-
tract threshold for compliance with
Board rules, regulations, and standards
be changed to exempt all contracts of
$500,000 or less. Those giving reasons in
support of this suggestion generally based
their comments on simplification of ad-
ministration. These commentators felt
that it would be difficult for the Govern-
ment or prime contractors, when award-
ing a prime contract or subcontract in
excess of $100,000 to determine whether
the contractor or subcontractor had in
existence a prior $500,000 covered con-
tract.
The Board, in proposing the $500,000
threshold, did so with the intent of ex-
empting those companies which do not
receive contracts in excess of $500,000
from the Government. However, it was
decided in the interest of consistency in
cost accounting practices that once a
contractor had received a covered con-
tract of that size, compliance with CASB
rules, regulations and standards on con-
tracts at the level established in Pub. L.
91-379 was appropriate. This is also con-
sistent with the desire expressed by con-
tractors to follow a single set of account-
ing practices. Further, the requirement
for coverage of contracts in excess of
$100,000 where the contractor already
has received a covered contract in excess
of $500,000 will permit the small con-
tracts to be available for equitable ad-
justment if subsequently issued stand-
ards should become applicable. More-
over, once the administrative effort has
been expended to comply with standards
for contracts in excess of $500.000, com-
pliance with standards on contracts
above the statutory threshold of $100,000
requires little added effort.
With respect to the commentators'
statements concerning the difficulties,
when making an award exceeding
$100,000, of determining whether a con-
tractor or subcontractor had in existence
a prior award exceeding $500,000, the
Board feels that an administrative re-
quirement can be established for obtain-
ing this information. A similar require-
ment now exists concerning the discle-
sure statement, whereby contractors are
required to submit a disclosure state-
37
Cost Accounting Standards Board
ment, state that they have previously
filed a disclosure statement, or sub-
mit a certificate of monetary exemp-
tion. The Board feels that a similar
requirement can be set concerning the
$500,000 level. The Board is not per-
suaded that this matter would create
problems of sufficient significance to
eliminate coverage down to the $100,000
level.
In considering the advantages of the
exemption as proposed compared to its
assessment of the administrative diffi-
culties foreseen by commentators, the
Board is persuaded that its proposal
relative to coverage of awards in excess
of $100,000 should not be changed.
Exemption based on sales. A number of
commentators urged that the Board es-
tablish an exemption based on sales,
using either minimum annual dollar
amount of sales to the Government, or
Government sales as a percentage of
total annual sales, or a combination of
these two factors. The most frequently
suggested amount was $10 million of
sales to the Government or Government
sales amounting to 10 percent of total
annual sales. The objective sought by
these commentators was an exemption of
those companies or business units whose
sales to the Government constituted a
reasonably small portion of their total
annual sales and whose business was es-
sentially commercially oriented.
The Board has given lengthy consider-
ation to the use of a sales basis for the
establishment of a minimum threshold
for compliance with its rules, regulations
and standards. It did not use that basis
at this time due to the nature of the
problems involved in administering an
exemption based on sales. In either of
the situations suggested by commen-
tators, the representation concerning the
amount of sales must be made by the
contractor and subsequently verified by
the Government. This verification would
impose very substantial and time-con-
suming efforts on both the Government
and the contractor. Particularly in the
case of Government sales as a percentage
of total sales, Government representa-
tives would be placed in the position of
examining a contractor's total sales, in-
cluding those made in its commercial
business. Examination of a company's
records concerning its total sales is not
presently performed by Government pro-
curement activities and would present
new and unique problems to both parties
as well as requiring substantial addi-
tional effort on the part of Government
representatives.
An exemption based on sales would
require a measurement period during
which a contractor's status with respect
to compliance with standards would be
determined. Contracts under which sales
were recorded during this period would
not be subject to standards. If the volume
of sales during the measurement period
exceeded a stated threshold, a contractor
would then be required to comply with
standards under contracts received in
subsequent periods. Thus, the contracts
that brought the contractor under the
Board's rules would not be subject to
standards, while those received at a later
time would be.
The Board has decided that the admin-
istrative problems involved with an ex-
emption based on sales should be con-
sidered before establishing such a thres-
hold. The Board will continue to study
these problems and investigate whether
exemptions based on criteria other than
a minimum contract amount would be
appropriate and consistent with the pur-
poses of Pub. L. 91-379.
Retroactivity. Several commentators
requested that the Board modify its pro-
posal so as to provide retroactive ex-
emption to existing contracts where the
circumstances are such that these ex-
isting contracts would have been exempt
if awarded after the effective date of
the proposed regulation.
The Board has no authority to modify
existing contractual agreements be-
tween the government procurement
agencies and their contractors. However,
the Board sees nothing inconsistent with
its regulations or with Pub. L. 91-379 in
modification by the procurement agen-
cies of contracts in this category, assum-
ing of course that the Government re-
ceives adequate consideration for dele-
tion of the CAS requirements.
Increase minimum amount. A number
of commentators recommended that the
exemption proposed be increased to an
amount greater than $500,000, the figure
of $1,000,000 being frequently mentioned.
The Board is not now prepared to raise
further the minimum contract amount
requiring compliance with its promul-
gations. The Board, in studying an ex-
emption based on minimum contract
amount, concluded that the $500,000
threshold was the most appropriate one
for achieving its objectives, all factors
considered. The Board will continue to
examine various limitations but considers
that the threshold established in the pro-
38
Cost Accounting Standards Board
posed exemption best meets its require-
ments and obligations at this time.
Effect of final payment under con-
tracts subject to CAS clause. Several
commentators urged that the exemption
of contracts of $500,000 or less should not
be dependent on the final payment on
contracts which are subject to Board re-
quirements, on the grounds that final
payment can occur a substantial period
of time after completion of work on a
contract and that there are many tech-
nicalities in closing out a contract which
do not involve cost accounting applica-
tions.
The Board considers this point to be
well taken and has changed the require-
ment in § 331.30 (b) (8) where it first ap-
pears to "notification of final acceptance
of all items or work to be delivered."
At that time it is considered that all di-
rect costs will have been charged to the
contract since all work will have been
completed, and any further accounting
transactions would be the result of ad-
justments not directly related to con-
tract performance.
Reduction of contract price by ex-
clusion of commercial items. Some com-
mentators, in reading the introductory
comments to the Board's initial publi-
cation of this exemption, interpreted the
phrase "minimum contract amount re-
quiring compliance” in a manner not at
all intended by the Board. These com-
mentators interpreted this phrase to per-
mit the price of a contract subject to
standards to be reduced by the value
of those individual contract items or sub-
assemblies of final contract items whose
prices could be considered to be "cata-
log" or "market" prices, if sold sep-
arately. They requested that the regu-
lation be clarified to reflect their inter-
pretation of the Board's introductory
comments.
Those requesting this clarification
misunderstood the Board's intentions.
The Board does not intend that the price
of a contract be adjusted to exclude the
price of items or subassemblies which, if
purchased separately, might be exempt
from the Board's promulgations. Con-
sequently, the change in the regulation
requested by commentators on this point
would be completely inappropriate.
Definition of contractor. One com-
mentator noted that the prefatory com-
ments to the Board's September 27,
1974, publication specifically mentioned
the fact that receipt of a contract in ex-
cess of $500,000 by one business unit of a
multi-unit company would not in itself
require other units of the same com-
pany to follow Board requirements. This
commentator requested that the def-
initions of "defense contractor" and
"defense subcontractor" contained in
§ 331.20 (b) and (c) be modified to re-
flect this intention by the Board.
As the Board stated in its September
27 publication, its contract requirements
have been applied to business units, such
as a profit center, division, subsidiary, or
similar unit of a company, which per-
form the contract, even in those cases
where the contract was entered into on
behalf of the overall company rather
than the business unit. This application
of the Board's requirements to a per-
forming business unit is well established
and unchallenged, and clarification of
the definitions of "contractor" and "sub-
contractor" does not appear necessary.
Effective date. Several commentators
raised questions concerning the effective
date of the eligibility for this exemp-
tion in relation to awards received prior
to January 1, 1975. Contractors who
have received a prime contract or sub-
contract in excess of $500,000 subject
to cost accounting standards prior to
January 1, 1975, and on which notifica-
tion of final acceptance of all items or
work to be delivered on that contract or
subcontract has not been received, is a
contractor who has "already received a
contract or subcontract in excess of
$500,000," as that phrase is used in
§ 331.30(b) (8). Therefore, today's publi-
cation requires that a contractor meet-
ing this test will be required to comply
with standards on all covered prime con-
tracts or subcontracts in excess of $100,-
000 received after January 1, 1975, under
the provisions of § 331.30.
39
Cost Accounting Standards Board
Definitions.
§ 351.20
[Reserved]
Purpose.
DISCLOSURE STATEMENT¹
1
PART 351-BASIC REQUIREMENTS
Subchapter E-Disclosure Statement
§ 351.10
Sec.
351.10
[Reserved]
351.20
Purpose.
351.30
351.40
Filing requirement.
351.50
351.60
Forms.
351.70
351.80
351.90
351.100
351.110
351.120
351.130
Contract awards.
Submission.
Incorporation of Disclosure State-
ment.
Adequacy of Disclosure Statement.
Effect of filing Disclosure Statement.
Early filing.
Amendment of Disclosure State-
ment.
Instructions and information.
351.140 Disclosure Statement.
851.145 Disclosure statement-colleges and
universities.
Appendix A-Principal Product or Service
Code
Supplement-Preambles
AUTHORITY: Sec. 103, 84 Stat. 796 (50
U.S.C. App. 2168).
SOURCE: 38 FR 30728, Nov. 7, 1973, unless
otherwise noted.
NOTE: For a document affecting §§ 351.41,
351.50, and 351.70, see 39 FR 44030, Dec. 20,
1974.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4139, February 29, 1972)
is set forth in preamble A of the supplement.
The preamble to an amendment affecting the
original publication of this part is set forth.
in preamble B of the supplement.
Part 351 was revised at 38 FR 30725, Novem-
ber 7, 1973, with the exception of §§ 351.41,
351.50 (c) and the last sentence of § 351.70.
The preambles to the revision of this part are
set forth in preambles B and C.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal
Register, National Archives and Records
Service, General Services Administration,
Washington, D.C. 20408.
1 37 FR 4145, Feb. 29, 1972.
This regulation is promulgated pur-
suant to section 719 of the Defense Pro-
duction Act of 1950, as amended by 84
Stat. 796 (Pub. L. 91-379), to provide
the means by which affected persons can
satisfy the requirements established by
that law for disclosure of their cost ac-
counting practices and to promulgate
the Disclosure Statement form. The
regulation also sets forth the adminis-
trative procedures to be followed by the
Cost Accounting Standards Board and
relevant Federal agencies in connection
with such disclosures.
§ 351.30
Definitions.
A "profit center" is the smallest orga-
nizationally independent segment of a
company which has been charged by
management with profit and loss respon-
sibilities.
§ 351.40
Filing requirement.
(a) The requirements of this part are
applicable to all defense contractors who
enter into negotiated national defense
contracts with the United States in ex-
cess of $100,000, except as provided in 4
CFR 331.30 (b), other than contracts
where the price negotiated is based on
(1) established catalog or market prices.
of commercial items sold in substantial
quantities to the general public, or (2)
prices set by law or regulation. A sep-
arate disclosure statement must be sub-
mitted covering the practices of each
of the contractor's profit centers, divi-
sions, or similar organizational units
whose costs included in the total price
of any contract exceed $100,000, except
as provided in 4 CFR 331.30 (b), except
where such costs are based on (1) es-
tablished catalog or market prices of
commercial items sold in substantial
quantities to the general public or (ii)
prices set by law or regulation. If the cost
accounting practices under contracts are
identical for more than one organiza-
tional unit, then only one statement need
be submitted for those units, but each
such organizational unit must be iden-
tified. A disclosure statement will also
be required for each corporate or group
office whose costs are allocated to one
40
Cost Accounting Standards Board
pliers. A commentator, not wishing to
comment on the present proposal, never-
theless recommended that the Board ex-
empt all foreign suppliers, on the ground
that problems in the administration of
the CAS clause are matters of conten-
tion and, in the opinion of the commen-
tator, pose relatively greater difficulties
in the administration of foreign con-
tracts.
The Board has announced the estab-
lishment of projects to investigate the
administrative concerns of this commen-
tator and others, and if those concerns
prove to be substantial, the Board will
take appropriate action. In the more
than four years during which the CAS
clause has been required to be included
in all appropriate foreign contracts and
subcontracts, absent a waiver, the Board
has heard of no problem in the adminis-
tration of the clause which has posed
any problem in foreign contracts.
Whenever the Board believes a waiver
of the CAS clause for foreign firms has
been persuasively proposed by a con-
tracting agency, it will grant such a
waiver, but the Board's experience to
date does not indicate to it any reason
to consider a blanket waiver for all for-
eign prime contracts and subcontracts.
Miscellaneous comments. One com-
ment, from a major defense contractor,
deserves note by the Board because of
what the Board perceives to be major
misconceptions and erroneous assump-
tions underlying the comment.
The comment opposed the proposal for
a conditional exemption and favors an
unqualified exemption. One reason given,
to quote from this comment, is:
By requiring a contract clause which will
provide for a penalty to be paid by the U.S.
prime contractor in the event that a U.K.
subcontractor fails to consistently follow dis-
closed cost accounting practices where such
failure results in increased costs paid by the
U.S. Government, is to impose on the U.S.
primes an obligation so vague and impracti-
cable as literally to be unique in the history
of bilateral contracting.
The Board believes this comment is
wholly inaccurate. First, the obligation
to consistently follow disclosed or estab-
lished cost accounting practices is not
imposed by the Board's current pro-
posal-it has been present in every U.K.
prime contract or subcontract subject to
the CAS clause. Secondly, exactly the
same obligation of a prime contractor has
existed for years with respect to every
subcontract it makes which includes the
CAS clause. The Board does not believe
that the obligation arising under the con-
ditional exemption is either vague or im-
practicable, and it knows it is not unique.
Additionally, this commentator with
respect to the same obligation stated:
For the U.S. Government to impose such
alien rules on the defense contracting com-
munity in the United Kingdom * where
neither the Government of the United King-
dom nor the contractors have determined for
themselves that there are benefits to the im-
position of such punitive rules regarding ac-
counting practices seems patently absurd.
Further, to impose on the procurement proc-
ess such a nebulous and one-sided contrac-
tual requirement by the use of the regula-
tory procedures which will render the clause
"mandatory and non-negotiable” is to express
an unwarranted contempt by the United
States for the standards and practices of
business accounting and contracting proce-
dures of the United Kingdom.
Apart from the commentator's several
adverse characterizations of the Board's
requirements, which are discussed gen-
erally below, this portion of its comment
does not appear to recognize that the
Board's proposal was discussed with the
U.K. Government and with representa-
tives of the British defense industries.
Through meetings in both Washington
and London and through continuing,
close consultations, the Board has con-
fidence that its proposal has been care-
fully reviewed and discussed within the
United Kingdom and that its adoption
will be welcomed by the firms and gov-
ernmental agencies affected by it. This
careful consultation, and the Board's
subsequent proposal for a conditional ex-
emption, arose out of the Board's respect
for, not its contempt of, the standards
and practices of cost accounting in the
United Kingdom.
Finally, this commentator expressed
its view that there have been no discern-
ible benefits whatever from the Board's
regulations and its further view that the
Board has abundant evidence that its
regulations requiring consistency in fol-
lowing disclosed cost accounting prac-
tices have resulted in "substantial im-
pairment of the economy, efficiency, and
effectiveness of procurement *
**". The
commentator concluded this point by
stating that since it regards the Board's
consistency requirement to be "unfair,
unworkable and doubtfully enforceable",
it would use the proposed conditional ex-
emption for U.K. firms only "with shame
39D
Supp. No. 3
Cost Accounting Standards Board
and reluctance."
The Board has received reports from
procurement agencies of major benefits
stemming from use of its consistency re-
quirements, and the Board believes that
they have unquestionably improved the
economy, efficiency and effectiveness of
procurement. The Board believes that
those requirements are fair, workable
and enforceable.
As noted above, the Board is currently
investigating suggestions made by some
U.S. defense contractors, including this
commentator, to determine whether
there are substantial problems in the ad-
ministration of its requirement to follow
disclosed accounting practices consist-
ently. The commentator offers no infor-
mation concerning any such problem,
only its conclusion that the Board has
acted wholly improperly in proposing the
U.K. conditional exemption. The Board
does not agree.
Costs and benefits. The Board discerns
no significant cost or inflationary impact
of the conditional exemption.
The benefits include a substantial re-
duction in the number of waiver requests
for United Kingdom firms, while estab-
lishing a consistency requirement for all
U.K. contractors which is necessarily lost
when all Board requirements are waived.
A United Kingdom firm could find
that its obligations to follow U.K. Gov-
ernment Accounting Conventions might
require the firm to change a disclosed
cost accounting practice. In such an
event, the Board hopes that the cost im-
pact on U.S. contracts or subcontracts
of any such change would be negotiated
in advance of the effective date of a
change to the Convention, so as to avoid
the imposition of any interest charges on
increased cost paid by the United States.
The negotiation relating to a change in
disclosed practices would be patterned
on the similar negotiation required under
Section (a) (4) (B) of the Cost Account-
ing Standards Clause.
In view of the foregoing, the following
change to Part 331 of the Board's regula-
tions is being made effective February 2,
1976:
Section 331.30, Applicability, Exemp-
tion, and Waiver, is modified by adding
subparagraph (9) to paragraph (b)
H. PREAMBLE
Amendment published 9-12-77. The amend-
ment to 4 CFR Part 331, 42 FR 45625, Sept
12, 1977, was published as a part of the publi-
cation which set forth the original 4 CFR Part
332 and amendments to Parts 351 and 403.
The complete Preamble appears in the Supple-
ment to Part 332.
SMALL BUSINESS
Several commentators urged that all
businesses which qualify as small busi-
ness concerns under the rules and regu-
lations of the Small Business Adminis-
tration be exempted. The February 16,
1977 proposal would have provided such
an exemption only for a small business
which received less than $10 million in
awards during its preceding fiscal year.
Modified coverage would have been pro-
vided for other small businesses. Re-
search indicates that there are very few
companies which would fall into the cate-
gory of small businesses receiving awards
of $10 million or more. In the interest
of using a single test, i.e., whether the
contractor qualifies as a small business
concern, rather than a dual test which
would result only in a few small busi-
nesses being subject to modified cover-
age, the Board has adopted the recom-
mendation to exempt all small business
concerns. Research indicates that if this
action had been applied to Federal Fiscal
Year 1976 it would have resulted in ex-
emption of 196 small business concerns
which were doing business with the De-
partment of Defense and which had $460
million of contracts of the type subject
to Cost Accounting Standards. Conse-
quently, on average, each small business
concern would have a relatively small
amount of covered contracts.
OTHER CATEGORIES
Various commentators renewed pre-
vious recommendations that the Board
exempt other categories of contracts and
contractors. The categories included col-
leges, universities, nonprofit organiza-
tions, hospitals, and government-owned-
contractor-operated facilities. The Board
has considered these recommendations
and concluded that none of these cate-
gories should be exempted.
39E
Supp. No. 3
Cost Accounting Standards Board
EFFECTIVE DATE
The effective date of the regulations
being published today is March 10, 1978.
Pub. L. 91-379 provides that regulations
shall take effect not earlier than the ex-
piration of the first period of sixty cal-
endar days of continuous session of the
Congress following the date on which a
copy of the regulations is transmitted
to the Congress. The calendars of the
Congress indicate that the required
sixty days will not pass until some time
in February 1978. Accordingly, March 10,
1978, has been selected to assure suffi-
cient time for the regulation to lie before
the Congress.
1. Preamble to Amendment of 10-5-77. This
amendment added § 331.71 and was published
on September 19, 1974 at 42 FR 54254.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt a modification to Part 331, Con-
tract Coverage, of its rules and regula-
tions. The modification will provide cri-
teria for determining the materiality of
amounts of cost in given circumstances.
The Board initially considered publishing
a definition of the terms "cost account-
ing practice" and "change to either a
disclosed cost accounting practice or an
established cost accounting practice"
along with the modification dealing with
materiality. That definition is being han-
dled separately by the Board, however,
and will be considered at a later date.
The Board is authorized by Pub. L. 91-
379 to prescribe rules and regulations for
implementing Cost Accounting Stand-
ards. Pursuant to this authority, the
Board is today issuing a modification to
its regulations. Contractors and procure-
ment agencies engaged in the implemen-
tation and administration of CASB rules,
regulations, and Standards have recom-
mended that the Board provide guidance
concerning materiality in the adminis-
tration of the Board's rules, regulations,
and Standards.
Representatives from various organi-
zations affected by Standards have
pointed out that guidance in this area
will facilitate the implementation and
administration of CASB pronounce-
ments. A similar recommendation was
also received by the Board at an Evalua-
tion Conference in June 1975. The Gen-
eral Accounting Office's Status Report on
the Cost Accounting Standards Pro-
gram-Accomplishments and Problems
(PSAD-76-154, Aug. 20, 1976), also re-
ferred to the need for guidance on this
subject.
Research in this area included a re-
view of data submitted by participants
in the Evaluation Conference, an anal-
ysis of papers submitted by various con-
tractors, professional groups, trade as-
sociations, and Government agencies, as
well as a review of existing procurement
regulations, and existing CASB promul-
gations. A Staff draft of an amendment
dealing with materiality criteria and
price adjustments was distributed on Au-
gust 13, 1976. Responses from 53 sources
contributed to the Board's further con-
sideration of the issues involved in this
proposed amendment.
A proposed amendment to the Board's
regulations was published in the FEDERAL
REGISTER On February 3, 1977 (42 FR
6591). A total of 45 responses were re-
ceived from individual companies, Gov-
ernment agencies, professional associa-
tions, industry associations, universities,
and others. The Board takes this oppor-
tunity to express its appreciation for the
helpful suggestions and criticisms which
have been furnished. The comments fur-
nished by the organizations and indi-
viduals have resulted in a number of
changes in the amendment being pro-
mulgated today. The following material
summarizes the issues regarding materi-
ality that were discussed by respondents
in connection with the proposed modifi-
cation and explains the changes made
to the proposal published February 3,
1977. The still relevant portions of
the comments which accompanied the
February 3, 1977, publication have been
incorporated in this material.
MATERIALITY CRITERIA
Generally, commentators felt the pro-
posed materiality criteria were a neces-
sary, positive and useful step. However,
some commentators suggested that the
proposed criteria were not sufficiently
specific and would not resolve the ma-
teriality questions that currently exist.
Some commentators suggested that
quantitative criteria be added to the pro-
posed regulation; others suggested that
the criteria proposed were suitable.
At the present time, the Board is of the
opinion that quantitative limits should
not be established for materiality deter-
minations. The essence of materiality
criteria is to allow for the excise of
judgment; an absolute dollar amount in
one case may be material while in
another case the same amount may be
39 F
Supp. No. 3
Cost Accounting Standards Board
immaterial. Accordingly, quantitative
limits have not been added to the pro-
posed amendment.
The materiality criteria being promul-
gated are designed for use in a variety of
situations and to resolve issues which
have been raised by various sources. Cost
Accounting Standards establish the cost
accounting appropriate for the deter-
mination of contract costs. Departure
from the requirements of these Stand-
ards may occur and the cost effects of
such departure may be immaterial. The
criteria serve to limit price adjustments
to material amounts of cost. The regula-
tion also describes the actions to be
taken when immaterial amounts of cost
are involved in noncompliance with
Standards. The criteria for materiality
are also to be used in applying words or
phrases of materiality used in Cost
Accounting Standards. In particular
Standards, the Board will continue to
give consideration to defining material-
ity in a specific manner as to either the
entire Standard or any provision thereof,
whenever it appears feasible and desir-
able to do so.
ADMINISTRATIVE COSTS
Commentators proposed that the ad-
ministrative cost of processing a change
in cost accounting practice to both the
Government and the contractor should
be one of the criteria used in determin-
ing materiality. The Board's initial pub-
lication did not provide for consideration
of these costs in determining materiality.
Generally, such costs on the part of both
the Government and the contractor are
absorbed as part of their routine opera-
tions. On a conceptual basis, the deter-
mination of materiality should be made
considering only the amount of costs
affected by the proposed change. As a
practical matter, however, the adminis-
trative cost to process a contract price
adjustment is a factor in a materiality
decision.
The Board is persuaded that the ad-
ministrative cost of processing a change
in cost accounting practice should influ-
ence a decision as to materiality. For
example, if it is estimated that costs
would be changed by $10,000 through
processing a change at a Government-
contractor administrative cost of $10,000,
then processing the change would be
nonproductive whether or not, consider-
ing all materiality factors, the estimated
change in costs of $10,000 would be
judged material. Accordingly, the Board
has added a provision to this modifica-
tion dealing with such costs.
MEASUREMENT OF COST IMPACT
Commentators suggested that the
Board's regulations provide that initially
the determination of materiality should
be done on a gross, overall, basis rather
than on an in-depth cost impact study.
These commentators asserted that a pro-
vision of this type would help to reduce
the time and cost of evaluating and proc-
essing proposed changes which are
judged to have an immaterial impact.
Procedures for measuring and process-
ing cost impact due to both changes in
cost accounting practice and noncompli-
ances with Cost Accounting Standards
have been developed by the procurement
agencies, and they now require an esti-
mate of the general dollar magnitude of
the change as a first step in the process.
The Board encourages the use of the ma-
teriality criteria promulgated today in
conjunction with the existing two-stage
cost impact evaluation procedure pro-
vided in procurement agency regula-
tions. The Board believes that the effec-
tive use of procedures established in
agency regulations will accomplish the
saving in time and cost desired.
Some Government commentators pro-
posed that subparagraph 331.71(b) (2)
be deleted. They expressed the view that
it dealt with administrative matters and
not criteria for the determination of
materiality. The question of both the
contractor's and the Government's
responsibility in situations where non-
compliance with Cost Accounting
Standards resulted in a cost impact
which is immaterial has frequently
arisen. The Board believes that the im-
plementation and administration of cost
accounting rules, regulations, and
Standards will be facilitated by a state-
ment of the Board's position on this
matter. Accordingly, the Board believes
that the subparagraph in question should
be retained in its regulations.
39G
RETROACTIVE APPLICATION
Commentators expressed concern
that subparagraph 331.71(b) (2) would
be applied retroactively to immaterial
items. The language of this subpara-
graph requires that it be applied to the
accounting period for which the cost
impact of a noncompliance becomes ma-
terial and to succeeding cost accounting
periods. In any cost accounting period
prior to that, by reason of the provisions
Supp. No. 3
Cost Accounting Standards Board
of this requirement, the cost impact of
the noncompliance would have been de-
termined to be immaterial. Thus, no
contract modification was or is required.
ILLUSTRATIONS
The February 3, 1977, proposal con-
tained two illustrations of the applica-
tion of the materiality criteria. A num-
ber of commentators stated that the
illustrations were too basic to be useful,
and that the problems related to the
determination of materiality are too
numerous and too complex to be ade-
quately illustrated in a regulation of
this type. The commentators suggested
that the illustrations be eliminated. The
Board agrees, and has eliminated the
examples in this section.
Amend Part 331 by adding a new
§ 331.71 as follows:
39H
Supp. No. 3
Cost Accounting Standards Board
PART 332-MODIFIED CONTRACT
COVERAGE
Add a new Part 332 as follows:
Sec.
332.10 Purpose.
332.20
Definition.
332.30 Applicability.
332.40
Solicitation.
332.50
Contract clause.
332.60
332.70
Interpretation.
332.80
Post-award disclosure.
Effective date.
AUTHORITY: Sec. 103, 84 Stat. 796; 50 U.S.C.
App. 2168.
§ 332.10
Purpose.
The regulations contained in this part
are promulgated to provide modified con-
tract coverage for certain classes of busi-
ness units.
§ 332.20
Definition.
The definitions set forth in § 331.20 of
this chapter and the following definitions
shall apply to this part.
(a) A "covered contract" is any nego-
tiated national defense prime contract
or subcontract which exceeds $100,000
and pursuant to requirements of the
Cost Accounting Standards Board is re-
quired to include a Cost Accounting
Standards clause (see 4 CFR Part 331
and this chapter).
(b) A "business unit" is any segment
of an organization, or an entire business
organization which is not divided into
segments.
(c) A "segment" is one of two or more
divisions, product departments, plants,
or other subdivisions of an organization
reporting directly to a home office, usu-
ally identified with responsibility for
profit and/or producing a product or
service. The term includes Government-
owned contractor-operated (GOCO) fa-
cilities, and joint ventures and subsidiar-
ies (domestic and foreign) in which the
organization has a majority ownership.
The term also includes those joint ven-
tures and subsidiaries (domestic and for-
eign) in which the organization has less
than a majority of ownership, but over
which it exercises control.
§ 332.30 Applicability.
(a) Except for the award of a single
covered contract of $10 million or more
the provisions of this part may be ap-
plied in lieu of Part 331 of this chapter
to any covered contract received by a
business unit which in its immediately
preceding cost accounting period re-
ceived less than $10 million in awards
of covered contracts: Providing, That
the sum of such awards equals less than
10 percent of the business unit's total
sales during that period.
(b) If in any cost accounting period
the provisions of this part are applied to
any one award to a business unit, they
must be applied to all covered contracts
awarded to that unit during that period,
except under the following conditions. If
the business unit receives a single con-
tract award of $10 million or more, that
contract must contain the clause set
forth in § 331.50 of this chapter. There-
after any covered contract awarded in
the same cost accounting period must
also contain that clause.
391
(c) Any covered contract awarded
subject to this part shall remain subject
thereto even if a portion of the contract
is performed in a subsequent cost ac-
counting period in which the business
unit is exempt from the requirements of
the Cost Accounting Standards Board or
ineligible to use this part.
§ 332.40
Solicitation.
Any covered contract awarded subject
to this part shall have been made in
conformity with the requirements of
§ 331.40, Solicitation Notice, of the
Board's regulations.
§ 332.50 Contract clause.
Upon appropriate certification by the
offeror that he is eligible and elects to
use this part, the following clause shall
be inserted in any resulting contract in
lieu of the clause prescribed in § 331.50
of this chapter.
DISCLOSURE AND CONSISTENCY OF Cost
ACCOUNTING PRACTICES
(a) The contractor, in connection with
this contract shall: (1) Comply with the re-
quirements of 4 CFR Parts 401, Consistency
in Estimating, Accumulating and Reporting
Costs, and 402, Consistency in Allocating
Costs Incurred for the Same Purpose, in ef-
fect on the date of award of this contract.
(2) If it is a business unit of a company
required to submit a Disclosure Statement,
disclose in writing its cost accounting prac-
tices as required by regulations of the Cost
Accounting Standards Board. The required
disclosures must be made prior to contract
award unless the Contracting Officer provides
a written notice to the contractor authorizing
post-award submission in accordance with
regulations of the Cost Accounting Standards
Board. If the contractor has notified the Con-
tracting Officer that the Disclosure Statement
contains trade secrets and commercial or
financial information which is privileged and
Supp. No. 3
Cost Accounting Standards Board
confidential, the Disclosure Statement will
be protected and will not be released outside
of the Government.
NOTE.-See, however, the note set out fol-
lowing paragraph (d) of the Cost Accounting
Standards contract clause in § 331.50 of the
Board's regulations.
(3) Follow consistently the cost account-
ing practices disclosed pursuant to (2) above
and the established cost accounting practices
of the business unit. A change to such
practices may be proposed, however, by either
the Government or the contractor, and the
contractor agrees to negotiate with the Con-
tracting Officer the terms and conditions
under which a change may be made. After
the terms and conditions under which the
change is to be made have been agreed to,
the change must be applied prospectively
to this contract, and the Disclosure State-
ment if affected must be amended accord-
ingly. No agreement may be made under
this provision that will increase costs paid
by the United States.
(4) Agree to an adjustment of the con-
tract price or cost allowance, as appropri-
ate, if he or a subcontractor fails to comply
with the applicable Cost Accounting Stand-
ards or to follow any practice disclosed or
established pursuant to subparagraph (a) (2)
or (a)(3) above and such failure results
in any increased costs paid by the United
States. Such adjustment shall provide for
recovery of the increased costs to the United
States together with interest thereon com-
puted at the rate determined by the Sec-
retary of the Treasury pursuant to Pub. L.
92-41, 85 Stat. 97, or 7 percent per annum,
whichever is less, from the time the pay-
ment by the United States was made to
the time the adjustment is effected.
(b) If the parties fail to agree whether
the contractor has complied with an appli-
cable Cost Accounting Standard, rule or
regulation of the Cost Accounting Standards
Board and as to any cost adjustment de-
manded by the United States, such failure
to agree shall be a dispute concerning a
question of fact within the meaning of
the disputes clause of this contract.
(c) The contractor shall permit any au-
thorized representatives of the head of the
agency, of the Cost Accounting Standards
Board, or of the Comptroller General of the
United States to examine and make copies
of any documents. papers, or records relating
to compliance with the requirements of this
clause.
(d) The contractor shall include in all
negotiated subcontracts which he enters into
the substance of this clause except paragraph
(b) of this section, and shall require such
inclusion in all other subcontracts of any
tier, except that:
(1) If the subcontract is awarded to a
business unit which pursuant to Part 331
is required to follow all Cost Accounting
Standards, the clause entitled "Cost Ac-
counting Standards" set forth in § 331.50 of
the Board's regulations shall be inserted in
lieu of this clause, or
(2) This requirement shall not apply to
negotiated subcontracts where the price ne-
gotiated is based on:
(i) Established catalog or market prices
of commercial items sold in substantial
quantities to the general public or
(ii) Prices set by law or regulation, or
(3) The requirement shall not apply to
negotiated subcontracts otherwise exempt
from the requirement to accept a Cost Ac-
counting Standards clause by reason of
§ 331.30 (b) of the Board's regulation.
(e) Notwithstanding (d) above, if this is
a contract with an agency which permits
subcontractors to appeal final decisions of
the Contracting Officer directly to the head
of the agency or his duly authorized repre-
sentative, then the contractor shall include
the substance of paragraph (b) as well.
§ 332.60 Post-award disclosure.
Any business unit entering into a prime
contract or subcontract containing the
clause set forth in § 332.50 if required to
submit a Disclosure Statement must do
so prior to award unless post-award sub-
mission is authorized pursuant to § 331.-
60(b).
§ 332.70 Interpretation.
(a) For the purpose of determining
under § 332.30 (a) whether the sum of
covered contract awards equals less than
10 percent of the business unit's total
sales, an order received by the one seg-
ment from another segment shall be
treated in the same way that a subcon-
tract award to the receiving segment
would be treated. In measuring sales for
a year, a transfer by one segment to an-
other shall be deemed to be a sale by the
transferor.
(b) Contracts subject to this Part 332
may be performed during a cost account-
ing period in which a subsequently
awarded contract subject to Part 331 is
also being performed. Compliance with
the requirements established by Part 331
may compel the use of cost accounting
practices for the subsequently awarded
contract that are not required under this
Part 332. Under these circumstances, the
cost accounting practices applicable to
contracts subject to this Part 332 need
not be changed. Any resulting differences
in practices between the contracts sub-
ject to this Part and those subject to
Part 331 of this chapter shall not con-
stitute violations of Standards 401 or
402.
(c) In applying § 332.30 (a), business
39J
Supp. No. 3
Cost Accounting Standards Board
units using Federal Management Circu-
lar 73-8 (Cost Principles for Educational
Institutions) shall use the amount of
current funds expeditures in lieu of total
sales.
(d) The interpretations set forth in
§ 331.70 shall also apply to this part.
§ 332.80 Effective date.
The effective date of this part is
March 10. 1978.
39K
Supp. No. 3
Cost Accounting Standards Board
SUPPLEMENT PREAMBLES
A. PREAMBLE
Preamble to original Publication 9-12-77. The
material set forth below is the preamble to the
original publication of Part 332, 42 FR 45625,
September 12, 1977.
CONTRACT COVERAGE, MODIFIED CONTRACT
COVERAGE, BASIC REQUIREMENTS
COST ACCOUNTING STANDARDS
AND
This publication adds a new Part 332
and amends Parts 331, 351 and 403 of the
Cost Accounting Standards Board's rules,
regulations and Standards. The proposal
to add Part 332 and to amend Parts 331
and 351 were published for comment in
the February 16, 1977 FEDERAL REGISTER
(42 FR 9389). The proposal to amend
Part 403 was published for comment in
the November 30, 1976 FEDERAL REGISTER
(41 FR 52473). Appropriate periods for
comment on the proposals were provided.
Numerous and extensive comments were
received concerning both proposals. The
Board appreciates the interest expressed
by the commentators and thanks them
for their participation.
COMMENTS OF PARTS 332, 331 AND 351
GENERAL
Many commentators expressed general
approval of the proposal to exempt cer-
tain businesses and provide modified
coverage for others. Information avail-
able to the Board does not demonstrate
that the benefits to be derived from ap-
plying all requirements to all contracts
clearly outweigh the cost of requiring
such application. Moreover the Board
does not believe that many small com-
panies with less sophisticated accounting
systems and small accounting staffs can
comply with the Board's requirements
without experiencing inordinate difficulty
and some cost. Under these circum-
stances, the Board has concluded that it
is appropriate to remove completely the
obligation of small businesses to comply
with Standards, rules, and regulations of
the Board. In reaching this conclusion
the Board has also given some weight to
the belief expressed by a few commenta-
tors that the prospect of having to com-
ply with Board requirements has caused
some companies to avoid Government
contracts.
As noted by some commentators who
opposed the Board's proposal, the grant-
ing of exemptions tends to reduce rather
than increase uniformity of cost account-
ing practices because of the exemptions.
In that sense the action may be viewed
as not being in furtherance of that statu-
tory goal which is set forth in Pub. L.
91-379. It has long been recognized that
uniformity is an extremely important ob-
jective of the Board's actions. It is not,
however, the only consideration. If there
were any doubt on this point, the fact
that the Law authorizes the Board to
prescribe rules and regulations exempt-
ing contractors from its requirements
should dispel that doubt. The Board be-
lieves that the action being taken is con-
sistent with its statutory duties viewed as
a whole even though uniformity among
some business units will be reduced.
THRESHOLD DETERMINATIONS
Several commentators noted that the
$10 million threshold provided in Part
332 would be based on all contracts sub-
ject to Cost Accounting Standards rather
than being limited to national defense
contracts and subcontracts. They noted
that Pub. L. 91-379 does not apply to
nondefense contracts and that such con-
tracts are subject to Board Standards
rules and regulations only to the extent
that the Administrator of General Serv-
ices has extended coverage to it. Because
of this they urged that the calculation
be made only on the basis of national de-
fense contracts and subcontracts. This
recommendation has been adopted by
the Board.
The proposal to exempt all contracts
under $500,000 was viewed as generally
desirable by many commentators. Some
recommended that $1 million or more be
established as the minimum coverage
level. However, some commentators op-
posed exempting small contracts of a
contractor required to follow Standards
on large contracts. They contended that
once the contractor has to establish prac-
tices in compliance with Standards, there
is no additional burden involved in ap-
plying those practices to its small con-
tracts. In any case it is unlikely that
application of those practices could re-
sult in burdens that would be equal to
those that would result from applying
one set of cost accounting practices to
large contracts and another set to small
contracts. For this reason the Board has
not adopted the proposal to exempt all
contracts under $500,000. Instead the
existing provisions providing for cover-
age of smaller contracts awarded to a
business unit which has received an
award of $500,000 or more are being
retained.
39L
Supp. No. 3
Cost Accounting Standards Board
One commentator noted that some
contractors receive contract awards of
$10 million or more every other year and
few, if any, covered awards in the inter-
vening years. The large contracts would
not be subject to disclosure requirements
or Standards under the February 16 pro-
posal. The Board has remedied this prob-
lem by providing that any single contract
award of $10 million or more is subject to
all Standards and must be covered by a
Disclosure Statement.
SMALL BUSINESS
Several commentators urged that all
businesses which qualify as small busi-
ness concerns under the rules and regu-
lations of the Small Business Adminis-
tration be exempted. The February 16,
1977 proposal would have provided such
an exemption only for a small business
which received less than $10 million in
awards during its preceding fiscal year.
Modified coverage would have been pro-
vided for other small businesses. Re-
search indicates that there are very few
companies which would fall into the cate-
gory of small businesses receiving awards
of $10 million or more. In the interest
of using a single test, i.e., whether the
contractor qualifies as a small business
concern, rather than a dual test which
would result only in a few small busi-
nesses being subject to modified cover-
age, the Board has adopted the recom-
mendation to exempt all small business
concerns. Research indicates that if this
action had been applied to Federal Fiscal
Year 1976 it would have resulted in ex-
emption of 196 small business concerns
which were doing business with the De-
partment of Defense and which had $460
million of contracts of the type subject
to Cost Accounting Standards. Conse-
quently, on average, each small business
concern would have a relatively small
amount of covered contracts.
OTHER CATEGORIES
Various commentators renewed pre-
vious recommendations that the Board
exempt other categories of contracts and
contractors. The categories included col-
leges, universities, nonprofit organiza-
tions, hospitals, and government-owned-
contractor-operated facilities. The Board
has considered these recommendations
and concluded that none of these cate-
gories should be exempted.
PART 332 ELIGIBILITY
The February 16 publication would re-
39M
quire that a contractor have less than
$10 million in covered contracts and that
the covered contracts be less than 10%
of total sales to be eligible for Part 332.
In discussing this provision some com-
mentators proposed a wide variety of
tests in lieu of the tests proposed in that
publication. Some suggested using only a
dollar test or only a percentage test
rather than both. The amounts recom-
mended ranged up to $100 million and 50
percent of total sales. Some suggested
using sliding scales to determine eligibil-
ity. None of the suggested tests appear
more likely to achieve the purposes of
the Board than the test originally pro-
posed. The Board has therefore retained
its initial proposal.
SCOPE OF PART 332
A number of commentators recom-
mended that eligibility for Part 332
should result in complete exemption.
Others recommended that requirement
for compliance with Parts 401 and 402 be
the only requirement and that the dis-
closure obligation be eliminated. The
Board believes that substantial benefits
may be derived by continuing to require
compliance with Parts 401 and 402. There
is nothing which suggests that compli-
ance with the two Standards entails any
significant cost. Consequently this re-
quirement is being retained. According
to information reported to the Board,
adoption of Part 332 will relieve 264 seg-
ments of 131 contractors of the require-
ments to comply with all Standards but
will remove only $405 million of contracts
from full coverage.
DISCLOSURE STATEMENT REQUIREMENTS
Many commentators suggested that
preparation of a Disclosure Statement
was burdensome. They also contended
that in the situation where a large com-
mercial contractor receives only a few
small contracts containing a Cost Ac-
counting Standards clause the need for
a Disclosure Statement appears to be
minimal. Some asserted that adoption of
the proposal to require a Disclosure
Statement for all covered contracts
would reduce the number of companies
that would accept contracts subject to
the Board's Standards, rules and regu-
lations. The Board is persuaded that for
the time being Disclosure Statements
should not be required for all covered
contracts. Accordingly it is not adopting
the February 16 proposal. The Board is
retaining the existing Disclosure State-
ment requirement provided in Part 351
Supp. No. 3
Cost Accounting Standards Board
except that a business unit will be re-
quired to submit a Disclosure State-
ment if it is a company or a segment of
a company which received awards of na-
tional defense contracts subject to Cost
Accounting Standards in excess of $10
million during its preceding cost ac-
counting period rather than the preced-
ing Federal fiscal year.
REVISIONS TO PART 351
Part 332 and the amendments to Part
331 generally will result in annual deter-
minations being made of a contractor's
obligation to follow Standards and to
submit Disclosure Statements. The de-
termination will be made on the basis
of sales and awards data from the im-
mediately preceding cost accounting
period. The requirement to continue to
submit a Disclosure Statement so long
as the contractor has a contract subject
to Cost Accounting Standards will no
longer apply. Disclosure Statements must
be maintained for and applied to only
those contracts which were awarded dur-
ing a cost accounting period in which
the contractor met the filing require-
ments of § 351.40. Sections 351.40 and
351.50 have been revised to reflect this
change.
SEGMENTS OF LARGE COMPANIES
A number of commentators sought to
have small segments of large companies
treated in the same way that small busi-
nesses are treated. In their view, small
segments are competing in the same en-
vironment as small business and are op-
erating with essentially similar capacity
and resources. Therefore, such segments,
they concluded, should be subject to the
same rules as small business. The Board
does not accept this line of reasoning.
Even in those cases where a segment
may appear to operate as a small busi-
ness its status as a segment precludes
it from being regarded in the same way.
It has available to its capacities and re-
sources of the company of which it is a
part. Also the policy considerations of
the Small Business Act have no appli-
cability to segments of a larger company.
Further, as a practical matter, the rules
already exist in the Small Business Ad-
ministration for identifying small busi-
ness concerns. There are no comparable
rules for identifying small segments.
As indicated by the February 16 pro-
posal the Board nonetheless recognizes
that segments which are engaged in pri-
marily noncovered work should be eligi-
ble for modified coverage. This coverage
39N
is provided by Part 332. It will apply to
segments which according to information
submitted to the Board have average
covered sales of approximately $1.4 mil-
lion per segment. The relatively small
amount of covered contract sales by each
of these segments, the limited Govern-
ment interest in the total business ac-
tivity of the unit and the fact that the
implementation and administration in-
volves some cost lead to the conclusion
that modified coverage is appropriate and
sufficient to protect the interests of the
Government.
SUMMARY
The results of the Board's adoption of
Part 332 and amendment of Parts 331
and 351 are:
1. None of the Board's requirements
apply to a business unit unless it has
received an award of at least one cov-
ered contract of more than $500,000.
Thereafter covered contracts of more
than $100,000 are subject to the Board's
requirements.
2. A Disclosure Statement must be
submitted by any business unit receiving
a covered contract if it is either a com-
pany which received net awards of nego-
tiated national defense prime contracts
and subcontracts subject to Cost Ac-
counting Standards totaling $10 million
or more in its preceding cost accounting
period or a segment of such a company.
3. Contracts awarded to any business
unit which received less than $10 mil-
lion in awards of covered contracts in
its preceding cost accounting period are
subject to:
(a) Standards 401 and 402, if the
dollar amount of such awards is equal
to less than 10 percent of the business
unit's total sales during that period; or
(b) All Standards, if the dollar amount
of such awards is equal to 10 percent or
more of the business unit's total sales
during that period.
4. Any single award of a covered con-
tract of $10 million or more is subject
to all Standards and requires submission
of a Disclosure Statement.
5. Contracts awarded to any business
unit which received $10 million or more
in awards of covered contracts during
the preceding cost accounting period are
subject to all Standards.
6. Notwithstanding the foregoing, all
businesses which qualify as small busi-
ness concerns under the rules and regu-
lations of the Small Business Adminis-
tration are exempt from all Cost Ac-
Supp. No. 3
Cost Accounting Standards Board
counting Standards Board requirements.
COMMENTS ON PART 403
With respect to the amendment of
Part 403, the November 30, 1976 proposal
was to revise that Standard to make it
applicable to any contract which was
subject to Cost Accounting Standards
generally. The amendment being pro-
mulgated today retains this concept.
However, as recommended by a number
of commentators, the Board deferred the
promulgation of this amendment pend-
ing the amendments to Parts 331 and
351 and the addition of Part 332 dis-
cussed above.
The decision to extend the application
of Part 403 to additional contractors was
made on the basis of extensive research.
This research included both those con-
tractors who were already required to
use Part 403 and those who were ex-
pected to use it as a result of this amend-
ment. With respect to the current users,
the Board is satisfied that this Standard
has resulted in more equitable alloca-
tions, with little administrative effort
in most cases. With respect to potential
additional users, the research indicated
that many of these would have to make
few, if any, changes to comply with Part
403 and that the remainder could comply
with little difficulty. The Board notes in
addition, an independent study by the
Conference Board which found that de-
fense contractors who are using Part 403
for contract costing purposes are using
the same allocation procedures for in-
ternal reporting purposes. According to
the Conference Board, it was typical of
these companies to allocate home office
expenses on a blanket basis prior to the
promulgation of Part 403. (Information
Bulletin No. 17, February 1977.)
A number of commentators suggested
various limitations for the application of
Part 403. Some of these suggestions were
expressed in general terms. Some of the
commentators recommended, for exam-
ple, that the requirement to use Part 403
should not be extended to "small con-
tractors." Alternatively or additionally
it was recommended that Part 403 should
not be required for a large contractor
with little work subject to Cost Account-
ing Standards. More specifically, recom-
mendations were received to exempt
those contractors with less than 10 per-
cent of their revenue from Government
work. Others recommended that contrac-
tors who have less than $10 million in
contracts subject to Cost Accounting
Standards should be exempt. The Board
believes that the recommendations of
this nature have been accommodated to
the extent desirable and practical by the
amendments to Parts 331 and 351 and
the addition of Part 332 being promul-
gated today. Accordingly, any further
exemption from Part 403, specifically, is
considered to be unnecessary.
the
In publishing the proposed amendment
to Part 403 in the FEDERAL REGISTER
of November 30, 1976, the Board stated
that there is evidence that almost all
contractors who were required to make
significant changes in their allocation
practices as a result of Part 403 did so
without undue trouble or expense. Sev-
eral commentators questioned
Board's conclusion in this regard. The
Board's conclusion was based in part on
Staff research involving 147 home offices
who now use Part 403 to allocate home
office expenses. This research sought to
determine, among other things, the ad-
ministrative problems and expense in-
volved in making allocations pursuant to
Part 403. Government auditors reported
that of the 147 home offices, only 4 had
problems in developing the necessary
data and that there was evidence of sig-
nificant administrative costs at one of
these four offices. In addition, evidence
of significant administrative costs in
making the allocations was found by the
Government auditors at four other of
the 147 home offices.
Some of the respondents who ques-
tioned the Board's conclusions regard-
ing administrative problems and expense
referred to an industry report on the
economic impact of Cost Accounting
Standards as support for this position.
These respondents variously referred the
Board to those sections of the report
which summarized (i) contractor's ap-
praisal of benefits from Part 403; (ii) the
number of contractors who were required
to make changes as a result of Part 403;
(iii) the number of noncompliance no-
tices issued in connection with Part 403;
and (iv) the increase and decrease in
costs allocated to Government work as a
result of CAS 403. Nothing in these sec-
tions, however, specifically addresses the
question of administrative problems or
expense involved in complying with Part
403.
Two associations reported that, con-
trary to the Board's findings, their mem-
ber companies had experienced trouble
and expense in complying with Part 403.
These associations declined to identify
39 O
Supp. No. 3
Cost Accounting Standards Board
the companies involved, the nature of
the problems, or the amount of the ex-
penses. Under these circumstances, there
is no basis to alter the conclusion that
contractors have been able to make
changes required as a result of Part 403
without undue trouble or expense.
One commentator stated that it would
not be desirable to make more contrac-
tors subject to Part 403 because he be-
lieves it to be defective, particularly with
respect to its application to the alloca-
tion of state and local taxes. With re-
spect to the application of the Stand-
ard to the allocation of state and local
taxes specifically, the Board notes that
it reached its conclusion on the basis of
considerable research and extensive de-
liberation. Moreover, it has reexamined
its conclusions, even after the promulga-
tion of Part 403. Notwithstanding the
views of the commentator, the Board
continues of the view that the provision
in question is proper. Accordingly, the
Board does not agree that this Standard
should not be extended to additional con-
tractors because of the tax allocation
provision.
EFFECTIVE DATE
The effective date of the regulations
being published today is March 10, 1978.
Pub. L. 91-379 provides that regulations
shall take effect not earlier than the ex-
piration of the first period of sixty cal-
endar days of continuous session of the
Congress following the date on which a
copy of the regulations is transmitted
to the Congress. The calendars of the
Congress indicate that the required
sixty days will not pass until some time
in February 1978. Accordingly, March 10,
1978, has been selected to assure suffi-
cient time for the regulation to lie before
the Congress.
39P
Supp. No. 3
Cost Accounting Standards Board
DISCLOSURE STATEMENT¹
§ 351.20
PART 351-BASIC REQUIREMENTS
Subchapter E-Disclosure Statement
§ 351.10
Sec.
351.10
[Reserved]
351.20
Purpose.
351.30
351.40
Filing requirement.
351.50
351.60
Forms.
351.70
351.80
351.90
Definitions.
Contract awards.
Submission.
Incorporation of Disclosure State-
ment.
Adequacy of Disclosure Statement.
351.100 Effect of filing Disclosure Statement.
351.110 Early filing.
351.120
351.130
Amendment of Disclosure State-
ment.
Instructions and information.
351.140 Disclosure Statement.
351.145 Disclosure statement-colleges and
universities.
Appendix A-Principal Product or Service
Code
Supplement-Preambles
AUTHORITY: Sec. 103, 84 Stat. 796 (50
U.S.C. App. 2168).
SOURCE: 38 FR 30728, Nov. 7, 1973, unless
otherwise noted.
NOTE: For a document affecting §§ 351.41,
351.50, and 351.70, see 39 FR 44030, Dec. 20,
1974.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4139, February 29, 1972)
is set forth in preamble A of the supplement.
The preamble to an amendment affecting the
original publication of this part is set forth
in preamble B of the supplement.
Part 351 was revised at 38 FR 30725, Novem-
ber 7, 1973, with the exception of §§ 351.41,
351.50 (c) and the last sentence of § 351.70.
The preambles to the revision of this part are
set forth in preambles B and C.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal
Register, National Archives and Records
Service, General
General Services Administration,
Washington, D.C. 20408.
1 37 FR 4145, Feb. 29, 1972.
[Reserved]
Purpose.
This regulation is promulgated pur-
suant to section 719 of the Defense Pro-
duction Act of 1950, as amended by 84
Stat. 796 (Pub. L. 91-379), to provide
the means by which affected persons can
satisfy the requirements established by
that law for disclosure of their cost ac-
counting practices and to promulgate
the Disclosure Statement form. The
regulation also sets forth the adminis-
trative procedures to be followed by the
Cost Accounting Standards Board and
relevant Federal agencies in connection
with such disclosures.
§ 351.30
Definitions.
A "profit center" is the smallest orga-
nizationally independent segment of a
company which has been charged by
management with profit and loss respon-
sibilities.
§ 351.40 Filing requirement.
(a) The requirements of this part are
applicable to all defense contractors who
enter into negotiated national defense
contracts with the United States in ex-
cess of $100,000, except as provided in 4
CFR 331.30(b), other than contracts
where the price negotiated is based on
(1) established catalog or market prices
of commercial items sold in substantial
quantities to the general public, or (2)
prices set by law or regulation. A sep-
arate disclosure statement must be sub-
mitted covering the practices of each
of the contractor's profit centers, divi-
sions, or similar organizational units
whose costs included in the total price
of any contract exceed $100,000, except
as provided in 4 CFR 331.30 (b), except
where such costs are based on (1) es-
tablished catalog or market prices of
commercial items sold in substantial
quantities to the general public or (11)
prices set by law or regulation. If the cost
accounting practices under contracts are
identical for more than one organiza-
tional unit, then only one statement need
be submitted for those units, but each
such organizational unit must be iden-
tified. A disclosure statement will also
be required for each corporate or group
office whose costs are allocated to one
40
Supp. No. 3
Cost Accounting Standards Board
or more corporate segments performing
contracts covered by Pub. L. 91–379.
(b) The requirements also apply to
each subcontractor of whatever tier un-
der a prime contract subject to these pro-
visions provided the subcontract would,
if it were a prime contract with the
United States, be covered by the above
statement of applicability for negotiated
national defense contracts.
(c) The practices disclosed pursuant
to these requirements shall be followed
on all contracts and subcontracts subject
to Pub. L. 91-379 being performed
by the contractor or subcontractor.
(d) The Cost Accounting Standards
Board will not make Disclosure State-
ments public in any case when the con-
tractor files its statement specifically
conditioned on the Government's agree-
ment to treat the Disclosure Statement
as confidential information.
(e) Any company that receives a ne-
gotiated national defense contract award
which is subject to Cost Accounting
Standards and is for $10 million or more
must submit a completed Disclosure
Statement.
(f) Any company which, together with
its subsidiaries, received net awards of
negotiated national defense prime con-
tracts and subcontracts subject to Cost
Accounting Standards totaling more
than $10 million in its most recent cost
accounting period, must submit a com-
pleted Disclosure Statement within
ninety (90) days after the end of that
period.
PREAMBLES: For preambles relating to
§ 351.40, see preambles C, E, Fand Gof the sup-
plement to this part. For preamble to super-
seded regulations, see preamble A of the sup-
plement.
§ 351.50 Contract awards.
no
(a) Effective January 1, 1976,
relevant Federal agency shall award any
national defense contract subject to this
regulation to any contractor required to
submit a Disclosure Statement under
§ 351.40, unless such submission has been
made or post award submission has been
authorized pursuant to § 331.60.
(b) No subcontract shall be awarded
to any subcontractor required to file a
Disclosure Statement pursuant to the
filing requirement of § 351.40 unless the
subcontractor has satisfied that require-
ment by submitting such Statement to
the Government in the manner pre-
scribed by agency regulations and
agreed to with the prime contractor
41
under whom the subcontract is to be
awarded.
PREAMBLES: For preambles relating to
§ 351.50, see preambles C F and G of the sup-
plement to this part. For preambles to super-
seded regulations, see preambles A and B of
the supplement.
§ 351.60 Forms.
Disclosure Statements shall contain
complete and accurate responses to the
items set forth in § 351.140. For the con-
venience of persons required to submit
Disclosure Statements, the Cost Account-
ing Standards Board has devised a form,
Form No. CASB-DS-1, which should be
used. Copies of the form may be re-
quested by relevant Federal agencies for
distribution to affected contractors and
subcontractors from the Administrative
Officer of the Cost Accounting Standards
Board, 441 G Street NW., Washington,
DC 20548. If for any reason, copies of the
form cannot be obtained, the required
information shall be supplied in a form
substantially in accord with the arrange-
ment set forth in § 351.140.
§ 351.70
Submission.
Each national defense contractor shall
submit a copy of each Disclosure State-
ment, and any amendments thereto in
accordance with the method prescribed
by each Federal agency for which the
contractor is performing or proposes to
perform contracts subject to the rules,
regulations, and standards of the Cost
Accounting Standards Board. Within ten
days after the prime contractor or sub-
contractor receives notice that his Dis-
closure Statement, or any amendment
thereto, has been determined to be ade-
quate, he shall submit a copy of the
Statement or amendment as appropriate
to the Cost Accounting Standards Board,
441 G Street N.W., Washington, D.C.
20548.
[38 FR 27508, Oct. 4, 1973, as amended at
38 FR 30728, Nov. 7, 1973]
PREAMBLES: For preambles relating to
§ 351.70, see preambles B and C of the sup-
plement to this part. For preamble to super-
seded regulations, see preamble A of the sup-
plement.
§ 351.80 Incorporation of Disclosure
Statement.
Every solicitation subject to the stand-
ards, rules, and regulations of the Cost
Accounting Standards Board shall con-
tain a provision allowing the contractor
to identify and incorporate by reference,
Supp. No. 3
Cost Accounting Standards Board
a Disclosure Statement already on file
which will be applicable to that solicita-
tion. Such identification and incorpora-
tion shall satisfy the requirement for dis-
closure as a condition of contracting.
Agencies may, nonetheless, require sub-
mission of additional copies of such Dis-
closure Statement to the extent deemed
necessary.
§ 351.90 Adequacy of Disclosure State-
ment.
Federal agencies shall prescribe regu-
lations by which each will determine that
a Disclosure Statement has adequately
disclosed the practices required to be
disclosed by Cost Accounting Standards
Board's standards, rules, and regulations.
Agencies are urged to coordinate devel-
opment of such regulations. The Disclo-
sure Statement submitted to the Cost
Accounting Standards Board in accord-
with § 351.70, is for evaluation and devel-
opment of Board programs only. Con-
sequently, such submission to the Board
does not satisfy the requirement for dis-
closure as a condition of contracting,
nor does any action by the Board with
respect to such statement constitute a
finding of any kind regarding the ade-
quacy of the statements as submitted.
§ 351.100 Effect of filing Disclosure
Statement.
Unless the Federal agency involved
provides otherwise either by regulation
or by specific notice to the contractor in-
volved, a Disclosure Statement submitted
to the agency or incorporated by refer-
ence shall be presumed adequate to meet
the requirement that disclosure be made
as a condition of contracting. The fact
that the condition of contracting has
been met shall serve only to establish
what the contractor's cost accounting
practices are or are proposed to be. In
the absence of specific regulation or
agreement, a disclosed practice shall not,
by virtue of such disclosure, be deemed
to have been approved by the agency
involved as a proper, approved or agreed
practice for pricing proposals or accumu-
lating and reporting contract perform-
ance cost data.
§ 351.110 Early filing.
In order to permit orderly processing
of Disclosure Statements, all prospective
contractors and subcontractors are urged
to submit Disclosure Statements as soon
as possible. Notwithstanding such early
filings, contractors will be bound to ad-
here to disclosed practices only with
respect to contracts under which the
contractor would otherwise be required
to adhere to his disclosed practices pur-
suant to § 351.40.
§ 351.120 Amendment of Disclosure
Statement.
(a) Disclosure Statement amend-
ments may be submitted at any time.
Contractors are reminded, however, that
any amendments to Disclosure State-
ments must be made applicable prospec-
tively to all contracts and subcontracts
subject to Cost Accounting Standards.
For this, reason, all relevant Federal
agencies are strongly urged to establish
interagency procedures for promptly co-
ordinating agency activities stemming
from changes in disclosed practices.
(b) Disclosure Statements must be
amended for practices that must be
changed to comply with Cost Accounting
Standards which become applicable sub-
sequent to the initial filing of the Dis-
closure Statements. Equitable adjust-
ment of contract price or cost allowance
will be made as set out in paragraph
(a) (4) (A) of § 331.50 of this chapter.
(c) Disclosure Statements must also
be amended for changes in practices vol-
untarily agreed to by the parties. In this
42
Supp. No. 3
Cost Accounting Standards Board
event, the contractor and the contract-
ing officer (s) may enter into an agree-
ment as contemplated by paragraph
(a) (4) (B) of § 331.50 of this chapter.
Such agreement may specify the impact
that a Government or contractor pro-
posed change in practice shall be deemed
to have on costs paid under one or more
existing contract(s) for which the con-
tracting officer(s) is responsible. Such
agreement may be made final and bind-
ing, notwithstanding the fact that ex-
perience may subsequently establish that
actual impact of the change differed
from that agreed to.
(d) Amendment shall be submitted to
the same offices, including the Cost Ac-
counting Standards Board, to which sub-
mission would have to be made were an
original Disclosure Statement being filed.
Revised responses for Items 1.4.0 through
1.7.0, 8.1.0 or 8.2.0 must be submitted at
the beginning of the contractor's fiscal
year only if the response to an item in the
Disclosure Statement on file requires a
change. If the contractor's sales were
such that it would check the same boxes
in the Disclosure Statement, resubmis-
sion of responses concerning these partic-
ular items is not required.
(e) For each revision of the Disclosure
Statement (addition, change or deletion),
only the pages containing such revision
shall be resubmitted. Each resubmission
shall include a new cover sheet and a
signed certification. In the first line of
Item 0.4 of the cover sheet, companies
shall enter the date of the revision. On
the next line of Item 0.4 the date of the
last cover sheet that was submitted shall
be entered. The numbers of the pages
being revised and submitted with the
cover sheet shall be entered immediately
above the certification. The upper right
corner of each revised page being sub-
mitted shall be marked "Revised" and
dated with the date shown in the first
line of Item 0.4. Companies shall enter in
the right margin of each page, an as-
terisk (*) alongside each line containing
a revision. For continuation sheets, aster-
isks may be used in the right margin to
identify revised material. Agencies may
prescribe criteria under which submis-
sion of a complete, updated Disclosure
Statement will be required.
[38 FR 30728, Nov. 7, 1973, as amended at
40 FR 32749, Aug. 4, 1975]
PREAMBLES: For preambles relating to
§ 351.120, see preambles C and F of the sup-
plement to this part. For preamble to super-
seded regulations, see preamble A of the sup-
plement.
§ 351.130 Instructions and information.
The following instructions and infor-
mation shall be used by persons complet-
ing Disclosure Statements.
INSTRUCTIONS AND INFORMATION
(a) This disclosure statement has been de-
signed to meet the requirements of Pub. L.
91-379, and persons completing it are to de-
scribe their contract cost accounting prac-
tices. For timing of requirement to file a
disclosure statement, see § 351.40. A state-
ment must be submitted by all defense con-
tractors who enter into negotiated national
defense contracts with the United States in
excess of $100,000 other than contracts
where the price negotiated is based on (1)
established catalog or market prices of com-
mercial items sold in substantial quantities
to the general public, or (2) prices set by law
or regulation, or contracts exempt under the
provisions of 4 CFR 331.30(b). A separate
disclosure statement must be submitted cov-
ering the practices of each of the contractor's
profit centers, divisions, or similar organiza-
tional units, whose costs included in the
total price of any contract exceed $100,000,
except where such costs are based on (1)
established catalog or market prices of com-
mercial items sold in substantial quantities
to the general public, or (11) prices set by
law or regulation, or contracts exempt under
the provisions of 4 CFR 331.30 (b). If the
cost accounting practices under contracts are
identical for more than one organizational
unit, then only one statement need be sub-
mitted for those units, but each such orga-
nizational unit must be identified. A disclo-
sure statement will also be required for each
corporate or group office when costs are allo-
cated to one or more corporate segments per-
forming contracts covered by Pub. L. 91–379,
but only Part VIII of the statement need be
completed.
(b) The statement must be signed by an
authorized signatory of the reporting unit.
(c) The disclosure of a cost accounting
practice by a contractor does not determine
the allowability of particular items of cost.
Irrespective of the practices disclosed by a
contractor, the question of whether or not,
or the extent to which, a specific element of
cost is allowed under a contract remains for
consideration in each specific instance. Con-
tractors are cautioned that the determination
of the allowability of cost items will remain
a responsibility of the contracting officers
pursuant to the provisions of the applicable
procurement regulations.
43
Cost Accounting Standards Board
(d) Unless the Federal agency involved
provides otherwise, either by regulation or
by specific notice to the contractor involved,
& Disclosure Statement submitted to the
agency or incorporated by reference should
be presumed adequate to meet the require-
ment that disclosure be made as a condition
of contracting. In the absence of specific
regulations or agreement, a disclosure prac-
tice should not, by virtue of such disclosure,
be deemed to have been approved by the
agency involved as a proper, approved, or
agrced practice for pricing proposals or ac-
cumulating and reporting contract perform-
ance cost data.
(e) The individual Disclosure Statement
may be used in audits of contracts or in ne-
gotiation of prices leading to contracts. The
authority of the audit agencies and the con-
tracting officers is in no way abrogated by the
material presented by the contractor in his
Disclosure Statement. Contractors are cau-
tioned that their disclosures in response to
the items herein must be complete and accu-
rate; the practices disclosed may have a sig-
nificant impact on ways in which contract-
tors will be required to comply with Cost
Accounting Standards.
(f) This Disclosure Statement should be
answered by checking the appropriate box or
Inserting the applicable Code letter which
most nearly describes the reporting unit's
cost accounting practices. Part I of the state-
ment asks for general information concern-
ing the reporting unit. Part VIII covers Cor-
porate and Group (Intermediate) offices
whose costs are allocated to one or more seg-
ments performing contracts covered by Pub.
L. 91-379. Part VIII should be completed
by each such office, and care should be taken
to insure proper identification of such offices
on the cover of the Disclosure Statement. In
short, while a Corporation or group office may
have more than one reporting unit submit-
ting Disclosure Statements, only one state-
ment need be submitted to cover the Corpo-
rate or Group Office operations.
(g) A number of questions in this statement
may need narrative answers requiring more
space than is provided. In such instances, the
reporting unit should use the continuation
sheets provided or a facsimile thereof. The
number of the question involved should be
Indicated and the same coding required to
answer the questions in the statement should
be used in presenting the answer in the con-
tinuation sheet. The reporting unit should
Indicate on the last continuation sheet used,
the number of such sheets that were used.
(h) Contractors to whom Pub. L. 91-
379 is applicable are required to follow con-
sistently their disclosed practices in pricing
contract proposals and in accumulating and
reporting contract performance cost data. If
deviation from disclosed practices results in
increased costs being paid by the Govern-
ment, contractors will be required to repay to
the Government the amount of the increased
costs together with interest charges.
(1) Pub. L. 91-379 contains an access
to records clause, section 719 (1) of the Law
states:
"For the purpose of determining whether
a defense contractor or subcontractor has
complied with duly promulgated cost ac-
counting standards and has followed con-
sistently his disclosed cost accounting prac-
tices, any authorized representative of the
head of the agency concerned, of the Board,
or of the Comptroller General of the United
States shall have the right to examine and
make copies of any documents, papers, or
records of such contractor or subcontractor
relating to compliance with such cost ac-
counting standards and principles."
[38 FR 30725, Nov. 7, 1973, as amended at
39 FR 44391, Dec. 12, 1974]
PREAMBLES:
For preambles relating to
§ 351.130, see preambles C and E of the sup-
plement to this part. For preamble to super-
seded regulations, see preamble A of the
supplement.
§ 351.140 Disclosure Statement.
The data which are required to be
disclosed are set forth in detail in the
Disclosure Statement form CASB-DS-1
which will be devised by the Cost Ac-
counting Standards Board and will be
arranged substantially as set forth below.
For the form to be used by colleges and
universities, see § 351.145.
NOTE: Forms CASB-DS-1 and CASB-DS-2,
referred to in §§ 351.140 and 351.145, respec-
tively, when revised, will be modified in ac-
cordance with the modifications to 4 CFR
351.130.
44
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
0.1
Company or Reporting Unit.
0.2
0.3
0.4
COVER SHEET AND CERTIFICATION
Name
Street Address
City, state, & zip code
Division or subsidiary of
(if applicable)
Reporting Unit is: (Check one.)
A. [ ] Corporate (Home) office
C. [ ] Division or subsidiary
Official to Contact Concerning this Statement.
Name and title
B. [ ] Group. office
D. [] Other
Phone number (incl. area code and extension)
Date of:
This statement
Most recent prior statement
CERTIFICATION.
I certify that to the best of my knowledge and belief this Statement is
the complete and accurate disclosure as of the above date by the above-named
organization of its cost accounting practices, as required by the Disclosure
Regulation of the Cost Accounting Standards Board under 50 U.S.C. App. 2168,
Public Law 91-379, (4 CFR 351).
FORM CASB-DS-1
【Name】
(Title)
THE PENALTY FOR MAKING A FALSE STATEMENT IN
THIS DISCLOSURE IS PRESCRIBED IN 18 U.S.C. 1001
45
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE. STATEMENT
REQUIRED BY PUBLIC LAN 91-379
INDEX
Page
PART I
General Information .
1
PART II
Direct Costs
4
PART III -
Direct Vs. Indirect .
1 11
PART IV.
Indirect Costs
. 14
PART V
Depreciation and Capitalization Practices
. 21 .
PART VI
Other Costs and Credits ..
26**
•
PART VII -
-
29.
Deferred Compensation and Insurance Costs .
PART VIII - Corporate or Group Expenses .
FORM CASB-DS-1
Continuation Sheet
- 38
46
Cost Accounting Standards Board

PART I – GENERAL INFORMATION
Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
Instructions for Part I
Sales data for this part should cover the most recently completed fiscal
year of the reporting unit. "Government Sales" includes sales under both prime
contracts and subcontracts. "Annual Total Sales" includes intracorporate
transactions. Educational institutions may skip Items 1.4.0 and 1.6.0, and
consider sales as used in Items 1.5.0 and 1.7.0 to refer to research revenues.
Estimates are permitted for Items 1.4.0 through 1.7.0.
1.1.0 Type of Business Entity of Which the Reporting Unit is a Part. (Check one.)
A. [ ] Corporation
C. [ ] Proprietorship
E. [ ] Joint venture
1.2.0 Predominant Type of Government Sales.
A. [ ] Manufacturing
C. Construction.
[ ]
Y. [ ] Other (specify)
B. [ ] Partnership
D. [ ] Not-for-profit
organization
F. [
(Check one.)
] Educational institution
B. [] Research and Development
D. [] Services
1.3.0 Principal Product or Service Sold to the Government. (Specify name of product
or service and enter code from Instructions.)
Name
Code
1.4.0 Annual Total Sales (Government and Commercial). (Check one.)
A. [] Less than
$1 million
B. [ ] $1-$10
million
C. [] $11-$25
million
D. [ ] $26-$50
million
E. [ ] $51-$100
million
F. [$101-$200
million
G..[ ] $201-$500
million
H. [ ] Over $500
million
FORM CASB-DS-1
1
-
47
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART I - GENERAL INFORMATION
1.5.0 Annual Total Government Sales:
(Check one.)
A. [] Less than
$1 million
D. [ ] $26-$50
B. [] $1-$10
million
c. [ ] $11-$25
million
E. [ ] $51-$100
mi 111 on
million
F. [ ] $101-$200
million
G. [ ] $201-$500
million
H. [ ] Over $500
million
1.6.0 Government Sales (Item 1.5.0) as Percentage of Total Sales (Item 1.4.0). (Check
one.)
A. [] Less than
10%
B. [ ] 10%-50%
C. [ ] 51%-80%-
D. [ ] 81%-95%
E. [ ] Over 95%
1.7.0 Government Subcontract Sales as Percentage of Total Government Sales (Item 1.5.0).
(Check one.)
A. [] Less than
10%
B. [ ] 10%-50%
C. [] 51%-80%
E. [ ] Over 95%
D. [ ] 81%-95%
1.8.0 Description of Your Cost Accounting System for Government Contracts and Sub-
contracts. (Check the appropriate block(s) and if more than one is checked,
explain on a continuation sheet.)
A. [] Standard costs
order
-
Job
B. [ ] Standard costs Process
C. [ ] Actual costs
-
Job
D. [ ] Actual costs
-
Process
order
Y. [ ] Other(s) (Describe on a continuation sheet.)
1.9.0 Integration of Cost Accounting with Financial Accounting. The cost accounting
system is: (Check one. If B or C is checked, describe on a continuation sheet
the costs which are accumulated on memorandum records.)
A. [] Integrated with financial accounting records
(Subsidiary cost accounts are all reconcilable to
general ledger control accounts.)
FORM CASB-DS-1
- 2 -
48
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART I - GENERAL INFORMATION
ITEM DESCRIPTION
1.9.0 Continued
B. [Not integrated with financial accounting (Cost data
are accumulated on memorandum records.)
C. [ ] Combination of A and B above
1.10.0 Unit or Job Costs. Is your cost accounting system capable of producing unit or
job lot costs during contract performance? (Check one.)
A. [ ] Yes (If Yes, describe on a continuation sheet the method used
or which could be used to arrive at such costs.)
B. I
] No (Interim repricing not involved.)
C. [
] No (Interim repricing involved. Describe on a continuation
sheet the manner in which interim repricing is developed.)
•
1.110 Year, Month, Day on Which Your Most Recent Fiscal Year Ended. (Enter in blocks
below. Use numeric terms, e.g., 710630 for June 30, 1971; 711231 for December 31,
1971.)
-
3 -
FORM CASB-DS-1
49
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART II - DIRECT COSTS
2.1.0
Instructions for Part II
This part covers three major elements of direct costs, i.e., Direct
Materials, Direct Labor, and Other Direct Costs. It is not the intent here
to spell out or define the three elements of direct costs.
. Rather, contractors should disclose practices based on their own defini-
tions of what costs are, or will be, charged directly to Government contracts
or similar cost objectives as Direct Materials, Direct Labor, or Other Direct
Costs. For example, some contractors may charge or classify purchased labor
of direct nature, as "Direct Materials" for purposes of pricing proposals,
requests for progress payments, claims for cost reimbursement, etc.; some other
contractors may classify the same cost as "Direct Labor," and still others as
"Other Direct Costs." In these circumstances, it is expected that contractors
will disclose practices consistent with their own classifications of Direct
Materials, Direct Labor, and Other Direct Costs.
Description of Direct Materials.
Direct Materials as used here are not limited to those items of materials
actually incorporated into the end product; they also include materials, con-
sumable supplies, and other costs when charged to Government contracts or
similar cost objectives as Direct Materials.
(Describe on a continuation sheet the principal classes of materials and
service costs which are charged as direct materials; group the materials and
service costs by those which are incorporated in an end product and those
which are not.)
2.2.0 Method of Charging Direct Materials.
2.2.1
Direct Charge Not Through an Inventory Account at: (Check the appropriate
block(s) and if more than one is checked, explain on a continuation sheet.)
A. [] Standard costs (Describe the type of standards used, e.g.,
current standards, basic standards, etc., on a continuation
sheet.)
B. [ ]
Actual costs
Y. [
] Other(s) (Describe on a continuation sheet.)
Z. [ ] Not applicable
FORM CASB-DS-1
·
50
Cost Accounting Standards Board

Item
No.
2.2.2
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART II
-
DIRECT COSTS
Charged from Central or Common, Company-owned Inventory Account at: (Check the
appropriate block(s) and if more than one is checked, explain an a continuation
sheet.)
A. [ ] Standard costs (Describe
2.3.0
B. [ ] Average costs
the type of standards used
on a continuation sheet.)
c. [
]
]
First in, first out
D. [ ] Last in, first out
Z. [ ] Not applicable
continuation sheet.)
Y.[ ] Other(s) (Describe on a
Timing of Charging Direct Materials Incorporated in End Product. (Check the
appropriate block(s) to indicate the point in time at which materials incor-
porated in the end product are charged to Government contracts or similar
cost objectives, and if more than one block is checked, explain on a continua-
tion sheet.)
A. [ ] When orders are placed
C. [] When material is issued
or released to jobs
E. [ ] When invoices are
vouchered or paid
B. [] When material is
received, or when
fabricated, if
fabricated in-house
D. []. When consumed or incor-
porated in end product
Y. [ ] Other(s) (Describe on
a continuation sheet.)
2.4.0
z. [ ]
Not applicable
Variances from Standard Costs for Direct Materials. (Do not complete this item
unless you use a standard cost method, i.e., you have checked Block A of Item
2.2.1 or 2.2.2. Check the appropriate block(s) in Items 2.4.1, 2.4.2, 2.4.3
and 2.4.4, and if more than one block is. checked, explain on a continuation
sheet.)
2.4.1
Type of Variance.
A. [ ] Price
B. [ ] Usage
C. [] Combined (A
and B)
Y. [] Other(s) (Describe on
a continuation sheet.)
FORM CASB-DS-1
- 5 -
51
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Item
No.
ITEM DESCRIPTION
2.4.2 Method of Accumulating Variance.
PART II - DIRECT COSTS
A. [ ] Plant-wide basis
B. [ ] By department
C. [
] By product or product line
D. EJ By contract
Y. [ ] Other(s) (Describe. on
continuation sheet.)
2.4.3 Method of Disposing of Variance. (Describe on a continuation sheet the basis
for, and the frequency of, the disposition of the variance.)
A. [] Prorated between inven-
tories and cost of goods
sold
C. [] Charged or credited only
to overhead
B. [ ] Charged or credited
only to cost of goods
sold
Y. [ ] Other(s) (Describe on
a continuation sheet.)
2.4.4 Revisions. Standard costs for direct materials are revised:
A. [] Semi annually
C. [ ] Revised as needed, but
at least once annually
FORM CASB-DS-1
B. [ ] Annually
Y. [ ] Other(s) (Describe on
a continuation sheet.)
52
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Item
No.
ITEM DESCRIPTION:
PART II
DIRECT COSTS
2.5.0 Method of Charging Direct Labor. (Check the appropriate block(s) for each
Direct Labor Category to show how such labor is charged to Government contracts
or similar cost objectives, and if more than one block is checked, explain on
a continuation sheet. Also describe on a continuation sheet the principal
classes of labor or costs that are, or will be, included in Manufacturing
Labor, Engineering Labor, and Other Direct Labor, as applicable.)
Direct Labor Category
A. Individual/actual rates.
B. Average rates (Describe
the type of average rates
on a continuation sheet.)
C. Standard costs/rates
(Describe the type of
standards used on a
continuation sheet.)
Y. Other(s) (Describe on
a continuation sheet.)
Z. Labor category is not
applicable
Manufac-
turing
Engi-
neering
Other
Direct
(1)______
(3)
[
]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ] [ ]
[ ]
[ ] [ ]
[ ]
[ ] [ ] [ ]
2.6.0 Variances from Standard Costs for Direct Labor. (Do not complete this item
unless you use a standard cost/rate method, i.e., you have checked Block C of
Item 2.5.0 for any direct labor category. Check the appropriate block(s)
in each column of Items 2.6.1, 2.6.2 and 2.6.3, and in Item 2.6.4. If more than
one is checked, explain on a continuation sheet.)
2.6.1 Type of Variance.
Direct Labor Category
Other
Other
Direct
(3)
Manufac-
turing
(1)______
Engi-
neering
(2)
A. Rate
[
]
[
]
[ ]
B. Efficiency
[ ]
[ ]
[ ]
C. Combined (A and B)
[ ]
[
]
[
]
FORM CASB-DS-1
53
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
2.6.1 Continued
ITEM DESCRIPTION
Y. Other(s) (Describe
on a continuation
sheet.)
Z. Labor category is not
applicable
2.6.2 Method of Accumulating Variance.
PART II DIRECT COSTS
[][][]
[ ] [ ] [ ]
Manufac-
turing
Engi-
neering
(1)
(2)
Direct Labor Category
Other
Other
Direct
(3)
A. Plant-wide basis
[
]
[ ]
[
[ ]
B. By department
[
]
[]
[
[ ]
C. By product or product line
[ ]
[
[ ]
D. By contract
[ ] ]
[
]
[
[
]
Y. Other(s) (Describe on a
continuation sheet.)
[
]
[
]
[ ]
Z. Labor category is not
applicable
[ ]
[ ] [ ]
2.6.3 Method of Disposing of Variance. (Describe on a continuation sheet the basis.
for, and the frequency of, the disposition of the variance.)
Direct Labor Category
Manufac-
turing
_(1)
Engi-
neering
(2)____
Other
Direct
(3)
[ ]
[ ]
[ ]
A. Prorated between inventories
and cost of goods sold
B. Charged or credited only to
cost of goods sold
[ ] [ ] [ ]
FORM CASB-DS-1
·
8
<
54
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Item
No.
2.6.3 Continued
ITEM DESCRIPTION
PART II
·
DIRECT COSTS
C. Charged or credited
only to overhead
Y. Other(s) (Describe on
a continuation sheet.)
Z. Labor category is not
applicable
2.6.4 Revisions.
[ ]
[ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
Standard costs for direct labor are revised:
A. [
[ ] Semiannually
B. [ ] Annually
C. [
[ ] Revised as needed, but
at least once annually
Y. [ ] Other(s) (Describe on a
continuation sheet.)
2.7.0 Credits to Contract Costs. When Government contracts or similar cost objectives
are credited for the following circumstances, are the rates of direct labor,
direct materials, cther direct costs and applicable indirect costs always the
same as those for the original charges? (Check one block for each circumstance,
and for each "No" answer, explain on a continuation sheet how the credit differs
from original charge.)
Circumstance
A.
Yes
(a) Transfers to other jobs/
B. No
[ ] [ ]
Z. Not Applicable
[ ]
contracts
(b) Unused or excess materials
remaining upon completion
of contract
[ ]
[ ]
[ ]
FORM CASB-DS-1
- 9-
-
55
Cost Accounting Standards Board

Item
No.
2.8.0
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
Interorganizational Transfers.
PART II - DIRECT COSTS
This item is directed only to those materials, supplies, and services
which are, or will be, transferred to you from divisions, subsidiaries, or
affiliates under common control with you.
(Check the appropriate block(s) in each column to indicate the basis
used by you as transferee to charge the cost or price of interorganizational
transfers of materials, supplies, and services to Government contracts or
similar cost objectives. If more than one block is checked, explain on a
continuation sheet. Full cost means the cost incurred as set forth in ASPR
15-205.22(e) or other pertinent procurement regulations.)
Basis
Materials
(1)
Supplies
(2)
[ ]
[ ]
Services
(3)
[ ]
A. At full cost excluding
transferor's general and
administrative (G&A) expenses
B. At full cost including
transferor's G&A expenses
C. At full cost (A or B above)
plus a markup percentage
D. At established catalog or
market price or prices based
on adequate competition
Y. Other(s) (Describe on a
continuation sheet.)
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ]
[ ] [ ] [ ]
Z. Interorganizational transfers [ ]
[ ] [ ] [ ]
are not applicable
FORM CASB-DS-1
- 10 -
-
56
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91–379
·PART III
-
DIRECT VS. INDIRECT
ITEM DESCRIPTION
3.1.0 Criteria for Determining How Costs are Charged to Government Contracts or Similar
Cost Objectives. (Describe on a continuation sheet your criteria for determining
whether costs are charged directly or indirectly.)
3.2.0 Treatment of Costs of Specified Functions, Elements of Cost, or Transactions.
(For each of the functions, elements of cost or transactions listed in Items
3.2.1, 3.2.2, and 3.2.3, enter one of the Codes A through F, or Y, to indicate
how the item is treated. Enter Code Z in those blocks that are not applicable to
you. Also, specify the name(s) of the indirect pool(s) for each function, element
of cost, or transaction Coded E or F. If Code E, Sometimes direct/Sometimes
indirect, is used and if there is a deviation from the criteria described in
response to Item 3.1.0, explain on a continuation sheet the circumstances
involved which cause the deviation.)
Treatment Code
A. Direct material
B.
Direct labor
C. Direct material and labor
D. Other direct costs
Y.
E. Sometimes direct/
Sometimes indirect
F. Indirect only
Other(s) (Describe on a
continuation sheet.)
Z. Not applicable
3.2.1 Functions, Elements of Cost, or Transactions
Treatment
Code
Name of Pool(s)
Relative to Direct Materials
(a) Cash discounts on purchases
[ ]
(b) Freight in
[ ]
(c) Income from sale of scrap
[ ]
(d) Income from sale of salvage
[ ]
(e) Incoming material inspection
[ ]
(f) Inventory adjustments
[ ]
(g) Purchasing
[ ]
(h) Trade discounts, refunds,
rebates, and allowances on purchases [ ]
FORM CASB-DS-i
11.
57
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART III
DIRECT VS. INDIRECT
3.2.2 Functions, Elements of Cost, or Transactions Treatment
Code
Name of Pool(s)
Relative to Direct Labor
(a) Health insurar.ce
[ ]
(b) Holiday differential (premium pay)
[ ]
흐흐
​(c) Overtime premium pay
[ ]
(d) Pension costs
[
]
(e) Shift premium pay
[
]
(f) Training
[ ]
(g) Travel and subsistence
[
J
(h) Vacation pay
[ ]
3.2.3 Functions, Elements of Cost, or
Transactions
Miscellaneous
(a) Design engineering (in-house)
[ ]
(b) Drafting (in-house)
[ ]
(c) Computer operations (in-house)
[ ]
(d) Contract administration
[ ]
(e) Freight out (finished product)
[ ]
(f) Line (or production) inspection
[ ]
(g) Packaging and preservation
[ ]
(h) Preproduction costs and
start-up costs
[ ]
(i). Production shop supervision
[ ]
FORM CASB-DS-1
12 -
58
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
3.2.3 Continued
PART III
-
DIRECT VS. INDIRECT
ITEM DESCRIPTION
Treatment
Code
Name of Pool(s)
(j) Professional services
(consultant fees)
[ ]
(k) Purchased labor of direct
nature (on premises)
[ ]
(1) Purchased labor of direct
[ ]
nature (off premises)
(m) Rearrangement costs
[
]
(n) Rework costs
[
]
(0) Royalties
[ ]
(p) Scrap work
[ ]
(q) Special test equipment (as
defined in ASPR 15-205.40 or
other pertinent procurement
regulations)
[ ]
(r) Special tooling (as defined
[ ]
in ASPR 15-205.40 or other
pertinent procurement
regulations)
(s) Subcontract costs
(t) Warranty costs
[ ]
[ ]
3.3.0 Other Costs Charged Direct to Contracts. (Describe on a continuation sheet all
other significant functions, elements of cost, or transactions charged to
Government contracts or similar cost objectives as direct material, direct
labor or other direct costs. Do not include functions or costs covered in
Items 2.1.0, 2.5.0, and 3.2.0 which are always charged direct. Describe also
whether there are any deviations from the criteria set out in Item 3.1.0 with
respect to any continuation sheet items.)
FORM CASB-DS-1
13.
59
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART IV - INDIRECT COSTS
Instructions for Part IV
For the purpose of this part, indirect costs have been divided into three
categories: (i) manufacturing, engineering, and comparable indirect costs,
(ii) general and administrative (G&A) expenses, and (iii) service center costs,
as defined in Item 4.3.0. The term "overhead," as used in this part, refers
only to the first category of indirect costs.
The following Allocation Base Codes are provided for use in connection
with Items 4.1.0, 4.2.0 and 4.3.0. Educational institutions, to which ASPR XV,
Part 3 applies, may enter Code Y for Items 4.1.0(n), 4.2.0(n) and 4.3.0(1), and
describe on a continuation sheet the indirect cost pools and the bases for
allocating such pools of expenses to Government contracts or similar cost
objectives.
A. Sales
B. Cost of sales
C.
Cost input (direct material, direct labor, other direct costs and
applicable overhead)
D. Total cost incurred (cost input plus G&A expenses)
E. Prime cost (direct material, direct labor and other direct cost)
F. Processing or conversion cost (direct labor and applicable overhead)
G. Direct labor dollars
H.
Direct labor hours
I.
Machine hours
J. Usage
K.. Unit of product
L. Direct material cost
M. Total payroll dollars (direct and indirect employees)
•
N. Headcount or number of employees (direct and indirect employees)
0. Square feet
Y. Other(s) or more than one basis (Describe on a continuation sheet.)
Z. Pool not applicable
4.1.0 Overhead Pools and Allocation Bases. (Enter for each type of overhead pool one
of the Allocation Base Codes A through 0 or Y, to indicate the basis for allo-
cating such pool of expenses to Government contracts or similar cost objectives,
i.e., allocation to these final cost objectives without any intermediate allo-
cations. Enter Code Z in those blocks for types of pools that are not applicable
to the reporting unit; however, if you use a single plant-wide pool, Lines (b)
through (n) may be left blank.).
Type of Pool
(a) Single, plant-wide pool (If an entry other
than "Z" is made here, skip to Stem 4.2.0)
FORM CASB-DS-1
Allocation Base Code
[ ]
- 14 -
60
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART IV - INDIRECT COSTS
Item
No.
4.1.0 Continued
Type of Pool
(b) Manufacturing
(c) Engineering
ITEM DESCRIPTION
Allocation Base Code
[ ]
[ ]
(d) Manufacturing and Engineering
[ ]
(e) Tooling
[ ]
(f) Off-site or out-plant (geographical pool)
[ ]
(g) Field service
(h) Material handling
(i) Departmental/shop
(j) Subcontract administration
(k) Use and occupancy
[ .]
[]
[ ]
[
]
[ ]
(1) Quality control
(m) Fringe benefits
[ ]
[ ]
[
]
If no
4.2.0
(n) Other pools (Enter Code Y on this line if other
pools are used and identify on a continuation sheet
each such pool and its Allocation Base Code.
other pools are used, enter Code Z.)
Reporting Unit's G&A Pools and Allocation Bases. (Enter for each type of G&A
pool one of the Allocation Base Codes A through 0, or Y, listed on Page 14 to
indicate the basis for allocating G&A to Government contracts or similar cost
objectives, i.e., allocation to these final cost objectives without any inter-
mediate allocations. Enter Code Z in those blocks for types of pools that are
not applicable to the reporting unit; however, if an entry other than "Z" is made
on Line (a), (b), (c) or (d), Lines (e) through (n) may be left blank.)
Type of Pool
(a) Single G&A pool only
Allocation Base Code
[ ]
FORM CASB-DS-1
-
- 15 -
61
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
4.2.0 Continued
-
PART IV INDIRECT COSTS
ITEM DESCRIPTION
No Separate G&A Pool
Allocation Base Code
(b) Combined with single, plant-wide
overhead pool
[]
(c) Combined with manufacturing overhead
[ ]
(d) Combined with engineering overhead
[ ]
More Than One Pool
(e) General and administrative
[ ]
(f) Commercial - General and administrative
[ ]
(g) Government General and administrative
[ ]
(h) Selling or marketing expense
[ ]
(1) Independent research and development
(IR&D) costs
[ ]
(j) Bidding and proposal (B&P) costs
[ ]
(k) IR&D and B&P costs
[ ]
(1) Spares administration
[ ]
(m) Corporate or home office expense
[ ]
(n) Other pools (Enter Code Y on this line if other
pools are used and identify on a continuation
sheet each such pool and its Allocation Base
Code. If no other pools are used, enter Base
Code Z.)
[ ]
4.3.0 Service Centers and Allocation Bases.
Service centers are departments or other functional units which perform
specific technical and/or administrative services for the benefit of other
units within a reporting unit.
FORM CASB-DS-1
- 16.-
62
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
4.3.0 Continued
ITEM DESCRIPTION
PART IV INDIRECT COSTS
Category Code
Generally, costs incurred by such centers are, or can be, charged or
allocated (i) partially to specific final cost objectives as direct costs
and partially to other indirect cost pools (such as a manufacturing overhead
pool) for subsequent reallocation to several final cost objectives, referred
to herein as Category "A", and (ii) only to several other indirect cost pools
(such as manufacturing overhead pool, engineering overhead pool and G&A expense
pool) for subsequent reallocation to several final cost objectives, referred to
herein as Category "B".
Rate Code
Some service centers may use predetermined billing or costing rates to
charge or allocate the costs (Rate Code A) while others may charge or allocate
on an actual basis (Rate Code B).
(Enter in Column (1) for each service center, Code A or B to indicate
the category of pool. Enter in Column (2) one of the Allocation Base Codes
A through 0, or Y, listed on Page 14, to indicate the basis of charging or
allocating service center costs. Enter in Column (3) Rate Code A or B to
describe the costing method used. Enter Code Z in Column (1) only, if any
service center is not applicable to the reporting unit.)
Category
Code
Allocation
Base Code
Rate
Code
Service Center
(1)
(2)
(3)
(a) Scientific computer
operations
[ ]
[ ]
[ ]
(b) Business data processing
[ ]
[ ]
[ ]
(c) Photography services
[ ]
[
]
[ ]
(d) Reproduction services
[ ]
[
]
[
]
(e) Art services
[ ]
[
]
[ ]
(f) Technical typing services
[ ]
[ ]
[ ]
(g) Communication services
[ ]
[ ]
[ ]
(h) Facility services
[ ]
[ ]
[
]
(maintenance, etc.)
FORM CASB-DS-1
-
17
63
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART IV - INDIRECT COSTS
Item
No.
ITEM DESCRIPTION
4.3.0 Continued
Category
Code
Allocation
Base Code
Rate
Code
Service Center
(1)
(2)
(3)
(i) Auto pool services
[
]
[ ]
[ ]
(j) Company aircraft services
[ ]
[ [
] ]
[ ]
(k) Wind tunnels
[ ]
[
] ]
[
[]
(1) Other service centers
[
]
[ ]
[ ]
(Enter Code Y on this line
if other service centers are
used and identify on a con-
tinuation sheet each such
service center, its Category
Code, Allocation Base Code,
and Rate Code. If no other
service centers are used,
enter Code Z.)
4.4.0 Treatment of Variances from Actual Cost (Underabsorption or Overabsorption).
Where predetermined billing or costing rates are used to charge costs of
service centers to Government contracts or other indirect cost pools (Rate
Code A in Column (3) of Item 4.3.0), variances from actual costs are: (Check
the appropriate block(s) and if more than one is checked, explain on a
continuation sheet.)
A. [ ] Prorated to users on
the basis of charges
made, at least once
annually
Y. [] Other(s) (Describe on
a continuation sheet.)
B. [ ] A11 charged or credited
to indirect cost pool(s)
at least once annually
Z. [] Service center is not
applicable to reporting
unit
4.5.0 Major Types of Indirect Costs. (For each pool coded other than Z in Items 4.1.0,
4.2.0, and 4.3.0, list on a continuation sheet the major functions, activities,
and elements of cost included.)
4.6.0 Allocation Base. (For each allocation base code used in Items 4.1.0, 4.2.0 and
4.3.0, describe on a continuation sheet the makeup of the base; for example, if
direct labor dollars is used, are overtime premium, fringe benefits, etc.,
included?)
FORM CASB-DS-1
· 18.
-
64
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Item
No.
ITEM DESCRIPTION
-
PART IV INDIRECT COSTS
4.7.0 Application of Overhead and G&A Rates to Specified Transactions or Costs.
This item is directed to ascertaining your practice in special situations
where, in lieu of establishing a separate indirect cost pool, allocation is
made from an established overhead or G&A pool at less than the normal full
rate for that pool. The term "less than full rate" below applies to this
type of indirect cost allocation practice. The term does not apply to
situations where, as in some cases of off-site activities, etc., a separate
indirect cost pool and base are used and the rate of such activities is
lower than the "in-house" rate.
(For each of the transactions or costs listed below, enter one of the
following codes to indicate your indirect cost allocation practice with
respect to that transaction or cost. If Code A, Less than full rate, is
entered, describe on a continuation sheet the major types of expenses that
are covered by such a rate. If Code B, Full rate, is entered, identify on
a continuation sheet the pool(s) reported under Items 4.1.0, 4.2.0 and 4.3.0
which are applicable. If Code C, Combination of A and B, is entered,
describe on a continuation sheet the applicable expense and pool data.)
Rate Code
C.
Combination of A and B
A. Less than full rate
B. Full rate
D.
No overhead or G&A is applied
Z.
Transaction or cost is not
applicable to reporting unit
Transaction or Cost to Which
Indirect Costs May Be Allocated
(a) Subcontract costs
(b) Purchased labor
(c) Government-furnished materials
(d) Interorganizational transfers in
(e) Interorganizational transfers out
(f) Self-constructed depreciable assets
FORM CASB-DS-1
Rate
Code
[ ]
[ ]
[ ]
[ ]
[
]
[ ]
- 19 -
65
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART IV - INDIRECT COSTS
Item
No.
ITEM DESCRIPTION
4.7.0 Continued
(g) Labor on installation of assets
(h) Off-site work
(1) Other transactions or costs (Enter Code A
on this line if there are other transactions
or costs to which less than full rate is
applied. List such transactions or costs on
a continuation sheet, and for each describe
the major types of expenses covered by such
a rate. If there are no other such trans-
actions or costs, enter Code Z.)
[ ]
[ ]
[ ]
4.8.0 Independent Research and Development (IR&D) and Bidding and Proposal (B&P) Costs.
4.8.1 Independent Research and Development. IR&D costs are defined in ASPR 15-205.35
or other pertinent procurement regulations, as revised. The full rate of all
allocable manufacturing, engineering, and/or other overhead is applied to IR&D
costs as if IR&D projects were under contract, and the "burdened" IR&D costs
(Check one.
are:
projed
A. [ ] Allocated to Government contracts or similar cost objectives
as part of the G&A rate
B. [ ]
Allocated as a separate IR&D rate
C. [ ]
Transferred to the corporate or home office level. The
corporate or home office level IR&D costs are subsequently
allocated back to the reporting unit for allocation as part
of the unit's G&A rate
D. [] Treated the same as C above, except that the IR&D costs are
allocated as a separate IR&D rate
Y. [ ]
Other (Describe on a continuation sheet.)
Z. [ ] Not applicable
4.8.2 Bidding and Proposal. B&P costs as defined in ASPR 15-205.3 or other pertinent
procurement regulations, as revised, are treated as follows: (Check one.)
A. [ ] Same as IR&D costs as checked above
Y. [ ] Other (Describe on a continuation sheet.)
FORM CASB-DS-1
-
20 -
66
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART V DEPRECIATION AND CAPITALIZATION
PRACTICES
ITEM DESCRIPTION
5.1.0 Depreciating Tangible Assets for Government Contract Costing. (For each of the
asset categories listed on Page 22, enter a code from A through G in Column (1)
describing the method of depreciation (Code F for assets that are expensed); a
code from A through E in Column (2) describing the basis for determining useful
life; a code from A through C in Column (3) describing how depreciation methods.
or use charges are applied to property units; and a Code A, B or C in Column (4)
indicating whether or not residual value is deducted from the total cost of
depreciable assets. Enter Code Y in each column of an asset category where
another or more than one method
asset category is not applicable applies. Enter Code Z in Column (1) only, if an
A.
Column (1)
-
Depreciation Method Code
B. Declining balance
Straight-line
C.
Sum-of-the-years digits
D.
Machine hours
E.
Unit of production
F.
G.
Y.
Z.
Expensed at acquisition
Use charge
Other or more than one method
(Describe on a continuation
sheet.)
Asset category is not applicable
A.
B.
C.
D.
E.
Column (2) Useful Life Code
-
U.S. Treasury Department "guide-
line lives"
Replacement experience
Term of Lease
Engineering estimate
As prescribed for use charge by
the Office of Management and
Budget Circular No. A-21
Y. Other or more than one method
(Describe on a continuation
sheet.)
j
Column (3) Property Units Code
A. Individual units are accounted for
separately
A.
B. Applied to groups of assets with
similar service lives
B.
ان
Column (4) - Residual Value Code
Residual value is deducted
Residual value is covered by the
depreciation method (e.g.,
declining balance)
Residual value is not deducted
ذن
C. Applied to groups of assets with
varying service lives
C.
Y.
Other or more than one method
Y. Other or more than one method
(Describe on a continuation sheet.)
(Describe on a continuation
sheet.)
FORM CASB-DS-1
· 21 -
67
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART V - DEPRECIATION AND CAPITALIZATION
PRACTICES
Item
No.
5.1.0
Continued
ITEM DESCRIPTION
Depreciation
Method
Code
Useful Property
Residual
Life Units
Value
Code
Code
Code
Asset Category
(1)
(2)___
(3)_____
(4)
(a) Land improvements
[ ]
[ ]
[ ]
[]
(b) Building
[ ]
[ ]
[ ]
[ ]
(c) Building improvements
[ ]
[
]
[
]
[
]
(d) Leasehold improvements
[
]
[ ]
[
]
[
]
(e) Machinery and equipment
[
]
[ ]
[
]
[
]
(f) Furniture and fixtures
[ ]
[ ]
[
]
[
]
(g) Automobiles and trucks
[ ]
[
]
[
]
[
]
(h) Data processing equipment
[ ]
[ ]
[ ]
[ ]
[ ]
(i) Programming/reprogramming
[ ]
[ [ ]
[
]
[ ]
costs
(j) Patterns and dies
[ ]
[ ]
[
]
[ ]
(k) Tools
[ ]
[
]
[
]
[ ]
(1) Other depreciable asset
categories (Enter Code Y
[ ]
[
]
[
]
[ ]
on this line if other asset
categories are used and
enumerate on a continuation
sheet each such asset
category and the applicable
codes. Otherwise enter
Code Z.)
FORM CASB-DS-1
- 22 -
68
Cost Accounting Standards Board

Item
No.
5.2.0
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART V - DEPRECIATION AND CAPITALIZATION
PRACTICES
ITEM DESCRIPTION
Depreciation Practices for Costing, Financial Accounting, and Income Tax. Are
depreciation practices the same for costing Government contracts as for financial
accounting and income tax? (Check one block on each line. Educational institu-
tions and not-for-profit organizations need not complete this item.)
Financial Accounting
A. ...Yes
B. No
(a) Methods
[ ]
[ ]
(b) Useful lives
[ ]
[ ]
(c) Property units
[
]
[ ]
(d) Residual values
[
]
[ ]
Income Tax
(e) Methods
[ ]
[ ]
(f) Useful lives
[
]
[ ]
[
]
[ ]
[
]
[ ]
5.3.0
5.4.0
(g) Property units
(h) Residual values
Fully Depreciated Assets.
to Government contracts?
on a continuation sheet.)
Is a usage charge for fully depreciated assets charged
(Check one. If Yes, describe the basis for the charge
A. [ ] Yes B. [ ] No
Z. [ ] Not applicable
Treatment of Gains and Losses on Disposition of Depreciable Property. Gains and
Tosses are: (Check the appropriate block(s) and if more than one is checked,
explain on a continuation sheet.)
A. [
] Credited or charged currently to the same overhead or G&A
pools to which the depreciation of the assets was charged
B. [ ] Taken into consideration in the depreciation cost basis of the
new items, where trade-in is involved
C. [ ] Not accounted for separately, but reflected in the depreciation
reserve account.
FORM CASB-DS-1
- 23 -
69
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART V - DEPRECIATION AND CAPITALIZATION
PRACTICES
ITEM DESCRIPTION
5.4.0 Continued
D..[ ] Credited or charged to Other (Miscellaneous) Income and Expense
accounts
Y. [ ]
Other(s) (Describe on a continuation sheet.)
Z. [ ] Not applicable
5.5.0 Capitalization or Expensing of Specified Costs. (Check one block on each line
to indicate your practices regarding capitalization or expensing of specified
costs incurred in connection with capital assets. If the same specified cost is
sometimes expensed and sometimes capitalized, check both blocks and describe on
a continuation sheet the circumstances when each method is used.)
Cost
A. Expensed
B. Capitalized
(a) Freight-in
[ ]
[ ]
(b) Installation costs
[
]
[ ]
(c) Sales taxes
[
]
[ ]
(d) Excise taxes
[ ]
[
]
(e) Architect-engineer fees
[ ]
[ ]
(f) Overhauls (extraordinary repairs)
[ ]
[ ]
(g).Major modifications or betterments
[ ]
[ ]
5.6.0 Criteria for Capitalization. (Enter (a) the minimum dollar amount of expenditures
for acquisition, addition, alteration and improvement of depreciable assets,
capitalized, and (b) the minimum number of expected life years of capitalized
assets. Use leading zeros for dollar amount, e.g., 0150 for $150.
If more than one dollar amount or number applies, show the information for the
majority of your depreciable assets, and enumerate on a continuation sheet the
dollar amounts and/or number of years for each category or subcategory of assets
involved which differ from those for the majority of assets.)
FORM CASB-DS-1
(a) Minimum dollar amount
(b) Minimum life years
- 24 -
70
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART V - DEPRECIATION AND CAPITALIZATION
PRACTICES
ITEM DESCRIPTION
5.7.0 Group or Mass Purchase. Are group or mass purchases (initial complement) of
similar items, which individually are less than the capitalization amount
indicated above, capitalized? (Check one.)
A. [ ] Yes
B. [ ] No
FORM CASB-DS-1
- 25 -
71
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE. STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART VI - OTHER COSTS AND CREDITS
6.1.0 Method of Charging and Crediting Vacation, Holiday and Sick Pay. (Check the
appropriate block(s) in each column of Items 6.1.1 and 6.1.2 to indicate the
method used to charge, or credit any unused or unpaid, vacation, holiday, or
sick pay for direct and indirect labor. If more than one method is checked,
explain on a continuation sheet.)
6.1.1 Charges
Direct
Indirect
Labor
Labor
__(1)______
(2)_____
A. When accrued (earned)
[
]
[
]
B. When taken
[
]
[
]
Y. Other(s) (Describe on a
continuation sheet..)
[ ]
[ ]
6.1.2 Credits for Unused or Unpaid Vacation,
Holiday, or Sick Pay
A.
Credited to Government contracts at
least once annually
[ ]
[ ]
B. Credited to indirect.cost pools at
least once annually
[ ]
[ ]
ن
C.
Income
D. Not Credited
Credited to Other (Miscellaneous)
[]
[ ]
[
]
[ ]
Y. Other(s) (Describe on a
continuation sheet.).
[
]
[ ]
6.2.0 Supplemental Unemployment (Extended Layoff) Benefit Plans. Costs of such plans
are charged to Government contracts: (Check the appropriate block(s) and if
more than one is checked, explain on a continuation sheet.)
A. [ ] When actual payments are made directly to employees
B. [ ] When accrued (book accrual or funds set aside but no trust fund
involved)
When contributions are made to a nonforfeitable trust fund
c. [
D. [ ] Not charged'
FORM CASB-DS-1
- 26 -
72
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VI
-
OTHER COSTS AND CREDITS
ITEM DESCRIPTION
6.2.0 Continued
Y. [ ] Other(s) (Describe on a continuation sheet.)
Z. [ ] Not applicable
6.3.0 Severance Pay. Costs of normal turnover severance pay, as defined in ASPR
15-205.39(b)(i) or other pertinent procurement regulations, which are charged
directly or indirectly to Government contracts, are based on: (Check the
appropriate block(s) and if more than one is checked, explain on a continuation'
sheet.)
A. [ ] Actual payments made.
•
[
]
Accrued amounts on the basis of past experience
C. [ ]
Y. [
Not charged
] Other(s) (Describe on a continuation sheet.)
z. [
[ ] Not applicable
6.4.0 Incidental Receipts. (Check the appropriate block(s) to indicate the method used
to account for receipts from renting real and personal property or selling ser-
vices when related costs have been charged to Government contracts. If more
than one is checked, explain on a continuation sheet.)
A. [] The entire amount of the receipt is credited to the same indirect
cost pools to which related costs have been charged
B. [] The amount of the receipt, less an allowance for profits, is
credited to the same indirect cost pools to which related
costs have been charged; the profits are credited to Other
(Miscellaneous) Income
C. [] The entire amount of the receipt is credited directly to Other
(Miscellaneous) Income
Y. [ ] Other(s) (Describe on a continuation sheet.)
Z. [] Not applicable
FORM CASB-DS-1
27.
73
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VI - OTHER COSTS AND CREDITS
ITEM DESCRIPTION
6.5.0
Proceeds from Employee Welfare Activities. Employee welfare activities include
all of those activities set forth in ASPR 15-205.10(a) or other pertinent
procurement regulations. (Check the appropriate block(s) to indicate the
practice followed in accounting for the proceeds from such activities. If more
than one is checked, explain on a continuation sheet.)
A. [ ]
Proceeds are turned over to an employee-welfare organi-
zation or fund; such proceeds are reduced by all applicable
costs such as depreciation, heat, light and power
B. [] Same as above, except the proceeds are not reduced by all
applicable costs
C. [ ] Proceeds are credited at least once annually to the appropriate
indirect cost pools to which costs have been charged
D. [] Proceeds are credited to Other (Miscellaneous) Income
Y. [ ] Other(s) (Describe on a continuation sheet.)
Z. [ ] Not applicable
FORM CASB-DS-1
- 28-
74
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
·
ITEM DESCRIPTION
Instructions for Part VII
DEFERRED COMPENSATION
AND INSURANCE COSTS
This part covers pension costs and certain types of deferred incentive com-
pensation and insurance costs. Some organizations may record all of these costs
at the corporate or home office level, while others may record them at sub-
ordinate organization levels. Still others may record a portion of these costs
at the corporate or home office level and the balance at subordinate organization
levels. Reporting units, therefore, should obtain the necessary information from
the organizational level at which such costs are recorded.
7.1.0 Pension Costs. The actuarial terms used in this item are defined in Opinion
Number 8 of the Accounting Principles Board, American Institute of Certified
Public Accountants.
7.1.1 Pension Plans Charged to Government Contracts. Does your organization have one
or more pension plans whose costs are charged to Government contracts? (Check one.)
A. [ ] Yes (If Yes, list each such plan on a continuation sheet.
Indicate
the approximate number and type of employees covered by each plan
and whether the plan is, or is not, qualified under Intemal
Revenue Service criteria. Complete Items 7.1.2 through 7.1.9 for
the three plans covering the greatest number of employees whose
pension costs are charged to Government contracts.)
B. I] No (If No, skip to Item 7.2.0.)
7.1.2 Extent of Funding. (Check one block for each plan. In the event the amount
funded for each plan is different from the amount charged on the books of account,
describe the difference on a continuation sheet.)
A. Normal costs only
Plan I Plan II
Plán III
[ ]
I ]
[ ]
[ ]
[ ]
[ ]
on past or prior service costs
[ ] [ ] [ ]
B. Normal costs plus interest
C. Normal costs plus an amortized
portion of past or prior service
costs.
Y. Other (Describe on a continuation [ ] [ ] [ ]
sheet.)
Z. Not applicable
[ ] [ ] [ ]
FORM CASB-DS-1
29
•
75
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
-
DEFERRED COMPENSATION
AND INSURANCE COSTS
Item
No.
ITEM DESCRIPTION
7.1.3
Actuarial Cost Method. (Check one block for each
Actuamput cost me and paster prier lerkite ceste plan
to show the method used
Plan I
Plan II
Plan III
A. Accrued benefit cost
B. Aggregate
[ ]
[ ]
[ ]
[
]
[
]
[
]
[ ]
[
]
[ ]
C. Attained age--initial
liability frozen
D. Attained age--initial
liability not frozen
E. Entry age--initial
liability frozen
[ ] [ ] [ ]
[ ]
[ ] [ ]
F. Entry age--initial
[ ] [ ] [ ]
liability not frozen
G. Individual level premium
[ ]
[
]
[ ]
Y.
Other (Describe on a
[ ]
[
]
[ ]
continuation sheet.)
Z. Not applicable
[ ]
[ ]
[ ]
7.1.4 Frequency of Actuarial Reevaluations.
(Check one block for each plan.)
A. Annually
B. 2
3 years
C.
4
-
5 years
Y. Other (Describe on a
continuation sheet.)
Z. Not applicable
FORM CASB-DS-1
Plan I
Plan II
Plan III
[:]
[ ]
[ ]
[
]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[
]
[ ]
[ ] [ ] [ ]
- 30 -
76
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
DEFERRED COMPENSATION
AND INSURANCE COSTS
ITEM DESCRIPTION
7.1.5 Criteria for Changing Actuarial Computations and Assumptions. (Describe on a
continuation sheet your criteria for determining when actuarial assumptions and
computations for your funded plan(s) are changed.)
7.1.6 Amortization of Past or Prior Service Costs. (Check one block for each plan to
show the period over which past or prior service costs are amortized.)
Plan I Plan II
Plan III
A. 10 years or less
[ ]
[ ]
[ ]
B.
11
-
20 years
[ ]
[ ]
[ ]
C.
21
-
40 years
[
]
[
]
[
]
Y.
More than one amortization
schedule (Describe on a
continuation sheet.)
[ ]
[
]
[ ]
Z. Not applicable
[ ]
[ ]
[ ]
7.1.7 Adjustment for Actuarial Gains and Losses. (Check one block for each
plan to show the period for which costs are adjusted for actuarial gains and
losses. If actuarial losses for a plan are treated differently from. actuarial
gains, describe the difference on a continuation sheet.)
A. Adjustment of past
service costs
B. Adjustment of current
year's costs
C. Adjustment of future
years' costs
Y. Other (Describe on a
continuation sheet.)
Z. Not applicable
Plan I Plan II Plan III
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
]
]
[ ] [ ]
[ ]
[ ]
]
[
[ ]
[ ]
FORM CASB-DS-1
- 31 -
77
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
ITEM DESCRIPTION
PART VII - DEFERRED COMPENSATION
AND INSURANCE COSTS
7.1.8 Unrealized Gains and Losses. Do the actuarial gains and losses reported in
Item 7.1.7 above include unrealized gains and losses? (Check one block for
each plan. If Yes is checked, describe the method of recognition of such
gains and losses on a continuation sheet.)
A. Yes
B. No
Z. Not applicable
Plan I
Plan II Plan III
[
]
[ ]
[ ]
[
]
[
]
[ ]
[ ]
[
]
[ ]
7.1.9 Amortization of Actuarial Gains and Losses. (Check one block for each plan to
show the period over which actuarial gains and losses are amortized. If the amor-
tization of actuarial losses for a plan is treated differently from the amorti-
zation of actuarial gains, describe the difference on a continuation sheet.)
Plan I Plan II
Plan III
A. 10 years or less
[ ]
[ ]
[ ]
-
B. 11 20 years
[ ]
[ ]
[ ]
C.
More than 20 years
[ ]
[ ]
[
]
Y. Other (Describe on a
[ ]
[ ]
[ ]
[ ]
continuation sheet.)
Z. Not applicable
[ ] [ ]
[ ] [ ]
7.2.0 Deferred Incentive Compensation Charged to Government Contracts.
7.2.1 Deferred Incentive Compensation. Does your organization award deferred
incentive compensation (i.e., profit sharing, stock bonus, etc.) which is
charged to Government contracts? (Check one.)
A. [
] Yes (If Yes is checked, list each plan by name or title
on a continuation sheet and show the approximate number
and type of employees covered. Complete Items 7.2.2 and
7.2.3 for the three plans covering the greatest number
of employees whose deferred incentive compensation cost
is charged to Government contracts.)
B. [] No (If No is checked, skip to Item 7.3.0.)
FORM CASB-DS-1
-
32 -
78
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
Item
No.
ITEM DESCRIPTION
-
DE FERRED COMPENSATION
AND INSURANCE COSTS
7.2.2 Qualification of Plan. (Check one block for each plan.)
Plan I
Plan II
Plan III
A. Qualifies under section 401(a) [ ] [ ]
of the Internal Revenue Code
of 1954, as amended
[ ]
B.
Does not qualify under section [ ] [ ] [ ]
401(a) of the Internal Revenue
Code of 1954, as amended
7.2.3 Method of Charging Costs to Government Contracts. (Check one block for each plan.)
Plan I
Plan II
Plan III
A. When accrued
[ ]
[
]
[ ]
B. When contributions are made
to a trust fund
[ ]
[ ]
[ ]
C. When paid directly to
employees
D. When other "nonqualified"
payments are made
[ ] [ ] [ ]
Y.. Other or more than one method [ ] [ ] [ ]
(Describe on a continuation
sheet.)
7.3.0 Employee Group Insurance Charged to Government Contracts. (Includes .erage
for life, hospital, surgical, medical, long-term disability, accident, etc.)
7.3.1 Method of Providing Insurance. (Check one.)
A. [ ] All by purchase
C. [
] Combination of A and B above
(Describe on a continuation
sheet.)
B. [ ] All self-insured (If
checked, skip to Item Z. [ ] Not applicable (If checked,
7.4.0.)
skip to Item 7.5.0.)
FORM CASB-DS-1
- 33
79
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
-
Item
No.
7.3.2 Type of Purchased Insurance Plans. (Check one.)
ITEM DESCRIPTION
DEFERRED COMPENSATION
AND INSURANCE COSTS
A. []
Retrospective rating (also called experience rating plan
or retention plan)
B. [ ]
Manually rated
Y. [ ]
Other or more than one type (Describe on a continuation sheet.)
7.3.3 Treatment of Earned Refunds and Dividends from Purchased Insurance Plans. Refunds
are also called experience rating credits or retroactive rating credits. All
earned refunds and dividends allocable to Government contracts: (Check one.)
A. [ ] Are credited directly or indirectly to contracts in the
policy year earned, in the same manner as the premiums are
charged
B. [ ] Are credited directly or indirectly to contracts in the year
received in the same manner as the premiums are charged, not
necessarily in the year earned
C. [] Which are estimated to be received in the future are accrued
each year, as applicable, to currently reflect the net annual
cost of the insurance
·
D. [ ] Or portions thereof are not credited or refunded to the con-
tractor each year and are retained by the carriers as reserves.
(If D is checked, describe on a continuation sheet (i) the
purposes of the reserves, other than "claims reserves"
retained by carriers and (ii) whether such reserves are
refundable on call or upon termination of the policies,
clauses, or auxiliary agreements which provide for reserve
retentions.)
Y. [ ] Other or more than one method (Describe on a continuation sheet.)
7.3.4 Employee Contributions (Contributory Purchased Insurance Plans). (Check one.)
A. [] Plans provide that employees contribute fixed amount, employer
is responsible for balance
B. [] Plans provide for fixed percentage participation by both
employer and employee
FORM CASB-DS-1
· 34 -
80
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
DEFERRED COMPENSATION
AND INSURANCE COSTS
Item
No.
ITEM DESCRIPTION
7.3.4 Continued
Y.[ ] Other or more than one method (Describe on a continuation sheet.)
Z. [ 1. Not applicable
7.3.5 Employee Sharing in Refunds and Dividends (Contributory Purchased Insurance Plans №
(Check one.)
A. [ ] Employees do not participate in refunds and dividends unless
employer's contribution is less than the refunds and dividends
B. [ ] Employees share in refunds and dividends in the same fixed
amount or percentage ratio as their contributions to premium
costs
] Employees do not share in refunds and dividends
C. [
Y. [
]. Other or more than one method (Describe on a continuation sheet.)
Z. [ ] Not applicable
7.4.0 Self-Insurance Programs (Employee Group Insurance). Costs of the self-insurance
programs are charged to Government contracts: (Check one.)
A. [ ] When accrued (book accrual only)
When contributions are made to a nonforfeitable fund
B. [ ]
C. [
] When contributions are made to a forfeitable fund
D. [
] When the benefits are paid to employees
E. [
]
When amounts are paid to an employee welfare plan or union
Y. [
] Other or more than one method (Describe on a continuation sheet.)
Z. [ ] Not applicable
FORM CASB-DS-1
- 35 -
81
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VII
-
DEFERRED COMPENSATION
AND INSURANCE COSTS
ITEM DESCRIPTION
7.5.0 Workmen's Compensation, Liability and Casualty Insurance (Purchased Insurance
Only). All allocable earned refunds and dividends under retrospectively rated
workmen's compensation and liability insurance policies, and dividends and
deposit refunds under casualty insurance policies, are: (Check one.)
7.6.0
7.6.1
A. [ ] Credited directly or indirectly to Government contracts in
the year earned
B. [ ] Credited directly or indirectly to Government contracts in the
year received, not necessarily in the year earned
C. [
D. [
] Accrued each year, as applicable, to currently reflect the net
annual cost of the insurance
] Not credited or refunded to the contractor but are retained by
the carriers as reserves
Y. [ ]
Other or more than one method (Describe on a continuation sheet.)
Z. [ ] Not applicable
Self-Insurance Programs (Workmen's Compensation, Liability and Casualty Insurance
Workmen's Compensation and Liability. Costs of such self-insurance programs are
charged to Government contracts: (Check one.)
A. [
B. [
C. [
] When claims are paid or losses are incurred (no provision for
reserves)
] When provisions for reserves are recorded based on the present
value of the liability
] When provisions for reserves are recorded based on the full or
undiscounted value, as contrasted with present value, of the
liability
When funds are set aside or contributions are made to a fund
D. [
]
Other or more than one method (Describe on a continuation sheet.)
Y. [ ]
Z. [ ] Not applicable
FORM CASB-DS-1
- 36 -
82
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Item
No.
7.6.2
Casualty Insurance.
Government contracts:
PART VII
-
ITEM DESCRIPTION
DEFERRED COMPENSATION
AND INSURANCE COSTS
Costs of such self-insurance programs are charged to
(Check one.)
A. [ ] When losses are incurred (no provision for reserves)
B. [] When provisions for reserves are recorded based on replacement
costs
C. [ ] When provisions for reserves are recorded based on reproduction
cost new less observed depreciation (market value) excluding
the value of land and other indestructibles
D. [] Losses are charged to retained earnings with no charge to
contracts (no provision for reserves)
Y. [ ]
Other or more than one method (Describe on a continuation sheet.)
Z. [] Not applicable
FORM CASB-DS-1
- 37.-.
83
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANCARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VIII
-
CORPORATE OR GROUP EXPENSES
ITEM DESCRIPTION
FOR CORPORATE (HOME) OFFICE, OR GROUP (INTERMEDIATE MANAGEMENT) OFFICE; AS
APPLICABLE (includes home office type operations of joint ventures, partnerships,
etc.)
Sales data for this part should cover the most recently completed fiscal year.
For a corporate (home) office, such data should cover the entire corporation.
For a group office, they should cover the subordinate organizations managed by
that group office. "Government Sales" includes sales under both prime contracts
and subcontracts.
8.1.0 Annual Total Sales (Government and Commercial). (Check one.)
A. [ ] Less than
$50 million
C. [ ] $101-$200
million
E. [ ] $501 million-
$1 billion
B. [ ] $50-$100
million
D. [ ] $201-$500
million
F. [ ] Over $1 billion
8.2.0 Approximate Percentage of Government Sales to Annual Total Sales. (Check one.)
•
A. [ ] Less than 5%
C. [ ] 11%-25%
B. [ ] 5%-10%
D. [ ] 26%-50%
E. [ ] 51%-80%
F. [ ] Over 80%
8.3.0 Expenses or Pools of Expenses and Methods of Allocation.
--
For classification purposes, three methods of allocation are defined:
(i) Directly Chargeable--those expenses that are charged to specific corporate
segments for centrally performed or purchased services; (ii) Separately Allocated
- those individual or groups of expenses which are allocated only to a limited
group of corporate segments; and (iii) Overall Allocation--the remaining
expenses which are allocated to all or most corporate segments on an overall
basis. Corporate segments, as used here, refer to divisions, product departments,
plants, or profit centers of a corporation with production and, usually, profit
responsibility, reporting to corporate headquarters directly or through inter-
mediate organizations. The term includes Government-owned, contractor-operated
(GOCO) plants, foreign operations, subsidiary corporations and joint ventures.
FORM CASB-DS-1
-
38
84
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
PART VIII - CORPORATE OR GROUP EXPENSES
ITEM DESCRIPTION
Allocation Base Codes
A. Sales
I.
B.
Cost of sales
J.
C.
Cost input (direct material, direct
K.
labor, other direct costs and
applicable overhead)
L.
M.
D. Total cost incurred (cost
input plus G&A expenses)
E. Prime cost (direct material,
direct labor, and other direct
costs)
F. Processing or conversion cost
(direct labor and applicable
overhead)
Direct labor dollars
G.
H. Direct labor hours
Machine hours
Us age
Unit of product
Direct material cost
Total payroll dollars (direct
and indirect employees)
N. Headcount or number of
employees (direct and indirect
employees)
0.
Square feet.
Y.
Other or more than one basis
(Describe on a continuation
sheet)
(Enter the type of expenses or the name of the expense pool(s) and one of
the Allocation Base Codes A through 0, or Y, to indicate the basis of allocation.
Use a continuation sheet if additional space is required.)
Type of Expenses or Name
of Pool of Expenses
8.3.1 Directly Chargeable
Allocation Base Code
흐흐​흐흐흐
​[ ]
(b)
[ ]
[ ]
(d)
[ ]
(e)
[ ]
3.3.2 Separately Allocated
(a)
[ ]
흐흐흐
​[
]
[ ]
(e)
[ ]
[ ]
FORM CASB-DS-1
-
39 -
85
Cost Accounting Standards Board

COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
PART VIII - CORPORATE OR GROUP EXPENSES
REQUIRED BY PUBLIC LAW 91-379
Item
No.
ITEM DESCRIPTION
8.3.3 Overall Allocation
(b)
흐흐 ​흐흐흐
​(e)
[ ]
[ ]
[ ]
[ ]
[
]
8.4.0 Major Types of Expense. (For each pool. reported in Items 8.3.1, 8.3.2 and 8.3.3,
list on a continuation sheet the major functions, activities, and elements of
cost included.)
8.5.0 Allocation Base. (For each Allocation Base used in Items 8.3.2 and 8.3.3,
describe on a continuation sheet the makeup of the base; for example, if direct
labor dollars is used, are overtime premium, fringe benefits, etc., included?)
8.6.0 Overall Allocation. Are expenses in this category, Item 8.3.3, allocated to all
corporate segments? (Check one. If No is checked, list on a continuation sheet
the names of excluded corporate segments and the reasons for their exclusion from
the allocation.)
B. [ ] No
A. [ ] Yes
8.7.0 Transfer of Expenses. Are there normally transfers of expenses from corporate
segments to corporate or group office? (Check one. If Yes is checked, identify
on a continuation sheet the classifications of expense, the names of the cor-
porate segments incurring the expense, and the corporate or group office pools
in which the expenses are included.)
A. [ ] Yes
B. [] No
8.8.0 Fixed Management Charges. Are fixed amounts of expenses charged to any corporate
segments in lieu of a prorata or allocation basis? (Check one. If Yes is
checked, list on a continuation sheet the names of such corporate segments and
the basis for making fixed management charges.)
A. [ ] Yes
B. [ ] No
8.9.0 Government Owned/Contractor Operated (GOCO) Plants. Are corporate or group office
expenses allocated to GOCO plants? (Check one. If Yes is checked, describe on a
continuation sheet the types of expenses involved and the method of allocation.)
Z. [ ] Not applicable
A. [ ] Yes
B. [ ] No
FORM CASB-DS-1
- 40 -
86
Cost Accounting Standards Board

Item
No.
COST ACCOUNTING STANDARDS BOARD
DISCLOSURE STATEMENT
REQUIRED BY PUBLIC LAW 91-379
Page
CONTINUATION SHEET
of Pages
ITEM DESCRIPTION-
FORM CASB-DS-1
[38 FR 30728, Nov. 7, 1973, as amended at 38 FR 34260, Dec. 12, 1973]
PREAMBLES: For preambles relating to § 351.140, see preambles C and D of the supplement
to this part. For preamble to superseded regulations, see preamble A of the supplement.
§ 351.145 Disclosure statement-col-
leges and universities.
The data which are required to be dis-
closed by colleges and universities are
set forth in detail in the Disclosure State-
ment Form, CASB-DS-2, which will be
devised by the Cost Accounting Stand-
ards Board and will be arranged sub-
stantially as set forth below.
NOTE: Forms CASB-DS-1 and CASB-DS-2,
referred to in 4 CFR, §§ 351.140 and 351.145,
respectively, when revised, will be modified in
accordance with the modifications to 4 CFR
351.130.
[38 FR 34260, Dec. 12, 1973]
PREAMBLES: For preamble relating to
§ 351.145, see preamble D of the supplement
to this part.
87
Cost Accounting Standards Board
APPENDIX A
PRINCIPAL product or seRVICE CODE
(For Item 1.3.0 of the Disclosure Statement)
The following codes and classification de-
scriptions have been selected from the Stand-
ard Industrial Classification Manual, 1967,
Executive Office of the President (Bureau of
the Budget), which is used by U.S. Govern-
ment agencies to classify establishment data
by industry.
For the most part, only those industries
which account for a majɔr portion of defense
contracting are specifically identified to a
significant 4-digit level, that is, a code whose
last two digits are each greater than zero.
Where the specific industries are not rela-
tively large in defense contracting terms,
either a group code (ending in zero) or a
major group code (ending in two zeros) is
used. An exception to this rule is made when
only one specific industry is assignable to a
group, e.g., Metal Cases, Code 3411, is used
because it is the only industry in Group 3410.
One other exception applies to the group code
rule: When a specific industry code is used
and the group has two or more specific
Industries, the remaining industry codes
within the group are consolidated into a
group code ending in zero, e.g., Industrial
Gases, is separately identified as Code 2813
and the remaining industries in the group
are consolidated into a Group Code 2810 for
all other industrial organic and inorganic
chemicals.
To obtain the appropriate code for entry
in Item 1.3.0 of the Disclosure Statement,
each reporting organization should first ex-
amine the list of major-group descriptions
below to determine which apply to the orga-
nization's products or services. Second, the
specific codes and descriptions for the major
group or groups should be reviewed to select
the one code that most nearly identifies the
product or service which accounted for most
of the organization's sales or shipments in
the base fiscal year used for the Disclosure
Statement.
If research and development or modifica-
tion and overhaul is associated with a prod-
uct, use a specific manufactured product
code (Codes 1911 through 3900) rather than
a service code. For example, development
work associated with aircraft should be coded
3721 (aircraft) rather than 7391 (commercial
research and development laboratories).
Following are the major groups whose
codes and descriptions are included:
I-Manufactured Products
Ordnance and Accessories.
19
20
Food and Kindred Products.
21
Tobacco Manufactures.
22 Textile Mill Products.
23 Apparel.
24 Lumber and Wood Products except Fur-
niture.
26 Paper and Allied Products
25
Furniture and Fixtures.
27 Printing, Publishing and Allied Indus-
tries.
28
Chemicals and Allied Products.
29
Petroleum Refining.
30
Rubber and Miscellaneous Plastic Prod-
31
ucts.
Leather and Leather Products.
32
33
Stone, Clay, Glass and Concrete Products.
Primary Metal Industries.
34
Fabricated Metal Products, except Ord-
nance Machinery and Transportation
Equipment.
35
Machinery, except Electrical.
Electrical Machinery, Equipment and
Supplies.
Transportation Equipment.
36
37
38
39
15
16
17
Professional, Scientific and Controlling
Instruments; Photographic and Op-
tical Goods; Watches and Clocks.
Miscellaneous Manufactures.
II-Construction and Services
Building Construction.
Construction, other than Building Con-
struction.
Construction, Special Trade Contractors.
Railroad Transportation.
40
42
Motor Freight Transportation and Ware-
housing.
44
Water Transportation.
45
Transportation by Air.
47 Transportation Services.
48
73
Communication.
Miscellaneous Business Services.
80 Medical and Other Health Services.
82
Educational Services.
PRINCIPAL PRODUCT OR SERVICE CODE
SECTION I-MANUFACTURED PRODUCTS
Description
Code
1911
1925
19. ORDNANCE AND ACCESSORIES
Guns, Howitzers, Mortars, and Related
Equipment. Artillery having a bore
over 30 mm, or over 1.18 inches, and
components.
Guided Missiles and Space Vehicles.
Completely assembled guided mis-
siles and space vehicles. Excludes
guided missile and space vehicle en-
gines and engine parts (Code 3722);
ground and airborne guidance,
checkout and launch electronic sys-
tems and components (Code 3662);
and guided missile and space vehicle
airframes, nose cones, and space cap-
sules (Code 3729).
1928 Ammunition, Except for Small Arms.
Ammunition over 30 mm or 1.18
inches, and also bombs, mines, tor-
pedoes, grenades, depth charges,
chemical warfare projectiles, and
component parts. Excludes explo-
sives (Code 2892).
1931
Tanks and Tank Components. Com-
plete tanks and specialized compo-
nents for tanks. Excludes military
vehicles other than tanks (Code
3711) and tank engines (Code 3519).
88
Cost Accounting Standards Board
Code
1941
1951
1961
1999
2000
2100
2200
2300
Description
Sighting and Fire Control Equipment.
Includes bomb sights, percentage
correctors, wind correctors, directors,
and sound locators. Excludes com-
puters and computer systems (Code
3573).
Small Arms. Small firearms having a
bore 30 mm or 1.18 inches and be-
low, and parts for small firearms. In-
cludes certain weapons over 30 mm
which are carried and employed by
the individual, such as grenade
launchers and heavy field machine
guns.
Small Arms Ammunition. Ammunition
for small arms as defined in Code
1951.
Ordnance and Accessories, Not Else-
where Classified. Examples include
flame throwers, Y-guns, and smoke
generators.
20. FOOD AND KINDRED PRODUCTS
Foods and beverages for human con-
sumption, and certain related prod-
ucts, such 89 manufactured ice,
chewing gum, and prepared feeds for
animals.
21. TOBACCO MANUFACTURES
Cigarettes, cigars, smoking and chew-
ing tobacco, and snuff.
22. TEXTILE MILL PRODUCTS
Includes any of the following: (1)
Yarn, thread, braids, twine, and
cordage; (2) broad woven fabric, nar-
row woven fabric, knit fabric, and
carpets and rugs from yarn; (3) dye-
ing and finishing fiber, yarn, fabric
and knit apparel; (4) coating, water-
proofing, or otherwise treating fab-
ric; (5) the integrated manufac-
ture of knit apparel and other in-
ished articles from yarn; and (6) the
manufacture of felt goods, lace
goods, bonded-fiber fabrics, and mis-
cellaneous textiles.
23. APPAREL
Clothing and other finished products
fabricated by cutting and sewing
purchased or government-furnished
textile fabrics and related materials,
such as leather, rubberized fabrics,
plastics, and furs.
24. LUMBER AND WOOD PRODUCTS, EXCEPT
FURNITURE
2400
Poles, timber and pulpwood, sawmill
and planing mill products, flooring.
cooperage, millwork, plywood, pre-
fabricated buildings, and wooden
containers.
25. FURNITURE AND FIXTURES
2500 Household, office, public building and
restaurant furniture, and office and
store fixtures.
Code
Description
26. PAPER AND ALLIED PRODUCTS
2600 Pulps from rags and from wood and
other cellulose fibers;
paper and
paperboard including building paper
and building board, paper bags,
boxes, and envelopes.
27. PRINTING, PUBLISHING AND ALLIED
INDUSTRIES
2700 Printing, such as by letterpress, lithog-
raphy, gravure or screen; bookbind-
ing, typesetting, engraving, and elec-
trotyping; and newspaper, periodi-
cal, and book publishing.
2813
2810
2820
2830
2840
28. CHEMICALS AND allied pRODUCTS
Industrial Gases. Gases in compressed
liquid, and solid forms. Excludes
fluorine and ammonia (Code 2810).
Industrial Organic, Inorganic Chemi-
cals, Except Industrial Gases.
Plastic Materials and Synthetic Resins,
Synthetic Rubber, Synthetic
Synthetic and
Other Man-Made Fibers, Except
Glass Fibers.
Drugs and Pharmaceuticals.
Soaps, Detergents, and Cleaning Prep-
arations.
2850 Paints, Varnishes,
Enamels.
Lacquers, and
2860 Agricultural Chemicals. Fertilizers and
pesticides.
2892
2890
Explosives.
2900
Chemicals, Not Elsewhere Classified.
29. PETROLEUM REFINING
Petroleum, paving and roofing mate-
rials (asphalt and tar), and lubri-
cating oils and greases.
80
KUBBER AND
3000
3100
3200
3310
MISCELLANEOUS
PRODUCTS
PLASTIC
Products from natural, synthetic or
reclaimed rubber; and miscellaneous
Anished plastic products.
31. LEATHER AND LEATHER PRODUCTS
Includes finished leather and artifi-
cial leather products, and also the
tanning, currying, and finishing of
hides and skins.
32. STONE, CLAY, GLASS, AND CONCRETE
PRODUCTS
Flat glass and other glass products.
cement, structural clay products,
pottery, concrete, and gypsum prod-
ucts, cut stone, abrassive and as-
bestos products.
33. PRIMARY METAL INDUSTRIES
Furnaces, Steel
Products of Blast Furnaces,
Works, and Rolling and Finishing
Mills.
3320
3330
Iron and Steel Foundry Products.
Primary Smelting and Refining of
Nonferrous Metals.
3340 Secondary Smelting and Refining of
Nonferrous Metals.
89
Cost Accounting Standards Board
Code
Description
3350 Rolling, Drawing, and Extruding of
3360
3390
Nonferrous Metals.
Nonferrous Foundry Products.
Miscellaneous Primary Metal Products.
Iron, steel, and nonferrous forgings,
and primary metal products, not
elsewhere classified.
34. FABRICATED METAL PRODUCTS, EXCEPT ORD-
NANCE, MACHINERY, AND TRANSPORTATION
EQUIPMENT
3411
3420
Metal cans.
Cutlery, Hand Tools and General Hard-
ware.
3430 Heating Apparatus (Except Electrical)
and Plumbing Fixtures.
3440 Fabricated Structural Metal Products.
3450 Screw Machine Products and Bolts,
Nuts, Screws, Rivets, and Washers.
3461 Metal Stampings.
3470 Coating, Engraving, and Allied Serv-
ices.
3481
3490
Miscellaneous Fabricated Wire Prod-
ucts.
Miscellaneous Fabricated Metal Prod-
ucts. Barrels, drums, kegs, and pails;
safes and vaults; steel springs; valve
and pipe fittings, except brass goods
and other fabricated metal prod-
ucts, not elsewhere classified.
35. MACHINERY, EXCEPT ELECTRICAL
3510 Engines and Turbines. Steam engines;
steam, gas, and hydraulic turbines;
steam, gas and hydraulic turbine
generator set units; and internal
combustion engines not elsewhere
classified. Excludes aircraft and
rocket engines (Code 3722) and au-
tomotive engines (Code 3714).
Farm Machinery and Equipment.
Construction Machinery and Equip-
3522
3531
3532
3533
3534
ment. Includes heavy machinery and
equipment, such as bulldozers, con-
crete mixers, cranes, dredging ma-
chinery, pavers and power shovels.
Mining Machinery and Equipment.
Oil Field Machinery and Equipment.
Elevators and Moving Stairways.
Conveyors and Conveying Equipment.
Hoists, Industrial Cranes and Monorail
3550 Special Industry Machinery, Except
Description
Code
3573 Electronic Computing Equip.—Con.
3580
3599
rated as components into control
equipment for industrial use, and as
components of equipment used in
weapons and weapons systems, space
and oceanographic exploration,
transportation and other systems.
Electronic computer systems contain
high speed arithmetic and program
control units, on-line information
storage devices and input/output
equipment. Examples of input/out-
put equipment are converters (card
and/or tape), readers and printers.
Examples of storage devices are mag-
netic drums and disks, magnetic
cores, and magnetic film memories.
Service Industry Machines.
Miscellaneous Machinery, Except Elec-
trical.
36. ELECTRICAL MACHINERY, EQUIPMENT
AND SUPPLIES
3611
Electric Measuring Instruments and
Test Equipment. Pocket, portable,
panel-board, and graphic recording
instruments for measuring electric-
ity, such as voltmeters, ammeters,
watt meters, watt-hour meters, de-
mand meters, and other meters and
indicating instruments. Also in-
cludes analyzers for testing the elec-
trical characteristics of internal
combustion engines and radio ap-
paratus.
3612 Power, Distribution, and Specialty
Transformers. Excludes radio fre-
quency or voice frequency trans-
formers, coils or chokes (Code 3679).
3613 Switchgear and Switchboard Appara-
tus.
Motors and Generators. Electric mo-
tors (except starting motors) and
power generators; motor generators
sets; railway motors and control
equipment; and motors, generators,
and control equipment for gasoline,
electric, and oil electric busses and
trucks.
3621
3622
Industrial Controls. Motor starters and
controllers, control accessories, elec-
tronic controls and other industrial
controls. Excludes automatic tem-
perature controls (Code 3822).
3620 Electrical Industrial Apparatus, Except
Motors and Generators (Code 3621)
and Industrial Controls (Code 3622).
Household Appliances.
3535
3536
Systems.
3537
Industrial Trucks, Tractors, Trailers
and Stackers.
3540
Metal working Machinery and Equip-
ment.
Metalworking.
3560 General
General Industrial Machinery
Equipment.
and
3630
3640
3570
Office, Computing and Accounting Ma-
chines, Except Electronic Computing
Equipment (Code 3573).
Electric Lighting and Wiring Equip-
ment.
3651
3573
Electronic Computing Equipment. In-
cludes general purpose electronic
analog computers as well as elec-
tronic digital computers. The elec-
tronic computers may be used for
data processing or may be incorpo-
3652
3661
Telephone and Telegraph Apparatus.
Radio and Television Receiving Sets,
Except Communication Types. Elec-
tronic equipment for home enter-
tainment. Includes public address
systems, and music distribution ap-
paratus except records.
Phonograph Records.
90
Cost Accounting Standards Board
Code
3662
3671
3672
3673
3674
3679
8690
8711
Description
Radio and Television Transmitting,
Signaling, and Detection Equipment
and Apparatus. Radio and television
broadcasting equipment; electric
communication equipment and
parts, except telephone and tele-
graph; electronic field detection ap-
paratus, light and heat emission
operating apparatus, object detec-
tion apparatus and navigational
electronic equipment, and aircraft
and missile control systems; and
high energy particle accelerator
systems and equipment designed and
sold as a complete package for radi-
ation therapy, irradiation, radio-
graphic inspection, and research
(linear accelerators, betatrons, dyna-
motrons, Vandergraff generators, res-
onant transformers, insulating core
transformers, etc.); high energy par-
ticle electronic equipment and ac-
cessories sold separately for the con-
struction of linear accelerators, cy-
clotrons, synchrotrons, and other
high energy research installations
(transmitters/modulators, acceler-
ating waveguide structures, pulsed
electron guns, vacuum systems, cool-
ing systems, etc.); other electric and
electronic communication and sig-
naling products. not elsewhere
classified. Excludes transmitting
tubes (Code 3673).
Radio and Television Receiving Type
Electron Tubes Except Cathode Ray.
Cathode Ray Picture Tubes.
Transmitting, Industrial, and Special
Purpose Electron Tubes.
Semiconductors and Related Devices.
Semiconductor and related solid
state devices, such as semiconductor
dlodes and stacks, including recti-
filers, integrated microcircuits (semi-
conductor networks), transistors,
solar cells, and light sensitive semi-
conductor (solid state) devices.
Electronic Components and Accessor-
ies, Not Elsewhere Classified. Estab-
lishments primarily engaged in
manufacturing specialty resistors
for electronic end products; induc-
tors, transformers, and capacitors
and other electronic components,
not elsewhere classified.
Miscellaneous Electrical Machinery,
Equipment, and Supplies. Includes
storage and primary batteries, X-ray
apparatus, electrical equipment for
internal combustion
combustion engines and
miscellaneous electrical machinery,
equipment and supplies, not else-
where classified.
37. TRANSPORTATION EQUIPMENT
Motor Vehicles. Complete passenger
automobiles, trucks, commercial
cars and buses, and special purpose
motor vehicles.
Code
3714
3715
3721
3722
3723
3729
3731
3732
3740
3750
3790
Description
Motor Vehicle Parts and Accessories.
Truck Trailers (Full).
Aircraft. Complete aircraft. Also in-
cludes factory type modification and
overhaul of aircraft.
Aircraft Engines and Engine Parts.
Aircraft Propellers and Propeller Parts.
Aircraft Parts and Auxiliary Equip-
ment, Not Elsewhere Classified.
Ship Building and Repairing. Ships,
barges, and lighters, whether pro-
pelled by sail or motor power or
towed by other craft. Also includes
the conversion and alteration of
ships.
Boat Building and Repairing.
Railroad Equipment.
Motorcycles, Bicycles and Parts.
Miscellaneous Transportation Equip-
ment.
38. PROFESSIONAL, SCIENTIFIC, AND CONTROL-
LING INSTRUMENTS; PHOTOGRAPHIC AND OP-
TICAL GOODS; WATCHES AND CLOCKS
3811
3821
3822
3831
3851
3861
Engineering, Laboratory, and Scien-
tific and Research Instruments and
Associated Equipment. Laboratory,
scientific, and engineering instru-
ments such as nautical, navigational,
aeronautical, surveying, drafting,
and instruments for laboratory work
and scientific research (except opti-
cal instruments Code 3831).
Mechanical Measuring and Controlling
Instruments, Except Automatic
Temperature Controls.
Automatic Temperature Controls.
Automatic temperature controls
activated by pressure, temperature,
level, flow, time, or humidity (in-
cluding pneumatic controls) of the
type principally used as components
of air conditioning, refrigeration,
and comfort heating, or as com-
ponents of household appliances.
Excludes industrial electric controls
(Code 3620).
Optical Instruments and Lenses. Opti-
cal lenses and prisms, and optical in-
struments such as microscopes, tele-
scopes, field and opera glasses; and
optical measuring and testing in-
struments such as refractometers,
spectrometers, spectroscopes, colori-
meters, polariscopes.
3840 Surgical, Medical, and Dental Instru-
ments and Supplies.
Ophthalmic Goods.
Photographic Equipment and Supplies.
Photographic apparatus, equipment.
parts, attachments, and accessories.
such as still and motion picture
cameras and projection apparatus;
photocopy and microfilm equipment;
blueprinting and diazotype (white
printing) apparatus and equipment;
and other photographic equipment;
and sensitized film. paper, cloth, and
plates, and prepared photographic
chemicals for use therewith.
91
Cost Accounting Standards Board
Code
Description
3671 Watches, Clocks, Clockwork Operated
Devices, and Parts Except Watch-
cases. Clocks (including electric)
watches, mechanisms for clockwork
operated devices, and clock
watch parts.
3900
39. MISCELLANEOUS MANUFACTURERS
and
Manufacture of products not classified
in any other major manufacturing
groups, 1.e., from Code 1911 through
3871. Includes jewelry, silverware,
musical instruments, toys, sporting
and athletic goods and other miscel-
laneous manufactured products.
II. CONSTRUCTION AND SERVICES
15. BUILDING
1500
CONSTRUCTION-GENERAL
TRACTORS
CON-
Construction of residential, farm, in-
dustrial, commercial, public or other
buildings.
16. CONSTRUCTION OTHER THAN BUILDING CON-
STRUCTION-GENERAL CONTRACTORS
1600 Heavy construction, such as highways
and streets, bridges, sewers, railroads,
airports, and other types of construc-
tion work, except buildings.
17. CONSTRUCTION-SPECIAL TRADE
CONTRACTORS
1700 Specialized construction activities,
such as plumbing, painting, plaster-
ing, carpentering, electrical, etc.
40. RAILROAD TRANSPORTATION
4000 Transportation by line-haul railroad
and certain services allied to rail
transportation, such as sleeping and
dining car services, railway express,
and switching and terminal services.
FREIGHT TRANSPORTATION AND
42. MOTOR
4200
4463
4400
WAREHOUSING
Local or long-distance trucking, trans-
fer, and draying services, or storage
of farm products, furniture and
other household goods, or com-
mercial goods of any nature. Also
Includes operation of terminal facili-
tles for handling freight, with or
without maintenance facilities.
44. WATER TRANSPORTATION
Marine Cargo Handling.-Services di-
rectly related to marine cargo han-
dling from the time cargo, for or
from a vessel, arrives at shipside,
dock, pier, terminal, staging area, or
intransit area until cargo loading or
unloading operations are completed.
Includes the operation and main-
tenance of piers, docks, and
sociated buildings and facilities.
Water Transportation, Except Marine
Cargo Handling-Freight and pas-
senger transportation on the open
seas or inland waters, and incidental
as-
Code
4400
Description
Water Transportation—Con.
services such as lighterage, towing,
and canal operation. Also includes
excursion boats, sightseeing boats,
and water taxis.
45. TRANSPORTATION BY AIR
4582 Airports and Flying Fields-Operation
and maintenance of airports and fly-
ing fields and/or the servicing, re-
pairing (except on a factory basis),
and storing of aircraft at such air-
ports. Excludes modification and
factory type overhaul of aircraft
(Code 3721).
4500 Transportation by Air, Except Airports
and Flying Fields. Domestic and for-
eign transportation by air and also
terminal services.
47. TRANSPORTATION SERVICES
47C0 Services incidental to transportation,
such as forwarding, packing and
crating, and rental of railroad cars
48. COMMUNICATION
4800 Point-to-point communication service
whether by wire or radio, and
whether intended to be received
aurally or visually; and radio broad-
casting and television. Services for
the exchange or recording of mes-
sages are also included.
73. MISCELLANEOUS BUSINESS SERVICES
7391 Commercial Research and Development
Laboratories. Research and develop-
ment activities on a fee or contract
basis. Research and development
laboratories of companies which
manufacture the products developed
from their research activities are
classified as auxiliary to the manu-
facturing establishments served.
7392 Business, Management, Administra-
tive and Consulting Services. Busi-
ness and management administra-
tive and consulting services, such as
business analyzing business ro-
search, efficiency experts, fashion
designing and consulting, industrial
management, market research, per-
sonnel management, public rela-
tions counselors, sales engineers,
statistical services, tax consultation,
and traffic consultants.
7394 Equipment Rental and Leasing Serv-
ices. Includes electronic equipment
rental.
7300
Other miscellaneous business services,
such as advertising, mailing, steno-
graphic, employment agency, com-
mercial
and
testing
protective
services.
80. MEDICAL AND OTHER HEALTH SERVICES
8000 Medical, surgical, and other health
service to persons.
92
Cost Accounting Standards Board
Code
8221
Description
82. EDUCATIONAL SERVICES
Colleges, Universities, and Professional
Schools. Tuition fees at colleges, uni-
versities, and professional schools
granting academic degrees and re-
quiring for admission at least a high
school diploma or equivalent general
academic training.
8200 Other Educational Services. Excludes
services involving colleges, universi-
ties, and professional schools and
also excludes research and develop-
ment activities of such institutions
(Code 8921).
89. MISCELLANEOUS SERVICES
8911 Engineering and Architectural Serv-
ices. Services of a professional nature
in the fields of engineering and
architecture.
8921
8900
Nonprofit Educational and Scientific
Research Agencies. Research at non-
profit establishments including edu-
cational institutions.
Other Miscellaneous Services.
93
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 2–29–72
The material set forth below is the pre-
amble to the original publication of Part 351,
February 29, 1972, at 37 FR 4139. For the
preambles to the revision of Part 351 (Oc-
tober 4, 1973 and November 7, 1973), see pre-
ambles B and C. Portions of this preamble,
relating to Parts 331, 400, and 401 have been
omitted; they can be found in the supple-
ments to their respective parts. This pre-
amble to the publication of Part 351 is in-
cluded as part of the administrative history
of Part 351.
General comments. The purpose of the
regulations promulgated today by the
Cost Accounting Standards Board is to
implement section 719 of the Defense
Production Act of 1950, as amended, 50
U.S.C. App. 2168, which provides for de-
velopment of Cost Accounting Stand-
ards to be used in connection with
negotiated national defense contracts
and for disclosure of cost accounting
practices to be used in such contracts.
The Board believes the materials being
promulgated today constitute a signifi-
cant initial step toward accomplishing
one of its major objectives-improved
cost accounting and the proper determi-
nation of the cost of negotiated defense
contracts. The regulations spell out con-
tract coverage (Part 331), disclosure re-
quirements (Part 351), a compilation of
Definitions (Part 400), and two Cost Ac-
counting Standards, one calling for con-
sistency in estimating, accumulating, and
reporting costs (Part 401), and the other
calling for consistency in allocating costs
incurred for the same purpose (Part
402).
Development of the material being
promulgated today began many months
ago with extensive research. It included
examining publications on the subject,
conferring with knowledgeable repre-
sentatives or various Government agen-
cies. Government contractors, industry
associations, and professional accounting
associations, and identifying and consid-
ering all available viewpoints. From this
research, the initial versions of the mate-
rial now being published were developed.
As a part of the continuing research ef-
fort, these initial drafts were sent to 81
agencies, associations, and Government
contractors which had expressed interest
in assisting the Board in its work, and
their comments were solicited. Some na-
tional defense contractors field-tested
the material to see how it would ap-
ply to and affect their operations and ad-
vised the Board of their findings. In each
step of the research process, the Board
and its staff have urged and received ac-
tive participation and assistance by Gov-
ernment, industry, and accounting
organizations. Their cooperative efforts
contributed in large measure to the ex-
posure draft published in the Decem-
ber 30, 1971, FEDERAL REGISTER for
comment.
To better assure that all who might
want to comment had an opportunity to
do so, the Board supplemented the FED-
ERAL REGISTER notice by sending copies
of the FEDERAL REGISTER materials di-
rectly to about 175 organizations and in-
dividuals who had expressed interest or
had provided assistance in the develop-
ment of the published material. Also, a
press release was distributed announcing
the publication, which resulted in nu-
merous articles in journals. The Board
availed itself of all opportunities to pub-
licize the proposals and solicit comments
on them.
Written comments in response to the
published material were requested by
February 4, 1972. Comments were re-
ceived from 105 sources, including
Government agencies, professional as-
sociations, industry, associations, public
accounting firms, individual companies,
and others. The Board appreciates the
obvious care and attention devoted by
commentators, and as will be seen below,
the Board has greatly benefited from the
comments received.
Many of the comments received were
addressed to all parts of the proposed
Board rules as well as to the question of
public availability of the Disclosure
Statements. All of the comments received
have been carefully considered by the
Board taking into account the require-
ments of section 719. Understandably,
many of the comments were addressed
to issues which recur in two or more of
the proposed parts while others dealt
only with specific sections. Comments
which dealt with 11 general issues are
discussed separately below followed by
a section-by-section analysis of other
comments. Appropriate changes have
been made in the material promulgated
based on the Board's disposition of the
comments received.
Those comments and suggestions re-
ceived which are of particular signifi-
cance are discussed below.
1. Public availability of disclosure
statement. In a special notice in the
94
Cost Accounting Standards Board
notice of proposed rule making, the
Board sought comments to assist it
in its determination of whether Dis-
closure Statements submitted by defense
contractors and subcontractors should be
available to the general public, pursuant
to the Public Information Section of the
Administrative Procedure Act (5 U.S.C.
552) or whether such information was
properly within one of the statutory ex-
ceptions to the legal requirement for
public availability.
With few exceptions, both Government
and industry commentators urged that
the Disclosure Statements not be made
available to the general public. Numerous
arguments were presented. Among them
were that public disclosure by a Govern-
ment official would violate 18 U.S.C. 1905
(a provision in the Criminal Code making
it a crime for a Government official to
make certain matters public in certain
circumstances), thus making disclosure
improper under an exception to the re-
quirement for public availability set out
in 5 U.S.C. 552(b) (3); that the cost ac-
counting practices were trade secrets or
property of considerable value and that
disclosure would deprive the company of
their value without compensation; that
disclosure would reduce competition; and
that the public might be misled in that
it might construe disclosures respecting
the defense segment of a contractor's
business as representative of his entire
business organization.
An argument in favor of making the
Disclosure Statements available to the
public was made by a public interest
group. It argued that 5 U.S.C. 552 clearly
applies to Disclosure Statements, which
do not fall within any exception to public
availability; that the public requires ac-
cess to Disclosure Statements in order
to consider adequately and comment in-
telligently on any Cost Accounting
Standards proposed by the Board; that
public availability would enhance com-
petition; that Disclosure Statements
which are ultimately approved will form
a body of precedents to guide others in
complying with future Board Standards
and that public availability will enable
citizens and the Congress to hold both
the Board and contracting officials ac-
countable for implementation of section
719. A few commentators stated that they
favored, or could see no harm to com-
panies from, public availability of com-
tractors' disclosed practices.
The Board is especially impressed with
arguments that cost accounting prac-
tices have never been made public, that
companies have regarded and treated
them as confidential, and that a com-
pany's competitive position would be
damaged by public disclosure of its
cost accounting practices. Since disclo-
sure will be required of many companies
or divisions of companies whose princi-
pal competitors are not subject to Board
regulations, the Board recognizes there
might arise competitive disadvantage to
the disclosing company or division if its
competitors may see its disclosure but
need make none themselves. The Board
has, in light of these latter arguments,
concluded that information received in
response to Disclosure Statements is
within the exception set forth at 5 U.S.C.
552(b)(4) and that the Board will not
make Disclosure Statements public in
any case when the company or segment
files its statement specifically conditioned
on the
the Government's agreement to
treat the Disclosure Statement as con-
fidential information.
A provision to this effect has been
added at § 351.4 (d) of Part 351. Addi-
tionally, paragraph (a)(1) of the con-
tract clause set forth at § 331.5 has been
modified to this effect, and a provision
added to it so that subcontractors may
submit Disclosure Statements directly to
the contracting officer.
While the Board has concluded that
public availability of the Disclosure
Statements of identified contractors is
not required, it will, nevertheless, imple-
ment its announced intention of compil-
ing statistical summaries of disclosure
data and making those studies avail-
able to the public. The Board believes
that the creation of a data bank of cost
accounting practices will greatly bene-
fit the Board's own research efforts and
the formulation of Cost Accounting
Standards; summaries of these data or
studies of them should also prove to be
of great value to the public. Aggregated
information not identified to particular
contractors will, therefore, be made
available to the public.
2. Contractor-subcontractor relation-
ships. Several commentators, stating
that contractors cannot dictate the cost
accounting practices of their subcon-
tractors at any tier, urged that the Board
not hold contractors responsible for in-
creased costs to the United States aris-
ing from the failure of subcontractors to
95
Cost Accounting Standards Board
follow Cost Accounting Standards or dis-
closed cost accounting practices. Several
commentators also urged that the con-
tractor not be subject to the possibility
of a default termination by reason of
the actions or inactions of any of its sub-
contractors at any tier. Finally, some
commentators urged that the Board
establish a novel concept of privity be-
tween the contracting agency and sub-
contractors with respect to any concerns
stemming from Board rules, regulations,
and Cost Accounting Standards.
The Board has dealt with many of the
issues touched on by these commentators
in its conclusions, discussed below, re-
specting the phasing of applicability and
the proposed termination-for-default
language in the Contract Clause. The
Board is also mindful of the desirability
of its maintaining neutrality with respect
to contracting policies outside its juris-
diction; thus it should avoid establish-
ing a standard or policy which would
influence decisions of whether work
should be performed in-house or subcon-
tracted. A Board policy permitting con-
tractors to avoid responsibility for the
actions of their subcontractors could
surely have such an impact.
The Board reaffirms the established
principle that prime contractors are re-
sponsible to the Government for per-
formance of their contracts in all
required respects and urges that contrac-
tors who are fearful of deficiencies in
their subcontractors' performances pro-
tect themselves by use of whatever means
they currently employ under other flow-
down contractual requirements.
to
3. Exemptions. Many commentators
urged the Board to provide exemptions
either to the requirement to file a Dis-
closure Statement or to both that re-
quirement and the requirement
follow Cost Accounting Standards. Ex-
emptions were urged for subcontrac-
tors below the first tier, subcontractors
with small amounts of defense contract-
ing business, producers of basic or raw
materials, colleges and universities, con-
struction contractors, firms which would
qualify as small businesses, and others.
The Board has long been concerned
with the question of appropriate exemp-
tions. It has specifically requested in-
terested groups to offer suggestions for
criteria for use by the Board in con-
sidering exemptions. It also requested
its staff to study exemptions and has
discussed the staff investigations at
Board meetings. In light of these studies
and the comments received, the Board
has found no persuasive reasons for is-
suing blanket or class exemptions at this
time.
The Board recognizes, however, that
individual Cost Accounting Standards
may by their nature be inapplicable or
inappropriate to certain classes or cate-
gories of defense contractors or con-
tracts. The Board will continue to
consider exemptions from individual pro-
posed Cost Accounting Standards as
appropriate.
With respect to the requirement to
submit a Disclosure Statement, the
Board's proposed regulation provides a
phasing of that requirement. The Board
remains convinced that a company which
together with its subsidiaries received
prime contract awards of negotiated na-
tional defense contracts including sup-
plemental awards during Federal fiscal
year 1971 totaling more than $30 mil-
lion should be required to submit a Dis-
closure Statement as soon as Part 351
of the Board's regulations becomes ef-
fective. In order to provide both to other
contractors and to Government agencies
adequate time within which to study
the use of Disclosure Statements, how-
ever, the Board will defer determination
of the date after which other affected
contractors and subcontractors may be
required to file Disclosure Statements.
From time to time, the Board will an-
nounce the dates of applicability to other
contractors and subcontractors.
4. Applicability date of standards,
rules, and regulations. A related issue
raised by many commentators is a re-
quest that Cost Accounting Standards
be made applicable 90 days after is-
suance or at the beginning of the con-
tractor's next fiscal year, whichever is
later. In order to provide the maximum
benefits from use of Cost Accounting
Standards, the Board has decided not
to adopt any rule which would auto-
matically delay the effective date of Cost
Accounting Standards beyond the dates
contemplated in section 719 (h). That
section provides a minimum of 4 months'
notice from the date of promulgation, to
contractors of the likely applicability of
a Cost Accounting Standard. The Board
regards this as an adequate time for
companies to prepare for use of the
standard. The Board nevertheless recog-
nizes that certain standards by their
nature may require deferring applica-
bility to the beginning of a contractor's
fiscal year next following the effective
96
Cost Accounting Standards Board
date, and in such cases that applica-
bility will be stated in the standards
concerned.
5. Agency administrative responsi-
bility. Many commentators, noting the
Board's statutory responsibilty to pro-
mote uniformity and consistency in cost
accounting practices used in defense
contracting and subcontracting, have
suggested that uniformity would be pro-
moted by giving the Board or another
single Federal agency the sole imple-
menting responsibility respecting Board
regulations. Thus, some commentators
recommended that the Board itself issue
regulations prescribing the frequently of
submission of Disclosure Statements and
where they must be submitted. Other
commentators urged that the Board is-
sue a single regulation prescribing exact
methods by which increased costs to the
United States will be determined. Other
commentators urged that the Board pre-
scribe methods by which advance
agreements affecting more than one con-
tract shall be made, some commentators
urging that the Board itself make those
agreements. Others urged that the Board
rule that the contracting agencies must
act to approve or disapprove Disclosure
Statements within a stated period of
time. And finally, some commentators
urged that the Board itself be the sole
agency to approve the cost accounting
practices disclosed through submission
of a Disclosure Statement.
The Board finds these recommenda-
tions cogent. It also recognizes that to
act pursuant to them would require a
Board regulation directed to the ad-
ministrative and contracting procedures
of many Federal agencies and in some
cases—such as the recommendation for
Board approval of disclosed cost ac-
counting practices-substitute a Board
regulation for the exercise of contract-
ing officers' discretion.
The Board, therefore, has decided not
to implement at this time the suggestions
set forth in this connection. The Board
nevertheless will watch closely during
the early implementation by contracting
agencies of Board rules, regulations, and
Cost Accounting Standards so that it
may become aware of any diversity of
regulations or actions by contracting
agencies. If the Board finds that an un-
acceptable amount of diversity has
arisen, it will be prepared to reconsider
the recommendations that the Board is-
sue its own regulations in many of the
areas left by Board regulations to the
discretion of contracting agencies.
Many commentators have expressed
concern about the problems which could
arise from inconsistent actions by differ-
ent Federal agencies respecting dis-
closed practices, changes in practices,
and equitable adjustment of contract
prices and costs. The Board has directed
its staff to work with representatives of
relevant Federal agencies with the objec-
tive of obtaining designation of a single
contracting officer for each contractor
or major component thereof in order to
achieve consistent practices within the
standards issued by the Board.
Several
6. Contract modifications.
commentators have urged that negoti-
ated contract changes and amendments
over $100,000 to contracts which are
themselves not subject to Board jurisdic-
tion should not be covered. One commen-
tator pointed out that in a long-term
contract, most changes represent "in-
stead of" type changes with cost of price
adjustments only for the incremental ef-
fect of the change. This commentator
stated that there is no practical way
separately to identify these incremental
costs.
The Board is persuaded that for the
time being it should not cover negotiated
modifications to contracts exempt at
their inception. It has, therefore, elimi-
nated coverage for the time being of such
contract modifications. In doing so, how-
ever, the Board intends that the annual
extension of existing negotiated con-
tracts and similar contract modifications
would not be exempt from the Board's
rules, regulations, and Cost Acounting
Standards.
7. Definitions. The Board is also per-
suaded of the value of one commenta-
tor's suggestion that the Board provide a
compilation of definitions of the words
or phrases defined in individual Cost
Acounting Standards, making those
definitions applicable to all such stand-
ards. Consequently, a new Part 400 has
been added, and all terms defined in
Parts 401 and 402 have been placed in it,
although they also remain in the partic-
ular standards in which they are de-
fined. As more standards are added, any
terms defined in them will also be added
to Part 400. However, terms defined in
Parts 331 and 351 are not included in
the glossary of definitions, nor are terms
used in those parts necessarily to bear
97
Cost Accounting Standards Board
the meanings ascribed to those terms in
Part 400.
8. Application to individual contracts.
Several commentators urged that the
Board adopt the date of final agreement
on a negotiated price as a cut-off date
for the disclosure of cost accounting
practices. The Board has reviewed the
merits of selecting that date rather than
the date of award to establish the date
as of which the contractor's Disclosure
Statement must accurately reflect his
cost accounting practices, at least with
respect to those contracts where cost or
pricing data have been submitted pur-
suant to Public Law 87-653. The Board
has decided to use the date of final agree-
ment on price, as shown on the signed
certificate of current cost or pricing data,
with respect to contractors who have
submitted cost or pricing data, and to
use the date of award of the contract for
all other contractors. In addition, the
Board has concluded that it is appropri-
ate to use those dates to establish which
Cost Accounting Standards shall be ap-
plicable to the proposal and to the con-
tract at its Inception. Appropriate
changes in Parts 331, 351, and 401 have
been made to reflect this decision.
9. Price adjustments. Many commen-
tators stated that where a contractor's
departure from existing disclosed prac-
tices is occasioned by the contractor's
wish to adopt a newly issued Cost Ac-
counting Standard for all contracts, the
Government should be willing to provide
upward price adjustment whenever an
existing contract is rendered thereby
more expensive to perform. The view was
often expressed that contractors could
not maintain one accounting practice for
contracts subject to a particular Cost
Accounting Standard, but a different
practice for contracts not so subject;
therefore, it was alleged, once a con-
tractor had to adopt a standard for any
one contract, he would of necessity adopt
it for all contracts and amend his Dis-
closure Statement accordingly.
The Board notes in this connection
that the Cost Accounting Standard at
Part 402 requires consistency in the al-
location of all direct and indirect costs
under all covered contracts. If a Cost
Accounting Standard were issued which
required a company to modify its dis-
closed cost accounting practices with re-
spect to its earlier practice of allocating
direct and indirect costs, Part 402 would
require amendment of existing disclosed
practices so as to meet that requirement.
In such a case, the Board believes it
would be unfair to deny an equitable
price adjustment arising from such
amendment.
Further, the Board has been persuaded
by the strong arguments from industry
commentators that companies with móre
than one contract, subject to different
Cost Accounting Standards, cannot
maintain multiple records to account for
each contract related to its set of stand-
ards. Another industry commentator
stated that the vast majority of com-
panies must apply any required cost ac-
counting practices across their total busi-
ness, and that it would be impractical
if not impossible for companies to apply
different practices to different contracts.
The Board has accommodated this view
by enabling contractors to apply uniform
practices to all covered contracts. Such
application will also serve to improve
cost accounting practices for all
contracts.
The Board has consequently modified
both Part 331 and Part 351 to provide
three things: First, that a contractor's
practices disclosed for any contract shall
be the same as the practices currently
disclosed and applied on all other cov-
ered contracts and subcontracts being
performed by that contractor. Second,
that a contractor must amend his dis-
closure of cost accounting practices as
new standards are issued and become ap-
plicable to new contracts if a change in
practices is necessary, so that, at any
given time, the same practices prevail
under all of the contractor's existing
contracts and subcontracts subject to
Board jurisdiction. Similarly, contractors
must amend Disclosure Statements to
reflect any change in practices disclosed
under later contracts. Third, that for
those amendments of disclosed practices
applicable to a particular contract which
are occasioned by the issuance of a new
Cost Accounting Standard, the Govern-
ment will equitably adjust the contract
price in accordance with the changes
clause in the contract or reimburse any
increased costs under that contract.
In view of the phasing of the require-
ment to file a Disclosure Statement, the
Board has adopted a contract provision
that will provide equitable adjustments
in appropriate cases when a contractor
who has not yet filed a Disclosure State-
ment is required to change his estab-
lished cost accounting practices to com-
ply with newly issued Cost Accounting
Standards. On the other hand, any de-
98
Cost Accounting Standards Board
parture from disclosed cost accounting
practices which is not required by a
newly issued Cost Accounting Standard
will not be subject to equitable price ad-
justment, but only to price adjustment
downward in the event that that depar-
ture would otherwise result in increased
costs being paid by the United States.
The Board wishes to emphasize that if
the parties to a contractual negotiation
mutually agree to a price based on ex-
clusion of costs which are allocable under
the contractor's disclosed cost account-
ing practices, such agreement shall not
affect the requirement for conformity
with Board rules, regulations, and Cost
Accounting Standards in the contractor's
allocation of costs between the contract
being negotiated and other work.
10. Materiality. The Board notes that
many commentators urged that a con-
cept of materiality be incorporated in the
Board's regulations, to the end that
minimal or insignificant modifications of
or failures to use disclosed cost account-
ing practices would not be subject to
price adjustment.
The Board agrees that the administra-
tion of its rules, regulations, and Cost
Accounting Standards should be reason-
able and not seek to deal with insignifi-
cant amounts of cost. Since this rule of
common sense is already practiced by
the Government, the Board does not
believe that there is any need to attempt
to formulate and state in acceptable con-
cept of materiality applicable to all
Board rules, regulations, and standards,
although the Board might consider doing
so if subsequent events indicate the ne-
cessity therefor. The Board does recog-
nize that in particular standards a
"materiality" statement may be useful,
and in such cases, it will include one. See
for example the addition at § 402.50 (e).
11. Additional requirements by agen-
cies. As a final general point, concern
was expressed that Federal agencies
might require submission of cost propos-
als in ways inconsistent with the cost
accounting practices of some or all of the
potential offerors. The Board recognizes
that this has happened in the past, but
it notes that Board rules, regulations,
and Cost Accounting Standards are to
be used by relevant Federal agencies as
well as by contractors and subcontrac-
tors, and it believes that henceforth re-
quests for proposals must be fully con-
sistent with such rules, regulations, and
standards, although of course the Fed-
eral agency may ask for supplementary
information to accompany proposals if
this is needed to meet the agency's
requirements.
Section 351.14 Disclosure Statement.
Several commentators pointed out that
the statement was too detailed or com-
plex, or urged that the Statement be
modified to require only a statement of
cost accounting policy and philosophy.
The Board believes that such generalized
and unspecific statements would not as-
sist it adequately in performance of its
responsibilities. Further, in order to per-
mit the statutory requirements of dis-
closure of cost accounting practices and
consistency to be met, the Board con-
cluded that the extent of detail now
called for in the Disclosure Statement is
necessary.
Two commentators suggested that ref-
erences to ASPR, the Internal Revenue
Code and financial accounting be deleted
from the Disclosure Statement since the
contractors stated they are irrelevant to
their cost accounting practices. The
Board did not agree with these sugges-
tions for the reason that in most cases
the regulations have been referred to in
the Statement in lieu of redefining cer-
tain words, such as "Independent Re-
search and Development Costs." Fur-
thermore, with particular respect to the
Internal Revenue Code, the Board can-
not ignore that income tax considera-
tions often influence cost accounting
practices, such as those for depreciation.
The Board has deleted the item in the
Statement calling for an explanation of
the difference between commercial and
Government cost accounting practices
since the Board agrees with several com-
mentators that inclusion of such in-
formation in the Disclosure Statement is
not needed.
An educational institution and one as-
sociation pointed out that the terminol-
ogy in the Disclosure Statement was not
responsive to the special circumstances of
educational institutions. The Board made
appropriate word-changes to a number
of items in the Statement to accom-
modate educational institutions.
By far, the majority of the comments
addressed to the Disclosure Statement
dealt with suggestions for clarification
of terminology and intent of the vari-
ous items in the statement. The Board
considered each comment and made ap-
propriate revisions to the statement. The
part most affected by these revisions is
Part IV-Indirect Costs. Several items in
the part were rearranged in sequence to
99
Cost Accounting Standards Board
improve clarity, and instructions cover-
ing the items in Part IV were restated.
Effective date and application. For the
convenience of readers, the following
summarizes the effective dates set forth
in § 331.8, § 351.4(e), and Parts 400, 401,
and 402, which were transmitted to the
Congress on February 24, 1972, pursuant
to section 719(h) (3) of the Defense Pro-
duction Act of 1950 as amended. After
the expiration of a period of 60 calendar
days of continuous session following the
date of transmittal to the Congress, the
regulations herein promulgated shall
take effect as set forth in those regula-
tions, unless there is passed by the two
Houses a concurrent resolution stating
in substance that the Congress does not
favor the proposed standards, rules, or
regulations.
3. The provisions of Part 351 will be
applicable to any contractor who sub-
mits a proposal which results in contracts
containing the clause in § 331.5 and
whose net awards of negotiated national
defense prime contracts during Federal
fiscal year 1971 totaled more than $30
million. Contractors whose net awards
were less than that amount may be re-
quired to complete or submit a Disclo-
sure Statement as the Board announces
extensions of this requirement to such
contractors.
4. Any contractor having a contract
awarded prior to July 1, 1972, which con-
tains a clause which already incorporates
requirements governing submission of
Disclosure Statements and application of
Cost Accounting Standards will be re-
quired to comply with the provisions of
that clause. In this connection, such con-
tractor and the respective contracting
agencies whose contracts contain such
a clause should review those contracts
to determine whether negotiations should
be instituted to make Parts 400 through
402 applicable to them.
B. Preamble to Amendments of 10-4-73
These amendments (38 FR 27507, Oct. 4,
1973) added §§ 351.41 and 351.50(c), and
amended § 351.70.
The purpose of this publication by the
Cost Accounting Standards Board is to
modify Part 351, Basic Requirements, of
its rules and regulations. A proposed
modification to Part 351 was published in
the FEDERAL REGISTER of July 27, 1973
(38 FR 20101). That proposal was a re-
vision of an earlier proposal published.
on May 21, 1973. Thirty-three sets of
comments were received in response to
the July publication and after consider-
ing those comments (discussed below),
the Board is today publishing an amend-
ment to its rules relative to the require-
ment for the submission of Disclosure
Statements by defense contractors.
The Board's July 27 proposal required
that, in determining who must file Dis-
closure Statements, only negotiated con-
tracts of the type which are subject
to Cost Accounting Standards were to be
considered. All commentators who dealt
with this matter supported the proposal.
The Board, therefore, in the amend-
ments being published today, specifically
limits the contract awards to be included
in the computation of a contractor's vol-
ume of defense contracts in determining
whether the revised filing requirement
has been met, to those of the type sub-
ject to the Board's jurisdiction. The
Board recognizes that Standards were
not required in contracts in Fiscal Year
1972. In view of this, the amendment
refers to "negotiated national defense
prime contracts of the type which are
subject to Cost Accounting Standards."
This filing requirement, therefore, in-
cludes all negotiated defense prime con-
tracts in excess of $100,000 except those
where the negotiated price is based on
(1) established catalog or market prices
of commercial items sold in substantial
quantities to the general public or (2)
prices set by law or regulation, or con-
tracts which are otherwise exempt.
The amendment being published today
by the Board to reduce the dollar level
above which filing of a Disclosure State-
ment will be required excludes from the
computation the amounts of all subcon-
tracts and those negotiated defense
prime contracts not subject to Cost Ac-
counting Standards. In view of this ex-
clusion, the Board is providing that if the
dollar volume of prime contract awards
to be considered exceeds $10 million, the
contractor will be required to submit a
Disclosure Statement. Also, in comput-
ing the amount, the amendments require
that contracts awarded in either Federal
Fiscal Year 1972 or 1973 should be
considered. Contractors who meet the
threshold amount in either year would be
required to file Disclosure Statements,
effective April 1, 1974.
The Board believes that the inclusion
of the amount of subcontract awards in
100
Cost Accounting Standards Board
the Disclosure Statement filing require-
ment would be appropriate because sub-
contracts, unless specifically exempt, are
subject to the Board's Standards, rules
and regulations. The Board recognizes,
however, that there is a lack of records
relative to the nature of subcontracts
awarded during fiscal years 1972 and
1973. Because of this, the Board con-
cludes that it is inappropriate to include
subcontracts in the determination of the
threshold amount for filing Disclosure
Statements at this time.
The amendments being published
today thus limit consideration to the dol-
lar value of prime contracts only. The
Board wishes to point out, however, that
future levels of hte threshold amount
may call for inclusion of the dollar value
of subcontract awards in the calculation.
Contractors are hereby advised that they
may be required to determine the dollar
value of negotiated defense subcontract
awards subject to Cost Accounting
Standards beginning with July 1, 1973.
Contractors and subcontractors may find
it advantageous to begin to identify and
accumulate the value of such awards
separately.
A major defense agency commented
that reduction of the threshold at this
time would be premature. It stated that
a large number of Disclosure Statements
would now be required from contractors
less likely to have sophisticated account-
ing systems. Consequently, greater
agency manpower efforts would be re-
quired to review them for adequacy. Also,
the agency expressed concern with the
upcoming work required for compliance
reviews and the possibility of negotia-
tion of price adjustments relative to
Standards. Finally, it stated that a num-
ber of manpower spaces have already
been provided in order to support Board
requirements. The agency suggested that
a threshold reduction be deferred until
after July 1, 1974.
The Board believes that Disclosure
Statements from "contractors less likely
to have sophisticated accounting sys-
tems" would seem to be especially needed
by the Government in order to know
more precisely how such contractors ac-
count for their costs. Additionally, the
Government has gained a great deal of
experience in reviewing the Disclosure
Statements already received, which
should aid review of newly submitted
statements on an expeditious basis.
With respect to the potential workload
required in compliance reviews, Govern-
ment agencies have always had a respon-
sibility for reviewing contractor account-
ing practices and the use of those
practices for Government contract cost-
ing. The Disclosure Statement provides
a benchmark which should facilitate
such reviews in the future. Moreover,
the Board is advised that most Disclo-
sure Statements filed under the existing
$30 million threshold have been reviewed
for adequacy, and compliance reviews
are now being made as a part of other
routine audit work.
The need to provide manpower spaces
to support Board requirements is to be
expected. The advantages of the ex-
panded disclosure requirement, however,
are many. For example, another defense
agency strongly endorsed the Board's
proposal to reduce the threshold because
of the useful information provided in
Disclosure Statements to contracting of-
ficers and auditors. Additionally, one
agency previously reported to the Board
that the Disclosure Statement has be-
come a valuable tool in given the nego-
tiator more cost visibility while another
referred to the Statement as a significant
asset for use in reviewing contract pro-
posals. After considering the agencies'
comments referred to above, the Board
has concluded that a reduction in the
threshold is desirable and within the
capabilities of the agencies' staffs to re-
view the additional statements that
would be submitted.
The Board's July proposal included an
effective date of January 1, 1974. The
Board has concluded that additional time
between the publication of these amend-
ments and the effective date of the re-
duced threshold should be given to al-
low agencies to prepare fully to handle
the additional volume of Disclosure
Statements that will be submitted. Also,
additional time will further assure that
contractors meeting the new threshold
requirement can complete the Disclosure
Statement without interference with the
prospective award of contracts. For these
reasons, the amendments being pub-
lished today require that contractors
meeting the threshold must submit a
Disclosure Statement in order to receive
a covered contract after April 1, 1974.
Nine commentators urged the Board
to provide an exemption for profit cen-
ters, divisions, etc., which are predom-
inately commercially oriented and which
have only a small dollar volume or per-
centage of covered defense contracts.
The Board has announced that it is ini-
101
Cost Accounting Standards Board
tiating a study to consider the estbalish-
ment of a minimum dollar amount or
percentage of covered contract effort be-
low which contractors' profit centers and
divisions would be exempt from Board
Standards, rules and regulations, includ-
ing the disclosure requirement. In any
case, the Board has concluded that $10
million in covered contracts on a com-
pany wide basis is a significant dollar
volume and that it warrants establish-
ment of the requirement for submission
of a Disclosure Statement.
Two commentators objected to the
establishment of an absolute dollar
amount of awards as a basis for deter-
mining the requirement for filing a Dis-
closure Statement. They suggested that
a percentage of overall business would be
more appropriate. This kind of informa-
tion is not available at the present time.
In estimating the number of Disclosure
Statements that would be submitted at
any threshold amount, and relating that
number of statements to the agency's
capability to process them, the Board
uses statistics on contract awards main-
tained by defense agencies. Because of
this, for the present the Board has re-
tained the requirement to compute the
threshold amount for filing a Disclosure
Statement in terms of a dollar volume
of contract awards. The study discussed
above may provide information to allow
the Board to consider use of a percentage
of covered contracts in relation to total
business as a factor in setting future
threshold requirements.
While not specifically related to the
Board's proposal of July 27, 1973, the
Board has received a number of oral in-
quiries concerning the intent of the sec-
ond sentence of § 351.120(d) of the
Board's regulations, which states:
Revised data for items 1.4.0 through
1.7.0, 8.1.0 and 8.2.0 must be submitted
annually at the beginning of the con-
tractor's fiscal year.
The Board did not intend that the
changes to these items should be con-
sirdered in counting the number of
changes which would necessitate the re-
submission of an entire Disclosure State-
ment. This information, which relates to
the volume of business, should be sent to
the recipients of Disclosure Statements
only on an annual basis and only if the
responses to the items in the Disclosure
Statement on file require a change. If on
a year-to-year basis, the sales data re-
main such that the contractor would
check the same box in the Disclosure
Statement, the Board's rules and regula-
tions do not require resubmission of data
concerning these particular items.
The Board's July 27 proposal included
a requirement that contractors were to
submit a copy of their Disclosure State-
ment to the Board only after a determi-
nation of adequacy has been made of the
Statement. All commentators who dealt
with this point supported this proposal,
and it is included in the amendment
being published today.
Today's publication is numbered in
consonance with the new numbering sys-
tem published on September 5, 1973, as
part of the proposal set forth in 38 FED-
ERAL REGISTER 171 at page 23971 et seq.
Pending adoption of the September 5,
proposal, references to §§ 331.60, 351.40,
351.50, and 351.70 refer to §§ 331.6, 351.4,
351.5 and 351.7 respectively of the
Board's current rules and regulations.
The new § 351.41 will be located immedi-
ately after § 351.4 which will become
351.40.
C. Preamble to Revision of Part 351, 11-7-73
This publication (38 FR 30725, Nov. 7, 1973)
revised Part 351 in its entirety, with the ex-
ception of §§ 351.41, 351.50 (c) and the last
sentence of § 351.70.
The purpose of this publication by the
Cost Accounting Standards Board is to
amend Parts 331, 351, 400, 401, 402, 403,
and 404 of its rules and regulations. The
amendments, which are minor clarifica-
tions to the regulations, were published
in the FEDERAL REGISTER of September 5,
1973 (38 FR 23971). The amendments:
(a) Re-number Parts 331 and 351 to fa-
cilitate insertion of future modifications
to those parts; (b) clarify one section of
the contract clause at § 331.5; and (c)
modify certain definitions in Parts 400,
401, 402, 403, and 404 for the purposes
of uniformity among the various Parts.
Only one comment in response to the
September publication has been received
by the Board. This expressed agreement
with the proposed changes.
In view of the foregoing, the following
amendments to the Board's regulations
are being made effective November 7,
1973:
D. Preamble to Amendment of 12-12-73
This publication (38 FR 32460, Dec. 12,
1973) amended § 351.140 and added a new
§ 351.145.
The purpose of this publication by the
Cost Accounting Standards Board is to
modify Part 351, Basic Requirements, of
102
Cost Accounting Standards Board
its rules and regulations. A proposed
modification to Part 351 was published
in the FEDERAL REGISTER of September 17,
1973 (38 FR 26072). That proposal dealt
with a Disclosure Statement form de-
signed expressly for submission by col-
leges and universities. Comments were
requested on that proposal from the gen-
eral public.
Pub. L. 91-379 which applies to most
negotiated defense prime contracts and
subcontracts in excess of $100,000 re-
quires that contractors shall disclose in
writing their cost accounting practices.
The Disclosure Statement form, CASB-
DS-1 has been designed to facilitate the
meeting of this requirement by con-
tractors. Representatives of colleges and
universities had expressed to the Board
a desire to have a separate Disclosure
Statement to cover their practices. Form
CASB-DS-2, being published today, was
devised for that purpose and incorpo-
rates terminology more commonly used
by colleges and universities.
Comments on the September 17 pro-
posal were received from 15 commen-
tators, who offered suggestions for
changing the proposed form to explain
or further clarify the intent of the ques-
tions. Insofar as practicable, the Board
has made changes to the college and uni-
versity Disclosure Statement form to ac-
commodate the suggestions made.
Colleges and universities required to
submit Disclosure Statements after
April 1, 1974, should use Form CASB-
DS-2. Any college or university which has
previously submitted a Disclosure State-
ment should use Form CASB-DS-2 for
any amendments which are to be effec-
tive after April 1, 1974.
E. Preamble to Amendments Published 12-24-74
This publication revised §§ 351.40 (a) and
amended § 351.130, and was published on
Dec. 24, 1974, at 39 FR 44389.
The purpose of this publication by the
Cost Accounting Standards Board is to
adopt modifications to Part 331, Contract
Coverage, and Part 351, Basic Require-
ments, of its rules and regulations. These
modifications will provide an exemption
from Cost Accounting Standards Board
requirements for certain national de-
fense contracts and subcontracts of
$500,000 or less.
Public Law 91-379 requires that Cost
Accounting Standards must be used in
all negotiated prime contract and sub-
contract national defense procurements
with the United States in excess of
$100,000, with certain stated exceptions.
From time to time the Board refers to
contracts subject to its rules and regula-
tions as "covered contracts". Section 719
(h) (2) of Pub. L. 91-379 authorizes the
Cost Accounting Standard Board to pre-
scribe rules exempting from its require-
ments such classes or categories of na-
tional defense contractors and subcon-
tractors as it determines, on the basis
of the size of the contracts involved or
otherwise, are appropriate and consist-
ent with the purposes sought to be
achieved by Pub. L. 91-379. The Board
has granted several exemptions to classes
or categories of contractors and sub-
contractors and also has established a
procedure under which waiver of the
Board's requirements may be granted
for individual contracts.
A proposed exemption increasing the
minimum contract amount requiring
compliance with Cost Accounting Stand-
ards Board rules, regulations and Stand-
ards from $100,000 to $500,000 was pub-
lished by the Board on September 27,
1974 (39 FR 34669). The Board received
82 responses to the September 27 pro-
posal. Comments were received from in-
dividual companies, government agen-
cies, professional associations, industry
associations, public accounting firms,
and individuals. All of these comments
have been carefully considered by the
Board, and the Board takes this oppor-
tunity to express its appreciation for the
helpful suggestions which have been
furnished.
The comments below summarize the
major issues discussed by respondents
in connection with the initial publication
and explain the Board's disposition of
these issues.
Issuance of the exemption. Practi-
cally all the commentators expressed
concurrence in the proposed exemption,
giving either unqualified support or sup-
port with added comments that addi-
tional exemptions should also be con-
sidered. However, three commentators-
a constituting firm, a major aerospace
company and a Government agency-
disagreed with the proposed exemption,
stating that an increase in the threshold
for compliance with CAS requirements
was inconsistent with the Board's ob-
jective of establishing uniformity and
consistency among contractors doing
business with the Government.
The Board agrees that the adoption of
the proposed regulation will exempt a
substantial number of contractors and
subcontractors who otherwise would be
103
Cost Accounting Standards Board
covered, and consequently will permit
such companies to follow accounting
practices other than those set out in
Cost Accounting Standards. However, the
Board is aware that compliance with its
rules, regulations and standards may in-
volve additional administrative effort,
particularly on the part of small com-
panies, which may not be commensurate
with the benefit to the Government or
the contractor resulting from such com-
pliance. The Board, after considering
the efforts required by both the Gov-
ernment and its contractors to assure
compliance on all covered contracts
in excess of $100,000, is persuaded
that maximum benefit to the Govern-
ment with minimum cost can be achieved
by limiting the mandatory application of
its standards to contractors who receive
awards which constitute a substantial
majority of the national defense pro-
curement dollars. As was stated at the
time the proposed exemption was issued
for comment, some 70 percent of the
prime contractors of the Department of
Defense did not receive one or more
negotiated awards in excess of $500,000
in Fiscal Year 1973. Thus, only 30 per-
cent, or approximately 750 prime con-
tractors, who received contract awards
totaling $20 billion, would continue to be
covered. The exemption would remove
coverage from only about 10 percent of
the dollar value of annual DOD awards.
In view of the foregoing, the Board
considers the proposed exemption in-
creasing the minimum contract amount
requiring compliance with the Cost Ac-
counting Standards Board rules, regu-
lations, and standards to be in keeping
with the purposes sought to be achieved
by Pub. L. 91-379 and to be an appro-
priate exercise of the authority granted
to the Board by section 719 (h) (2) of that
law.
Increase exemption on all contracts to
$500,000. A number of commentators sug-
gested that the $500,000 single contract
threshold for compliance with Board
rules, regulations, and standards be
changed to exempt all contracts of $500,-
000 or less. Those giving reasons in sup-
port of this suggestion generally based
their comments on simplification of ad-
ministration. These commentators felt
that it would be difficult for the Govern-
ment or prime contractors, when award-
ing a prime contract or subcontract in
excess of $100,000 to determine whether
the contractor or subcontractor had in
existence a prior $500,000 covered con-
tract.
The Board, in proposing the $500,000
threshold, did so with the intent of ex-
empting those companies which do not
receive contracts in excess of $500,000
from the Government. However, it was
decided in the interest of consistency in
cost accounting practices that once a
contractor had received a covered con-
tract of that size, compliance with CASB
rules, regulations and standards on con-
tracts at the level established in Pub. L.
91-379 was appropriate. This is also con-
sistent with the desire expressed by con-
tractors to follow a single set of account-
ing practices. Further, the requirement
for coverage of contracts in excess of
$100,000 where the contractor already
has received a covered contract in excess
of $500,000 will permit the small con-
tracts to be available for equitable ad-
justment if subsequently issued stand-
ards should become applicable. More-
over, once the administrative effort has
been expended to comply with standards
for contracts in excess of $500,000, com-
pliance with standards on contracts
above the statutory threshold of $100,000
requires little added effort.
With respect to the commentators'
statements concerning the difficulties,
when making an award exceeding $100,-
000, of determining whether a contractor
or subcontractor had in existence a prior
award exceeding $500,000, the Board
feels that an administrative requirement
can be established for obtaining this in-
formation. A similar requirement now
exists concerning the disclosure state-
ment, whereby contractors are required
to submit a disclosure statement, state
that they have previously filed a disclo-
sure statement, or submit a certificate of
monetary exemption. The Board feels
that a similar requirement can be set
concerning the $500,000 level. The Board
is not persuaded that this matter would
create problems of sufficient significance
to eliminate coverage down to the $100,-
000 level.
In considering the advantages of the
exemption as proposed compared to its
assessment of the administrative diffi-
culties foreseen by commentators, the
Board is persuaded that its proposal
relative to coverage of awards in excess
of $100,000 should not be changed.
Exemption based on sales. A number of
commentators urged that the Board es-
tablish an exemption based on sales,
using either minimum annual dollar
104
Cost Accounting Standards Board
amount of sales to the Government, or
Government sales as a percentage of
total annual sales, or a combination of
these two factors. The most frequently
suggested amount was $10 million of
sales to the Government or Government
sales amounting to 10 percent of total
annual sales. The objective sought by
these commentators was an exemption of
those companies or business units whose
sales to the Government constituted a
reasonably small portion of their total
annual sales and whose business was es-
sentially commercially oriented.
The Board has given lengthy consider-
ation to the use of a sales basis for the
establishment of a minimum threshold
for compliance with its rules, regulations
and standards. It did not use that basis
at this time due to the nature of the
problems involved in administering an
exemption based on sales. In either of
the situations suggested by commenta-
tors, the representation concerning the
amount of sales must be made by the
contractor and subsequently verified by
impose very substantial and time-con-
the Government. This verification would
suming efforts on both the Government
and the contractor. Particularly in the
case of Government sales as a percentage
of total sales, Government representa-
tives would be placed in the position of
examining a contractor's total sales, in-
cluding those made in its commercial
business. Examination of a company's
records concerning its total sales is not
presently performed by Government pro-
curement activities and would present
new and unique problems to both parties
as well as requiring substantial addi-
tional effort on the part of Government
representatives.
An exemption based on sales would
require a measurement period during
which a contractor's status with respect
to compliance with standards would be
determined. Contracts under which sales
were recorded during this period would
not be subject to standards. If the volume
of sales during the measurement period
exceeded a stated threshold, a contractor
would then be required to comply with
standards under contracts received in
subsequent periods. Thus, the contracts
that brought the contractor under the
Board's rules would not be subject to
standards, while those received at a later
time would be.
The Board has decided that the admin-
istrative problems involved with
an
exemption based on sales should be con-
sidered before establishing such a thres-
hold. The Board will continue to study
these problems and investigate whether
exemptions based on criteria other than
a minimum contract amount would be
appropriate and consistent with the pur-
poses of Pub. L. 91-379.
Retroactivity. Several commentators
requested that the Board modify its pro-
posal so as to provide retroactive ex-
emption to existing contracts where the
circumstances are such that these ex-
isting contracts would have been exempt
if awarded after the effective date of
the proposed regulation.
The Board has no authority to modify
existing contractual agreements be-
tween the government procurement
agencies and their contractors. However,
the Board sees nothing inconsistent with
its regulations or with Pub. L. 91-379 in
modification by the procurement agen-
cies of contracts in this category, assum-
ing of course that the Government
receives adequate consideration for dele-
tion of the CAS requirement.
Increase minimum amount. A number
of commentators recommended that the
exemption proposed be increased to an
amount greater than $500,000, the figure
of $1,000,000 being frequently mentioned.
The Board is not now prepared to raise
further the minimum contract amount
requiring compliance with its promul-
gations. The Board, in studying an ex-
emption based on minimum contract
amount, concluded that the $500,000
threshold was the most appropriate one
for achieving its objectives, all factors
considered. The Board will continue to
examine various limitations but considers
that the threshold established in the pro-
posed exemption best meets its require-
ments and obligations at this time.
Effect of final payment under con-
tracts subject to CAS clause. Several
commentators urged that the exemption
of contracts of $500,000 or less should not
be dependent on the final payment on
contracts which are subject to Board re-
quirements, on the grounds that final
payment can occur a substantial period
of time after completion of work on a
contract and that there are many tech-
nicalities in closing out a contract which
do not involve cost accounting applica-
tions.
The Board considers this point to be
well taken and has changed the require-
ment in § 331.30 (b) (8) where it first ap-
pears to "notification of final acceptance
105
Cost Accounting Standards Board
of all items or work to be delivered."
At that time it is considered that all di-
rect costs will have been charged to the
contract since all work will have been
completed, and any further accounting
transactions would be the result of ad-
justments not directly related to con-
tract performance.
Reduction of contract price by ex-
clusion of commercial items. Some com-
mentators, in reading the introductory
comments to the Board's initial publi-
cation of this exemption, interpreted the
phrase "minimum contract amount re-
quiring compliance" in a manner not at
all intended by the Board. These com-
mentators interpreted this phrase to per-
mit the price of a contract subject to
standards to be reduced by the value
of those individual contract items or sub-
assemblies of final contract items whose
prices could be considered to be "cata-
log" or "market" prices, if sold sep-
arately. They requested that the regu-
lation be clarified to reflect their inter-
pretation of the Board's introductory
comments.
Those requesting this clarification
misunderstood the Board's intentions.
The Board does not intend that the price
of a contract be adjusted to exclude the
price of items or subassemblies which, if
purchased separately, might be exempt
from the Board's promulgations. Con-
sequently, the change in the regulation
requested by commentators on this point
would be completely inappropriate.
Definition of contractor. One com-
mentator noted that the prefatory com-
ments to the Board's September 27,
1974, publication specifically mentioned
the fact that receipt of a contract in ex-
cess of $500,000 by one business unit of a
multi-unit company would not in itself
require other units of the same com-
pany to follow Board requirements. This
commentator requested that the def-
initions of "defense contractor" and
"defense subcontractor" contained
in
§ 331.20 (b) and (c) be modified to re-
flect this intention by the Board.
As the Board stated in its September
27 publication, its contract requirements
have been applied to business units, such
as a profit center, division, subsidiary, or
similar unit of a company, which per-
form the contract, even in those cases
where the contract was entered into on
behalf of the overall company rather
than the business unit. This application
of the Board's requirements to a per-
D
forming business unit is well established
and unchallenged, and clarification of
the definitions of "contractor” and “sub-
contractor" does not appear necessary.
Effective date. Several commentators
raised questions concerning the effective
date of the eligibility for this exemp-
tion in relation to awards received prior
to January 1, 1975. Contractors who
have received a prime contract or sub-
contract in excess of $500,000 subject
to cost accounting standards prior to
January 1, 1975, and on which notifica-
tion of final acceptance of all items or
work to be delivered on that contract or
subcontract has not been received, is a
contractor who has "already received a
contract or subcontract in excess of
$500,000," as that phrase is used in
§ 331.30(b) (8). Therefore, today's publi-
cation requires that a contractor meet-
ing this test will be required to comply
with standards on all covered prime con-
tracts or subcontracts in excess of $100,-
000 received after January 1, 1975, under
the provisions of § 331.30.
F. Preamble to Amendments of 8-4-75
This publication (40 FR 32747, Aug. 4,
1975) amended § 351.40 by revising (c) and
adding (f); deleted § 351.41; amended
§ 351.50 by revising (a) and (c) and adding
(d); and amended § 351.120 by revising (d)
and adding (e). A correction to the language
which amended § 351.40 appeared at 40 FR
33819, Aug. 12, 1975.
The purpose of this publication by the
Cost Accounting Standards Board is to
modify Part 351, Basic Requirements, of
its rules and regulations and Part 403,
Allocation of Home Office Expenses to
Segments. A proposed modification to
Part 351 was published in the FEDERAL
REGISTER Of April 3, 1975 (40 FR 14942).
Twenty-seven sets of comments were
received in response to that publication.
After considering those comments, the
most significant of which are discussed
below, the Board is today publishing an
amendment to its rules relative to the re-
quirement for the submission of Dis-
closure Statements by defense con-
tractors and subcontractors.
1. Fiscal Year Coverage. The Board's
April 3 proposal provided that any com-
pany which, together with its subsid-
iaries, received more than $10 million
in prime contracts subject to Cost Ac-
counting Standards in Government fiscal
years 1974 or 1975 would be required to
file Disclosure Statements. Board regula-
tions now require the filing of Disclosure
106
Cost Accounting Standards Board
Statements on the basis of prime con-
tracts awarded in fiscal years 1971, 1972
or 1973. There were no objections voiced
by commentators to the inclusion of
fiscal years 1974 and 1975 in the filing
requirement. Accordingly, the amend-
ments being published today require that
companies who exceeded the threshold
amounts in either of those fiscal years
will be required to file Disclosure State-
ments.
2. Effective Date. The Board's proposal
established July 1, 1975, as the effective
date for the requirement to include
awards made in fiscal years 1974 and
1975. Most commentators pointed out
that in view of the short time permitted
between submission of comments on the
proposal and the July 1 date, any com-
pany which met the new requirement
would not have sufficient time to file a
satisfactory Disclosure Statement to per-
mit receipt of a covered contract. The
Board agrees,
agrees, and
and accordingly, the
amendments being published today
establish an effective date of January 1,
1976, for the new requirement. Thus, any
company which, together with its sub-
sidiaries, received more than $10 million
in prime contract awards subject to Cost
Accounting Standards in Government
fiscal years 1974 or 1975 must submit a
Disclosure Statement in order to receive
a covered national defense contract after
January 1, 1976.
The April 3 proposal also provided for
including subcontract awards in the
computation to determine if a company
meets the requirement for the filing of
Disclosure Statements, beginning with
Federal fiscal year 1976. The proposal
stated that companies which met the
threshold in fiscal year 1976 would be
required to file Disclosure Statements as
of July 1, 1976. In view of the need for
a company to determine whether or not
it met the filing requirement and then
have sufficient time in which to prepare
a satisfactory Disclosure Statement, the
effective date for filing a Disclosure
Statement on the basis of fiscal year
1976 data has been changed to March 31,
1977. For fiscal years subsequent to 1976,
companies will be required to file Dis-
closure Statements as a condition of re-
ceiving a contract by March 31 following
the end of the fiscal year in which the
threshold is met. This should permit con-
tractors to make their eligibility deter-
mination in sufficient time to allow
preparation of acceptable Disclosure
Statements.
3. Inclusion of Subcontracts. The
Board's proposal required that beginning
with Federal fiscal year 1976 (July 1,
1975-June 30, 1976) companies would be
required to include, in addition to prime
contract awards, the value of subcontract
awards received subject to Cost Account-
ing Standards in their computation to
determine if they must file Disclosure
Statements. Beginning with that fiscal
year and for all subsequent fiscal years,
the Board's proposal stated that any
company which, together with its sub-
sidiaries, received more than $10 million
in prime contract awards and subcon-
tract awards subject to Cost Accounting
Standards would be required to file Dis-
closure Statements.
Some commentators questioned how
the value of awards was to be considered
in determining if a company met the
threshold. The $10 million figure is to
include both prime contract awards and
subcontract awards and may, in fact, be
met by companies receiving only sub-
contracts subject to Standards. There
was no intention that companies must
have received one or more prime con-
tracts in order to be required to file a
Disclosure Statement. The determina-
tion of whether or not a company has $10
million in awards subject to Cost Ac-
counting Standards must include both
prime contracts and subcontracts.
A number of commentators objected
to the inclusion of subcontract awards in
a requirement for filing Disclosure State-
ments. They argued that in many cases
they do not have sufficient information
to determine whether a subcontract is
subject to Standards. Some commenta-
tors stated that in many cases prime
contractors pass through to subcontrac-
tors all Standard Government contract
clauses whether or not they are required
to be included in the subcontract. They
allege that, in some cases, when the
prime contractors are contacted to de-
termine specifically whether or not a sub-
contract which contains the Cost Ac-
counting Standards Clause is, in fact,
subject to Standards, the prime contrac-
tor states that it is not. Because of this,
the commentators claim they would be
required to establish an elaborate infor-
mation-gathering system to assure that
they properly identify every subcontract
subject to Standards.
The argument about the adequacy of
information concerning coverage of sub-
107
Cost Accounting Standards Board
contracts has been made to the Board
on a number of occasions. In October
1973, when the Board published an ear-
lier revision to the Disclosure Statement
filing requirement, it advised contractors
that they may be required to determine
the dollar value of defense subcontract
awards subject to CAS, and encouraged
them to begin to identify and accumulate
the value of subcontract awards
separately. Many contractors are in fact
effectively identifying subcontracts sub-
ject to Standards. These facts persuade
the Board that identification of covered
subcontracts is feasible, although the
Board recognizes that some firms may
have to clarify their information ex-
change procedures with the prime con-
tractors with whom they do business.
The Board believes that the inclusion
of the amount of subcontract awards in
the Disclosure Statement filing require-
ment is appropriate because subcon-
tracts, unless specifically exempt, are
legally subject to the Board's Standards,
rules and regulations. Accordingly, the
amendments being published today pro-
vide for the inclusion of subcontract
awards subject to Standards in the de-
termination made by a company as to
whether or not it must file a Disclosure
Statement. This requirement is effective
with Government fiscal year 1976 and
applies to all subsequent fiscal years.
4. Change in Fiscal Year Period. Sev-
eral commentators noted that the Fed-
eral Government is changing the dates
of its fiscal year following Federal fiscal
year 1976. The new fiscal year period will
be from October 1 through the following
September 30. The period July 1, 1976,
thru September 30, 1976, will be known
as Federal fiscal period 197T. These com-
mentators asked whether or not con-
tracts awarded in that period should be
included in some way with a normal
fiscal year's contract awards. The Board
feels that it is not desirable to upset
the regular twelve-month fiscal year
computation period and accordingly has
concluded that contracts awarded in
that three-month period need not be
included by companies in determining
the value of contract awards received
in fiscal year 1976 or any subsequent
fiscal year.
5. Previously Announced Filing Re-
quirements. The Board's proposal in-
cluded a requirement that any company
which has submitted or was required to
submit a Disclosure Statement to the
Government under the previously an-
nounced filing requirements by virtue of
having received a covered contract shall
remain subject to those requirements so
long as it has any contract subject to
Cost Accounting Standards. The proposal
also required that Disclosure Statements
from those companies on file with the
Government must be maintained in cur-
rent form by those companies. There
were virtually no comments received on
this requirement. The amendments being
published today contain that require-
ment as set out in the April 3 proposal.
6. Applicability of CAS 403. A number
of commentators noted that the April 3
proposal deleted paragraph 351.41 of the
Board's regulations. This paragraph re-
stated the requirement that only com-
panies that met the Disclosure Statement
filing requirement for Federal fiscal year
1971 were required to comply with CAS
403. Allocation of Home Office Expenses
to Segments. These commentators asked
that the Board's position be clarified as
to whether or not any current revision
to the Disclosure Statement requirement
also changed the coverage of CAS 403. It
was not the Board's intention to broaden
the coverage of CAS 403 at this time.
The possibility of extending the coverage
of that Standard is the subject of a sepa-
rate study currently underway. To make
the Board's intention wholly clear, sec-
tion 403.70 of CAS 403 is being revised to
state explicitly rather than by cross ref-
erence the continuing coverage of that
Standard. This revision has no substan-
tive significance whatever, but instead
merely sets out specifically what was and
continues to be the exemption from that
Standard, which was before today ac-
complished by reference to section 351.40
of the Board's Basic Requirements. Con-
tractors and subcontractors which to-
gether with their subsidiaries did not re-
ceive net awards of negotiated national
defense prime contracts during Federal
fiscal year 1971 totaling more than $30
million continue to be exempt from
Standard 403.
7. Amendments to Disclosure State-
ments. The Board's April 3 proposal also
included revised procedures for handling
changes to the Disclosure Statement.
Contractors would be required to submit
only the Disclosure Statement pages on
which changes have been made. All com-
mentators supported these revised proce-
dures, and they are being published today
108
Cost Accounting Standards Board
as part of the Board's regulations.
The Board's April 3 proposal also in-
cluded a provision enabling procurement
agencies to issue regulations prescribing
criteria under which a contractor may
be required to submit a complete, updated
Disclosure Statement. A number of com-
mentators expressed concern over this
provision. They felt that procuring agen-
cies perhaps would issue regulations that
were not consistent with the Board's in-
tention and for this reason they urged
that the Board prescribe criteria under
which procurement agencies could make
such a request.
The Board appreciates the concern ex-
pressed by the commentators. It would
appear, however, that agencies would
have a need for a complete, updated Dis-
closure Statement only where the num-
ber of amended pages submitted is so
great that review of a Disclosure State-
ment would obviously be an excessively
cumbersome process. The Board urges
agencies to consider these views when
adopting their criteria for submittal of
a complete, updated Disclosure State-
ment. The Board has concluded that it
should not itself set criteria for this
particular requirement.
8. Computation of Dollar Amount of
Contract Awards. A number of commen-
tators asked that the Board clarify its
intent as to which contracts should be
included in the computation of the dollar
amounts. The Board feels that covered
contracts awarded in any fiscal year in
which the computation is being made
should be included. This would mean that
for all of fiscal year 1974, negotiated de-
fense prime contracts in excess of $100,-
000 would be included by a company in
determining if it met the requirement to
file a Disclosure Statement.
Fiscal period
Fiscal year 1971.
Fiscal year 1972, 1973..
Fiscal year 1974, 1975..
Fiscal year 1976..
Following years.
For the first six months of fiscal year
1975 all covered contracts in excess of
$100,000 would be included in the figure
for that fiscal year. For the balance of
fiscal year 1975 only those awards which
are subject to Standards would be in-
cluded. This means that if a company
was not performing under a covered con-
tract exceeding $500,000 at January 1,
1975, and did not receive an award ex-
ceeding that amount in the last six
months of the fiscal year, then only the
covered contracts received in the first
six months would be included. Only those
companies which received an award of
$500,000 or more in the last six months
of the year would add up their covered
contracts, including those subsequently
awarded in amounts of $100,000 or more.
to arrive at the total amount awarded in
that period, to be added to the total for
the first six months.
Beginning with Federal fiscal year 1976
only companies which receive at least one
award exceeding $500,000 either as a
prime contract or subcontract subject
to Standards will be required to include
the value of awards received to deter-
mine if they must file a Disclosure State-
ment. In essence, it is the Board's inten-
tion that contracts subject to Cost Ac-
counting Standards shall be included in
the computation to determine if the filing
requirement has been met by a company
for fiscal year 1974 and all subsequent
fiscal years.
9. Summary of Disclosure Statement
Filing Requirements. The Board has
amended the requirement for filing Dis-
closure Statements a number of times.
As a convenience to those affected by
CAS, there follows a tabulation showing
these requirements.
Government contracts to be included in computation Amount
(million)
Net negotiated prime defense contracts.
Defense prime contracts of the type subject to CAS.
Defense prime contracts subject to CAS…..
Defense prime contracts and subcontracts subject to
CAS.
Defense prime contracts and subcontracts subject to
CAS.
10. Modification. The modifications
being adopted today are limited to those
areas in which the Board considers clari-
fication or changes warranted at the
present time. From time to time the
Board may announce further changes in
Effective date
$30 Oct. 1, 1972.
10 Jan. 1, 1974.
10 Jan. 1, 1976.
10 Mar. 31, 1977.
10 Mar. 31 following fiscal
year.
the criteria for applicability of the dis-
closure requirement.
The following modifications to Part 351
of the Board's regulations are being
made, effective August 1, 1975, in view
of the foregoing.
109
Supp. No. 3
Cost Accounting Standards Board
G. PREAMBLE
Amendment published 9-12-77. The amend-
ment to 4 CFR Part 351, 42 FR 45625, Sep-
tember 12, 1977 was published as a part of the
publication which set forth the original 4 CFR
Part 332 and amendments to Parts 331 and
403. The complete preamble appears in the sup-
plement to Part 332.
DISCLOSURE STATEMENT REQUIREMENTS
Many commentators suggested that
preparation of a Disclosure Statement
was burdensome. They also contended
that in the situation where a large com-
mercial contractor receives only a few
small contracts containing a Cost Ac-
counting Standards clause the need for
a Disclosure Statement appears to be
minimal. Some asserted that adoption of
the proposal to require a Disclosure
Statement for all covered contracts
would reduce the number of companies
that would accept contracts subject to
the Board's Standards, rules and regu-
lations. The Board is persuaded that for
the time being Disclosure Statements
should not be required for all covered
contracts. Accordingly it is not adopting
the February 16 proposal. The Board is
retaining the existing Disclosure State-
ment requirement provided in Part 351
except that a business unit will be re-
quired to submit a Disclosure State-
ment if it is a company or a segment of
a company which received awards of na-
tional defense contracts subject to Cost
Accounting Standards in excess of $10
million during its preceding cost ac-
counting period rather than the preced-
ing Federal fiscal year.
REVISIONS TO PART 351
Part 332 and the amendments to Part
331 generally will result in annual deter-
minations being made of a contractor's
obligation to follow Standards and to
submit Disclosure Statements. The de-
termination will be made on the basis
of sales and awards data from the im-
mediately preceding cost accounting
period. The requirement to continue to
submit a Disclosure Statement so long
as the contractor has a contract subject
to Cost Accounting Standards will no
longer apply. Disclosure Statements must
be maintained for and applied to only
those contracts which were awarded dur-
ing a cost accounting period in which
the contractor met the filing require-
ments of § 351.40. Sections 351.40 and
351.50 have been revised to reflect this
change.
EFFECTIVE DATE
The effective date of the regulations
being published today is March 10, 1978.
Pub. L. 91-379 provides that regulations
shall take effect not earlier than the ex-
piration of the first period of sixty cal-
endar days of continuous session of the
Congress following the date on which a
copy of the regulations is transmitted
to the Congress. The calendars of the
Congress indicate that the required
sixty days will not pass until some time
in February 1978. Accordingly, March 10,
1978, has been selected to assure suffi-
cient time for the regulation to lie before
the Congress.
109A
Supp. No. 3
Cost Accounting Standards Board
(This page left blank intentionally)
109B
Supp. No. 3
Cost Accounting Standards Board
Bec.
400.1
400.2
COST ACCOUNTING STANDARDS ¹
PART 400-DEFINITIONS
Definitions.
Effective date.
AUTHORITY: The provisions of this Part
400 are issued under sec. 103, 84 Stat. 796;
60 U.S.C. App. 2168.
NOTE: Each of these definitions is followed
by a bracketed note which tells the number
of the section where it first appeared, and
the location of the preamble to the docu-
ment which added it.
§ 400.1
Definitions.
(a) This part defines various terms
used in standards promulgated by the
Cost Accounting Standards Board. Un-
less the text of a particular standard
demands a different definition or the def-
inition is expressly modified for a partic-
ular standard, terms defined herein
whenever used in any standard shall have
the meanings ascribed to them in this
part. For convenience, the definitions of
terms which are prominent in an indi-
vidual standard are reprinted in that
standard. The selection or non-selection
of a particular definition to be reprinted
in an individual standard, however, does
not affect the applicability of all defl-
nitions in this part to that standard.
Accrued Benefit Cost Method. An actu-
arial cost method under which units of
benefit are assigned to each cost account-
ing period and are valued as they ac-
crue—that is, based on the services per-
formed by each employee in the period
involved. The measure of normal cost un-
der this method for each cost account-
ing period is the present value of the
units of benefit deemed to be credited to
employees for service in that period. The
measure of the actuarial liability at a
plan's inception date is the present value
of the units of benefit credited to employ-
ees for service prior to that date. (This
method is also known as the Unit Credit
cost method.)
[This definition first appeared in § 412.30;
for the preamble see preamble A of the sup-
plement to Part 412]
Accumulating Costs. The collecting of
cost data in an organized manner, such
as through a system of accounts.
[See 401.30; for preamble, see preamble A
of supplement to Part 401]
Actual cost. An amount determined
on the basis of cost incurred as distin-
guished from forecasted cost. Includes
standard cost properly adjusted for ap-
plicable variance.
[See §§ 401.30 and 407.30; for preamble, see
preamble B of supplement to Part 401 and
preamble A of supplement to Part 407]
Actuarial Assumption. A prediction of
future conditions affecting pension cost;
for example, mortality rate, employee
turnover, compensation levels, pension
fund earnings, changes in values of pen-
sion fund assets.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Cost Method. A technique
which uses actuarial assumptions to
measure the present value of future pen-
sion benefits and pension fund adminis-
trative expenses, and which assigns the
cost of such benefits and expenses to cost
accounting periods.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Gain and Loss. The effect on
pension cost resulting from differences
between actuarial assumptions and actu-
al experience.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Liability. Pension cost attrib-
utable, under the actuarial cost method
in use, to years prior to the date of a par-
ticular actuarial valuation. As of such
date, the actuarial liability represents the
excess of the present value of the future
benefits and administrative expenses over
the present value of future contributions
for the normal cost for all plan partici-
pants and beneficiaries. The excess of
the actuarial liability over the value of
the assets of a pension plan is the Un-
funded Actuarial Liability.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial valuation. The determination, as of a
specified date, of the normal cost, actuarial lia-
bility, value of the assets of a pension fund, and
other relevant values for the pension plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
187 F.R. 4171, Feb. 29, 1972.
110
Supp. No. 3
Cost Accounting Standards Board
Allocate. To assign an item of cost, or
a group of items of cost, to one or more
cost objectives. This term includes both
direct assignment of cost and the re-
assignment of a share from an indirect
cost pool.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Asset accountability unit. A tangible
capital asset which is a component of
plant and equipment that is capitalized
when acquired or whose replacement is
capitalized when the unit is removed,
transferred, sold, abandoned, demolished,
or otherwise disposed of.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Deferred Compensation. An award
made by an employer to compensate an
employee in a future cost accounting pe-
riod or periods for services rendered in
one or more cost accounting periods
prior to the date of the receipt of com-
pensation by the employee. This defini-
tion shall not include the amount of year
end accruals for salaries wages, or
bonuses that are to be paid within a rea-
sonable period of time after the end of a
cost accounting period.
(See $415.30; for preamble see preamble A
[See § 402.30; for preamble, see preamble A of Supplement to Part 415).
of supplement to Part 404]
Business Unit. Any segment of an or-
ganization, or an entire business organi-
zation which is not divided into segments.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Category of Material. A particular
kind of goods, comprised of identical or
interchangeable units, acquired or pro-
duced by a contractor, which are in-
tended to be sold, or consumed or used
in the performance of either direct or
indirect functions.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Compensated personal absence. Any
absence from work for reasons such as
illness, vacation, holidays, jury duty or
military training, or personal activities,
for which an employer pays compensa-
tion directly to an employee in accord-
ance with a plan or custom of the
employer.
[See § 408.30; for preamble, see preamble A
of supplement to Part 408]
Cost of Capital Committed to Facili-
ties. An imputed cost determined by ap-
plying a cost of money rate to facilities
capital.
Cost input. The cost, except G&A ex-
penses, which for contract costing pur-
poses is allocable to the production of
goods and services during a cost account-
ing period.
[See $410.30; for preamble, see
amble A of supplement to Part 410]
pre-
Cost objective. A function, organiza-
tional subdivision, contract or other work
unit for which cost data are desired
and for which provision is made to ac-
Inulate and measure the cost of proc-
esses. products, jobs, capitalized projects.
etc.
111
Defined-Benefit Pension Plan. A pen-
sion plan in which the benefits to be paid
or the basis for determining such benefits
are established in advance and the con-
tributions are intended to provide the
stated benefits.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Defined-Contribution Pension Plan. A
pension plan in which the contributions
to be made are established in advance
and the benefits are determined thereby.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Direct Cost. Any cost which is identi-
fied specifically with a particular final
cost objective. Direct costs are not lim-
ited to items which are incorporated in
the end product as material or labor.
Costs identified specifically with a con-
tract are direct costs of that contract.
All costs identified specifically with other
final cost objectives of the contractor
are direct costs of those cost objectives.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Directly associated cost. Any cost
which is generated solely as a result of
the incurrence of another cost, and which
would not have been incurred had the
other cost not been incurred.
[See § 405.30; for preamble, see preamble A
of supplement to Part 405]
Entitlement. An employee's right,
whether conditional or unconditional, to
receive a determinable amount of com-
pensated personal absence, or pay in lieu
thereof.
[See § 408.30; for preamble, see preamble A
of supplement to Part 408]
Estimating Costs. The process of fore-
casting a future result in terms of cost,
based upon information available at the
Supp. No. 3
Cost Accounting Standards Board
time.
[See § 401.30; for preamble, see preamble B
of supplement to Part 401]
Expressly unallowable cost. A partic-
ular item or type of cost which, under the
express provisions of an applicable law,
regulation, or contract, is specifically
named and stated to be unallowable.
[See § 405.30; for preamble, see preamble A
of supplement to Part 405]
Facilities Capital. The net book value
of tangible capital assets and of those in-
tangible capital assets that are subject
to amortization.
Final Cost Objective. A cost objective
which has allocated to it both direct
and indirect costs, and, in the contrac-
tor's accumulation system, is one of the
final accumulation points.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Fiscal Year. The accounting period for
which annual financial statements are
regularly prepared, generally a period of
12 months, 52 weeks, or 53 weeks.
[See § 406.30; for preamble, see preamble A
of supplement to Part 406]
Funded Pension Cost. The portion of
pension costs for a current or prior cost
accounting period that has been paid to
a funding agency or, under a pay-as-
you-go plan, to plan participants or
beneficiaries.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Funding Agency. An organization or
individual which provides facilities to re-
ceive and accumulate assets to be used
either for the payment of benefits under
a pension plan, or for the purchase of
such benefits.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
General and Administrative (G&A) ex-
pense. Any management, financial, and
other expense which is incurred by or al-
located to a business unit and which is for
the general management and administra-
tion of the business unit as a whole. G&A
expense does not include those manage-
ment expenses whose beneficial or causal
relationship to cost objectives can be
more directly measured by a base other
than a cost input base representing the
total activity of a business unit during a
cost accounting period.
[See $410.30; for preamble, see pre-
amble A of supplement to Part 410]
•
111A
Supp. No. 3
Cost Accounting Standards Board
(This page left blank intentionally)
111B
Supp. No. 3
Cost Accounting Standards Board
Home office. An office responsible for
directing or managing two or more, but
not necessarily all, segments of an orga-
nization. It typically establishes policy
for, and provides guidance to the seg-
ments in their operations. It usually per-
forms management, supervisory, or ad-
ministrative functions, and may also
perform service functions in support of
the operations of the various segments.
An organization which has intermediate
levels, such as groups, may have several
home offices which report to a common
home office. An intermediate organiza-
tion may be both a segment and a home
office.
[See § 403.30; for preamble, see preamble B
of supplement to Part 403]
Immediate-Gain Actuarial Cost Meth-
od. Any of the several actuarial cost
methods under which actuarial gains and
losses are included as part of the un-
funded actuarial liability of the pension
plan, rather than as part of the normal
cost of the plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
Indirect Cost. Any cost not directly
identified with a single final cost objec-
tive, but identified with two or more final
cost objectives or with at least one in-
termediate cost objective.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Indirect cost pool. A grouping of in-
curred costs identified with two or more
objectives but not identified specifically
with any final cost objective.
[See §§ 401.30; for preamble, see preamble
A of supplement to part 401]
lished measure, expressed in temporal
terms, of the quantity of labor.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Material Cost at Standard. A pre-
established measure of the material ele-
ment of cost, computed by multiplying
material-price standard by material-
quantity standard.
[See § 407.30; for preamble, see preamble À
of supplement to Part 407]
Material Inventory Record. Any rec-
ord used for the accumulation of actual
or standard costs of a category of mate-
rial recorded as an asset for subsequent
cost allocation to one or more cost ob-
jectives.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Material-Price Standard. A pre-estab-
lished measure, expressed in monetary
terms, of the price of material.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Material-Quantity Standard. A pre-
established measure, expressed in physi-
cal terms, of the quantity of material.
[See § 407.30; for preamble, see Preamble A
of supplement to Part 407]
Moving Average Cost. An inventory
costing method under which an average
unit cost is computed after each acquisi-
tion by adding the cost of the newly ac-
quirea units to the cost of the units of
inventory on hand and dividing this
figure by the new total number of units.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Multiemployer Pension Plan. A plan to
which more than one employer contrib-
utes and which is maintained pursuant to
one or more collective bargaining agree-
ments between an employee organization
and more than one employer.
of supplement to Part 412]
[See § 412.30; for preamble, see preamble A
Intangible Capital Asset. An asset
that has no physical substance, has more
than minimal value, and is expected to
be held by an enterprise for continued
use or possession beyond the current ac-
counting period for the benefits it yields.
Labor Cost at Standard. A pre-estab-
lished measure of the labor element of
cost, computed by multiplying labor-rate
standard by labor-time standard.
[See §407.30; for preamble, see preamble A [See § 412.30; for preamble, see preamble A
of supplement to Part 407]
utable, under the actuarial cost method
in use, to years subsequent to a particular
valuation date.
Normal Cost. The annual cost attrib-
of supplement to Part 412]
Labor-Rate Standard. A pre-estab-
lished measure, expressed in monetary
Operating revenue. Amounts accrued
terms, of the price of labor.
or charged to customers, clients, and
[See § 407.30; for preamble, see preamble A tenants, for the sale of products manu-
factured or purchased for resale, for
of supplement to Part 407]
services, and for rentals of property held
Labor-Time Standard. A pre-estab- primarily for leasing to others. It in-
112
Supp. No. 3
Cost Accounting Standards Board
cludes both reimbursable costs and fees
under cost-type contracts and percent-
age-of-completion sales accruals except
that it includes only the fee for man-
agement contracts under which the con-
tractor acts essentially as an agent of the
Government in the erection or operation
of Government-owned facilities. It ex-
cludes incidental interest, dividends,
royalty, and rental income, and proceeds
from the sale of assets used in the
business.
[See § 403.30; for preamble, see preamble A
of supplement to Part 403]
Original complement of low cost equip-
ment. A group of items acquired for the
initial outfitting of a tangible capital
asset or an operational unit, or a new ad-
dition to either. The items in the group
individually cost less than the minimum
amount established by the contractor
for capitalization for the classes of as-
sets acquired but in the aggregate they
represent a material investment. The
group, as a complement, is expected to be
held for continued service beyond the
current period. Initial outfitting of the
unit is completed when the unit is ready
and available for normal operations.
[See § 408.30; for preamble, see preamble A
of supplement to Part 408]
Pay-As-You-Go Cost Method. A meth-
od of recognizing pension cost only when
benefits are paid to retired employees or
their beneficiaries.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Pension Plan. A deferred compensation
plan established and maintained by one
or more employers to provide systemati-
cally for the payment of benefits to plan
participants after their retirement: Pro-
vided, That the benefits are paid for life
or are payable for life at the option of
the employees. Additional benefits such
as permanent and total disability and
death payments, and survivorship pay-
ments to beneficiaries of deceased em-
ployees may be an integral part of a
pension plan.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Pension Plan Participant. Any em-
ployee or former employee of an em-
ployer or any member or former mem-
ber of an employee organization, who is
or may become eligible to receive a bene-
fit from a pension plan which covers em-
ployees of such employer or members of
such organization who have satisfied
the plan's participation requirements, or
whose beneficiaries are receiving or may
be eligible to receive any such benefit. A
participant whose employment status
with the employer has not been termi-
nated is an active participant of the em-
ployer's pension plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 412]
Pricing. The process of establishing the
amount or amounts to be paid in return
for goods or services.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Production Unit. A grouping of activi-
ties which either uses homogeneous in-
puts of direct material and direct labor
or yields homogeneous outputs such that
costs or statistics related to these homo-
geneous inputs or outputs are ap-
propriate as bases for allocating
variances.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Projected Benefit Cost Method. Any of
the several actuarial cost methods which
distribute the estimated total cost of all
of the employees' prospective benefits
over a period of years, usually their
working careers.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Proposal. Any offer or other submis-
sion used as a basis for pricing a con-
tract, contract modification or termina-
tion settlement or for securing payments
thereunder.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Repairs and maintenance. Mainte-
nance is the regularly recurring activity
of keeping assets in normal or expected
operating condition. Repair is the ac-
tivity of putting them back into normal
or expected operating condition. The to-
tal endeavor to obtain the expected serv-
ice during the life of tangible capital
assets is generally called repairs and
maintenance.
[See § 404.30; for preamble, see preamble A
of supplement to Part 404]
Reporting Costs. Provision of cost in-
formation to others. The reporting of
costs involves selecting relevant cost data
and presenting it in an intelligible man-
ner for use by the recipient.
113
Supp. No. 3
Cost Accounting Standards Board
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Residual value. The proceeds (less re-
moval and disposal costs, if any, realized
upon disposition of a tangible capital
asset. It usually is measured by the net
proceeds from the sale or other disposi-
tion of the asset, or its fair value if the
asset is traded in on another asset. The
estimated residual value is a current
forecast of the residual value.
[See § 409.30; for preamble, see preamble A
of supplement to Part 409]
Segment. One of two or more divisions,
product departments, plants, or other
subdivisions of an organization reporting
directly to a home office, usually identi-
fied with responsibility for profit and/or
producing a product or service. The term
includes Government-owned contractor-
operated (GOCO) facilities, and joint
ventures and subsidiaries (domestic and
foreign) in which the organization has a
majority ownership. The term also in-
cludes those joint ventures and subsidi-
aries (domestic and foreign) in which the
organization has less than a majority of
ownership, but over which it exercises
control.
[See § 403.30; for preamble, see preamble A
of supplement to Part 403]
Service life. The period of usefulness
of a tangible capital asset (or group of
assets) to its current owner. The period
may be expressed in units of time or
output. The estimated service life of a
tangible capital asset (or group of assets)
is a current forecast of its service life
and is the period over which depreciation
cost is to be assigned.
[See § 409.30; for preamble, see preamble A
of supplement to Part 409]
Spread-Gain Actuarial Cost Method.
Any of the several projected benefit
actuarial cost methods under which ac-
tuarial gains and losses are included as
part of the current and future normal
costs of the pension plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
Standard Cost. Any cost computed with
the use of pre-established measures.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Tangible capital asset. An asset that
has physical substance, more than mini-
mal value, and is expected to be held by
an enterprise for continued use or pos-
session beyond the current accounting
period for the services it yields.
[See § 404.30; for preamble, see preamble A
of supplement to Part 404]
Termination Gain or Loss. An actu-
arial gain or loss resulting from the dif-
ference between the assumed and actual
rates at which plan participants separate
from employment for reasons other than
retirement, disability, or death.
[See § 413.30; for preamble, see preamble A
of supplement to Part 413]
Unallowable cost. Any cost which,
under the provisions of any pertinent
law, regulation, or contract, cannot be
included in prices, cost reimbursements,
or settlements under a Government con-
tract to which it is allocable.
[See § 405.30; for preamble, see preamble A
of supplement to Part 405]
Variance. The difference between a
pre-established measure and an actual
measure.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Weighted Average Cost. An inventory
costing method under which an average
unit cost is computed periodically by
dividing the sum of the cost of begin-
ning i.ventory plus the cost of acquisi-
tions, by the total number of units in-
cluded in these two categories.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
[37 F.R. 4171, Feb. 29, 1972, as amended at
37 FR 26680, Dec. 14, 1972; 38 FR 5318,
Feb. 27, 1973; 38 FR 24195, Sept. 6, 1973; 38
FR 30730, Nov. 7, 1973; 38 FR 30732, Nov. 7,
1973; 39 FR 11869, Apr. 1, 1974; 39 FR 33681,
Sept. 19, 1974; 40 FR 4259, Jan. 29, 1975; 40
FR 19429, May 5, 1975; 40 FR 43873, Sept. 24,
1975; 40 FR 45417, Oct. 2, 1975]
§ 400.2 Effective date.
July 1, 1972.
[37 F.R. 9609, May 13, 1972]
114
Supp. No. 3
Cost Accounting Standards Board
PART 401-COST ACCOUNTING
STANDARD—CONSISTENCY IN ES-
TIMATING, ACCUMULATING AND
REPORTING COSTS
Sec.
401.10 General applicability.
401.20 Purpose.
401.30
401.40
401.50
401.60
401.70
Definitions.
Fundamental requirement.
Techniques for application.
Пlustrations.
Exemptions.
401.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part 401
are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168.
·
SOURCE: The provisions of this Part 401
appear at 37 F.R. 4172, Feb. 29, 1972, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4172, February 29, 1972)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections; see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 401.10
General applicability.
This standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration and set-
tlement of all negotiated prime contract
and subcontract national defense pro-
curements with the United States in ex-
cess of $100,000, other than contracts or
subcontracts where the price negotiated
is based on: (a) Established catalog or
market prices of commercial items sold
in substantial quantities to the general
public, or (b) prices set by law or
regulation.
§ 401.20 Purpose.
The purpose of this Cost Accounting
Standard is to insure that each con-
tractor's practices used in estimating
costs for a proposal are consistent with
cost accounting practices used by him in
accumulating and reporting costs. Con-
sistency in the application of cost ac-
counting practices is necessary to en-
hance the likelihood that comparable
transactions are treated alike. With re-
spect to individual contracts, the consist-
ent application of cost accounting prac-
tices will facilitate the preparation of
reliable cost estimates used in pricing a
proposal and their comparison with the
costs of performance of the resulting
contract. Such comparisons provide one
important basis for financial control
over costs during contract performance
and aid in establishing accountability
for costs in the manner agreed to by both
parties at the time of contracting.
The comparisons also provide an im-
proved basis for evaluating estimating
capabilities.
§ 401.30
Definitions.
(a) The following definitions of terms
which are prominent in this standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in subpara-
graph (b) of this paragraph.
(1) Accumulating Costs. The collect-
ing of cost data in an organized manner,
such as through a system of accounts.
(2) Actual cost. An amount deter-
mined on the basis of cost incurred as
distinguished from forecasted cost. In-
cludes standard cost properly adjusted
for applicable variance.
(3) Estimating costs. The process of
forecasting a future result in terms of
cost, based upon information available
at the time.
(4) Indirect cost pool. A grouping of
incurred costs identified with two or more
objectives but not identified specifically
with any final cost objective.
(5) Pricing. The process of establish-
ing the amount or amounts to be paid
in return for goods or services.
(6) Proposal. Any offer or other sub-
mission used as a basis for pricing a con-
tract, contract modification or termina-
tion settlement or for securing payments
thereunder.
(7) Reporting costs. Provision of cost
information to others.
The reporting of costs involves selecting
115
Cost Accounting Standards Board
relevant cost data and presenting it in
an intelligible manner for use by the
recipient.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this standard:
None.
[37 FR 4172, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES:
For preambles relating to
§ 401.30, see preambles A and B of the sup-
plement to this part.
§ 401.40
Fundamental requirement.
(a) A contractor's practices used in
estimating costs in pricing a proposal
shall be consistent with his cost account-
ing practices used in accumulating and
reporting costs.
(b) A contractor's cost accounting
practices used in accumulating and re-
porting actual costs for a contract shall
be consistent with his practices used in
estimating costs in pricing the related
proposal.
(c) The grouping of homogeneous
costs in estimates prepared for proposal
purposes shall not per se be deemed an
inconsistent application of cost account-
ing practices under paragraphs (a) and
(b) of this section when such costs are
accumulated and reported in greater de-
tail on an actual cost basis during con-
tract performance.
§ 401.50 Techniques for application.
(a) The standard allows grouping of
homogeneous costs in order to cover
those cases where it is not practicable to
estimate contract costs by individual
cost element or function. However, costs
estimated for proposal purposes shall be
presented in such a manner and in such
detail that any significant cost can be
compared with the actual cost accumu-
lated and reported therefor. In any event
the cost accounting practices used in
estimating costs in pricing a proposal
and in accumulating and reporting costs
on the resulting contract shall be con-
sistent with respect to: (1) The classi-
fication of elements or functions of cost
as direct or indirect; (2) the indirect cost
pools to which each element or function
of cost is charged or proposed to be
charged; and (3) the methods of allocat-
ing indirect costs to the contract.
(b) Adherence to the requirement of
§ 401.40 (a) of this standard shall be de-
termined as of the date of award of the
contract, unless the contractor has sub-
mitted cost or pricing data pursuant to
Public Law 87-653, in which case ad-
herence to the requirement of § 401.40(a)
shall be determined as of the date of
final agreement on price, as shown on
the signed certificate of current cost or
pricing data. Notwithstanding § 401.40
(b), changes in established cost account-
ing practices during contract perform-
ance may be made when authorized by
standards, rules, and regulations issued
by the Cost Accounting Standards
Board.
§ 401.60
Illustrations.
(a) The following examples are illus-
trative of applications of cost account-
ing practices which are deemed to be
consistent.
Practices used in estimating costs for
proposals
1. Contractor estimates an average direct
labor rate for manufacturing direct labor
by labor category or function.
2. Contractor estimates an average cost for
minor standard hardware items, including
nuts, bolts, washers, etc.
8. Contractor uses an estimated rate for
manufacturing overhead to be applied to
an estimated direct labor base. He identifies
the items included in his estimate of
manufacturing overhead and provides
supporting data for the estimated direct
labor base.
Practices used in accumulating and reporting
costs of contract performance
1. Contractor records manufacturing direct
labor based on actual cost for each indi-
vidual and collects such costs by labor
category or function.
2. Contractor records actual cost for minor
standard hardware items based upon in-
voices or material transfer slips.
3. Contractor accounts for manufacturing
overhead by individual items of cost which
are accumulated in a cost pool allocated
to final cost objectives on a direct labor
base.
116
Cost Accounting Standards Board
(b) The following examples are illustrative of application of cost accounting
practices which are deemed not to be consistent.
Practices used for estimating costs for
proposals
4. Contractor estimates a total dollar amount
for engineering labor which includes dis-
parate and significant elements or func-
tions of engineering labor. Contractor does
not provide supporting data reconciling
this amount to the estimates for the same
engineering labor cost functions for which
he will separately account in contract
performance.
5. Contractor estimates engineering labor by
cost function, i.e., drafting, production
engineering, etc.
6. Contractor estimates a single dollar
amount for machining cost to cover labor,
material and overhead.
Practices used in accumulating and reporting
costs of contract performance
4. Contractor accounts for engineering labor
by cost function, i.e., drafting, designing,
production engineering, etc.
5. Contractor accumulates total engineering
labor in one undifferentiated account.
6. Contractor records separately the actual
cost of machining labor and material as
direct costs, and factory overhead as
indirect costs.
§ 401.70
Exemptions.
None for this standard.
§ 401.80 Effective date.
July 1, 1972.
[37 F.R. 9609, May 13, 1972]
PREAMBLES: Preamble A of the supplement
to this part explains how effective dates are
determined.
117
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Original Publication of Part 401, 2-29-72
Preamble to the original publication of
4 CFR Part 401, 37 FR 4139, Feb. 29, 1972.
Because that publication also added 4 CFR
Parts 331, 351, 400, and 402, material relating
to those parts has been omitted. It appears
in the Supplements to those parts.
General comments. The purpose of the
regulations promulgated today by the
Cost Accounting Standards Board is to
implement section 719 of the Defense
Production Act of 1950, as amended, 50
U.S.C. app. 2168, which provides for de-
velopment of Cost Accounting Stand-
ards to be used in connection with ne-
gotiated national defense contracts and
for disclosure of cost accounting prac-
tices to be used in such contracts. The
Board believes the materials being
promulgated today constitute a signifi-
cant initial step toward accomplishing
one of its major objectives-improved
cost accounting and the proper determi-
nation of the cost of negotiated defense
contracts. The regulations spell out con-
tract coverage (Fart 331), disclosure re-
quirements (Part 351), a compilation of
Definitions (Part 400), and two Cost Ac-
counting Standards, one calling for con-
sistency in estimating, accumulating, and
reporting costs (Part 401), and the other
calling for consistency in allocating costs
incurred for the same purpose (Part
402).
Development of the material being pro-
mulgated today began many months ago
with extensive research. It included ex-
amining publications on the subject,
conferring with knowledgeable repre-
sentatives of various Government agen-
cies, Government contractors, industry
associations, and professional accounting
associations, and identifying and consid-
ering all available viewpoints. From this
research, the initial versions of the mate-
rial now being published were developed.
As a part of the continuing research ef-
fort, these initial drafts were sent to 81
agencies, associations, and Government
contractors which had expressed interest
in assisting the Board in its work, and
their comments were solicited. Some na-
tional defense contractors field-tested
the material to see how it would ap-
ply to and affect their operations and ad-
vised the Board of their findings. In each
step of the research process, the Board
and its staff have urged and received ac-
tive participation and assistance by Gov-
ernment, industry, and accounting orga-
nizations. Their cooperative efforts con-
tributed in large measure to the exposure
draft published in the December 30, 1971,
FEDERAL REGISTER for comment.
To better assure that all who might
want to comment had an opportunity to
do so, the Board supplemented the FED-
ERAL REGISTER notice by sending coples
of the FEDERAL REGISTER materials di-
rectly to about 175 organizations and in-
dividuals who had expressed interest or
had provided assistance in the develop-
ment of the published material. Also, a
press release was distributed announcing
the publication, which resulted in nu-
merous articles in journals. The Board
availed itself of all opportunities to pub-
licize the proposals and solicit comments
on them.
Written comments in response to the
published material were requested by
February 4, 1972. Comments were re-
ceived from 105 sources, including
Government agencies, professional as-
sociations, industry associations, public
accounting firms, individual companies
and others. The Board appreciates the
obvious care and attention devoted by
commentators, and as will be seen below,
the Board has greatly benefited from the
comments received.
Many of the comments received were
addressed to all parts of the proposed
Board rules as well as to the question of
public availability of the Disclosure
Statements. All of the comments received
have been carefully considered by the
Board taking into account the require-
ments of section 719. Understandably,
many of the comments were addressed
to issues which recur in two or more of
the proposed parts while others dealt
only with specific sections. Comments
which dealt with 11 general issues are
discussed separately below followed by
a section-by-section analysis of other
comments. Appropriate changes have
been made in the material promulgated
based on the Board's disposition of the
comments received.
Those comments and suggestions re-
ceived which are of particular signifi-
cance are discussed below.
Section 401.20 Purpose. Commenta-
tors stated that the purpose of the stand-
ards would require each contractor to re-
vise his formal system of accounts in
order to maintain them on a basis used
for estimatir.g Government contracts.
The Board did not intend that require-
ment. The standard does not contain any
requirement that a contractor must re-
118
Cost Accounting Standards Board
vise his formal system of accounts. Cost
accounting records are supplemental to,
and generally subsidiary to a contractor's
financial records. However, it is neces-
sary that the cost accounting records be
reconcilable to the contractor's general
financial records.
Two commentators believed that the
term "practices" in the phrase "Prac-
tices used in estimating costs in pricing
proposals" could be confused as including
estimating techniques relating to quanti-
tative determination as well as the cost
accounting practices used in estimating.
The Board does not agree, because noth-
ing in the standard precludes the use of
any quantitative estimating tools.
Section 401.50 Techniques for appli-
cation. Several commentators believed
there may be an inconsistency between
the requirements of the standard and the
ability to make changes to established
cost accounting practices. The Board in-
tends that compliance with respect to
proposals shall be determined as of the
award date of the contract or as of the
date of final agreement on price if the
contractor has submitted cost or pricing
data pursuant to Public Law 87-653.
Modifications of established cost ac-
counting practices for accumulating and
reporting costs are permitted by other
regulations of the Cost Accounting
Standards Board without causing a vio-
lation of this standard. The Board has
modified the standard to express these
intentions.
Section 401.60 Illustration. An illus-
tration has been added to this section to
emphasize a requirement of the stand-
ard that any significant cost must be
accumulated and reported in sufficient
detail to permit its comparison with the
estimates made therefor.
Effective date and application. For the
convenience of readers, the following
summarizes the effective dates set forth
in § 331.8, § 351.4(e), and Parts 400, 401,
and 402, which were transmitted to the
Congress on February 24, 1972, pursuant
to section 719(h) (3) of the Defense Pro-
duction Act of 1950 as amended. After
the expiration of a period of 60 calendar
days of continuous session following the
date of transmittal to the Congress, the
regulations herein promulgated shall
take effect as set forth in those regula-
tions, unless there is passed by the two
Houses a concurrent resolution stating
in substance that the Congress does not
favor the proposed standards, rules, or
regulations.
4. Any contractor having a contract
awarded prior to July 1, 1972, which con-
tains a clause which already incorporates
requirements governing submission of
Disclosure Statements and application of
Cost Accounting Standards will be re-
quired to comply with the provisions of
that clause. In this connection, such con-
tractor and the respective contracting
agencies whose contracts contain such
a clause should review those contracts
to determine whether negotiations should
be instituted to make Parts 400 through
402 applicable to them.
B. Preamble to Amendments of 11-7-73
Preamble to revision of the definitions of
“actual cost" and "indirect cost pool" in
§ 401.30 (a)2) and (4), published at 38 FR
30725, Nov. 7, 1973. Material referring to
other parts of 4 CFR Ch. III has been
omitted; it appears in the Supplements to
those parts.
The purpose of this publication by the
Cost Accounting Standards Board is to
amend Parts 331, 351, 400, 401, 402, 403,
and 404 of its rules and regulations. The
amendments, which are minor clarifica-
tions to the regulations, were published
in the FEDERAL REGISTER of September 5,
1973 (38 FR 23971). The amendments:
(c) modify certain definitions
in Parts 400, 401, 402, 403, and 404 for
the purposes of uniformity among the
various parts. Only one comment in re-
sponse to the September publication has
been received by the Board. This ex-
pressed agreement with the proposed
changes.
In view of the foregoing, the following
amendments to the Boards regulations
are being made effective November 7,
1973.
119
Cost Accounting Standards Board
PART 402-COST ACCOUNTING
STANDARD-CONSISTENCY IN AL-
LOCATING COSTS INCURRED FOR
THE SAME PURPOSE
Sec
402.10 General applicability.
402.20 Purpose.
402.30
402.40
402.50
402.60
402.70
402.80
Definitions.
Fundamental requirement.
Techniques for application.
Illustrations.
Exemptions.
Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part
402 are issued under sec. 103, 84 Stat. 796;
50 U.S.C. App. 2168.
SOURCE: The provisions of this Part 402
appear at 37 F.R. 4173, Feb. 29, 1972, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDeral RegistER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4137, February 29, 1972)
is set forth in preamble A of the supple-
ment.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 402.10
General applicability.
This standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof, and by all relevant
Federal agencies in estimating, accumu-
lating and reporting costs in connection
with the pricing, administration, and set-
tlement of all negotiated prime contract
and subcontract national defense pro-
curements with the United States in ex-
cess of $100,000, other than contracts or
subcontracts where the price negotiated
is based on (a) established catalog or
market prices of commercial items sold
in substantial quantities to the general
public, or (b) prices set by law or
regulation.
§ 402.20
Purpose.
The purpose of this standard is to re-
quire that each type of cost is allocated
only once and on only one basis to any
contract or other cost objective. The cri-
teria for determining the allocation of
costs to a product, contract, or other
cost objective should be the same for all
similar objectives. Adherence to these
cost accounting concepts is necessary to
guard against the overcharging of some
cost objectives and to prevent double
counting. Double counting occurs most
commonly when cost items are allocated
directly to a cost objective without elimi-
nating like cost items from indirect cost
pools which are allocated to that cost
objective.
§ 402.30
Definitions.
(a) The following definitions of terms
which are prominent in this standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this standard and are de-
fined in Part 400 of this chapter have
the meanings ascribed to them in that
part unless the text demands a differ-
ent definition or the definition is modi-
fied in paragraph (b) of this section.
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Cost objective. A function, organi-
zational subdivision contract or other
work unit for which cost data are de-
sired and for which provision is made to
accumulate and measure the cost to
processes, products, jobs, capitalized
projects, etc.
(3) Direct cost. Any cost which is
identified specifically with a particular
final cost objective. Direct costs are not
limited to items which are incorporated
in the end product as material or labor.
Costs identified specifically with a con-
tract are direct costs of that contract.
All costs identified specifically with other
final cost objectives of the contractor are
direct costs of those cost objectives.
(4) Final cost objective. A cost ob-
jective which has allocated to it both di-
rect and indirect costs, and, in the
contractor's accumulation system, is one
of the final accumulation points.
(5) Indirect cost. Any cost not di-
rectly identified with a single final cost
objective, but identified with two or
more final cost objectives or with at
least one intermediate cost objective.
(6) Indirect cost pool. A grouping of
incurred costs identified with two or
more cost objectives but not identified
specifically with any final cost objective.
120
Cost Accounting Standards Board
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this standard:
None.
{37 FR 4173, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES: For preambles to amendments
of § 402.30, see preambles A and B of the
supplement to this part.
§ 402.40 Fundamental requirement.
All costs incurred for the same pur-
pose, in like circumstances, are either
direct costs only or indirect costs only
with respect to final cost objectives. No
final cost objective shall have allocated
to it as an indirect cost any cost, if
other costs incurred for the same pur-
pose, in like circumstances, have been
included as a direct cost of that or any
other final cost objective. Further, no
final cost objective shall have allocated
to it as a direct cost any cost, if other
costs incurred for the same purpose, in
like circumstances, have been included
in any indirect cost pool to be allocated
to that or any other final cost objective.
§ 402.50 Techniques for application.
(a) The Fundamental Requirement is
stated in terms of cost incurred and is
equally applicable to estimates of costs
to be incurred as used in contract
proposals.
(b) The Disclosure Statement to be
submitted by the contractor will require
that he set forth his cost accounting
practices with regard to the distinction
between direct and indirect costs. In ad-
dition, for those types of cost which are
sometimes accounted for as direct and
sometimes accounted for as indirect, the
contractor will set forth in his Disclosure
Statement the specific criteria and cir-
cumstances for making such distinctions.
In essence, the Disclosure Statement sub-
mitted by the contractor, by distinguish-
ing between direct and indirect costs, and
by describing the criteria and circum-
stances for allocating those items which
are sometimes direct and sometimes in-
direct, will be determinative as to
whether or not costs are incurred for the
same purpose. Disclosure Statement as
used herein refers to the statement re-
quired to be submitted by contractors
as a condition of contracting as set forth
in Part 351 of this chapter.
(c) In the event that a contractor has
not submitted a Disclosure Statement the
determination of whether specific costs
are directly allocable to contracts shall
be based upon the contractor's cost ac-
counting practices used at the time of
contract proposal.
(d) Whenever costs which serve the
same purpose cannot equitably be in-
directly allocated to one or more final
cost objectives in accordance with the
contractor's disclosed accounting prac-
tices, the contractor may either: (1) Use
a method for reassigning all such costs
which would provide an equitable dis-
tribution to all final cost objectives, or
(2) directly assign all such costs to final
cost objectives with which they are spe-
cifically identified. In the event the con-
tractor decides to make a change for
either purpose the Disclosure Statement
shall be amended to reflect the revised
accounting practices involved.
(e) Any direct cost of minor dollar
amount may be treated as an indirect
cost for reasons of practicality where the
accounting treatment for such cost is
consistently applied to all final cost ob-
jectives, provided that such treatment
produces results which are substantially
the same as the results which would have
been obtained if such cost had been
treated as a direct cost.
§ 402.60 Illustrations.
(a) Illustrations of costs which are in-
curred for the same purpose:
(1) Contractor normally allocates all
travel as an indirect cost and previously
disclosed this accounting practice to the
Government. For purposes of a new pro-
posal, contractor intends to allocate the
travel costs of personnel whose time is
accounted for as direct labor directly to
the contract. Since travel costs of per-
sonnel whose time is accounted for as
direct labor working on other contracts
are costs which are incurred for the same
purpose, these costs may no longer be in-
cluded within indirect cost pools for pur-
poses of allocation to any covered
Government contract. Contractor's Dis-
closure Statement must be amended for
the proposed changes in accounting
practices.
(2) Contractor normally allocates
planning costs indirectly and allocates
this cost to all contracts on the basis
of direct labor. A proposal for a new
contract requires a disproportionate
amount of planning costs. The contractor
prefers to continue to allocate planning
costs indirectly. In order to equitably
allocate the total planning costs, the
contractor may use a method for allo-
cating all such costs which would provide
an equitable distribution to all final cost
objectives. For example, he may use the
number of planning documents proc-
121
Cost Accounting Standards Board
essed rather than his former allocation
base of direct labor. Contractor's Dis-
closure Statement must be amended
for the proposed changes in accounting
practices.
(b) Illustrations of costs which are
not incurred for the same purpose:
(1) Contractor normally allocates
special tooling costs directly to contracts.
The costs of general purpose tooling are
normally included in the indirect cost
pool which is allocated to contracts. Both
of these accounting practices were pre-
viously disclosed to the Government.
Since both types of costs involved were
not incurred for the same purpose in
accordance with the criteria set forth in
the contractor's Disclosure Statement,
the allocation of general purpose tooling
costs from the indirect cost pool to the
contract, in addition to the directly
allocated special tooling costs is not con-
sidered a violation of the standard.
(2) Contractor proposes to perform a
contract which will require three fire-
men on 24-hour duty at a fixed-post
to provide protection against damage to
highly inflammable materials used on
the contract. Contractor presently has a
fire fighting force of 10 employees for
general protection of the plant. Con-
tractor's costs for these latter firemen
are treated as indirect costs and allocated
to all contracts; however, he wants to
allocate the three fixed-post firemen
directly to the particular contract re-
quiring them and also allocate a portion
of the cost of the general firefighting
force to the same contract. He may do so
but only on condition that his disclosed
practices indicate that the costs of the
separate classes of firemen serve differ-
ent purposes and that it is his practice
to allocate the general firefighting force
indirectly and to allocate fixed-post fire-
men directly.
§ 402.70 Exemptions.
None for this standard.
§ 402.80 Effective date.
July 1, 1972.
137 F.R. 9609, May 13, 1972]
PREAMBLES: Preamble A of the supplement
to this part explains how effective dates are
determined.
122
Cost Accounting Standards Board
APPENDIX-INTERPRETATION No. 1
Part 402, Cost Accounting Standard, Con-
sistency in Allocating Costs Incurred for the
Same Purpose, provides, in Section 402.40,
that "**
* * no final cost objective shall have
allocated to it as a direct cost any cost, if
other costs incurred for the same purpose, in
like circumstances, have been included in
any indirect cost pool to be allocated to that
or any other final cost objective.”
This interpretation deals with the way
Part 402 applies to the treatment of costs in-
curred in preparing, submitting, and sup-
porting proposals. In essence, it is addressed
to whether or not, under the Standard, all
such costs are incurred for the same pur-
pose, in like circumstances.
Under Part 402, costs incurred in prepar-
ing, submitting, and supporting proposals
pursuant to a specific requirement of an
existing contract are considered to have been
incurred in different circumstances from the
circumstances under which costs are incurred
in preparing proposals which do not re-
sult from such specific requirement. The
circumstances are different because the costs
of preparing proposals specifically required
by the provisions of an existing contract re-
late only to that contract while other pro-
posal costs relate to all work of the con-
tractor.
This interpretation does not preclude the
allocation, as indirect costs, of costs incur-
red in preparing all proposals. The cost ac-
counting practices used by the contractor,
however, must be followed consistently and
the method used to reallocate such costs,
of course, must provide an equitable dis-
tribution to all final cost objectives.
(Secs. 103, 84 Stat. 796 (50 U.S.C. App. 2168))
ARTHUR SCHOENHAUT,
Executive Secretary.
[FR Doc.76-17909 Filed 6-17-76;8:45 am]
123
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication of Part 402,
2-29-72
Preamble to original publication of 4 CFR
Part 402, 37 FR 4139, Feb. 29, 1972. That
publication also included the addition of
4 CFR Parts 331, 351, 400, and 401, and so
material relating to those parts has been
omitted. It appears in the Supplements to
those parts.
General comments. The purpose of the
regulations promulgated today by the
Cost Accounting Standards Board is to
implement section 719 of the Defense
Production Act of 1950, as amended, 50
U.S.C. app. 2168, which provides for de-
velopment of Cost Accounting Stand-
ards to be used in connection with ne-
gotiated national defense contracts and
for disclosure of cost accounting prac-
tices to be used in such contracts. The
Board believes the materials being
promulgated today constitute a signifi-
cant initial step toward accomplishing
one of its major objectives-improved
cost accounting and the proper determi-
nation of the cost of negotiated defense
contracts. The regulations spell out con-
tract coverage (Part 331), disclosure re-
quirements (Part 351), a compilation of
Definitions (Part 400), and two Cost Ac-
counting Standards, one calling for con-
sistency in estimating, accumulating, and
reporting costs (Part 401), and the other
calling for consistency in allocating costs
incurred for the same purpose (Part
402).
Development of the material being pro-
mulgated today began many months ago
with extensive research. It included ex-
amining publications on the subject,
conferring with knowledgeable repre-
sentatives of various Government agen-
cies, Government contractors, industry
associations, and professional accounting
associations, and identifying and consid-
ering all available viewpoints. From this
research, the initial versions of the mate-
rial now being published were developed.
As a part of the continuing research ef-
fort, these initial drafts were sent to 81
agencies, associations, and Government
contractors which had expressed interest
in assisting the Board in its work, and
their comments were solicited. Some na-
tional defense contractors field-tested
the material to see how it would ap-
ply to and affect their operations and ad-
vised the Board of their findings. In each
step of the research process, the Board
and its staff have urged and received ac-
tive participation and assistance by Gov-
ernment, industry, and accounting orga-
nizations. Their cooperative efforts con-
tributed in large measure to the exposure
draft published in the December 30, 1971,
FEDERAL REGISTER for comment.
To better assure that all who might
want to comment had an opportunity to
do so, the Board supplemented the FED-
Eral REGISTER notice by sending copies
of the FEDERAL REGISTER materials di-
rectly to about 175 organizations and in-
dividuals who had expressed interest or
had provided assistance in the develop-
ment of the published material. Also, a
press release was distributed announcing
the publication, which resulted in nu-
merous articles in journals. The Board
availed itself of all opportunities to pub-
licize the proposals and solicit comments
on them.
Written comments in response to the
published material were requested by
February 4, 1972. Comments were re-
ceived from 105 sources, including
Government agencies, professional as-
sociations, industry associations, public
accounting firms, individual companies,
and others. The Board appreciates the
obvious care and attention devoted by
commentators, and as will be seen below,
the Board has greatly benefited from the
comments received.
Many of the comments received were
addressed to all parts of the proposed
Board rules as well as to the question of
public availability of the Disclosure
Statements. All of the comments received
have been carefully considered by the
Board taking into account the require-
ments of section 719. Understandably,
many of the comments were addressed
to issues which recur in two or more of
the proposed parts while others dealt
only with specific sections. Comments
which dealt with 11 general issues are
discussed separately below followed by
a section-by-section analysis of other
comments. Appropriate changes have
been made in the material promulgated
based on the Board's disposition of the
comments received.
Those comments and suggestions re-
ceived which are of particular signifi-
cance are discussed below.
Part 402 Title. One commentator
pointed out that the definition of the
word "allocate" covered all of the actions
encompassed by the word "charge" and,
therefore the title of the standard should
be changed to delete the words "charg-
ing and." The Board agrees and has
made the appropriate change here and
124
Cost Accounting Standards Board
elsewhere throughout the standard.
Section 402.40 Fundamental require-
ment. A number of commentators sug-
gested a change to the standard to elim-
inate the requirement that direct and
indirect costs be consistently allocated
to all final cost objectives. Making the
standard applicable only to individual
contracts would permit a choice to be
made solely on the basis of short-term
economic benefit; the Board therefore
has not adopted the suggestion.
Section 402.50 Techniques for appli-
cation. Several commentators noted that
the standard discusses the required treat-
ment of incurred costs but does not
cover estimated costs. The Board intends
that both types of costs be covered by
the standard and has therefore added a
new paragraph to this section to make
that intention clear.
A number of commentators suggested
that the concept of materiality be in-
cluded in the standard to allow the
handling of minor direct cost items as in-
direct costs similar to the treatment ac-
corded materiality in current ASPR
regulations. The Board agrees, and has
included a materiality statement in this
section.
Several commentators did not under-
stand the relationship of this standard to
the Disclosure Statement. (This relation-
ship is set out in paragraph (b).) The
Board intends to allow the contractor to
disclose the cost accounting practices and
criteria appropriate to his own situation
while at the same time imposing the re-
quirement that he adhere consistently to
the choices once made. The Disclosure
Statement is the vehicle by which the
contractor describes the criteria and
circumstances which define costs which
are or are not incurred for the same
purpose.
Effective date and application. For the
convenience of readers, the following
summarizes the effective dates set forth
in § 331.8, § 351.4(e), and Parts 400, 401,
and 402, which were transmitted to the
Congress on February 24, 1972, pursuant
to section 719(h) (3) of the Defense Pro-
duction Act of 1950 as amended. After
the expiration of a period of 60 calendar
days of continuous session following the
date of transmittal to the Congress, the
regulations herein promulgated shall
tafle effect as set forth in those regula-
tions, unless there is passed by the two
Houses a concurrent resolution stating
in substance that the Congress does not
favor the proposed standards, rules, or
regulations.
4. Any contractor having a contract
awarded prior to July 1, 1972, which con-
tains a clause which already incorporates
requirements governing submission of
Disclosure Statements and application of
Cost Accounting Standards will be re-
quired to comply with the provisions of
that clause. In this connection, such con-
tractor and the respective contracting
agencies whose contracts contain such
a clause should review those contracts
to determine whether negotiations should
be instituted to make Parts 400 through
402 applicable to them.
B. Amendments Published 11-7-73
Preamble to revision of the definitions of
"cost objective" and "indirect cost pool",
§ 402.30 (a) (2) and 6); 38 FR 30725, Nov. 7,
1973. Material relating to other parts of 4
CFR Ch. III, published in the same docu-
ment, has been omitted, and appears in the
Supplements to those parts.
The purpose of this publication by the
Cost Accounting Standards Board is to
amend Parts 331, 351, 400, 401, 402, 403,
and 404 of its rules and regulations. The
amendments, which are minor clarifica-
tions to the regulations, were published
in the FEDERAL REGISTER of September 5,
1973 (38 FR 23971). The amendments:
* (c) modify certain definitions in
Parts 400, 401, 402, 403, and 404 for the
purposes of uniformity among the var-
ious parts. Only one comment in re-
sponse to the September publication has
been received by the Board. This ex-
pressed agreement with the proposed
changes.
In view of the foregoing, the following
amendments to the Board's regulations
are being made effective November 7,
1973.
1
125
Cost Accounting Standards Board
PART 402—COST ACCOUNTING STAND-
ARD CONSISTENCY IN ALLOCATING
COSTS INCURRED FOR THE SAME PUR-
POSE
Interpretation of Standard
Interpretation No. 1 to Part 402, Cost
Accounting Standard, Consistency in Al-
locating Costs Incurred for the Same
Purpose, is being published today by the
Cost Accounting Standards Board pursu-
ant to Section 719 of the Defense Pro-
duction Act of 1950, as amended. (Pub.
L. 91-379, 50 U.S.C. App. 2168). The in-
terpretation deals with the application
of § 402.40 of Part 402 to proposal costs.
Section 402.40 provides that, "All costs
incurred for the same purpose, in like
circumstances, are either direct costs
only or indirect costs only with respect to
final cost objectives."
A number of questions had been raised
by both the Government and contractors
as to how Cost Accounting Standard 402
is to be applied to the accounting for
proposal costs and, particularly, as to
whether all costs incurred in preparing
proposals are incurred for the same pur-
pose, in like circumstances. A proposed
interpretation was published in the FED-
ERAL REGISTER of February 4, 1976, with
an invitation to interested parties to sub-
mit written comments if the proposed
interpretation did not respond fully, or
did not respond clearly enough, to what
the Board understood to be the questions
which had arisen. The Board also sup-
plemented the invitation in the FEDERAL
REGISTER by sending copies of the pro-
posed interpretation to several hundred
organizations and individuals. The Board
received 32 written comments from com-
panies, Government agencies, industry
and professional associations, and others.
All of these comments have been care-
fully considered by the Board. The issues
of particular significance which were dis-
cussed by respondents in connection with
the proposed interpretation are sum-
marized below, together with explana-
tions of the changes made in the inter-
pretation being published today. The
Board takes this opportunity to express
its appreciation for the helpful sugges-
tions and criticisms that were received.
(1) Specific requirement provision.
Several commentators, while suggesting
changes to the proposed interpretation
published on February 4, 1976, com-
mended the Board for recognizing the
problem with respect to the application
of § 402.40 of Part 402 to the costs in-
curred in preparing proposals and be-
lieved that the interpretation would
resolve a longstanding area of con-
troversy. The most prevalent comments
received dealt with costs incurred in pre-
paring a follow-on proposal which is not
specifically required by an existing
contract.
Many commentators suggested that
the words "specific requirement" be de-
leted and that, in lieu thereof, words such
as "related to," "arising from," "identi-
fied with," or "directly associated with,"
be used. Other commentators, while
agreeing that the "specific requirement"
provision should be retained, suggested
an expansion to also cover proposals "re-
lated to" existing contracts such as pro-
posals for follow-on contracts. Still other
commentators, however, believed that
the "specific requirement" provision
was appropriate and should be retained
without addition or other change.
In the February 4, 1976, publication
of the proposed interpretation, the dis-
tinguishing characteristic noted by the
Board for determining if circumstances
can be considered to be different with
respect to costs incurred in preparing two
proposals was whether one proposal was
prepared pursuant to a specific require-
ment of an existing contract while the
other was not. The Board continues in
the belief that the "specific requirement"
provision is the distinguishing character-
istic and, accordingly, has retained this
provision in the interpretation being
published today.
Several commentators suggested that
proposals prepared in order to comply
with other contract provisions, such as
when the Government exercises an un-
priced option or when an option is re-
priced, should be considered to be specif-
ically required under the interpretation.
The Board believes that the interpreta-
tion being published today accommo-
dates this suggestion.
One commentator suggested that the
Board's intent be clarified with respect
to whether only proposals required by
line items in a contract are considered
to be specifically required by the con-
tract. The Board intended that, while
the "specific requirement" could be a line
item in a contract, it need not be. Pro-
posals specifically required by any other
provisions of a contract, such as the re-
quirement in the Changes clause of
Standard Form 32, that any "claim by
the contractor for adjustment under this
clause must be asserted within 30 days
from the date of receipt by the contrac-
tor of the notification of change," are
126
Cost Accounting Standards Board
considered to be specifically required un-
der the interpretation.
(2) Indirect allocation of all proposal
costs. A few commentators recommend-
ed clarification of the final paragraph
in the proposed interpretation as pub-
lished on February 4, 1976. One com-
mentator stated that the paragraph
could be interpreted as authorizing con-
tractors to allocate all proposal costs in-
directly while another commentator be-
lieved that the subject of indirect alloca-
tion of all proposal costs should be de-
veloped later as a separate issue. The
paragraph has been revised (a) to give
recognition to the fact that some con-
tractors' accounting practices now pro-
vide that all proposal costs are pooled
and allocated indirectly and (b) to make
it clear that, in this respect, no change
in a contractor's accounting practice or
allocation method is required by this in-
terpretation if the cost accounting prac-
tice is being followed consistently and
if the allocation method provides an
equitable distribution to all final cost ob-
jectives.
(3) Determination of cost accounting
practices by contracting officer. A few
commentors stated that the words, "spe-
cific requirement of an existing contract"
would place contracting officers in the
position of determining cost accounting
practices because they could determine
whether there would be a specific re-
quirement in a contract.
Contracting officers now decide for al-
most every contract whether to include
or exclude specific contractual require-
ments covering a wide variety of activi-
ties. The Board believes that inclusion
or exclusion of a specific requirement in
a contract may influence the cost ac-
counting practice being followed but the
decision to include or exclude the re-
quirement is not the determinant of the
cost accounting practice.
(4) Prospective application. Two com-
mentators suggested that, under this in-
terpretation, certain proposal costs
which some contractors have allocated
directly to contracts will have to be al-
located indirectly. One of the commen-
tators recommended that, consequently,
the interpretation should be applied on
a prospective basis only.
Cost Accounting Standard 402, which
became effective July 1, 1972, states that,
"All costs incurred for the same purpose,
in like circumstances, are either direct
costs only or indirect costs only with re-
spect to final cost objectives." Interpre-
tation No. 1 to Part 402 recognizes that
the circumstances involved in preparing
certain proposals are different from the
circumstances involved in preparing
other proposals. The interpretation ex-
plains when, under the Standard, cer-
tain proposal costs are consequently
deemed to have been incurred in unlike
circumstances and therefore may be ac-
counted for differently.
Although the interpretation is being
provided to explain in greater detail how
Cost Accounting Standard 402 applies to
costs incurred in preparing proposals,
the Standard from its inception has ap-
plied to these costs in this way. As to any
individual contractor, Standard 402 has
applied to such costs from whatever date
that Standard became applicable to that
contractor. The commentator's recom-
mendation therefore has not been ac-
cepted. In view of the widespread un-
certainty over the application of Stand-
ard 402 to proposal costs, however, the
Board believes that any failures to fol-
low the Standard in this respect have
been inadvertent. The Board also be-
lieves that any adjustments should be
made with due consideration to the
Board's statement on materiality.
(5) Accounting for the cost of propos-
als for follow-on contracts. Several com-
mentators stated that the interpretation
would create cost accounting problems
with respect to accounting for the cost
of proposals for follow-on contracts. The
statement was made that a follow-on
proposal is prepared by employees as-
signed full time to the on-going pro-
gram and that it would be most difficult
and impractical to attempt to separate
their labor costs for preparing follow-on
proposals from their other labor costs
of the on-going program.
The Board recognizes the possibility
that some contractors may have to re-
fine somewhat their present practices for
distributing incurred labor costs in or-
der to separate the costs of preparing
proposals for a follow-on contract from
the costs of an existing contract. The
Board does not agree, however, that
whatever refinements may be necessary
should be difficult or impractical to de-
velop.
(6) Other comments. One commenta-
tor suggested that it be clearly stated in
the interpretation that proposal costs al-
located direct to contracts will have
overhead and General and Administra-
127
Cost Accounting Standards Board
tive expenses (including indirect proposal
costs) applied. The Board agrees that
proposal costs allocated direct to a con-
tract are no different than any other
costs allocated direct to that contract
but believes this is self-evident and that
no change in the interpretation is re-
quired.
Another commentator suggested that
the word "bid" be added to the inter-
pretation in conjunction with the word
"proposal." The Board intends that the
interpretation apply to a "proposal" as
defined in 4 CFR, Part 400.
A few commentators requested clari-
fication of the wording of the introduc-
tory comments and the proposed inter-
pretation published on February 4, 1976.
The introductory comments stated that,
"Costs * * are incurred in different
circumstances * * *" whereas the pro-
posed interpretation stated that, "The
contracting parties can determine that
the circumstances are different * * * "
Accordingly, the Board has deleted the
words, "The contracting parties can de-
termine that * *" from the interpreta-
tion being published today.
Another commentator suggested that
the phrase, "to all work of the contrac-
tor," in the last sentence of the third
paragraph of the interpretation be clari-
fied because some companies have sev-
eral indirect cost pools for proposal costs,
one for each major product line within
a division. The commentator believed
that the phrase could be misinterpreted
as limiting the number of such indirect
cost pools to only one pool for each divi-
sion. It is not the intent of the Board
to change, through this interpretation,
any of the established cost accounting
practices now being followed by contrac-
tors with respect to the pooling and al-
location of indirect proposal costs. Ac-
cordingly, if it is the contractor's estab-
lished cost accounting practice to pool
and allocate indirect proposal costs by
product groupings, he may continue to do
SO.
One commentator requested a state-
ment in the interpretation with respect
to solicited and unsolicited proposals,
particularly as to "whether one or the
other is properly included in the direct
or indirect charge category." The deter-
mination as to like or unlike circum-
stances does not depend on whether a
proposal is solicited or unsolicited. The
test is whether the proposal was specif-
ically required by an existing contract.
Therefore, the following Appendix is
added to Part 402:
128
Cost Accounting Standards Board
PART 403-ALLOCATION OF HOME
OFFICE EXPENSES TO SEGMENTS
Sec.
403.10 General applicability.
403.20 Purpose.
Definitions.
403.30
403.40
403.50
Fundamental requirement.
Techniques for application.
403.60
403.70
Illustrations.
Exemptions.
403.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part
403 are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168.
SOURCE: The provisions of this Part 403
appear at 37 F.R. 22683, Dec. 14, 1972, unless
otherwise noted.
EFFECTIVE DATE: The provisions of this Part
403 must be followed for a contractor's fiscal
year beginning after Sept. 30, 1973.
NOTE: A supplement, consisting of the
preambles to these regulations as they ap-
peared in the FEDERAL REGISTER, follows the
text of this part. These preambles, which are
intended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 22683, December 14, 1972)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 403.10
General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof, and by all relevant
Federal agencies in estimating, accuniu-
lating, and reporting expenses in con-
nection with the pricing, administration,
and settlement of all negotiated prime
contract and subcontract national de-
fense procurements with the United
States in excess of $100,000 other than
contracts or subcontracts where the price
negotiated is based on (a) established
catalog or market prices of commercial
items sold in substantial quantities to
the general public, or (b) prices set by
law or regulation.
§ 403.20
Purpose.
(a) The purpose of this Cost Account-
ing Standard is to establish criteria for
allocation of the expenses of a home office
to the segments of the organization based
on the beneficial or causal relationship
between such expenses and the receiving
segments. It provides for (1) identifica-
tion of expenses for direct allocation to
segments to the maximum extent prac-
tical; (2) accumulation of significant
nondirectly allocated expenses into
logical and relatively homogeneous pools
to be allocated on bases reflecting the
relationship of the expenses to the seg-
ments concerned; and (3) allocation of
any remaining or residual home office
expenses to all segments. Appropriate im-
plementation of this Standard will limit
the amount of home office expenses
classified as residual to the expenses of
managing the organization as a whole.
(b) This Standard does not cover the
reallocation of a segment's share of home
office expenses to contracts and other
cost objectives.
§ 403.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this
chapter for convenience. Other terms
which are used in this Standard and
are defined in Part 400 of this chapter
have the meanings ascribed to them in
that part unless the text demands a
different definition or the definition is
modified in paragraph (b) of this
section:
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indi-
rect cost pool.
(2) Home office. An office responsible
for directing or managing two or more,
but not necessarily all, segments of an
organization. It typically establishes pol-
icy for, and provides guidance to the
segments in their operations. It usually
performs management, supervisory, or
administrative functions, and may also
perform service functions in support of
the operations of the various segments.
An organization which has intermediate
levels, such as groups, may have several
home offices which report to a common
home office. An intermediate organiza-
tion may be both a segment and a home
office.
(3) Operating revenue. Amounts ac-
crued or charged to customers, clients,
and tenants, for the sale of products
manufactured or purchased for resale,
for services, and for rentals of property
129
Cost Accounting Standards Board
held primarily for leasing to others. It
includes both reimbursable costs and
fees under cost-type contracts and per-
centage-of-completion sales accruals ex-
cept that it includes only the fee for
management contracts under which the
contractor acts essentially as an agent
of the Government in the erection or op-
eration of Government-owned facilities.
It excludes incidental interest, dividends,
royalty, and rental income, and proceeds
from the sale of assets used in the busi-
ness.
(4) Segment. One of two or more divi-
sions, product departments, plants, or
other subdivisions of an organization re-
porting directly to a home office, usually
identified with responsibility for profit
and/or producing a product or service.
The term includes Government-owned
contractor-operated (GOCO) facilities,
and joint ventures and subsidiaries (do-
mestic and foreign) in which the orga-
nization has a majority ownership. The
term also includes those joint ventures
and subsidiaries (domestic and foreign)
in which the organization has less than
a majority of ownership, but over which
it exercises control.
(5) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or
possession beyond the current account-
ing period for the services it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this standard:
None.
[37 FR 22683, Dec. 14, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES: For preambles to amendments
to § 403.30. see preambles A and B of the sup-
plement to this part.
§ 403.40
Fundamental requirement.
(a)(1) Home office expenses shall be
allocated on the basis of the beneficial
or causal relationship between support-
ing and receiving activities. Such ex-
penses shall be allocated directly to
segments to the maximum extent prac-
tical. Expenses not directly allocated, if
significant in amount and in relation to
total home office expenses, shall be
grouped in logical and homogeneous ex-
pense pools and allocated pursuant to
paragraph (b) of this section. Such al-
locations shall minimize to the extent
practical the amount of expenses which
may be categorized as residual (those of
managing the organization as a whole).
These residual expenses shall be allo-.
cated pursuant to paragraph (c) of this
section.
(2) No segment shall have allocated to
It as an indirect cost, either through a
homogeneous expense pool, or the resid-
ual expense pool, any cost, if other costs
incurred for the same purpose have been
allocated directly to that or any other
segment.
(b) The following subparagraphs pro-
vide criteria for allocation of groups of
home office expenses.
(1) Centralized service functions. Ex-
penses of centralized service functions
performed by a home office for its seg-
ments shall be allocated to segments on
the basis of the service furnished to or
received by each segment. Centralized
service functions performed by a home
office for its segments are considered
to consist of specific functions which, but
for the existence of a home office, would
be performed or acquired by some or all
of the segments individually. Examples
include centrally performed personnel
administration and centralized data
processing.
(2) Staff management of certain spe-
cific activities of segments. The expenses
incurred by a home office for staff man-
agement or policy guidance functions
which are significant in amount and in
relation to total home office expenses
shall be allocated to segments receiving
more than a minimal benefit over a base,
or bases, representative of the total spe-
cific activity being managed. Staff man-
agement or policy guidance to segments
is commonly provided in the overall di-
rection or support of the performance of
discrete segment activities such as man-
ufacturing, accounting, and engineering
(but see subparagraph (6) of this
paragraph).
(3) Line management of particular
segments or groups of segments. The ex-
pense of line management shall be allo-
cated only to the particular segment or
group of segments which are being man-
aged or supervised. If more than one seg-
ment is managed or supervised, the ex-
pense shall be allocated using a base or
bases representative of the total activity
of such segments. Line management is
considered to consist of management or
supervision of a segment or group of seg-
ments as a whole.
(4) Central payments or accruals. Cen-
tral payments or accruals which are
made by a home office on behalf of its
segments shall be allocated directly to
130
Cost Accounting Standards Board
segments to the extent that all such pay-
ments or accruals of a given type or class
can be identified specifically with indi-
vidual segments. Central payments or ac-
cruals are those which but for the exist-
ence of a number of segments would be
accrued or paid by the individual seg-
ments. Common examples include cen-
trally paid or accrued pension costs,
group insurance costs, State and local in-
come taxes and franchise taxes, and pay-
rolls paid by a home office on behalf of
its segments. Any such types of payments
or accruals which cannot be identified
specifically with individual segments
shall be allocated to benefited segments
using an allocation base representative
of the factors on which the total pay-
ment is based.
(5) Independent research and develop-
ment and bidding and proposal costs.
Notwithstanding any other provisions
herein, the costs of independent research
and development and bidding and pro-
posal efforts allocated by a home office
shall continue to be allocated pursuant to
provisions of existing laws, regulations,
and other controlling factors.
(6) Staff management not identifiable
with any certain specific activities of seg-
ments. The expenses incurred by a home
office for staff management, supervisory,
or policy functions, which are not identi-
flable to specific activities of segments
shall be allocated in accordance with
paragraph (c) of this section as residual
expenses.
(c) Residual expenses. (1) All home
office expenses which are not allocable in
accordance with paragraph (a) of this
section and subparagraphs (1) through
(5) of paragraph (b) of this section shall
be deemed residual expenses. Typical re-
sidual expenses are those for the chief
executive, the chief financial officer, and
any staff which are not identifiable with
specific activities of segments. Residual
expenses shall be allocated to all seg-
ments under a home office by means of a
base representative of the total activity
of such segments, except where subpara-
graph (2) or (3) of this paragraph
applies.
(2) Residual expenses shall be allo-
cated pursuant to subparagraph (1) of
§ 403.50(c) if the total amount of such
expenses for the contractor's previous
fiscal year (excluding any unallowable
costs and before eliminating any amounts
to be allocated in accordance with sub-
paragraph (3) of this paragraph) exceeds
the amount obtained by applying the
following percentage(s) to the aggregate
operating revenue of all segments for
such previous year:
3.35 percent of the first $100 million;
0.95 percent of the next $200 million;
0.30 percent of the next $2.7 billion;
0.20 percent of all amounts over $3 billion.
The determination required by this sub-
paragraph for the 1st year the contractor
is subject to this Standard shall be based
on the pro forma application of this
Standard to the home office expenses and
aggregate operating revenue for the con-
tractor's previous fiscal year.
(3) Where a particular segment re-
ceives significantly more or less benefit
from residual expenses than would be
reflected by the allocation of such ex-
penses pursuant to subparagraph (1) or
(2) of this paragraph (see § 403.50 (d)),
the Government and the contractor may
agree to a special allocation of residual
expenses to such segment commensurate
with the benefits received. The amount of
a special allocation to any segment made
pursuant to such an agreement shall
be excluded from the pool of residual
expenses to be allocated pursuant to sub-
paragraph (1) or (2) of this paragraph,
and such segment's data shall be ex-
cluded from the base used to allocate
this pool.
§ 403.50 Techniques for application.
(a) (1) Separate expense groupings
will ordinarily be required to implement
§ 403.40. The number of groupings will
depend primarily on the variety and
significance of service and management
functions performed by a particular
home office. Ordinarily, each service or
management function will have to be
separately identified for allocation by
means of an appropriate allocation tech-
nique. However, it is not necessary to
identify and allocate different functions
separately, if allocation in accordance
with the relevant requirements of § 403.40
(b) can be made using a common alloca-
tion base. For example, if the personnel
department of a home office provides
personnel services for some or all of the
segments (a centralized service function)
and also establishes personnel policies for
the same segments (a staff management
function), the expenses of both func-
tions could be allocated over the same
base, such as the number of personnel,
and the separate functions do not have
to be identified.
(2) Where the expense of a given func-
131
Cost Accounting Standards Board
tion is to be allocated by means of a
particular allocation base, all segments
shall be included in the base unless: (1)
Any excluded segment did not receive
significant benefits from, or contribute
significantly to the cause of the expense
to be allocated and, (ii) any included seg-
ment did receive significant benefits
from or contribute significantly to the
cause of the expense in question.
(b) (1) Section 403.60 illustrates var-
ious expense pools which may be used
together with appropriate allocation
bases. The allocation of centralized
service functions shall be governed
by a hierarchy of preferable alloca-
tion techniques which represent bene-
ficial or casual relationships. The pre-
ferred representation of such rela-
tionships is a measure of the activity
of the organization performing the
function. Supporting functions are
usually labor-oriented, machine-ori-
ented, or space-oriented. Measures of the
activities of such functions ordinarily
can be expressed in terms of labor hours,
machine hours, or square footage. Ac-
cordingly, costs of these functions shall
be allocated by use of a rate, such as a
rate per labor hour, rate per machine
hour or cost per square foot, unless such
measures are unavailable or impractical
to ascertain. In these latter cases the
basis for allocation shall be a measure-
ment of the output of the supporting
function. Output is measured in terms of
units of end product produced by the
supporting function, as for example,
number of printed pages for a print shop,
number of purchase orders processed by
a purchasing department, number of
hires by an employment office.
(2) Where neither activity nor output
of the supporting function can be prac-
tically measured, a surrogate for the
beneficial, or causal relationship must be
selected. Surrogates used to represent
the relationship are generally measures
of the activity of the segments receiving
the service; for example, for personnel
services reasonable surrogates would be
number of personnel, labor hours, or
labor dollars of the segments receiving
the service. Any surrogate used should
be a reasonable measure of the services
received and, logically, should vary in
proportion to the services received.
(c) (1) Where residual expenses are
required to be allocated pursuant to
§ 403.40 (c) (2), the three factor formula
described below must be used. This for-
mula is considered to result in appropri-
ate allocations of the residual expenses
of home offices. It takes into account
three broad areas of management con-
cern: The employees of the organization,
the business volume, and the capital
invested in the organization. The per-
centage of the residual expenses to be
allocated to any segment pursuant to the
three factor formula is the arithmetical
average of the following three percent-
ages for the same period:
(1) The percentage of the segment's
payroll dollars to the total payroll dol-
lars of all segments.
(ii) The percentage of the segment's
operating revenue to the total operating
revenue of all segments. For this pur-
pose, the operating revenue of any seg-
ment shall include amounts charged to
other segments and shall be reduced by
amounts charged by other segments for
purchases.
(iii) The percentage of the average
net book value of the sum of the seg-
ment's tangible capital assets plus inven-
tories to the total average net book value
of such assets of all segments. Property
held primarily for leasing to others shall
be excluded from the computation. The
average net book value shall be the aver-
age of the net book value at the begin-
ning of the organization's fiscal year and
the net book value at the end of the year.
(2) The first time a change is made
from a technique previously followed to
the techniques specified in § 403.50(c)
(1), such change shall be deemed to be
within the scope of paragraph (a) (3) of
the clause appearing at § 351.50 of the
Board's regulation entitling a contrac-
tor to an equitable adjustment under
paragraph (a)(4)(A) of the contract
clause.
(d) The following subparagraphs pro-
vide guidance for implementing the re-
quirements of § 403.40 (c)(3).
(1) An indication that a segment re-
ceived significantly less benefit in rela-
tion to other segments can arise if a seg-
ment, unlike all or most other segments,
performs on its own many of the func-
tions included in the residual expense.
Another indication may be that, in rela-
tion to its size, comparatively little or no
costs are allocable to a segment pursu-
ant to § 403.40 (b) (1) through (5). Evi-
dence of comparatively little communi-
cation or interpersonal relations between
a home office and a segment, in relation
to its size, may also indicate that the seg-
ment receives significantly less benefit
from residual expenses. Conversely, if the
opposite conditions prevail at any seg-
132
Cost Accounting Standards Board
ment, a greater allocation than would
result from the application of § 403.40
(c) (1) or (2) may be indicated. This may
be the case, for example, if a segment
relies heavily on the home office for cer-
tain residual functions normally per-
formed by other segments on their own.
(2) Segments which may require spe-
cial allocations of residual expenses pur-
suant to § 403.40 (c)(3) include, but are
not limited to foreign subsidiaries,
GOCO's, domestic subsidiaries with less
than a majority ownership, and joint
ventures.
(3) The portion of residual expenses to
be allocated to a segment pursuant to
§ 403.40 (c) (3) shall be the cost of esti-
mated or recorded efforts devoted to the
segments.
(e) Home office functions may be per-
formed by an organization which for
some purposes may not be a part of the
legal entity with which the Government
has contracted. This situation may arise,
for example, in instances where the
Government contracts directly with a
corporation which is wholly or partly
owned by another corporation. In this
case, the latter corporation serves as a
"home office," and the corporation with
which the contract is made is a "seg-
ment" as those terms are defined and
used in this Standard. For purposes of
contracts subject to this Standard, the
contracting corporation may only accept
allocations from the other corporation to
the extent that such allocations meet the
requirements set forth in this Standard
for allocation of home office expenses to
segments.
[37 FR 4173, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES:
For preambles relating to
§ 403.50, see preambles A and B of the sup-
plement to this part.
§ 403.60
Illustrations.
(a) The following table lists some
typical pools, together with illustrative
allocation bases which could be used in
appropriate circumstances:
Home office expense or function
Centralized service functions:
1. Personnel administration..
2. Data processing services___.
3. Centralized purchasing and subcon-
tracting.
4. Centralized warehousing-.
5. Company aircraft service_
6. Central telephone service..
(b) The selection of a base for allo-
cating centralized service functions shall
be governed by the criteria established
in § 403.50(b).
(c) The listed allocation bases in this
Illustrative allocation bases
1. Number of personnel, labor hours, pay-
roll, number of hires.
2. Machine time, number of reports.
3. Number of purchase orders, value of pur-
chases, number of items.
4. Square footage, value of material, volume.
5. Actual or standard rate per hour, mile,
passenger mile, or similar unit.
6. Usage costs, number of instruments.
section are illustrative. Other bases for
allocation of home office expenses to seg-
ments may be used if they are substan-
tially in accordance with the beneficial or
casual relationships outlined in § 403.40.
133
Supp. No. 3
Cost Accounting Standards Board
Home office expense or function
Staff management of specific activities:
1. Personnel management.
2. Manufacturing policies (quality control,
industrial engineering, production,
scheduling, tooling, inspection and
testing, etc.).
3. Engineering policies.
4. Material/purchasing policies.
5. Marketing policies.
Central payments or accruals:
1. Pension expenses.---
2. Group insurance expenses----
3. State and local income taxes and fran-
chise taxes.
§ 403.70
Exemptions.
(a) Any contractor or subcontractor
which together with its subsidiaries did
not receive net awards of negotiated
national defense prime contracts during
Federal fiscal year 1971 (July 1, 1970,
through June 30, 1971) totaling more
than $30 million is exempt from this
Standard. This exemption expires on
March 10, 1978. Any contractor, unless
otherwise exempt, who receives a nego-
tiated national defense contract after
March 10, 1978, shall be required to com-
ply at the start of his first cost account-
ing period following receipt of that
award.
(b) This Standard shall not apply to
contractors who are subject to the pro-
visions of Office of Management and
Budget Circular No. A-21 (Principles
for Determining Costs Applicable to Re-
search and Development under Grants
and Contracts with Educational Institu-
tions and Principles for Determining
Costs Applicable to Training and Other
Educational Services under Grants and
Contracts with Educational Institutions)
Illustrative allocation bases
1. Number of personnel, labor hours, payroll,
number of hires.
2. Manufacturing cost input, manufacturing
direct labor.
8. Total engineering costs, engineering di-
rect labor, number of drawings.
4. Number of purchase orders, value of pur-
chases.
5. Sales, segment marketing costs.
1. Payroll or other factor on which total
payment is based.
2. Payroll or other factor on which total
payment is based.
3. Any base or method which results in an
allocation that equals or approximates a
segment's proportionate share of the tax
imposed by the jurisdiction in which the
segment does business, as measured by
the same factors used to determine tax-
able income for that jurisdiction.
or Circular No. A-87 (Principles for De-
termining Costs Applicable to Grants
and Contracts with State and Local
Governments).
[37 FR 4173, Feb. 29, 1972, as amended at
40 FR 32749, Aug. 4, 1975]
PREAMBLES: For preambles affecting § 403.70
see preambles A C and D of the supplement to
this part. For preamble to superseded regu-
lations, see preamble B of the supplement.
§ 403.80 Effective date.
(a) This standard shall be followed by each
contractor as of the beginning of his
next fiscal year after September 30, 1973
The effective date of this standard is
July 1, 1973.
[38 FR 7447, Mar. 22, 1973]
PREAMBLES: Preambles A and D of the sup
plement to this part explains how effective
dates are determined.
134
Supp. No. 3
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 12–14–72
Preamble to original publication of 4 CFR
Part 403, at 38 FR 26680, Dec. 14, 1972.
The Standard on Allocation of Home
Office Expenses to Segments is one of a
series being promulgated by the Cost
Accounting Standards Board pursuant to
section 719 of the Defense Production
Act of 1950, as amended, Public Law 91-
379, 50 U.S.C. app. 2168, which provides
for the development of Cost Accounting
Standards to be used in connection with
negotiated national defense contracts.
Work on this Standard was initiated
as the result of a variety of continuing
problems between contractors and the
Government concerning equitable allo-
cations of home office expenses to seg-
ments involved in negotiated defense
contracts. The problems include dis-
agreements on: (i) The propriety in cer-
tain circumstances of using particular
allocation bases, such as cost of sales or
direct labor for allocating home office
expenses to segments; (ii) whether and
to what extent certain kinds of segments
such as GOCO's, foreign subsidiaries and
partially owned subsidiaries should be
included in the allocation base; and (iii)
the homogeneity of expense pools.
The allocation of home office expenses
to segments is not now specifically gov-
erned or guided by an authoritative ac-
counting statement. Home office expenses
allocated to segments and then to con-
tracts can constitute an important ele-
ment of total contract cost. The lack of
authoritative standards to guide con-
tractors, procurement officers, auditors,
and others, provides a great potential
for disagreement and controversy over
contract costs. Assurance of equity in
cost determinations and contract settle-
ment is singularly lacking.
This Standard prescribes criteria for
allocation of the expenses of a home
office to segments of an organization. The
criteria are based primarily on the bene-
ficial or causal relationship between such
expenses and the receiving segments. The
Standard governs how a contractor may
allocate expenses of its corporate head-
quarters to various divisions, subsidi-
aries, plants, or other subsidiaries of the
corporation. The Board believes that ap-
plication of this Standard will result in
sound cost accounting and will provide
a great degree of uniformity in the de-
termination of costs of negotiated de-
fense contracts.
Research establishes that some home
office expenses are incurred for specific
segments and can be assigned directly to
them. Other expenses, not incurred for a
specific segment, have clear relationships
to two or more segments, relationships
which are measurable with reasonable
objectivity. A third type of home office
expense possesses no readily measurable
relationship to segments.
The Cost Accounting Standards Board
finds that a Cost Accounting Standard
to govern the allocation of home office
expenses is desirable to reduce wasteful
and expensive controversy and to obtain
equity for the contracting parties. The
Standard published today requires that
those home office expenses incurred for
specific segments are to be allocated di-
rectly to those segments to the maximum
extent practical. Those that can be allo-
cated to segments on the basis of objec-
tive measurable relationships are to be
accumulated and allocated by means of
logical and homogenous expense pools
established for this purpose. The remain-
ing or residual home office expenses are
then to be allocated as discussed below.
The Board expects that this Standard
will operate to reduce residual expenses
to a relatively minor amount and by this
means also reduce controversy and in-
equity. Where this is the case, the Board
sees no reason to require one particular
technique to allocate these expenses. Ac-
cordingly, where residual expenses are
no greater than a specified percentage of
operating revenues, the Standard allows
the use of any appropriate allocation
technique. However, if residual expenses
exceed such specified percentages, the
Board believes that its objective of re-
ducing controversy and avoiding inequity
would best be served by selecting a single
allocation technique to be used. Its re-
search in this connection has led the
Board to conclude that for this purpose,
a three-factor formula is superior to
other allocation bases and techniques
for the allocation of residual expenses.
Early research on this Standard in-
cluded an extensive review of available
literature on the subject, a review of de-
cisions of contract appeals boards and
courts, and a study of home office man-
agement philosophy and operations of
40 companies representing a wide vari-
ety of industries.
This research led to the publication of
a proposed Cost Accounting Standard in
the FEDERAL REGISTER of June 30, 1972,
with an invitation for interested parties
135
Cost Accounting Standards Board
to submit written data, views, and com-
ments to the Board. To better assure
that those who had already expressed in-
terest or provided assistance had an op-
portunity to comment, the Board supple-
mented the FEDERAL REGISTER notice by
sending copies of the FEDERAL REGISTER
materials directly to 196 organizations
and individuals, of which 86 companies
were invited to furnish the Board with
estimates of any additional or reduced
costs which could arise from the imple-
mentation of the Standard.
Responses were received from 130
sources, including individual companies,
Government agencies, professional as-
sociations, industry associations, public
accounting firms, and others. All of these
comments and data have been carefully
considered by the Board. Those com-
ments which are of particular signifi-
cance are discussed below together with
an explanation of resultant substantive
changes to the Standard as published in
the FEDERAL REGISTER of June 30, 1972.
As will be seen from the following dis-
cussion, the Board was greatly benefited
by the many comments it received on
the Standard as published in the FED-
ERAL REGISTER of June 30, 1972. The
Board takes this opportunity to express
its considerable debt to those who de-
voted time and skill to assisting the
Board in this endeavor and to thank the
many companies and individuals
involved.
(1) Materiality. Many commentators
urged that the Standard contain a gen-
eral statement on materiality. The Board
has previously stated that the admin-
istration of its rules, regulations, and
Cost Accounting Standards should be
reasonable and not seek to deal with
insignificant amounts of cost. The Board
does not believe that any further general
statement is needed at this time. How-
ever, where specific changes could be
made to clarify the intent of this Stand-
ard with respect to materiality, they have
been made as further discussed below.
While most commentators agreed with
the concept of maximum direct alloca-
tion of home office expenses, and accu-
mulation of nondirectly allocated home
office expenses into logical, homogeneous
expense pools, a few of these commenta-
tors believed that the Standard did not
adequately incorporate the concept of
materiality for this purpose. The Board
agrees that materiality is an important
consideration in determining whether to
specify that an expense is to be allocated
directly or by means of a separate ex-
pense pool. Accordingly, § 403.40 of the
Standard has been revised to state that
expenses are to be allocated to the maxi-
mum extent "practical" and that ex-
penses not directly allocated are to be
grouped into separate homogeneous ex-
pense pools "if significant in amount and
in relation to total home office expenses."
In addition, a number of commenta-
tors questioned the need for using what
they considered to be a relatively com-
plex formula to allocate residual ex-
penses even when they are minor in
amount. This requirement was contained
in the Standard as published in the FED-
ERAL REGISTER of June 30, 1972. The
Board believes the formula to be rela-
tively simple, well understood, already
used by many companies to satisfy State
tax requirements, and based on financial
data that is readily available. Neverthe-
less, the Board agrees that other alloca-
tion techniques may be acceptable if re-
sidual expenses are not material. Accord-
ingly, § 403.40 (c) of the Standard being
published today permits the use of any
allocation base representative of total
activity if residual expenses are less than
a specified percentage of operating
revenue.
The Board also considered a material-
ity test conducted periodically which
would permit a contractor, otherwise
covered, to choose not to follow the
Standard if its application would result
in little or no change in the total amount
he allocates to his segments with Gov-
ernment business. The Board in this in-
stance rejected this approach for the fol-
lowing reasons:
(a) Such an approach would put un-
due emphasis on the effect of this Stand-
ard on the allocation of costs to or away
from Government contracts.
(b) The administrative problems and
time spent by both the Government and
the contractor in estimating the contract
cost consequences of application of the
Standard periodically and negotiating
the pro forma application of the Stand-
ard for comparative test purposes would
outweigh any benefits that might be de-
rived from waiver of the entire Standard
on the basis of materiality of result.
(c) There would be no assurance that
a contractor's own procedures, which in
the test year happened to provide nearly
identical results to the results which
would be provided through use of the
Standard, would in other, subsequent
}
136
Cost Accounting Standards Board
years also produce the same nearly iden-
tical results. In effect, the results in the
test year may have been an aberration.
(d) In light of the general acceptance
by the majority of commentators of the
concept of direct charging and grouping
of homogeneous expense pools, the pro-
visions for materiality considerations
previously described are deemed suffi-
cient.
(e) The Board has applied the con-
cept of materiality to the extent it be-
lieves practical in this Standard. The
Board, however, as noted in its prefac-
tory comments on the first two published
Standards (37 FR 4141), will give con-
sideration to stating a concept of mate-
riality applicable to all Standards if sub-
sequent events indicate the desirability
and feasibility of doing so.
The Board has eliminated a require-
ment, originally contained in the June
30, 1972, proposal, for interdepartmental
allocations of home office expenses. This
proposal would have required part of the
cost of certain home office functions to
be allocated to other home office func-
tions before being reallocated to seg-
ments. The Board accepts the views of
a number of commentators that this pro-
cedure would be complex and unwarrant-
ed in the light of a relatively insignifi-
cant effect on the allocation of home
office expenses.
The proposed Standard, as published
in the FEDERAL REGISTER of June 30, 1972,
required that all segments be included
in an allocation base unless it could be
demonstrated that any segment did not
receive benefit from, or contribute to the
cause of, an expense to be allocated. A
number of commentators observed that
it would be virtually impossible to dem-
onstrate that a segment received no ben-
efit. Others commented that a segment
should not be included in an allocation
base if it received only negligible benefit.
The June 30, 1972 proposal has been re-
vised to accommodate these comments
and to emphasize again the application
of the concept of materiality.
(2) Hierachy of allocation methods. A
number of commentators were concerned
that a provision in the FEDERAL REGISTER
of June 30, 1972, that costs be "*
** al-
located on the basis of expenses caused
by the segments, benefits received by
the segments, or benefits available to the
segments," did not provide adequate
guidance for the selection of appropriate
allocation bases. The Board believes that
with the exception of centralized service
functions, the allocation criteria con-
tained in the fundamental requirement
are sufficiently specific so as not to re-
quire additional guidance. The Board is
persuaded, however, that it is desirable
to establish more definitive criteria for
the selection of an appropriate alloca-
tion base for centralized service func-
tions. For this purpose, the Board has
added in § 403.50 (b) a hierarchy of allo-
cation methods. The hierarchy is based
on achieving the most realistic represen-
tation of the beneficial or casual rela-
tionship that is practical in the circum-
stances.
(3) Allocation of residual expenses.
With few exceptions, commentators ob-
jected to the establishment of a single
formula to allocate costs of managing the
company as a whole, i.e., residual costs.
Many noted that the formula, in con-
junction with a broadly inclusive defini-
tion of a "segment," would produce in-
equitable allocations to certain segments.
Most often concern was expressed that
the allocations would have to be made
to segments which receive little benefit
from the home office, such as independ-
ent subsidiary corporations, subsidiaries
in which the organization has only a
minority ownership, foreign segments,
and Government-owned contractor-op-
erator (COGO) plants. Others were con-
cerned that the formula was unduly com-
plex to administer and that the results
of its use would not be worth the effort,
particularly where home office expenses
are relatively minor in amount.
The most commonly suggested alter-
native to the formula was that the
Standard should provide "criteria" for al-
location, rather than a specific method
or procedure. Some suggested, for ex-
ample, that the Standard require only
that the allocation base be representa-
tive of the activity of the segments. Most
often the recommended criteria were
phrased in such general terms as equity,
fairness, and reasonableness. Some sug-
gested total cost input, cost of sales, reve-
nue, payroll, number of employees, or
value-added, as a single allocation base.
The Board recognizes that where resid-
ual expenses are minor in amount in
relation to a contractor's total business
volume, the use of other techniques is
unlikely to affect materially the amount
allocated to a given segment, and is even
less likely to affect materially the alloca-
tions to individual contracts. The Board
has therefore provided in § 403.40 (c)
that, where residual expenses are no
greater than a specified percentage of
137
Cost Accounting Standards Board
the organizations, operating revenue,
they may be allocated by means of any
appropriate allocation technique. To de-
velop the percentages specified in the
Standard, the Board considered both ac-
tual statistics of various companies and
the results of a staff study to determine
the effect of the Standard on the home
office allocations of a number of com-
panies. The choice of an alternative tech-
nique for allocation of residual expenses
is expected to be available to many con-
tractors whose home offices perform rela-
tively few functions, or which adequately
employ direct allocation or allocations
by means of other homogeneous expense
pools.
The Board has concluded that where
residual expenses are material in amount,
a single allocation technique should be
specified. Accordingly, § 403.40 (c) of the
Standard requires the use of the three-
factor formula if residual expenses are
in excess of the specified percentage of
total company revenues. If residual ex-
penses are material in amount, the Board
believes that selection of a single allo-
cation technique is necessary to reduce
costly controversy in an area where dis-
putes have been commonplace. Further-
more, the Board is of the view that the
greater the amount of residual expenses,
the greater the likelihood that the use of
a single factor base for all contractors
could result in inequitable allocations.
The use of the three factors in the
formula minimizes any distortion that
may result from any one of the factors.
The three-factor formula is selected
because it takes into account the major
subjects of management concern, i.e.,
volume or activity, employees, and in-
vested capital. Some companies consider
that the time, effort, and attention of top
management attributable to various seg-
ments are approximately proportionate
to the volume or activity of those seg-
ments. Revenue is considered by some
companies to be a generally reliable and
convenient measure of volume or activ-
ity. Other companies believe that top
management efforts are primarily de-
voted to the employees of an organiza-
tion and, therefore, advocate the use of
payroll for allocating the cost of these
efforts. Still others believe that a major
top management concern is the manage-
ment and deployment of the capital in-
vested in the organization; for the pur-
pose of this formula, the net book value
of tangible capital assets and inventories
is considered by the Board to be a rea-
sonable representation of invested capi-
tal.
(4) The formula factors. In addition
to permitting an alternative to the three-
factor formula for allocating residual
expenses, the Board has made certain
modifications to the formula itself.
A number of commentators opposed the
inclusion of intraorganizational sales, in
the revenue factor. Several of these com-
mentators were concerned that this pro-
cedure would "pyramid” the allocation of
home office expenses to those products
which progress through several segments
of an organization before they are finally
sold to outside customers. Others noted
that a segment established primarily to
sell products produced by other segments
would receive a disproportionately large
share of home office expenses under the
formula. However, a segment which sells
much or all of its output to other seg-
ments would receive a disproportionately
small allocation of home office expenses
if such sales were excluded from the
revenue factor. The Board, therefore,
has concluded that the operating reve-
nue of a segment shall include sales to
other segments, but such operating reve-
nue shall be reduced by purchases from
other segments. This procedure will as-
sure an appropriate allocation to each
segment, regardless of whether it sells
to other segments or to outside customers
while at the same time avoiding "pyra-
miding" of home office expenses.
As originally published in the FEDERAL
REGISTER of June 30, 1972, the Standard
required the inclusion of rental property
in the property factor of the formula.
Such property was to be valued at eight
times the annual rental rates. Many com-
mentators opposed the inflexible valua-
tion of such property. Others believed
the inclusion of rental property at all was
entirely inappropriate. Questions were
also raised whether, and to what extent,
minor, short-term leases would have to
be included. In view of these comments,
the Board has concluded that tangible
capital assets to be included in the
formula should be those capitalized in
accordance with a contractor's estab-
lished practices.
The Board, however, did not adopt the
recommendation of many commentators
that the value of Government-furnished
property be included in computing the
property factor of each segment. These
commentators were of the view that
Government property requires as much,
or more, management attention as owned
138
Cost Accounting Standards Board
property. The Board believes that such
administration is mostly accomplished
at the segment level, and therefore, resid-
ual expenses of the home office are not
significantly related. Rather, property is
included in the formula as a measure of
top management's attention to invested
capital.
(5) Allocation of residual expenses to
special segments. As originally published
in the FEDERAL REGISTER of June 30, 1972,
the Standard would have required, as a
general rule, the allocation of a propor-
tionate share of residual expenses to all
segments pursuant to the three factor
formula. For this purpose, "segments"
included domestic and foreign sub-
sidiaries owned more than 50 percent as
well as those subsidiaries owned between
20 percent and 50 percent if the home
office exercised significant guidance and
control.
Numerous comments were received in
regard to these provisions. Commenta-
tors observed variously that the percent-
age of ownership is not in proportion to
the benefits received from the home
office, that the amount of guidance and
control is not in proportion to the per-
centage of ownership, or that the bene-
fits received are not in proportion to the
amount of guidance and control. Some
commentators noted that the absence of
significant guidance and control is dif-
ficult to demonstrate. A number of com-
mentators were particularly concerned
about the resultant allocations to subsidi-
aries owned less than 50 percent, foreign
subsidiaries, unconsolidated subsidiaries,
and sales subsidiaries. Many commenta-
tors observed that subsidaries often per-
form their own home office functions,
that the necessary information to make
the required allocation would not always
be available, that subsidiaries could not
always be billed for home office costs, or
that such allocations would cause tax
and legal problems. Various commenta-
tors recommended alternatively that
allocations to subsidiaries be based on
management judgment, on the degree
of guidance and control, or on the basis
of benefit, rather than on any owner-
ship criteria. Others recommended
variously that no allocation be made to
subsidiaries owned less than 100 percent,
to subsidiaries owned less than 50 per-
cent, or to subsidiaries which are uncon-
solidated. Still others suggested partial
allocations in various forms. One indus-
try association recommended that alloca-
tions to subsidiaries be based on advance
agreements with the Government.
Upon analysis of the comments re-
ceived on this subject, the Board is per-
suaded that a requirement to allocate a
pro rata share of residual expenses by
means of the formula or other alloca-
tion base to all segments, without excep-
tion, could result in inequitable
allocation in certain situations. In the
opinion of the Board, this problem is not
necessarily limited to subsidiary corpora-
tions, but can extend to other segments.
Accordingly, the Board has provided in
§ 403.40 (c) (3) of the Standard that,
where the Contracting Officer and the
contractor agree that a particular seg-
ment receives significantly more or less
benefit from residual expenses than
would be reflected by the allocation of
such expenses pursuant to the formula
or other representative base, they may
agree to establishing a special allocation
of residual expenses to such segment.
Any such special allocation must reason-
ably reflect the benefits received by the
segment. Guidance to implement this
provision is contained in a new para-
graph (d) under § 403.50 of the Standard.
(6) GOCO's. Some commentators
urged that GOCO facilities be excluded
from the definition of segments to receive
allocations of home office expenses, argu-
ing that the GOCO facilities receive little
or no benefits from home office activities.
Several commentators were concerned
that this Standard would result in con-
tractors being required to make greater
allocations to GOCO's than would be
reimbursed to them under the terms of
some GOCO contracts. The Board be-
lieves that contractual problems asso-
ciated with the allocation of costs to a
GOCO contract pursuant to this Stand-
ard, where such costs represent signifi-
cantly more or less benefit than the
GOCO contract actually receives, can
be dealt with by agreement, as discussed
in the preceding section. The Board in-
tends to consider in the near future the
pervasive question of the treatment re-
quired by relevant Federal agencies of
the costs allocated in accordance with
any Standard.
(7) State and local income and fran-
chise taxes. The Board believes that the
nature of this expense is essentially the
same for all companies and that there
is little justification for the observed
multiplicity of allocation methods being
used to allocate to segments their share
of corporate State and local income taxes
and franchise taxes. By means of an
illustration in the FEDERAL REGISTER pub-
lication of June 30, 1972, the Board pro-
139
Cost Accounting Standards Board
posed the allocation of State and local
income taxes on the basis of the profit
and loss of each segment and specifically
requested comments on this particular
illustration. Numerous comments were
received. While some commentators
agreed with the proposed illustration,
most did not. Of those that did not, most
advocated an allocation method which
would allocate such taxes on the basis
of the same factors used to compute a
segment's share of total corporate tax-
able income, that generally being the
percentage of payroll, sales, and property
of the segment to the corporate total of
each of these factors. Several commen-
tators noted that they use different allo-
cation bases, such as income or sales,
but that these result in approximately
the same allocation as one based on the
same factors used to compute the tax.
After evaluating the comments, the
Board continues to be of the view that
the nature of this expense is essentially
the same for all companies. Further, allo-
cation of this expense on the same basis
used to compute a segment's share of
total corporate taxable income is, in the
Board's judgment, more in accord with
the concept of allocating home office
expenses on the basis of the beneficial
or causal relationships between such ex-
penses and receiving segments. The
Board has therefore revised the illustra-
tion for the allocation of State and local
taxes to permit "any base or method
which results in an allocation that equals
or approximates a segment's proportion-
ate share of the tax imposed by the juris-
diction in which the segment does busi-
ness, as measured by the same factors
used to determine taxable income for
that jurisdiction." As a practical matter,
this means that the tax for any State
must be allocated only to those segments
that contribute to the factors used to
measure taxable income for that State.
If there are several segments that do
business within a State, each segment's
share of that State's tax is to be meas-
ured by the proportionate contribution
made by such segment to the total of
the factors for that State.
(8) Cost-benefits. Many commentators
addressed themselves to the last sentence
of section 719 (g) of the Act which pro-
vides that. "In promulgating such stand-
ards, the Board shall take into account
the probable costs of implementation
compared to the probable benefits."
The Board has not neglected its obli-
gation and continues to measure the
costs and benefits involved in implement-
ing both proposed and promulgated
standards. Its experience to date leads
to the conclusion that the kind and
amount of empirical data called for by
some commentators is neither available
nor possible of accumulation. In the final
analysis, the Board must determine
whether the information that has been
assembled and evaluated is sufficient to
enable it to make reasonable judgments.
In making this determination with re-
spect to the present Standard, the Board
gave careful consideration to the evi-
dence bearing on the likely initial and
continuing implementation costs in-
volved, both for contractors and for af-
fected agencies of the Government. At
the same time, consideration was given
to the benefits which will be achieved
through simplified negotiation, adminis-
tration, audit, and settlement proce-
dures; one of the major gains of stand-
ards, to contractors and the Government
alike, is the reduction in the number of
costly controversies. After evaluating the
Standard being promulgated today, the
Board finds that the probable benefits
of this Standard clearly outweigh the
probable cost of implementation.
(9) Exemptions. A number of educa-
tional institutions requested that they
be exempted from the provisions of this
Standard. There appears to be no dis-
agreement that many educational insti-
tutions have "home offices" similar in
many respects to those of commercial
organizations. However, the educational
institutions contend that, unlike com-
mercial organizations, they develop over-
head rates for institutionwide functional
activities, such as education or research,
in lieu of overhead rates for organiza-
tional segments. According to these edu-
cational institutions, it would serve no
purpose, therefore, to require allocation
of an institution's "home office" expenses
to organizational segments. In addition,
a number of these commentators noted
that there are problems in defining the
segments of an educational institution;
e.g., whether a segment is a campus, a
school, a department or some other or-
ganization.
The Board is persuaded that in the
light of the present practices of educa-
tional institutions in carrying out Gov-
ernment contracts, little purpose would
be served at this time by requiring edu-
cational institutions to adhere to a
standard which prescribes criteria for
140
Cost Accounting Standards Board
allocating home office expenses to orga-
nizational segments. The Board recog-
nizes that Office of Management and
Budget Circular No. A-21, which con-
tains the cost principles applicable to
grants and contracts with educational
institutions, does not presently require
development of indirect cost rates for
individual segments of an educational
institution. Therefore, for the time being,
these organizations which are subject
to Office of Management and Budget
Circular No. A-21 are exempted from
the provisions of this Standard.
In addition, the Board is exempting
State and local governments subject to
Office of Management and Budget Circu-
lar No. A-87 from the provisions of this
Standard pending further study of the
applicability of this Standard to such
organizations.
(10) Effective date. As originally pub-
lished in the FEDERAL REGISTER Of June 30,
1972, the Standard would have had to
be followed by a contractor for his first
fiscal year following the receipt of a con-
tract to which the Standard is applica-
ble. A number of commentators observed
that if a contractor received a contract
shortly after the effective date of the
Standard and his fiscal year began
shortly thereafter, little time would be
available to implement the Standard.
Most of these commentators requested
that at least 6 months be allowed to
make the necessary preparations to im-
plement the Standard. To accommodate
these requests, the Standard, now being
published, requires that it must be fol-
lowed for a contractor's fiscal year be-
ginning after September 30, 1973.
(11) Other comments. In addition to
those changes already discussed, the
Board has made a number of other
changes as a result of the comments
received. While these are considered to
be of a minor or editorial nature, the
Board calls particular attention to the
following additional comments.
Various commentators stated that this
Standard would require contractors to
accumulate and allocate home office ex-
penses on a different basis than that
used for internal management purposes.
As a consequence, these commentators
were concerned that the Standard would
necessitate two separate sets of records.
Others urged that the Standard specifi-
cally permit the use of memorandum
records. The Board notes that even in
the absence of this Standard, many con-
tractors now use memorandum records
141
to make home office allocations for pur-
poses of Government contracts because
they do not make formal allocations of
home office expenses to segments, or do
so on a different basis. The Board sees
no need to disturb the practice of using
memorandum records for home office
allocations, nor does it view this as being
a significant burden on contractors who
find the need to do so. However, the
Board does not consider it necessary or
appropriate to refer specifically to the
use of memorandum records by means
of this Standard.
Certain commentators recommended
that the Standard be specific as to the
use of estimated or budgeted amounts,
either for pricing purposes or for pur-
poses of actual allocations. The use of
estimates or budgets for pricing purposes
or for purposes of provisional rates for
cost accumulation is customary, and is
not considered by the Board to require
specific authority by the terms of this
Standard.
There is also being published today
(37 F.R. 26678) an amendment to Part
400. Definitions, to incorporate in that
part the words and phrases defined in
§ 403.30 of the Standard.
B. Amendments, 11-7-73
B. Preamble to revisions of the definitions
of “home office" and "tangible capital asset,
§ 403.30 (a) (2) and (5), and editorial
amendments to §§ 403.50(c) (2) and 403.70,
38 FR 30725, Nov. 7, 1973. The document
amended 4 CFR Parts 331, 351, 401, 402, and
404 as well as Part 403; material relating
to those parts is omitted. It appears in the
supplements to those parts.
The purpose of this publication by the
Cost Accounting Standards Board is to
amend Parts 331, 351, 400, 401, 402, 403,
and 404 of its rules and regulations. The
amendments, which are minor clarifica-
tions to the regulations, were published
in the FEDERAL Register of September 5,
1973 (38 FR
(38 FR 23971). The amend-
ments: * * (c) modify certain defini-
tions in Parts 400, 401, 402, 403, and 404
for the purposes of uniformity among
the various Parts. Only one comment in
response to the September publication
has been received by the Board. This ex-
pressed agreement with the proposed
changes.
In view of the foregoing, the following
amendments to the Board's regulations
are being made effective November 7,
1973.
Supp. No.3
Cost Accounting Standards Board
C. Amendments, 8-4-75
This publication, 40 FR 32747, August 4,
1975, revised § 403.70 (a) and made several
amendments to Part 351. Only those portions
of the preamble which describe the revision
of § 403.70 (a) are printed here, although the
complete preamble appears as preamble F
of the supplement to Part 351. A correction
to the language which amended § 403.70 was
printed at 40 FR 33819, August 12, 1975.
The purpose of this publication by the
Cost Accounting Standards Board is to
modify Part 351, Basic Requirements, of
its rules and regulations and Part 403,
Allocation of Home Office Expenses to
Segments. A proposed modification to
Part 351 was published in the FEDERAL
REGISTER of April 3, 1975 (40 FR 14942).
Twenty-seven sets of comments were
received in response to that publication.
After considering those comments, the
most significant of which are discussed
below, the Board is today publishing an
amendment to its rules relative to the re-
quirement for the submission of Dis-
closure Statements by defense con-
tractors and subcontractors.
6. Applicability of CAS 403. A number
of commentators noted that the April 3
proposal deleted paragraph 351.41 of the
Board's regulations. This paragraph re-
stated the requirement that only com-
panies that met the Disclosure Statement
filing requirement for Federal fiscal year
1971 were required to comply with CAS
403, Allocation of Home Office Expenses
to Segments. These commentators asked
that the Board's position be clarified as
to whether or not any current revision
to the Disclosure Statement requirement
also changed the coverage of CAS 403. It
was not the Board's intention to broaden
the coverage of CAS 403 at this time.
The possibility of extending the coverage
of that Standard is the subject of a sepa-
rate study currently underway. To make
the Board's intention wholly clear, sec-
tion 403.70 of CAS 403 is being revised to
state explicitly rather than by cross ref-
erence the continuing coverage of that
Standard. This revision has no substan-
tive significance whatever, but instead
merely sets out specifically what was and
continues to be the exemption from that
Standard, which was before today ac-
complished by reference to section 351.40
of the Board's Basic Requirements. Con-
tractors and subcontractors which to-
gether with their subsidiaries did not re-
ceive net awards of negotiated national
defense prime contracts during Federal
fiscal year 1971 totaling more than $30
million continue to be exempt from
Standard 403.
D. Amendments, 9-12-77
The amendment to 4 CFR Part 403, 42 FR
45625, September 12, 1977 was published as a
part of the publication which set forth the orig-
inal 4 CFR Part 332 and amendments to Parts
331 and 351. The complete preamble appears
in the supplement to Part 332.
COMMENTS ON PART 403
With respect to the amendment of
Part 403, the November 30, 1976 proposal
was to revise that Standard to make it
applicable to any contract which was
subject to Cost Accounting Standards
generally. The amendment being pro-
mulgated today retains this concept.
However, as recommended by a number
of commentators, the Board deferred the
promulgation of this amendment pend-
ing the amendments to Parts 331 and
351 and the addition of Part 332 dis-
cussed above.
The decision to extend the application
of Part 403 to additional contractors was
made on the basis of extensive research.
This research included both those con-
tractors who were already required to
use Part 403 and those who were ex-
pected to use it as a result of this amend-
ment. With respect to the current users,
the Board is satisfied that this Standard
has resulted in more equitable alloca-
tions, with little administrative effort
in most cases. With respect to potential
additional users, the research indicated
that many of these would have to make
few, if any, changes to comply with Part
403 and that the remainder could comply
with little difficulty. The Board notes in
addition, an independent study by the
Conference Board which found that de-
fense contractors who are using Part 403
for contract costing purposes are using
the same allocation procedures for in-
ternal reporting purposes. According to
the Conference Board, it was typical of
these companies to allocate home office
expenses on a blanket basis prior to the
promulgation of Part 403. (Information
Bulletin No. 17, February 1977.)
142
A number of commentators suggested
Supp. No. 3
Cost Accounting Standards Board
"
various limitations for the application of
Part 403. Some of these suggestions were
expressed in general terms. Some of the
commentators recommended, for exam-
ple, that the requirement to use Part 403
should not be extended to "small con-
tractors." Alternatively or additionally
it was recommended that Part 403 should
not be required for a large contractor
with little work subject to Cost Account-
ing Standards. More specifically, recom-
mendations were received to exempt
those contractors with less than 10 per-
cent of their revenue from Government
work. Others recommended that contrac-
tors who have less than $10 million in
contracts subject to Cost Accounting
Standards should be exempt. The Board
believes that the recommendations of
this nature have been accommodated to
the extent desirable and practical by the
amendments to Parts 331 and 351 and
the addition of Part 332 being promul-
gated today. Accordingly, any further
exemption from Part 403, specifically, is
considered to be unnecessary.
the
In publishing the proposed amendment
to Part 403 in the FEDERAL REGISTER
of November 30, 1976, the Board stated
that there is evidence that almost all
contractors who were required to make
significant changes in their allocation
practices as a result of Part 403 did so
without undue trouble or expense. Sev-
eral commentators questioned
Board's conclusion in this regard. The
Board's conclusion was based in part on
Staff research involving 147 home offices
who now use Part 403 to allocate home
office expenses. This research sought to
determine, among other things, the ad-
ministrative problems and expense in-
volved in making allocations pursuant to
Part 403. Government auditors reported
that of the 147 home offices, only 4 had
problems in developing the necessary
data and that there was evidence of sig-
nificant administrative costs at one of
these four offices. In addition, evidence
of significant administrative costs in
making the allocations was found by the
Government auditors at four other of
the 147 home offices.
Some of the respondents who ques-
tioned the Board's conclusions regard-
ing administrative problems and expense
referred to an industry report on the
economic impact of Cost Accounting
Standards as support for this position.
These respondents variously referred the
Board to those sections of the report
which summarized (i) contractor's ap-
praisal of benefits from Part 403; (ii) the
number of contractors who were required
to make changes as a result of Part 403;
(iii) the number of noncompliance no-
tices issued in connection with Part 403;
and (iv) the increase and decrease in
costs allocated to Government work as a
result of CAS 403. Nothing in these sec-
tions, however, specifically addresses the
question of administrative problems or
expense involved in complying with Part
403.
Two associations reported that, con-
trary to the Board's findings, their mem-
ber companies had experienced trouble
and expense in complying with Part 403.
These associations declined to identify
the companies involved, the nature of
the problems, or the amount of the ex-
penses. Under these circumstances, there
is no basis to alter the conclusion that
contractors have been able to make
changes required as a result of Part 403
without undue trouble or expense.
One commentator stated that it would
not be desirable to make more contrac-
tors subject to Part 403 because he be-
lieves it to be defective, particularly with
respect to its application to the alloca-
tion of state and local taxes. With re-
spect to the application of the Stand-
ard to the allocation of state and local
taxes specifically, the Board notes that
it reached its conclusion on the basis of
considerable research and extensive de-
liberation. Moreover, it has reexamined
its conclusions, even after the promulga-
tion of Part 403. Notwithstanding the
views of the commentator, the Board
continues of the view that the provision
in question is proper. Accordingly, the
Board does not agree that this Standard
should not be extended to additional con-
tractors because of the tax allocation
provision.
142A
Supp. No. 3
Cost Accounting Standards Board
EFFECTIVE DATE
The effective date of the regulations being
published today is March 10, 1978. Pub. L.
91-379 provides that regulations shall take ef-
fect not earlier than the expiration of the first
period of sixty calendar days of continuous ses-
sion of the Congress following the date on
which a copy of the regulations is transmitted
to the Congress. The calendars of the Congress
indicate that the required sexty days will not
pass until some time in February 1978. Accord-
ingly, March 10, 1978, has been selected to
assure sufficient time for the regulation to lie
before the congress.
142B
Supp. No. 3
Cost Accounting Standards Board
Sec.
TANGIBLE ASSETS
PART 404-CAPITALIZATION OF
404.10 General applicability.
404.20 Purpose.
404.30
404.40
Definitions.
Fundamental requirement.
404.50 Techniques for application.
404.60
404.70
Illustrations.
Exemptions.
404.80 Effective date.
Supplement Preambles
AUTHORITY: 84 Stat. 796, sec. 103, 50 U.S.C
App. 2168.
SOURCE: 38 FR 5321, Feb. 27, 1973, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 5318, February 27, 1973)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to; Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 404.10 General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration, and
settlement of all negotiated prime con-
tract and subcontract national defense
procurements with the United States in
excess of $100,000, other than contracts
or subcontracts where the price negoti-
ated is based on (a) established catalog
or market prices of commercial items
sold in substantial quantities to the gen-
eral public, or (b) prices set by law or
regulation.
§ 404.20
Purpose.
This Standard requires that, for pur-
poses of cost measurement, contractors
establish and adhere to policies with re-
spect to capitalization of tangible assets
which satisfy criteria set forth herein.
Normally, cost measurements are based
on the concept of enterprise continuity;
this concept implies that major asset ac-
quisitions will be capitalized, so that the
cost applicable to current and future
accounting periods can be allocated to
cost objectives of those periods. A capi-
talization policy in accordance with this
Standard will facilitate measurement of
costs consistently over time.
§ 404.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are defined
in Part 400 of this chapter have the
meanings ascribed to them in that part
unless the text demands a different defi-
nition or the definition is modified in
paragraph (b) of this section:
(1) Asset accountability unit. A tan-
gible capital asset which is a component
of plant and equipment that is capital-
ized when acquired or whose replacement
is capitalized when the unit is removed.
transferred, sold, abandoned, demolished,
or otherwise disposed of.
(2) Original complement of low cost
equipment. A group of items acquired
for the initial outfitting of a tangible
capital asset or an operational unit, or
a new addition to either. The items in
the group individually cost less than
the minimum amount established by the
contractor for capitalization for the
classes of assets acquired but in the ag-
gregate they represent a material invest-
ment. The group, as a complement, is
expceted to be held for continued service
beyond the current period. Initial out-
fitting of the unit is completed when
the unit is ready and available for nor-
mal operations.
(3) Repairs and maintenance. Main-
tenance is the regularly recurring activ-
ity of keeping assets in normal or ex-
pected operating condition. Repair is the
activity of putting them back into nor-
mal or expected operating condition. The
total endeavor to obtain the expected
service during the life of tangible capital
assets is generally called repairs and
maintenance.
(4) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or
possession beyond the current accounting
period for the service it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
143
Cost Accounting Standards Board
[87 FR 4173, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES: For preambles to amendments
to § 404.30, see preambles A and B of the
supplement to this part.
§ 404.40 Fundamental requirement.
(a) The acquisition cost of tangible
capital assets shall be capitalized. Capi-
talization shall be based upon a written
policy that is reasonable and consistently
applied.
(b) The contractor's policy shall des-
ignate economic and physical character-
istics for capitalization of tangible
assets.
(1) The contractor's policy shall des-
ignate a minimum service life criterion,
which shall not exceed 2 years, but which
may be a shorter period. The policy shall
also designate a minimum acquisition
cost criterion which shall not exceed
$500, but which may be a smaller
amount.
(2) The contractor's policy may desig-
nate other specific characteristics which
are pertinent to his capitalization policy
decisions (e.g., class of asset, physical
size, identifiability and controllability,
the extent of integration or independ-
ence of constituent units).
(3) The contractor's policy shall pro-
vide for identification of asset account-
ability units to the maximum extent
practical.
(4) The contractor's policy may desig-
nate higher minimum dollar limitations
for original complement of low cost
equipment and for betterments and im-
provements than the limitation estab-
lished in accordance with paragraph (b)
(1) of this section, provided such higher
limitations are reasonable in the con-
tractor's circumstances.
(c) Tangible assets shall be capital-
ized when both of the criteria in the
contractor's policy as required in para-
graph (b)(1) of this section are met,
except that assets described in para-
graph (b)(4) of this section shall be
capitalized in accordance with the cri-
teria established in accordance with that
paragraph.
(d) Costs incurred subsequent to the
acquisition of a tangible capitai asset
which result in extending the life or in-
creasing the productivity of that asset
(e.g., betterments and improvements)
and which meet the contractor's estab-
lished criteria for capitalization shall be
capitalized with appropriate accounting
for replaced asset accountability units.
However, costs incured for repairs and
maintenance to a tangible capital asset
which either restore the asset to, or
maintain it at, its normal or expected
service life or production capacity shall
be treated as costs of the current period.
§ 404.50 Techniques for application.
(a) The cost to acquire a tangible
capital asset includes the purchase price
of the asset and costs necssary to pre-
pare the asset for use.
(1) The purchase price of an asset
shall be adjusted to the extent practical
by premiums and extra charges paid or
discounts and credits received which
properly reflect an adjustment in the
purchase price.
(1) Purchase price is the consideration
given in exchange for an asset and is
determined by cash paid, or to the extent
payment is not made in cash. in an
amount equivalent to what would be the
cash price basis. Where this amount is
not available, the purchase price is deter-
mined by the current value of the con-
sideration given in exchange for the
asset. For example, current value for a
credit instrument is the amount imme-
diately required to settle the obligation
or the amount of money which might
have been raised directly through the use
of the same instrument employed in
making the credit purchase. The current
value of an equity security is its market
value. Market value is the current or pre-
vailing price of the security as indicated
by recent market quotations. If such
values are unavailable or not appropriate
(thin market, volatile price movement,
etc.), an acceptable alternative is the
fair value of the asset acquired.
(ii) Donated assets which, at the time
of receipt, meet the contractor's criteria
for capitalization shall be capitalized at
their fair value at that time.
(2) Costs necessary to prepare the as-
set for use include the cost of placing the
asset in location and bringing the asset
to a condition necessary for normal or
expected use. Where material in amount.
such costs, including initial inspection
and testing, installation and similar ex-
penses, shall be capitalized.
(b) Tangible capital assets constructed
or fabricated by a contractor for its own
use shall be capitalized at amounts which
include all indirect costs properly allo-
cable to such assets. This requires the
capitalization of general and administra-
tive expenses when such expenses are
identifiable with the constructed asset
144
Cost Accounting Standards Board
and are material in amount (e.g., when
the in-house construction effort requires
planning, supervisory, or other signifi-
cant effort by officers or other personnel
whose salaries are regularly charged to
general and administrative expenses)
When the constructed assets are iden-
tical with or similar to the contractor's
regular product, such assets shall be cap-
italized at amounts which include a full
share of indirect costs.
(c) In circumstances where the ac-
quisition by purchase or donation of pre-
viously used tangible capital assets is not
an arm's length transaction, acquisition
cost shall be limited to the capitalized
cost of the asset to the owner who last
acquired the asset through an arm's-
length transaction, reduced by deprecia-
tion charges from date of that acquisi-
tion to date of gift or sale.
(d) Under the "purchase method" of
accounting for business combinations.
acquired tangible capital assets shall be
assigned a portion of the cost of the ac-
quired company, not to exceed their fair
value at date of acquisition. Where the
fair value of identifiable acquired assets
less liabilities assumed exceeds the pur-
chase price of the acquired company in
an acquisition under the "purchase
method," the value otherwise assignable
to tangible captal assets shall be reduced
by a proportionate part of the excess.
(e) Under the "pooling of interest
method" of accounting for business com-
binations, the values established for tan-
gible capital assets for financial account-
ing shall be the values used for deter-
mining the cost of such assets.
(f) Asset accountability units shall be
identified and separately capitalized at
the time the assets are acquired. How-
ever, whether or not the contractor iden-
tifies and separately capitalizes a unit
initially, the contractor shall remove the
unit from the asset accounts when it is
disposed of and, if replaced, its replace-
ment shall be capitalized.
§ 404.60
Illustrations.
(a) Illustrations of costs which must
be capitalized. (1) Contractor has an es-
tablished policy of capitalizing tangible
assets which have a service life of more
than 1 year and a cost of $1,000. The con-
tractor's policy must be modified to con-
form to the $500 policy limitation on
minimum acquisition cost established by
the Standard.
(1) Contractor acquires a tangible
capital asset with a life of 18 months at
a cost of $600. The Standard requires
that the asset be capitalized in compli-
ance with contractor's policy as to serv-
ice life.
(ii) Contractor acquires a tangible as-
set with a life of 18 months at a cost
of $450. The asset need not be capitalized
unless the contractor's revised policy
establishes a minimum cost criterion
below $450.
(2) Contractor has an established pol-
icy of capitalizing tangible assets which
have a service life of more than 1 year
and a cost of $250. Contractor acquires
a tangible asset with a life of 18 months
and a cost of $250. Contractor acquires
quires that based upon contractor's
policy the asset be capitalized.
(3) Contractor establishes a major
new production facility. In the process,
a number of large and small items of
equipment were acquired to outfit it. The
contractor has an established policy of
capitalizing individual items of tangi-
ble assets which have a service life of
over 1 year and a cost of $500, and all
items meeting these requirements were
capitalized. In addition, the contractor's
policy requires capitalization of an origi-
nal complement which has a service life
of over 1 year and a cost of $5,000.
Items of durable equipment acquired for
the production facility costing less than
$500 each aggregated $50,000. Based upon
the contractor's policy, the durable
equipment items must be capitalized as
the original complement of low cost
equipment. (The concept of original
complement applies to such items as
books in a new library, impact wrenches
in a new factory, work benches and racks
in a new production facility, or furniture
and fixtures in a new office building.)
(4) Contractor has an established
policy for treating its heavy presses and
their power supplies as separate asset ac-
countability units. A power supply is
replaced during the service life of the
related press. The Standard requires
that, based upon the contractor's policy,
the new power supply be capitalized with
appropriate accounting for the replaced
unit.
(b) Illustrations of costs which need
not be capitalized. (1) The contractor
has an established policy of capitalizing
tangible assets which have a service life
of 2 years and a cost of $500. The con-
tractor acquires an asset with a useful
life of 18 months and a cost of $5,000.
The tangible asset should be expensed
because it does not meet the 2 year
145
Cost Accounting Standards Board
criterion.
(2) The contractor establishes a new
assembly line. In outfitting the line, the
contractor acquires $5,000 of small tools.
On similar assembly lines under simi-
lar conditions, the original complement
of small tools was expensed because the
complement was replaced annually as a
result of loss, pilferage, breakage, and
physical wear and tear. Because the unit
of original complement does not meet
the contractor's service life criterion for
capitalization (1 year), the small tools
may be expensed.
§ 404.70
Exemptions.
None for this Standard.
§ 404.80 Effective date.
The effective date of this standard is
July 1, 1973. The standard shall be ap-
plied to accrued expenditures for acqui-
sition of tangible capital assets during
the contractor's next fiscal year begin-
ning on or after October 1, 1973.
[38 FR 12319, May 5, 1973]
PREAMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how
effective dates are determined.
146
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication of Part 404,
12-27-73
Preamble, published at 38 FR 5318, Feb.
27, 1973, to the original publication of this
part.
The Standard on Capitalization of
Tangible Assets published today is one
of a series being promulgated by the
Cost Accounting Standards Board pur-
suant to section 719 of the Defense Pro-
duction Act of 1950, as amended (Public
Law 91-379, 50 U.S.C. app. 2168), which
provides for the development of Cost Ac-
counting Standards to be used in con-
nection with negotiated national defense
contracts.
Work preliminary to the development
of this Standard was initiated as the
result of recognition that the general
subject of fixed asset accounting has been
the source of continuing problems be-
tween contractors and the Government
concerning equitable determinations of
the costs attributable to performance of
specific contracts. The problems include
(1) determination of the acquisition costs
to be capitalized as opposed to those
which are charged against revenues of
the current period, (2) determination
of appropriate depreciation charges for
a given fiscal period, (3) determination
of the appropriate allocation of deprecia-
tion charges among contractor activities,
and (4) determination of appropriate
techniques for treating dispositions of
fixed assets. The Standard establishes the
beginning point for fixed asset account-
ing as described in (1) above. It does not
cover the other related topics.
Early research on this Standard in-
cluded an extensive review of available
literature on the subject and a review of
decisions of contract appeals boards and
courts. A preliminary analysis of the en-
tire topic of fixed asset accounting was
made and a number of issues were iden-
tified; comments on this analysis were
obtained in response to an extensive
mailing. After careful evaluation of the
comments, the Board developed and cir-
culated a questionnaire on tangible fixed
asset accounting practices. The replies
to the questionnaire were considered in
the preparation of a preliminary draft
of the Standard on Capitalization of
Tangible Assets, which was, in turn,
widely distributed for informal comment
by interested parties.
The Standard now being promulgated
is derived from the proposal which was
published in the FEDERAL REGISTER for
October 5, 1972, with an invitation for
interested parties to submit data, views,
and arguments to the Board. The Board
supplemented that FEDERAL REGISTER
publication by sending copies of the
FEDERAL REGISTER material directly to
organizations and individuals who were
expected to be interested. Responses were
received from 107 sources, including in-
dividual companies, Government agen-
cies, professional associations, industry
associations, public accounting firms,
universities, and others. All of the com-
ments have been carefully considered by
the Board.
Most of those who commented ex-
pressed general concurrence with the
provisions of the proposal. Many of the
contractors who commented indicated
that their practices in most respects al-
ready complied with the Standard; most
suggested that the proposal should be
modified only in a few respects. The
Board takes this opportunity to express
its appreciation for the helpful sugges-
tions and criticisms which have been fur-
nished. Many companies and individuals
have devoted significant talent and effort
to the improvement of this Standard.
The comments below summarize the
major issues discussed in connection with
the October 5 proposal and explain the
major changes which have been made.
(1) Adequacy of existing situation.
Some commentators contended that the
Board should not promulgate any rules
in this area because the applicable prin-
ciples have been well established and
accepted. The Board, however, finds that
the existing regulations have failed to
establish reasonable uniformity of capi-
talization practices among comparable
organizations.
(2) Specificity. Some interested parties
criticized the proposed Standard on the
basis that it was "too procedural." Those
who comment in this vein tend to assert
that this Cost Accounting Standard
should deal only with criteria and poli-
ries. Others critized the October 5 pro-
posal as being too general and failing to
provide sufficient guidance about treat-
ment of specific types of costs (such as
sales tax) or certain types of transactions
(such as deferred maintenance).
The Standard provides practical im-
plementation for the basic concept of
direct identification of costs with final
cost objectives to the maximum practical
extent. The acquisition costs of tangible
assets should be identified and capitalized
wherever the service lives and amounts
147
Cost Accounting Standards Board
involved are so significant that contract
costs would be distorted if the acquisition
costs were not capitalized. The main fea-
ture of this Standard is the requirement
that contractors consistently apply rea-
sonable capitalization policies in ac-
cordance with criteria stated in the
Standard.
A policy for capitalization is a policy
for distinguishing between assets and
expenses. Immediate charge-off is justi-
fiable as a practical expedient in those
situations where the improved allocation
of cost among cost objectives and ac-
counting periods which would be attain-
able by capitalization is worth the
administrative costs which would be re-
quired. Assets with either short service
lives or minor acquisition costs are con-
veniently accounted for as charges
against current revenues.
When a transaction is identified as the
acquisition of a tangible capital asset,
the full cost of acquiring the asset should
be capitalized. The Board might have ap-
plied this concept by requiring the in-
clusion of specific elements of cost in
the determination of acquisition cost. As
one example, it would be appropriate in
concept to capitalize sales and use taxes
as a part of the acquisition cost because
such taxes are clearly caused by the ac-
quisition. However, as many commenta-
tors have stated, a requirement to capi-
talize such taxes and similar costs would
require significant changes in contrac-
tor's accounting systems, and the bene-
fit from such increased uniformity may
not exceed the expected cost to contrac-
tors if required to change from their pres-
ent practices. The Sstandard, therefore,
does not specifically require the capitali-
zation of sales or use taxes or other col-
lateral costs of acquiring tangible cap-
Ital assets. The subject remains under
active consideration by the Board and
if further study should indicate that the
benefits from increased uniformity in
this area would outweigh probable ad-
ministrative costs, the Board will take
affirmative action on this subject.
This Standard does not provide pro-
cedural detail for determining the ac-
counting treatment for some specific
kinds of transactions related to existing
assets. The major problems encountered
in practice are those of classification;
once specific work is defined, for example,
as "preventive maintenance," "routine
repair," "major overhaul," "extensive
renovation," "addition," "betterment,"
or some other such classification in ac-
cordance with contractor policy. the ap-
propriate accounting treatment can
readily be agreed upon.
The Standard leaves latitude to the
contractor in establishing his capitaliza-
tion policy, but it provides some reason-
able limits. A major purpose of Cost Ac-
counting Standards is increased uni-
formity and consistency; this goal im-
plies some reduction in the flexibility
which was formerly available.
(3) Capitalization as an independent
issue. As indicated above, the research
which has led to this Standard began as
a broad inquiry into a number of closely
related issues. Capitalization is only one
of those issues. Interested parties have
suggested that the Board should not is-
sue a Standard on any single part of
the subject of fixed asset accounting
until it is prepared to deal comprehen-
sively with all related issues. The major
objection is that changes in this Stand-
ard may be found to be appropriate when
the details of a Standard on deprecia-
tion are agreed upon.
After careful consideration of all is-
sues presented, the Board is confident
that the Standard being promulgated
will be compatible with future Standards.
Nonetheless the Board acknowledges that
because of future Standards, or for other
reasons, modification in this, or indeed
in any Standard which it promulgates,
may be necessary. Should such modifica-
tions be needed, they will be made. This
Standard, by helping identify those ac-
quisitions which should be capitalized.
will be useful immediately in connection
with identifying items whose cost should
not be allocated to current contracts.
(4) Definition of tangible capital asset.
The term "Tangible Capital Asset" has
already been defined by the Board in
connection with the Cost Accounting
Standard on Allocation of Home Office
Expenses to Segments. The definition
provides that such assets "are to be held
for continued use or possession *** for
the services they yield." Some interested
parties have suggested that this def-
inition could apply to inventories which
are held for sale. The Board considers
that the phrase "for the services they
yield" is sufficient to show that the term
does not apply to inventories. No change
is deemed necessary in the published
definition.
(5) Nature of limits. The Standard re-
quires that each contractor establish and
adhere to a reasonable capitalization
148
Cost Accounting Standards Board
policy. The Board feels that, in most
cases, the contractor is best able to de-
termine what policy will be most suitable
for his situation, and that all interested
parties will be benefited by consistent ap-
plication of appropriate criteria for dis-
tinguishing between capital items and
those which should be charged off at time
of acquisition. In consideration of the
possible distortion and inequity which
might result from application of an un-
reasonable policy (significant amounts
of long-term fixed asset costs charged
to expense at acquisition), the Board
considered the desirability of a specific
definition of the limits of reasonableness.
The proposal published in October, as
well as earlier drafts distributed infor-
mally, included the requirements that
the policy deal with both the expected
service life and the acquisition cost. An
acceptable policy would not allow an as-
set to be charged off immediately against
revenue if its service life was expected
to be in excess of 2 years and its acquisi-
tion cost was in excess of $500.
The Board received many comments on
the provision of these specific limitations.
Critics have used the term "arbitrary."
The Board has considered carefully all
the pertinent points and has continued
the limits which were earlier proposed.
Disclosure statements and other research
data obtained by the Board indicate that
very few contractors will be required to
change their present policies and those
few required changes will impact only a
few acquisitions. A review of disclosure
statements filed with the Board indicates
that only 3 percent of the reporting com-
panies had dollar capitalization criteria
in excess of $500. In addition, the fact
that specific limits, appropriate today.
may need to be revised in the future is
not a reason to avoid establishing them
today. Limitations can be revised prompt.-
ly if developments warrant a change
There have been no established limits
on capitalization policies. Accordingly.
wide diversity exists among contractors.
The Board does not seek to establish a
single uniform accounting system for all
contractors. but it believes that limits
for total cost and useful life should be
placed under some uniform constraints.
Indeed, the Board feels that procurement
authorities are entitled to assurance that
contractor capitalization policies will re-
sult in the capitalization of those ac-
quired assets which are within specific
limits of reasonableness.
(6) Comparing benefits and costs. The
Congress provided, in section 719(g) of
the Act which established the Board,
that in promulgating Cost Accounting
Standards "the Board shall take into ac-
count the probable costs of implementa-
tion compared to the probable benefits."
Those commenting on the Board's work
show considerable interest in this aspect;
the comments on the October proposal
included a number of remarks on this
comparison.
The Board considers the benefits and
the costs which can be related to each
specific proposal and also to the total
program of developing Cost Accounting
Standards. This Standard has, for most
contractors, almost no cost. It requires
the adoption of a policy; most contrac-
tors already have policies which comply
with the criteria. Some contractors, how-
ever, will have to establish or modify
capitalization policies; for these contrac-
tors there may be costs. Benefits will be
available immediately; contract adminis-
tration will be improved. Once a capitali-
zation policy is established in accordance
with the standard, individual acquisi-
tions can be handled in accordance with
the established policy, with a reduction
in controversy. This Standard establishes
the beginning point for the determina-
tion of the costs associated with use of
capitalized tangible assets. One of the
major benefits of this Standard is, there-
fore, the provision of a more uniform
basis on which the Government and con-
tractors may deal with depreciation
expense.
During the development process which
led to this Standard. the Board asked
for, and received, a number of comments
from contractors about the likely costs
attributable to the implementation of a
proposal such as this one. Most replies
indicated little or no cost. Some indi-
cated compliance with this Standard will
cause divergence from practices now ac-
cepted for other purposes. The Board has
found no requirement imposed by other
authoritative bodies for continuance of
practices inconsistent with this Stand-
ard. Divergence, therefore, will occur
only if an affected contractor elects. for
other purposes, practices inconsistent
with the criteria set forth in this
Standard.
The Board concludes that this Stand-
ard will provide benefits which outweigh
the costs of implementation.
(7) Accounting for assets acquired by
149
Cost Accounting Standards Board
lease. Many commentators suggested to
the Board various methods of account-
ing for assets acquired by lease. This
problem is not a new one. Tangible assets
can be acquired by various kinds of busi-
ness transactions and relationships. The
accounting principles related to capital-
Ization are most readily applied in con-
nection with purchases. Some lease
agreements provide to the user of an
asset many of the attributes of owner-
ship. The accounting profession has long
been cognizant of difficulties related to
determining when assets acquired by
lease should be treated as purchases.
The Board agrees that assets actually
purchased should (if otherwise appro-
priate for capitalization) be capitalized
even when the purchase transaction is in
the form of a lease agreement.
must be
This same determination
made for other accounting purposes. The
accounting profession is now guided, in
this regard, primarily by opinions of the
Accounting Principles Board; it is our
understanding that the Financial Ac-
counting Standards Board will soon un-
dertake to provide a new statement for
the profession on this issue. This Board
will carefully consider all authoritative
statements of accounting principles to
the extent that it can do so while main-
taining progress toward its own primary
goal of increased uniformity and con-
sistency in cost accounting for contracts.
Those lease acquisitions which are
treated as purchases will be subject to
this standard; those which are treated
as leases will for the time being be sub-
ject to the existing procurement regula-
tions which deal with rental costs. The
Board is, therefore, willing that the con-
tractor determine, for each acquisition,
whether it is a purchase and hence sub-
ject to his capitalization rolicy (which
must comply with the criteria estab-
lished in this Standard) or a rental
transaction and hence subject to estab-
lished regulations on rental costs. In
either case, determination of the reason-
ableness of the lease costs remains the
responsibility of the procurement agen-
cies and is not dealt with here by the Cost
Accounting Standards Board.
(8) Investment Credit. The October
proposal included a specific provision
that the Investment Credit pursuant to
the Revenue Act of 1971, Public Law 92-
178, need not be deducted from the pur-
chase price of tangible capital assets in
establishing the acquisition cost of the
assets. Several interested parties criti-
cized the language used in this provision.
Public policy on the point is clear; the
Board, by including a specific provision,
did not intend to change the situation.
The Investment Credit need not be de-
ducted, and there is no need for a specific
provision on this point. The Board has,
therefore, removed the provision.
merous
(9) Indirect cost for constructed as-
sets. The October 5 proposal contained
a provision that the acquisition costs of
assets constructed or fabricated by a
contractor should include the indirect
costs allocable to final cost objectives.
The Board specifically drew attention
to this treatment of such assets and re-
quested that anyone advocating an alter-
native treatment should set it forth in
detail with reasons for favoring it. Nu-
commentators opposed the
Board's proposed treatment of con-
structed assets, stating variously that the
allocation of general and administrative
expenses to such assets was contrary to
generally accepted accounting prin-
ciples (since such expenses are period
costs), was not required by existing Gov-
ernment regulations, and no one ac-
counts for such assets in this manner. A
few suggestions for alternative treatment
were made. Most of them dealt with al-
locating to constructed assets only vari-
able indirect costs that could be directly
identified with the assets constructed.
For financial reporting purposes some
indirect costs are identified as period
costs and are not considered to be in-
ventoriable. Consistent application of the
full costing concept generally applicable
to Government contract costing is not
compatible with that period cost concept;
for such contract costing, all costs-in-
cluding those otherwise considered as pe-
riod costs-must be associated with
final cost objectives. The October 5 pro-
posal identified constructed assets as
projects which should be treated as final
cost objectives and share in indirect cost
allocations. This treatment is consistent
with the casting practice which would
be followed if the Government contracted
for the construction of fabrication of the
assets in question.
The Board continues to be of the view
that application of the full costing tech-
niques applicable to Government con-
tract costing requires that full consider-
ation be given to the applicability of
fixed overhead including general and ad-
ministrative expense to constructed as-
150
Cost Accounting Standards Board
sets. Some fixed overhead at the oper-
ations level and certain general and ad-
ministrative expenses are often allocable
to constructed assets based on their ben-
eficial relationship to the construction
effort. Costs generally not so allocable
could include selling expenses, bid and
proposal expenses, and the like.
Therefore, tangible capital assets con-
structed which are identical with or simi-
lar to the contractor's normal product
should receive an appropriate share of all
indirect cost including general and ad-
ministrative expenses. In addition, other
constructed tangible capital assets re-
quiring significant indirect support also
should be burdened with their allocable
share of indirect costs, where such indi-
rect costs are material. The revised
§ 404.50 (b) reflects this position.
(10) Grouping of assets. The proposed
standard as published October 5 was con-
strued by a number of readers to imply
that capital assets should be accounted
for on a unit basis and not in groups.
The Board did not intend any such im-
plication. The Board's interest is in cost-
ing principles and the requirements to
capitalize does not extend to the spe-
cific type of records to be maintained.
(11) Rearrangement costs. Many of the
controversies related to capitalization are
encountered in connection with costs in-
curred subsequent to the acquisition of
an asset. Routine repair costs are un-
questionably to be charged off against
current revenues, while costs of major
betterments are clearly to be capitalized.
Costs which are not at either extreme
are more difficult to account for. The Oc-
tober 5 proposal included a restatement
of the principle that "costs incurred sub-
sequent to the acquisition of a tangible
capital asset for activities which extend
the life or increase the usefulness of that
asset (e.g., betterments) and which meet
the contractor's established criteria for
capitalization shall be capitalized." This
aspect of the proposal was generally fa-
vored by commentators. The proposal
continued with the requirement that ex-
penditures for rearrangement and re-
conversion of tangible capital assets, if
they extend the life or increase the use-
fulness of those assets, and which meet
the capitalization criteria, should be cap-
italized. This requirement has been criti-
cized; many contractors assert that re-
arrangement costs, as they use the term,
should never be capitalized.
The Board agrees that rearrangements
of the sort normally expected to main-
tain the usefulness of assets should not
be capitalized. The Board expects that
rearrangements of the sort which extend
the life or increase the usefulness other-
wise anticipated from tangible capital
assets, will be classified as betterments
and capitalized in accordance with the
requirements of the standard. Accord-
ingly, the term "rearrangement" has
been deleted from the standard.
(12) Special purpose equipment. The
Board has received a number of sug-
gestions that the Standard should pro-
vide explicit coverage for special purpose
assets. Consideration was given to this
issue in the research which led to the
October 5 proposal. "Special tooling” and
"special test equipment" are defined in
Government procurement regulations;
expenditures of such assets are properly
charged against the contracts for which
their acquisition is authorized. The sug-
gestions for modification of the October
5 proposal on this point mostly deal with
acquisitions which do not qualify as "spe-
cial tooling" or "special test equipment.”
Contractors do acquire assets which
are expected to have technological or en-
gineering capabilities for long periods but
for which the contractor does not foresee
any significant utility after the comple-
tion of a particular contract. Such assets
are not "special purpose" assets. Rather
they are assets for which the contractor
expects relatively short economic serv-
ice life (as compared with the physical
potential). Most suggestions for a change
in the standard at this point seemed to
be based on the belief that these assets
should no be capitalized. The standard
being promulgated today is applicable to
all acquisitions; each contractor's policy
is required to include appropriate criteria
(e.g., estimated service life and economic
usefulness) for identification of capital-
izable assets, including those which are
unusual.
(13) Donated assets. Some commenta-
tors opposed that part of the standard
which requires the capitalization of as-
sets donated by the Government. These
commentators pointed out that such
treatment may eventually result in de-
preciation charges to Government con-
tracts and that Government regulations
today make such depreciation charges
unallowable. The allowability of depreci-
ation costs of assets donated by the Gov-
ernment will not be influenced by the re-
quirement that such assets be capital-
ized.
(14) Original complements of low cost
151
Cost Accounting Standards Board
equipment. A number of interested par-
ties were concerned with the concept of
original complement. Those who com-
mented asserted that there was an incon-
sistency in capitalizing items of little
value, that it would be difficult to identify
or control individual items, and that al-
ternative accounting methods were used
to achieve the same results of normaliza-
tion of cost between periods.
The Board's primary purpose in re-
quiring the capitalization of original
complements is to assure allocation of
incurred cost to applicable current and
future accounting periods. The Board
sees no inconsistency in this purpose.
The total original complement should
be treated as a tangible capital asset.
Therefore, the Board expects that a
contractor will identify and control the
original complement as an entity rather
than account separately for each individ-
ual item which comprises the total com-
plement.
The Board recognizes that several
methods are used to distribute the cost
of original complements to future ac-
counting periods: (1) Treating the com-
plement as a tangible capital asset sub-
ject to depreciation, (2) treating the cost
as a deferral charge, or (3) treating the
original complement as an inventoriable
asset. A standard on depreciation is ex-
pected to prescribe acceptable methods
for charging the cost of original com-
plements to acounting periods; the
standard being promulgated today re-
quires that the complement be capital-
ized.
(15) Asset accountability unit. A num-
ber of interested parties indicated prob-
lems with both the concept and definition
of a retirement unit as published in the
October proposal. The term retirement
unit has been changed to "Asset Account-
ability Unit" which the Board believes
to be more descriptive of the concept ac-
tually applied in identifying components
of major assets. These units, to the max-
imum extent practical, should be identi-
fied and separately capitalized upon ac-
quisition and, whether or not they have
been previously separately capitalized,
they should be removed from the asset
accounts when disposed of. Replacement
units should also be capitalized.
(16) Application of the standard. Sev-
eral universities commented that the pro-
posed Standard should not apply to them
because universities generally do not use
deprecation techniques. Under existing
procurement regulations, universities are
entitled to a use allowance for fixed as-
sets in lieu of a depreciation charge. The
Board believes that the Standard on Cap-
italization is applicable to universities
and others in determining capitalized
cost for computation of use allowances or
similar purposes and for identifying
those items which are not appropriate for
current charges. Therefore, no exemp-
tions are provided for by this Standard.
There is also being published today (38
FR 5318) and amendment to Part 400,
Definitions, to incorporate in that part
the words and phrases defined in § 404.30
of the Standard.
B. Amendments, 11-7-73
This publication, 38 FR 30725, Nov. 7,
1973, amended § 404.30 (a) (4) by revising the
definition of "tangible capital assets".
The purpose of this publication by
the Cost Accounting Standards Board
is to amend Parts 331, 351, 400, 401, 402,
403, and 404 of its rules and regulations.
The amendments, which are minor clar-
ifications to the regulations, were pub-
lished in the FEDERAL REGISTER of Sep-
tember 5, 1973 (38 FR 23971). The
amendments: (a) Re-number Parts 331
and 351 to facilitate insertion of future
modifications to those parts; (b) clarify
one section of the contract clause at
§ 331.5; and (c) modify certain defini-
tions in Parts 400, 401, 402, 403, and 404
for the purposes of uniformity among
the various Parts. Only one comment
in response to the September publica-
tion has been received by the Board.
This expressed agreement with the pro-
posed changes.
In view of the foregoing, the follow-
ing amendments to the Board's regula-
tions are being made effective Novem-
ber 7, 1973.
152
Cost Accounting Standards Board
Sec.
PART 405-ACCOUNTING FOR
UNALLOWABLE COSTS
405.10 General applicability.
Definitions.
405.20
Purpose.
405.30
405.40
405.50
405.60
405.70
Fundamental requirement.
Techniques for application.
Illustrations.
Exemptions.
405.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part 405
are issued under 84 Stat. 796, Sec. 103 (50
U.S.C. App. 2168).
SOURCE: 38 FR 24198, Sept. 6, 1973, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 24198, September 6, 1973)
is set forth in preamble A of the supple-
ment.
For preambles to amendments and revisions
which affect only certain sections, see the
references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 405.10 General applicability.
This Standard shall be used by de-
fense contractors and subcontractors un-
der Federal contracts entered into after
the effective date hereof, and by all rele-
vant Federal agencies, in estimating, ac-
cumulating, and reporting costs in con-
nection with the pricing, administration,
and settlement of all negotiated prime
contract and subcontract national de-
fense procurements with the United
States in excess of $100,000, other than
contracts or subcontracts where the price
negotiated is based on (a) established
catalog or market prices of commercial
items sold in substantial quantities to the
general public, or (b) prices set by law
or regulation.
§ 405.20 Purpose.
(a) The purpose of this Cost Account-
ing Standard is to facilitate the negotia-
tion, audit, administration and settle-
ment of contracts by establishing
guidelines covering: (1) Identification
of costs specifically described as unallow-
able, at the time such costs first become
defined or authoritatively designated as
unallowable; and (2) the cost account-
ing treatment to be accorded such iden-
tified unallowable costs in order to pro-
mote the consistent application of sound
cost accounting principles covering all
incurred costs. The Standard is predi-
cated on the proposition that costs in-
curred in carrying on the activities of
an enterprise-regardless of the allow-
ability of such costs under Government
contracts are allocable to the cost ob-
jectives with which they are identified
on the basis of their beneficial or causal
relationships.
(b) This Standard does not govern
the allowability of costs. This is a func-
tion of the appropriate procurement or
reviewing authority.
§ 405.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section:
(1) Directly associated cost. Any cost
which is generated solely as a result of
the incurrence of another cost, and which
would not have been incurred had the
other cost not been incurred.
(2) Expressly unallowable cost. A
particular item or type of cost which,
under the express provisions of an ap-
plicable law, regulation, or contract, is
specifically named and stated to be un-
allowable.
(3) Indirect cost. Any cost not di-
rectly identified with a single final cost
objective, but identified with two or more
final cost objectives or with at least one
intermediate cost objective.
(4) Unallowable cost. Any cost
which, under the provisions of any perti-
nent law, regulation, or contract, cannot
be included in prices, cost reimburse-
ments, or settlements under a Govern-
ment contract to which it is allocable.
(b) The following modifications of
definitions set forth is Part 400 of this
chapter are applicable to this Standard:
None.
§ 405.40 Fundamental requirement.
(a) Costs expressly unallowable or
mutually agreed to be unallowable, in-
cluding costs mutually agreed to be un-
153
Cost Accounting Standards Board
allowable directly associated costs, shall
be identified and excluded from any bill-
ing, claim, or proposal applicable to a
Government contract.
(b) Costs which specifically become
designated as unallowable as a result of a
written decision furnished by a contract-
ing officer pursuant to contract disputes
procedures shall be identified if included
in or used in the computation of any
billing, claim, or proposal applicable to a
Government contract. This identification
requirement applies also to any costs in-
curred for the same purpose under like
circumstances as the costs specifically
identified as unallowable under either
this paragraph or paragraph (a) of this
section.
(c) Costs which, in a contracting
officer's written decision furnished pur-
suant to contract disputes procedures,
are designated as unallowable directly
associated costs of unallowable costs cov-
ered by either paragraph (a) or (b) of
this section shall be accorded the identi-
fication required by paragraph (b) of this
section.
(d) The costs of any work project not
contractually authorized, whether or not
related to performance of a proposed or
existing contract, shall be accounted for,
to the extent appropriate, in a manner
which permits ready separation from the
costs of authorized work projects.
(e) All unallowable costs covered by
paragraphs (a) through (d) of this sec-
tion shall be subject to the same cost
accounting principles governing cost al-
locability as allowable costs. In circum-
stances where these unallowable costs
normally would be part of a regular
indirect-cost allocation base or bases,
they shall remain in such base or bases.
Where a directly associated cost is part
of a category of costs normally included
in an indirect-cost pool that will be al-
located over a base containing the unal-
lowable cost with which it is associated,
such a directly associated cost shall be
retained in the indirect-cost pool and be
allocated through the regular allocation
process.
(f) Where the total of the allocable
and otherwise allowable costs exceeds a
limitation-of-cost or ceiling-price provi-
sion in a contract, full direct and indirect
cost allocation shall be made to the con-
tract cost objective, in accordance with
established cost accounting practices and
Standards which regularly govern a given
entity's allocations to Government con-
tract cost objectives. In any determina-
tion of unallowable cost overrun, the
amount thereof shall be identified in
terms of the excess of allowable costs
over the ceiling amount, rather than
through specific identification of partic-
ular cost items or cost elements.
§ 405.50 Techniques for application.
(a) The detail and depth of records
required as backup support for proposals,
billings, or claims shall be that which is
adequate to establish and maintain visi-
bility of identified unallowable costs (in-
cluding directly associated costs), their
accounting status in terms of their
allocability to contract cost objectives,
and the cost accounting treatment which
has been accorded such costs. Adherence
to this cost accounting principle does not
require that allocation of unallowable
costs to final cost objectives be made in
the detailed cost accounting records. It
does require that unallowable costs be
given appropriate consideration in any
cost accounting determinations govern-
ing the content of allocation bases used
for distributing indirect costs to cost ob-
jectives. Unallowable costs involved in
the determination of rates used for
standard costs, or for indirect-cost bid-
ding or billing, need be identified only at
the time rates are proposed, established,
revised or adjusted.
(b) The visibility requirement of para-
graph (a) above may be satisfied by any
form of cost identification which is ade-
quate for purposes of contract cost de-
termination and verification. The
Standard does not require such cost
identification for purposes which are not
relevant to the determination of Govern-
ment contract cost. Thus, to provide
visibility for incurred costs, acceptable
alternative practices would include (1)
the segregation of unallowable costs in
separate accounts maintained for this
purpose in the regular books of account,
(2) the development and maintenance
of separate accounting records or work-
papers, or (3) the use of any less formal
cost accounting techniques which estab-
lishes and maintains adequate cost
identification to permit audit verification
of the accounting recognition given un-
allowable costs. Contractors may satisfy
the visibility requirements for estimated
costs either (1) by designation and de-
scription (in backup data, workpapers,
etc.) of the amounts and types of any
unallowable costs which have specifically
been identified and recognized in making
the estimates, or (2) by description of
154
Cost Accounting Standards Board
any other estimating technique employed
to provide appropriate recognition of any
unallowable costs pertinent to the
estimates.
(c) Specific identification of unallow-
able costs is not required in circum-
stances where, based upon considerations
of materiality, the Government and the
contractor reach agreement on an alter-
nate method that satisfies the purpose of
the Standard.
§ 405.60
Illustrations.
(a) An auditor recommends disallow-
ance of certain direct labor and direct
material costs, for which a billing has
been submitted under a contract, on the
basis that these particular costs were not
required for performance and were not
authorized by the contract. The contract-
ing officer issues a written decision which
supports the auditor's position that the
questioned costs are unallowable. Fol-
lowing receipt of the contracting officer's
decision, the contractor must clearly
identify the disallowed direct labor and
direct material costs in his accounting
records and reports covering any subse-
quent submission which includes such
costs. Also, if the contractor's base for
allocation of any indirect cost pool rele-
vant to the subject contract consists of
direct labor, direct material, total prime
cost, total cost input, etc., he must in-
clude the disallowed direct labor and ma-
terial costs in his allocation base for
such pool. Had the contracting officer's
decision been against the auditor, the
contractor would not, of course, have
been required to account separately for
the costs questioned by the auditor.
(b) A contractor incurs, and sepa -
rately identifies, as a part of his manu-
facturing overhead, certain costs which
are expressly unallowable under the
existing and currently effective regula-
tions. If manufacturing overhead is reg-
ularly a part of the contractor's base for
allocation of general and administrative
(G&A) or other indirect expenses, the
contractor must allocate the G&A or
other indirect expenses to contracts and
other final cost objectives by means of a
base which includes the identified unal-
lowable manufacturing overhead costs.
(c) An auditor recommends disallow-
ance of the total direct indirect costs at-
tributable to an organizational planning
activity. The contractor claims that the
total of these activity costs are allowable
under the Armed Services Procurement
Regulation as "Economic Planning
Costs" (ASPR 15-205.47); the auditor
contends that they constitute “Organiza-
tion Costs" (ASPR 15-205.23) and there-
fore are unallowable. The issue is re-
ferred to the contracting officer for reso-
lution pursuant to the contract disputes
clause. The contracting officer issues a
written decision supporting the auditor's
position that the total costs questioned
are unallowable under the Regulation.
Following receipt of the contracting of-
ficer's decision, the contractor must iden-
tify the disallowed costs and specific
other costs incurred for the same purpose
in like circumstances in any subsequent
estimating, cost accumulation or report-
ing for Government contracts, in which
such costs are included. If the contract-
ing officer's decision had supported the
contractor's contention, the costs ques-
tioned by the auditor would have been
allowable "Economic Planning Costs,"
and the contractor would not have been
required to provide special identification.
(d) A defense contractor was engaged
in a program of expansion and diversifi-
cation of corporate activities. This in-
volved internal corporate reorganization,
as well as mergers and acquisitions. All
costs of this activity were charged by the
contractor as corporate or segment gen-
eral and administrative (G&A) expense.
In the contractor's proposals for final
Segment G&A rates (including corporate
home office allocations) to be applied in
determining allowable costs of its defense
contracts subject to section XV, Part 2,
of the Armed Services Procurement Reg-
ulation, the contractor identified and ex-
cluded the expressiy unallowable costs
(as listed in ASPR 15-205.23) incurred
for incorporation fees and for charges
for special services of outside attorneys,
accountants, promoters, and consultants.
In addition, during the course of negotia-
tion of interim bidding and billing G&A
rates, the contractor agreed to classify
as unallowable various in-house costs in-
curred for the expansion program, and
various directly associated costs of the
identifiable unallowable costs. On the ba-
sis of negotiations and agreements be-
tween the contractor and the contract-
ing officers' authorized representatives,
interim G&A rates were established,
based on the net balance of allowable
G&A costs. Application of the rates ne-
gotiated to proposals, and on an interim
basis to billings, for covered contracts
constitutes compliance with the Stand-
ard.
(e) An official of a company, whose
salary, travel, and subsistence expenses
155
Cost Accounting Standards Board
are charged regularly as general and ad-
ministrative (G&A) expenses, takes sev-
eral business associates on what is clearly
a business entertainment trip. The en-
tertainment costs of such trips is ex-
pressly unallowable because it constitutes
entertainment expense, and is separately
Identified by the contractor. The con-
tractor does not regularly include his
G&A expenses in any indirect-expense
allocation base. In these circumstances,
the official's travel and subsistence ex-
penses would be directly associated costs
for identification with the unallowable
entertainment expense. However, unless
this type of activity constituted a sig-
nificant part of the official's regular du-
ties and responsibilities on which his sal-
ary was based, no part of the official's
salary would be required to be identified
as a directly associated cost of the un-
allowable entertainment expense.
§ 405.70 Exemptions.
None for this Standard.
$ 405.80 Effective date.
April 1, 1974.
[38 FR 31813, Nov. 19, 1973]
PREAMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how
effective dates are determined.
156
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 9-6-73
Preamble to the original publication of
Part 405, Sept. 6, 1973, at 38 FR 24195.
The Standard on Accounting for Un-
allowable Costs is one of a series being
promulgated by the Cost Accounting
Standards Board pursuant to section 719
of the Defense Production Act of 1950, as
amended, Pub. L. 91-379, 50 U.S.C. app.
2168, which provides for the development
of Cost Accounting Standards to be used
in connection with negotiated national
defense contracts.
Work preliminary to the development
of this Standard was started as a result
of recognition of the continuing problem
concerning the accounting treatment of
unallowable contract costs. There has
been a lack of uniformity or comparabil-
Ity in the cost accounting treatment ac-
corded unallowable costs after specific
determination of their unallowability.
There have also been reported problems
concerning the content of indirect-cost
allocation bases where unallowable costs
are involved. Further, there have been
instances reported of inclusion of unal-
lowable costs in the base for progress pay-
ment billings.
There is no present requirement in
agency regulations for contractor identi-
fication of unallowable costs. As a result,
reports prepared by Government auditors
contain frequent references to costs
which are known to be unallowable but
disclosed only through an audit. The
Board has concluded that the identifica-
tion of costs determined to be unallow-
able should be the subject of a Cost Ac-
counting Standard.
This Standard requires the identifica-
tion of specific costs at the time such
costs first become defined or authorita-
tively designated as unallowable. The
Standard also establishes guidelines for
the cost accounting treatment to be ac-
corded such identified costs. The Board
believes that application of this Stand-
ard will provide a greater degree of uni-
formity in the determination of costs of
negotiated defense contracts.
Early research on this Standard in-
cluded a review of available literature on
the subject, a review of the decisions of
contract appeals boards and courts, and
meetings with contractors and other or-
ganizations and individuals concerning
their operations and philosophy relative
to the treatment of unallowable costs.
This research led to the publication of
a proposed Cost Accounting Standard in
the FEDERAL REGISTER of March 30, 1973,
with an invitation for interested parties
to submit written data, views, and com-
ments to the Board. To assure that those
who had already expressed interest in
the proposed Standard had an opportu-
nity to comment, the Board supple-
mented the FEDERAL REGISTER notice by
sending copies of the published material
directly to several hundred organiza-
tions and individuals.
Responses were received from 67
sources, consisting of individual compa-
nies, Government agencies, professional
associations, industry associations, public
accounting firms and others. All of these
comments have been carefully considered
by the Board. Those comments which are
of particular significance are discussed
below, together with an explanation of
the changes made to the proposed Stand-
ard published in the FEDERAL REGISTER Of
March 30, 1973.
Government commentators generally
regarded a requirement for identification
of unallowable costs as being reasonable
and desirable as long as it recognized
that there is room for agency judgment
relative to the allowability of individual
cost elements. The reaction from industry
sources was generally in opposition to a
Standard on this subject. The reaction
from other commentators was mixed. The
Board notes that in the comments by in-
dustry representatives are a significant
number of admissions that at least some
unallowable costs can be identified clearly
in advance and, in fact, are so identified
by many contractors.
The Board has greatly benefited from
the many comments it received on the
Standard as published in the FEDERAL
REGISTER Of March 30, 1973. The Board
takes this opportunity to express its ap-
preciation for the suggestions it has re-
ceived, and for the time devoted to as-
sisting the Board in this endeavor by
the many companies and individuals
involved.
1. General Need for a Standard.-
Those who took specific exception to the
need for or propriety of a Standard raised
a number of issues. Following is a sum-
mary and discussion of each of the major
issues raised:
(a) Existing procurement regulations
and procedures are adequate to resolve
what is essentially an administrative is-
sue, and are more appropriately relied
upon for accomplishing the stated pur-
poses of the Standard.
157
Cost Accounting Standards Board
The Board does not agree with this
argument. Although the regulations of
procurement agencies deal extensively
with the definition of those items of cost
which are not to be accepted as allow-
able under Government contracts, they
do not require contractor identification
of unallowable costs and provide only
minimal guidance as to the cost account-
ing treatment to be accorded such costs.
The Board notes that the idea of "un-
allowable costs" is a concept not generally
applied in commercial cost accounting,
and that it apparently has no direct rele-
vance to the process of allocating costs
incurred to final cost objectives. The
Board's function is to promulgate Cost
Accounting Standards to "be used by all
relevant Federal agencies and by defense
contractors and subcontractors in esti-
mating, accumulating, and reporting
costs in connection with the pricing, ad-
ministration and settlement of all nego-
tiated prime contract and subcontract
national defense procurements with the
United States in excess of $100,000." The
Identification and measurement of un-
allowable costs are directly relevant to
this function. In the performance of its
assigned responsibility, therefore, the
Board finds that a Standard establishing
a concept of unallowable costs and pro-
viding for the identification, measure-
ment, and reporting of such costs will be
useful and desirable.
The Board believes that recognition of
the cost accounting concept that all costs
incurred in carrying on the activities of
an enterprise are allocable to the cost
obectives of the enterprise is essential
to the maintenance of sound and consist-
ent contract cost accounting. This is par-
ticularly significant in providing for con-
sistent policies governing allocations of
indirect costs, as discussed in greater
detail in connection with the issue of in-
direct-cost allocation bases. It is also im-
portant in connection with the profit de-
terminations of the Renegotiation Board
where it is necessary to determine the
total costs properly allocable to renegoti-
able contracts. Cost Accounting Stand-
ards should result in determination of
costs which are allocable to contracts and
other cost objectives. The use of Cost Ac-
counting Standards, however, has no di-
rect bearing on allowability determina-
tions.
(b) The published proposal constitutes
an inflexible procedural requirement
rather than a cost accounting standard;
it deals with minutiae and will necessi-
tate considerable additional accountino
effort and record keeping.
The Board does not believe that a re-
quirement for contractor identification
of costs known to be unallowable, or
which have clearly been designated as
unallowable, represents an undue bur-
den. It is reinforced in this belief by the
fact, as stated in several of the comments
received and as further shown by the
Board's research, that many contractors
already provide this identification, and
often with a greater detail of recorded
cost segregation than is required by the
Standard. Revised wording has been pro-
vided to make clear the Board's intent to
require only such detail and depth of cost
allocation and record keeping as is neces-
sary to provide appropriate cost visibility.
Provisions for accounting recognition of
unallowable costs are considered appro-
priate for a Standard.
The Board does not agree that this
standard deals with minutiae. A signifi-
cant amount of the time of both Govern-
ment and contractor personnel is spent
in identifying contract costs and in nego-
tiating their allowability. The cumula-
tive impact of unallowable costs can
signicantly affect contract cost reim-
bursement nad pricing. For example, in
fiscal year 1973. the Department of De-
fense disallowed costs exceeding $200
million. The Board believes that a Stand-
ard which will foster earlier and more
precise identification
identification of unallowable
costs, and thereby narrow the areas of
cost search, disagreement and negotia-
tion of differences, will be beneficial.
(c) A standard requiring specific
identification of unallowable costs will
only lead to added controversy and im-
pair the freedom of contracting parties
to negotiate equitable treatment of costs.
This issue is closely related to the first
issue discussed above, but is addressed to
the problems and interpretative differ-
ences involved in the classification of
costs as allowable or unallowable.
The Board acknowledges that there
may seldom be full agreement between
the parties to a contract as to all of the
specific items of costs which are unallow-
able under pertinent laws, regulations
and contractual provisions, and that
negotiation must, therefore, be resorted
to as a practical means of resolving dif-
ferences. The Standard does not contem-
plate interference with such negotia-
tions. However, by requiring consistent
cost accounting recognition and appro-
158
Cost Accounting Standards Board
priate accounting treatment of costs
agreed to be unallowable, or which are
authoritatively designated as unallow-
able, the Standard should encourage
more definitive negotiated agreements.
More specificity in agreements should
help to limit the areas of future negotia-
tion or dispute to those where there is a
rational basis for disagreement.
2. Directly Associated Costs.-The
published version of the proposed Stand-
ard defined a directly associated cost as,
"Any cost which is generated solely as a
result of the incurrence of another cost
and which would not have been incurred
had the other cost not been incurred." It
then provided, in effect, that directly as-
sociated costs of identified unallowable
costs should be included with the unal-
lowable costs with which they are asso-
ciated, and be accorded similar cost ac-
counting treatment. These provision of
the Standard, which were intended solely
to cover costs which were incremental
with respect to identified unallowable
costs, drew comment from disparate
sources. Those who disagreed with any
attribution of nonallowability to costs
which were not unallowable by nature
but merely by association were opposed
to the directly associated cost concept.
Also, some of those favoring such attri-
bution, while not opposed to the concept,
interpreted the Standard as encroaching
upon, or narrowing the application of,
existing regulatory provisions governing
cost disallowances, and expressed dis-
agreement with the proposed coverage
on this basis. After careful consideration
of the comments on this issue, the Board
has concluded that coverage in the
Standard of directly associated costs is
appropriate and necessary.
The Board notes that various regula-
tory provisions use such nondefinitive
terms as "corollary administrative
costs," "related collection costs," "re-
lated legal costs," "incidental costs re-
lating thereto," "other related costs,'
etc., in describing unallowable costs. In
such cases, the Board considers that the
identification and measurement of costs
covered by these broadly worded provi-
sions is a function of cost accounting,
and therefore appropriate for coverage
in this Cost Accounting Standard as di-
rectly associated costs.
In light of the above considerations,
the Board has retained coverage of di-
rectly associated costs. The Board, how-
ever, recognizes that treatment of a cost
as an unallowable directly associated
cost in certain circumstances could
result in double counting with respect to
a class or category of costs included in
an indirect-cost pool that will be allo-
cated over a base containing the desig-
nated unallowable costs with which the
cost in question is associated. In such
circumstances, the Standard requires
that the cost shall not be classified as a
directly associated cost, but rather shall
be retained in the indirect-cost pool and
allocated through the regular allocation
process.
3. Expressly Unallowable Costs.-The
requirement in the proposed Standard
for contractor identification of "costs
which are patently unallowable" gave
rise to expressions of concern on the part
of number of respondents. These ranged
from allegations of general impracti-
cabiliy of compliance to apprehensions
that the lack of a clear definition would
lead to overzealous implementation by
auditors and contracting officers and to
increased controversy.
Various alternative suggestions were
made by commentators. One such sug-
gestion was that identification be re-
quired only when there is mutual agree-
ment on unallowable costs by the parties
to a contract. This, however, would be
likely to minimize one of the benefits of
the Standard; namely, the reduction of
the time and effort spent in audit and
negotiation covering costs whose nonal-
lowability is obvious. Also, items requir-
ing agreement are covered by other pro-
visions of the Standard.
A second suggestion made by respond-
ents was that this requirement be made
applicable only to costs which the con-
tractor considers or determines to be
"patently" unallowable. This suggestion,
however, is subject to the obvious criti-
cism that any requirement that would
provide the party subject thereto with
absolute freedom of choice as to what
constitutes compliance would be of du-
bious effectiveness. The Standard, of
course, clearly provides for the contractor
to be the party having the primary re-
sponsibility of making the initial deter-
mination as to what costs incurred by him
are obviously unallowable.
A third suggestion offered by respond-
ents was that the Standard provide a
definition, or examples, covering the costs
which are considered to be "patently"
unallowable. The Board felt that this
suggestion had merit. Because of appar-
ent confusion as to the useage of the term
"patently." the Board has substituted
the word "expressly" in the Standard.
159
Cost Accounting Standards Board
and has included a definition of "ex-
pressly unallowable cost." Most of the
items of cost that are of the type re-
quired to be accounted for as expressly
unallowable are specified in agency
procurement regulations (e.g., ASPR 15-
205). It would not be practical to list
the items of cost that may be made ex-
pressly unallowable under the specific
provisions of contracts. The Board, in its
definition of an "expressly unallowable
cost," has used the word "expressly" in
the broad dictionary sense-that which
is in direct or unmistakable terms.
With regard to the stated concern
about overzealous implementation by au-
ditors and contracting officers, the Board
has previously stated that the adminis-
tration of its rules, regulations, and Cost
Accounting Standards should be reason-
able. The Board anticipates that this rule
of reason will be applied in the imple-
mentation of this Standard. Thus, where
a good faith effort has been made by
a contractor. in the development and
implementation of his cost accounting
rules, procedures, and practices, to pro-
vide for identification of expressly un-
allowable costs, it is intended that in-
advertent failure to properly classify a
particular item of cost will not be re-
garded as noncompliance.
The Board has retained the require-
ment for contractor identification of
costs which are unequivocally made un-
allowable by the express provisions of an
applicable law, regulation or contract.
The Standard, however, has been revised
to make clearer the accounting distinc-
tion between costs which are either ex-
pressly unallowable or mutually agreed to
be unallowable and costs which are desig-
nated as unallowable by the unilateral
exercise of a contracting officer's author-
ity under contract disputes procedures.
Solely for the purposes of this distinc-
tion, the provision in the revised Stand-
ard setting forth the identification re-
quirement for expressly unallowable and
mutually-agreed unallowable costs also
specifies that these are costs which shall
be excluded from Government-contract
billings, claims, or proposals.
4. Indirect-cost allocation bases.—By
far the largest number of comments were
addressed to the requirement in para-
graph (c) of $405.40 of the proposed
Standard, that unallowable costs shall be
subject to the same cost accounting re-
quirements as allowable costs in deter-
mining the content of cost-oriented bases
for allocation of indirect costs. This is an
issue which appears to have produced an
almost complete polarization of the view-
points of Government representatives
and of the parties with whom they
contract.
Current agency regulations (e.g. ASPR
15-203(c)) provide, in essence, that in-
direct-cost allocation bases should not be
fragmented for purposes of removing in-
dividual elements therefrom. They there-
fore provide that unallowable costs in an
allocation base shall "bear" their pro
rata share of the indirect costs in the
pool being distributed. The wording of
these regulatory provisions has com-
monly been interpreted as meaning that
the indirect costs shall assume the al-
lowability status of the costs in the
allocation base. Comments on this regu-
latory requirement, therefore, have cen-
tered on the issue of making otherwise
allowable costs unallowable, rather than
on the broader accounting principles
that should govern cost allocation.
As previously indicated, the Board be-
lieves that the issues concerning cost
allocation and those relating to cost
allowance are distinct and separate. Al-
lowability should not be a factor in the
selection or in the determination of the
content of an allocation base used to
distribute a pool of indirect costs. The
appropriateness of a particular alloca-
tion base should be determined primarily
in terms of its distributive character-
istics. Any selective fragmentation of that
base which eliminates given base
elements for only some of the relevant
cost objectives would produce a distor-
tion in the resulting allocations. The
Board, therefore, is retaining the re-
quirement that unallowable costs be sub-
ject to the same cost accounting princi-
ples as those governing allowable costs.
When an item, activity, or function has
been deemed unallowable by other rele-
vant authority, the Board in this Stand-
ard has approached the determination of
the costs related to the unallowable item,
activity, or function in three stages: (a)
Its direct cost, (b) its directly associated
cost, and (c) the indirect costs allocable
by means of a base containing such costs.
This has been done because, while there
is usually no question that the relevant
authority intended that the direct cost
(a) be disallowed, there may be questions
as to whether costs (b) and (c), other-
wise allowable, were intended to be dis-
allowed. The latter two costs are, there-
fore, required to be separately identified
and measured so that their allowability
can be resolved through the procurement
160
Cost Accounting Standards Board
:
process.
In concluding that indirect-cost allo-
cation bases should not be fragmented
solely for purposes of removing unal-
lowable base elements, the Board is not
implying that the elimination of all or
part of a base element for other purposes
is always inappropriate and inconsistent
with sound cost accounting.
5. Contracting Officer decision.—Many
respondents questioned the requirement,
in paragraph 405.40 (a) of the proposed
Standard, for identifving as unallowable
those costs "designated as unallowable
as a result * ** of **
*** a final decision of
the contracting officer issued pursuant to
contract disputes procedures." Concern
was expressed that this gave too much
standing to the unilateral administrative
decision of the contracting officer, and
did not recognize contractors' right of
appeal to the boards of contract appeals
and the courts.
The Board recognizes that legitimato
disagreements over allowability often are
not finally resolved by contracting of-
ficers' decisions. The Board notes, how-
ever, that the Standard distinguishes be-
tween costs which are "expressly unal-
lowable" and costs which are "designated
as unallowable." To further the distinc-
tion, and to remove a possible source of
misinterpretation, the words "final de-
cision" have been changed to "written
decision," to conform to wording in agen-
cy regulations governing disputes pro-
cedures. The Board believes that, al-
though the written decisions of contract-
ing officers pursuant to formal disputes
clause procedures are subject to appeal
and possible reversal, they nevertheless
constitute authoritative designations,
and represent the culmination of a proc-
ess of audit and negotiation. Further-
more, they are binding on the parties to
a contract until and unless changed on
appeal. The Board, therefore, considers
that any definitive designations of un-
allowable costs which are provided in the
contracting officers' written decisions
warrant identification, and it has re-
tained this requirement.
A further objection was raised by some
commentators to the requirement, in
paragraph (a) of 405.50 of the published
proposal, for future recognition of costs
identified as unallowable, or of other
costs incurred for the same purpose in
like circumstances. The observation was
made that future circumstances might
warrant different conclusions as to al-
lowability.
The Board recognizes that identical
costs may be unallowable under one set
of circumstances, but nevertheless be
determined to be allowable under dif-
ferent conditions, or as a result of
changed criteria. The Board, however,
believes that specific designations of the
allowability status of particular classes
or categories of cost should be given con-
sideration in the evaluations of any like
costs which are governed by the same
allowability criteria and which are in-
curred for the same purpose in like cir-
cumstances. The provisions in the Stand-
ard which reflect this viewpoint have
been clarified.
The Board notes that the identifica-
tion of costs covered by an adverse con-
tracting officer decision will not prevent
a contractor from continuing to claim
such costs, where disagreement as to al-
lowability continues. It serves merely to
identify the costs for special considera-
tion, thereby helping to assure adequate
reevaluations, and to promote resolution
of the issues involved in the disagree-
ment. Reversal of the contracting offi-
cer's decision by a final appeals board
or court ruling would, of course, relieve
the contractor of any identification re-
quirement under the Standard covering
the costs involved in the ruling.
6. Accountability for unallowable
costs. A number of comments were re-
ceived concerning what some writers in-
terpreted as an unnecessary and im-
proper requirement for detailed account-
ability covering costs which are absorbed
by the contractor and therefore should
not be of any legitimate concern to the
customer. The Board does not intend
requiring cost identification or cost al-
location which is not relevant to the
determination of Government contract
cost. The Standard requires identifica-
tion of unallowable costs only to the ex-
tent needed for audit verification of the
costs which are included in, or which
provide backup support for, proposals.
billings, or claims. Appropriate revisions
have been made in the Standard.
7. Colleges and universities.-A num-
ber of comments were received from
university officials expressing concern
that, because colleges and universi-
ties contracting with the Government are
subject to a different set of contract cost
reimbursement principles than commer-
cial organizations, and onerate in a dif-
ferent accounting environment, the pro-
posed Standard might present imple-
mentation problems if applied to these
161
Cost Accounting Standards Board
institutions. These comments have been
carefully considered. and supplemen-
tary discussions have been held with
some of the officials concerned.
On the basis of its analysis of the
practices described by commentators as
having been deemed acceptable in the
past, and of the underlving principles
and contractual requirements, the Board
believes that the Standard. as revised,
can be applied to colleges and universi-
ties without anv disruption of practices
which are acceptable under applicable
laws and regulations.
Particular concern was expressed over
what was reported to be a common sit-
uation. where certain costs, such as fac-
ulty salaries, are excluded from contract
costs even though such costs may direct-
lv pertain to work performance which is
an intrinsic part of the contract project.
The Board notes that specific identifica-
tion with, or allocation to, individual
contracts and other final cost objectives
is not required for costs which will not
be included in, nor constitute pertinent
backup support for, any proposal, bill-
ing, or claim. The Standard requires only
that sufficient identification be provided
to enable verification of the allocability
status of unallowable costs and the ac-
counting treatment actually accorded
such costs. The Board, therefore, does
not believe that any special provision
is required covering the situation de-
scribed.
8. Materiality.—A number of comments
were received suggesting that the ques-
tion of materiality be given more con-
sideration in the Standard. The recog-
nition of the materiality problem in para-
graph (f) of § 405.50 of the proposed
standard was endorsed, but concern was
expressed that limiting application to
circumstances where there was a "low
incidence of negotiated Government
contracts relative to other types of work"
would render the provision ineffective.
Several instances of potential problem
areas were mentioned. One of these con-
cerned the situation where corporate
headquarters' expenses are allocated to
segments which are involved in a rela-
tively insignificant volume of Govern-
ment contract work. Another cited the
case of a standard cost accounting sys-
tem covering the manufacture of stand-
ard products which may incidentally be
used as material or components in con-
tract work. A third referred to the prob-
lem of determining "true" cost of an in-
dividual product in a joint-product,
1
joint-cost production situation. Another
problem area is that involving determi-
nation of the share of indirect expense to
be assigned as costs of a proscribed or-
ganizational or functional activity.
The Board recognizes that accounting
for unallowable costs (which are them-
selves often determined only through ne-
gotiation) is an area where the question
of materiality should be given special
consideration. In providing this consider-
ation, many factors should be taken into
account. These include not only the ma-
teriality of the total unallowable costs,
but also the materiality of the refine-
ments in determinations of unallowable
costs which might be achieved through
requiring detailed application of the
Standard, as contrasted with negotiating
the agreements authorized under the pro-
posed paragraph (f) of § 405.50. The
Board, accordingly, has revised the
Standard to include an amended para-
graph (c) which, "based upon consider-
ations of materiality," permits agree-
ments that will satisfy the purpose of
the Standard. The Board believes that,
in applying the materiality provision of
the revised paragraph (c), consideration
should be given to the criteria listed in
the section titled "MATERIALITY” in
the Board's March 1973 "Statement of
Operating Policies, Procedures and Ob-
jectives."
9. Improperly allocated costs.-One
commentator raised a question concern-
ing the accounting treatment to be ac-
corded costs which are disallowed be-
cause they are erroneously allocated to
the contract under which they are
claimed. The Board does not believe that
the Standard needs to deal with account-
ing errors of this type. It is obvious that
the accounting treatment to be accorded
any item of cost should be determined by
that cost's correct positioning in the cost
accounting structure.
10. Cost/benefit.-Only limited com-
ments were received on the subject of the
implementation cost of the Standard, and
several of these indicated only minimal
impact. Of those claiming significant ad-
ditional implementation expense, none
provided any data as justification for the
claim. The Board has concluded from its
research that the Standard, as revised,
constitutes a reasonable requirement, and
that the costs of implementation will be
minimal. The potential benefits to the
audit and negotiation processes accru-
ing from the increase in visibility and in
uniformity of cost accounting treatment
162
Cost Accounting Standards Board
will be substantial and will greatly out-
weigh any added costs.
11. Effective date and application.—
With respect to the date that this stand-
ard becomes effective, it is anticipated
that its provisions will be applicable to
all solicitations issued on or after Janu-
ary 1, 1974, which are likely to lead to
contracts covered by Standards, rules,
and regulations of the Cost Accounting
Standards Board.
There is also being published today an
amendment to Part 400. Definitions, to
incorporate in that part the words and
phrases defined in § 405.30 of the
Standard.
163
Cost Accounting Standards Board
PART 406 COST ACCOUNTING STAND-
ARD COST ACCOUNTING PERIOD
Sec.
406.10 General applicability.
406.20 Purpose.
406.30
Definitions.
106.40
Fundamental requirement.
406.50
406.60
106.70
Techniques for application.
Пlustrations.
Exemptions.
406.80 Effective date.
Supplement-Preambles
AUTHORITY: Sec. 719, Defense Production
Act of 1950, as amended (Pub. L. 91–379, 50
U.S.C. app. 2168).
SOURCE: 38 FR 30732, Nov. 7, 1973 unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 30732, November 7, 1973)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service.
General Services Administration, Washing-
ton, D.C. 20408.
§ 406.10
General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration, and
settlement of all negotiated prime con-
tract and subcontract national defense
procurements with the United States in
excess of $100,000 other than contracts
or subcontracts where the price negoti-
ated is based on: (a) Established catalog
or market prices of commercial items sold
in substantial quantities to the general
public, or (b) prices set by law or regula-
tion.
§ 406.20 Purpose.
The purpose of this Cost Accounting
Standard is to provide criteria for the
selection of the time periods to be used
as cost accounting periods for contract
cost estimating, accumulating, and re-
porting. This Standard will reduce the
effects of variations in the flow of costs
within each cost accounting period. It
will also enhance objectivity, consistency,
and verifiability, and promote uniformity
and comparability in contract cost meas-
urements.
§ 406.30
Definitions.
(a) The following definitions which are
prominent in this Standard are reprinted
from Part 400 of this chapter for con-
venience. Other terms which are used in
this Standard and are defined in Part
400 of this chapter have the meanings
ascribed to them in that part unless the
text demands a different definition or the
definition is modified in paragraph (b)
of this section.
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Cost objective. A function, organi-
zational subdivision, contract or other
work unit for which cost data are desired
and for which provision is made to ac-
cumulate and measure the cost of proc-
esses, products, jobs, capitalized projects.
etc.
(3) Fiscal year. The accounting period
for which annual financial statements
are regularly prepared, generally a pe-
riod of 12 months, 52 weeks, or 53 weeks.
(4) Indirect cost pool. A grouping of
incurred costs identified with two or
more cost objectives but not identified
specifically with any final cost objective.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable: None.
§ 406.40 Fundamental requirement.
(a) A contractor shall use his fiscal
year as his cost accounting period, except
that:
(1) Costs of an indirect function which
exists for only a part of a cost accounting
period may be allocated to cost objectives
of that same part of the period as pro-
vided in § 406.50(a).
(2) An annual period other than the
fiscal year may, as provided in § 406.50
(d), be used as the cost accounting period
if its use is an established practice of the
contractor.
(3) A transitional cost accounting pe-
riod other than a year shall be used
whenever a change of fiscal year occurs.
(4) Where a contractor's cost account-
ing period is different from the reporting
164
Cost Accounting Standards Board
period required by Renegotiation Board
regulations, the latter may be used for
such reporting.
(b) A contractor shall follow consistent
practices in his selection of the cost ac-
counting period or periods in which any
types of expense and any types of adjust-
ment to expense (including prior-period
adjustments) are accumulated and allo-
cated.
(c) The same cost accounting period
shall be used for accumulating costs in
an indirect cost pool as for establishing
its allocation base, except that the con-
tracting parties may agree to use a dif-
ferent period for establishing an alloca-
tion base as provided in § 406.50(e).
§ 406.50 Techniques for application.
(a) The cost of an indirect function
which exists for only a part of a cost
accounting period may be allocated on
the basis of data for that part of the cost
accounting period if the cost is (1) mate-
rial in amount, (2) accumulated in a
separate indirect cost pool, and (3) allo-
cated on the basis of an appropriate di-
rect measure of the activity or output of
the function during that part of the
period.
(b) The practices required by § 406.40
(b) of this Standard shall include ap-
propriate practices for deferrals, accru-
als, and other adjustments to be used in
identifying the cost accounting periods
among which any types of expense and
any types of adjustment to expense are
distributed. If an expense, such as taxes,
insurance or employee leave, is identified
with a fixed, recurring, annual period
which is different from the contractor's
cost accounting period, the Standard
permits continued use of that different
period. Such expenses shall be distributed
to cost accounting periods in accord-
ance with the contractor's established
practices for accruals, deferrals and
other adjustments.
(c) Indirect cost allocation rates, based
on estimates, which are used for the pur-
pose of expediting the closing of con-
tracts which are terminated or com-
pleted prior to the end of a cost ac-
counting period need not be those finally
determined or negotiated for that cost
accounting period. They shall, however,
be developed to represent a full cost ac-
counting period, except as provided in
paragraph (a) of this section.
(d) A contractor may, upon mutual
agreement with the Government, use as
his cost acounting period a fixed annual
period other than his fiscal year, if the
use of such a period is an established
practice of the contractor and is con-
sistently used for managing and control-
ling the business, and appropriate ac-
cruals, deferrals or other adjustments
are made with respect to such annual
periods.
(e) The contracting parties may agree
to use an annual period which does not
coincide precisely with the cost ac-
counting period for developing the data
used in establishing an allocation base:
Provided, (1) The practice is necessary to
obtain significant administrative con-
venience, (2) the practice is consistently
followed by the contractor, (3) the an-
nual period used is representitive of the
activity of the cost accounting period for
which the indirect costs to be allocated
are accumulated, and (4) the practice
can reasonably be estimated to provide
a distribution to cost objevtices of the
cost accounting period not materially
different from that which otherwise
would be obtained.
(f) When a transitional cost account-
ing period is required under the provi-
sions of § 406.40(a) (3), the contractor
may select any one of the following: (1)
The period, less than a year in length,
extending from the end of his previous
cost accounting period to the beginning
of his next regular cost accounting pe-
riod; (2) a period in excess of a year,
but not longer than fifteen months, ob-
tained by combining the period described
in subparagraph (1) of this paragraph
with the previous cost accounting period;
or (3) a period in excess of a year, but
not longer than fifteen months, obtained
by combining the period described in
subparagraph (1) of this paragraph with
the next regular cost accounting period.
A change in the contractor's cost ac-
counting period is a change in account-
ing practices for which an adjustment
in the contract price may be required in
accordance with paragraph (a) (4) (B) of
the contract clause set out at § 331.50 of
this chapter.
$ 406.60 Illustrations.
general
(a) A contractor allocates
management expenses on the basis of
total cost input. In a proposal for a
covered negotiated fixed-price contract,
he estimates the allocable expenses based
solely on the estimated amount of the
general management expense pool and
the amount of the total cost input base
estimated to be incurred during the eight
months in which performance is sched-
165
Cost Accounting Standards Board
uled to be commenced and completed.
Such a proposal would be in violation of
the requirements of this Standard that
the calculation of the amounts of both
the indirect cost pools and the allocation
bases be based on the contractor's cost
accounting period.
(b) A contractor whose cost account-
ing period is the calendar year, installs a
computer service center to begin opera-
tions on May 1. The operating expense
related to the new service center is ex-
pected to be material in amount, will be
accumulated in a separate indirect cost
pool, and will be allocated to the benefit-
ing cost objectives on the basis of meas-
ured usage. The total operating expenses
of the computer service center for the
eight-month part of the cost accounting
period may be allocated to the benefiting
cost objectives of that same eight-month
period.
(c) A contractor changes his fiscal
year from a calendar year to the 12-
month period ending May 31. For finan-
cial reporting purposes, he has a five-
month transitional "fiscal year." The
same five-month period must be used as
the transitional cost accounting period;
it may not be combined as provided in
§ 406.50(f), because the transitional pe-
riod would be longer than fifteen months.
The new fiscal year must be adopted
thereafter as his regular cost accounting
period. The change in his cost accounting
period is a change in accounting prac-
tices; adjustments of the contract prices
may therafter be required in accordance
with paragraph (a)(4)(B) of the con-
tract clause set out at § 331.50 of this
chapter.
(d) Financial reports to stockholders
are made on a calendar year basis for the
entire contractor corporation. However,
the contracting segment does all internal
financial planning, budgeting, and inter-
nal reporting on the basis of a “model
year." The contracting parties agree to
use a "model year" and they agree to
overhead rates on the "model year" basis.
They also agree on a technique for pro-
rating fiscal year assignments of cor-
porate home office expenses between
model years. This practice is permitted
by the Standard.
(e) Most financial accounts and con-
tract cost records are maintained on the
basis of a fiscal year which ends Novem-
ber 30 each year. However, employee
vacation allowances are regularly
managed on the basis of a "vacation
year" which ends September 30 each
year. Vacation expenses are estimated
uniformly during each "vacation year.”
Adjustments are made each October to
adjust the accrued liability to actual, and
the estimating rates are modified to the
extent deemed appropriate. This use of a
separate annual period for determining
the amounts of vacation expense is per-
mitted under § 406.50(b).
§ 406.70
None.
Exemptions.
§ 406.80 Effective date.
(a) The effective date of this Stand-
ard is July 1, 1974.
(b) This Standard shall be followed by
each contractor as of the start of his next
fiscal year beginning after receipt of a
contract to which this Standard is
applicable.
[38 FR 30732, Nov. 7, 1973, as amended at
39 FR 10115. Mar. 18, 1974]
PREAMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how ef-
fective dates are determined.
166
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 11-7–73
The material below is the preamble to the
original publication of Part 406, on Nov. 7,
1973, at 38 FR 30732.
The Standard on Cost Accounting Pe-
riod published today is one of a series
being promulgated by the Cost Account-
ing Standards Board pursuant to section
719 of the Defense Production Act of
1950, as amended (Pub. L. 91-379, 50
U.S.C. app. 2168), which provides for the
development of Cost Accounting Stand-
ards to be used in connection with nego-
tiated national defense contracts.
Work preliminary to the development
of this Standard was initiated as the re-
sult of recognition that the selection of
time periods to be used for contract cost
accumulation and allocation has been the
source of continuing problems between
contractors and the Government. The
problems include: (1) The lack of a firm
requirement specifying the cost account-
ing period to be used, (2) the absence of
specificity as to when a cost accounting
period other than a contractor's fiscal
year should be used, and (3) the lack of
consistency in selecting the cost account-
ing period in which specific types of ex-
penses and adjustments are recognized.
Early research on this Standard in-
cluded an extensive review of available
literature on the subject and a review of
decisions of contract appeals boards and
courts. A preliminary draft of the Stand-
ard on Cost Accounting Period was widely
distributed for informal comment by in-
terested parties.
The Standard now being promulgated
is derived from the proposal which was
published in the FEDERAL REGISTER for
August 7, 1973, with an invitation for
interested parties to submit data, views,
and arguments to the Board. The Board
supplemented that FEDERAL REGISTER
publication by sending copies of the FED-
ERAL REGISTER directly to organizations
and individuals who were expected to be
interested. Responses were received from
50 sources, including individual compa-
nies, Government agencies, professional
associations, and industry associations.
All of the comments have been carefully
considered by the Board.
Most of those who replied to the
Board's solicitation indicated satisfac-
tion with the proposal as published. Sev-
eral contractors indicated that their
practices already complied with the
Standard. Several commentators voiced
objection to parts of the Standard.
The Board takes this opportunity to
express its appreciation for the helpful
suggestions and constructive criticisms
which have been furnished, both infor-
mally in response to the circulation of a
Staff draft of a Standard and formally
in response to the initial FEDERAL Regis-
TER rublication.
The comments below summarize the
major issues raised in connection with
the August 7 proposal and explain the
decisions which have been made.
(1) Monthly allocations. A few com-
mentators felt that the Standard should
permit monthly allocations of indirect
costs on the basis of the data accumu-
lated for each month. This alternative
was considered by the Board; however,
the idea of monthly cost accounting pe-
riods is not appropriate for contract cost
accounting. A number of fairly stringent
requirements for accruals, deferrals, and
other adjustments would have to be in-
corporated in the provisions of any
Standard if there were to be assurance
that monthly accruais, deferrals, and
other adjustments were appropriate. The
administrative costs would outweigh any
benefits. To allow monthly closings for
some contract situations and to require
full-year allocations for others would
not be in the interest of comparability
and uniformity. The Board, therefore.
has not adopted the suggestion.
(2) Identity of cost accounting peri-
ods for indirect cost pools and allocation
bases. A few commentators stated that
it may not be necessary to require in
every instance the identical allocation
base period as the cost accumulation pe-
riod. They stated that they presently use
various clerical expedients to accomplish
this, such as measuring the base for a
period other than, but representative of
the activity of, the period used for accu-
mulating costs in an indirect cost pool.
As a matter of principle, the Board does
not agree that mismatched periods are
proper. The Board, however, recognizes
the value of appropriate expedients
where cost allocations are not expected
to be materially affected. It acknowl-
edges that there may be occasions when
it is necessary to use combinations of
actual and estimated data to comply
with this Standard.
The Board has given recognition to
issues of materiality in its Statement of
Operating Policies, Procedures, and Ob-
jectives in the FEDERAL REGISTER Of
March 6, 1973, and believes that mate-
167
Cost Accounting Standards Board
riality should be considered in the ad-
ministration of its Standards. In order
to alleviate practical problems which
might be experienced in implementing
this concept of materiality, the Board
has changed § 406.40 (c) and has added
§ 406.50(e).
(3) Use of a cost accounting period
for estimating. Several commentators
stated that § 406.50(c) was ambiguous.
Some pointed out that this provision
might be interpreted as always requiring
the use of a full fiscal year, not with-
standing the permissible use of a short
period under the conditions provided in
§ 406.50(a). There was no provision in
§ 406.50(a) which precluded its applica-
tion, when appropriate, in the circum-
stances described in § 406.50 (c). Never-
theless, the Board has modified § 406.50
(c) to assure that there is no misinter-
pretation of its intent.
One commentator recommended that
detailed guidelines be established for es-
timating cost data when estimates were
necessary under the provisions of
§ 406.50 (c). The Board believes that this
is a matter of contract administration
and negotiation. If the parties do not
agree on proposed overhead rates for
early settlement or closing of contracts,
they are not required by this Standard
to agree to an expedited settlement.
Two commentators recommended that
variances resulting from a difference be-
tween the estimated overhead rates used
for expediting the closing of contracts
and the rates finally negotiated or deter-
mined for a cost accounting period
should be accounted for by making ap-
propriate eliminations from affected in-
direct cost pools and allocation bases. As
a matter of principle, the Board believes
that actual cost should be allocated in
accordance with the contractor's dis-
closed or established practices to all cost
objectives of the cost accounting period,
including closed or settled contracts. In
a settlement the price is fixed, but costs
are not. By agreeing to a settlement
price, the parties take the risk that ac-
tual costs allocated to that contract
might be higher or lower than expected.
However, the Board finds no need to
specify how variances are to be ac-
counted for in this Standard. Normally,
the expected variances will be estimated
to be minor in amount, or the parties
will not agree on the settlement price.
Also, the manner of accounting for the
actual variance should be agreed upon by
the contractor and the Administrative
Contracting Officer. If the amount is
negligible, it may be agreed that it should
be absorbed by other cost objectives of
the period. In any event, the Board be-
lieves that this is a matter of contract
administration and negotiation.
(4) Terminations. A few commenta-
tors recommended that guidance be pro-
vided in § 406.50 (c) for the treatment
of unabsorbed overhead and continuing
overhead charges allocable to contract
terminations. The Board has noted the
possible need for Cost Accounting Stand-
ards on termination costs and delay
claims, situations in which the problems
of unabsorbed overhead and continuing
overhead charges frequently arise, and
has initiated research projects on those
subjects. At this time, the Board sees no
need to disturb the expectations of the
parties to a contract with respect to the
absorption of overhead assigned to cost
accounting periods (normally, fiscal
years) by cost objectives of those same
periods, whether or not those cost objec-
tives exist throughout a cost accounting
period.
(5) Applicability of the standard to
both direct and indirect costs. One com-
mentator recommended that the Stand-
ard be applied only to indirect costs.
The Standard does apply to both direct
costs and indirect costs as those terms
are defined in 4 CFR Part 400. However,
this Standard also includes provisions
with specific applicability only to indirect
cost pools. The Standard does not require
that direct costs be allocated in the same
manner as indirect costs. For example, it
does not require that direct custs be an-
nualized or averaged for purposes of cost
allocation. Direct costs, however, are
often used in establishing allocation
bases for a period; therefore, they must
be assigned and accounted for as costs
of the particular cost accounting periods
to which they are applicable. Consistency
in making adjustments to both direct
and indirect costs for purposes of deter-
mining the total costs allocable to the
cost objectives of a cost accounting pe-
riod is an important objective of this
Standard.
(6) Permitting the use of periods less
than a year. A few interested parties
recommended that the Standard permit
the use of a period shorter than a fiscal
year when, for example, a signficant
contract was begun or concluded during
a fiscal year. No one advanced any cri-
teria for determining when to use a short
period or how to apply it, even after spe-
cific requests for such suggestions. The
168
Cost Accounting Standards Board
only rationale advanced for using less
than an annual period in such circum-
stances was the assertion that a short
period might be employed to arrive at
"more equitable allocations." or to avoid
inequitable burdens on other cost objec-
tives. In view of the vagueness of the cri-
terion of “equity," the possible effect of
changing the risks assumed by the re-
spective parties at the time of contract-
ing, the possible impact on matters of
cost allowability and contract adminis-
tration and negotiation responsibilities,
and the continuance of disputes and dis-
agreements over the equity of a short pe-
riod in particular circumstances, the
Board has concluded that the Standard
should not authorize the use of a short
period except for allocating the costs of
an indirect function which exists for only
a part of a cost accounting period and for
establishing a transitional period when a
change of fiscal year occurs. As published
this Standard precludes either party to
the contract from insisting upon a short
period in order to maximize or minimize
cost recoupment. It precludes, for exam-
ple, the calculation of overhead rates
after-the-fact for alternative application
on the basis of either the fiscal year or
the period of performance, and the con-
sequent polarization of the positions of
the parties as to which period is appro-
priate or "equitable" when there is a sub-
stantial difference between these rates.
The Board believes that this Standard
will significantly enhance fairness and
objectivity in this regard.
(1) Equitable adjustments. One pro-
fessional accounting organization re-
quested that a specific provision be added
whereby an equitable adjustment would
be made where the contract cost was af-
fected by a change in the contractor's
fiscal year and the change in the fiscal
year was adopted for financial account-
ing and income tax purposes as well as
for contract cost accounting. The prin-
cipal argument advanced for this posi-
tion is that "there seems to be no valid
reason why a contractor should neces-
sarily suffer and the Government should
necessarily benefit in such a circum-
stance." In the illustration in § 406.60
(c), the Board noted that under this
Standard, a change in the fiscal year
data is a change in accounting practices,
and that an adjustment of the contract
price might therefore be required in ac-
cordance with the adjustment provisions
of the contract clause set out at 4 CFR
331.50. Those provisions do contemplate
that no change in disclosed or established
cost accounting practices, other than
changes under paragraph (a) (4) (A) of
the clause, may result in an agreement
whereby costs paid by the United States
are increased. The Board recognizes that
a contractor may change his fiscal year
ending date for substantial business rea-
sons, and has illustrated this possibility
in the Standard. A change in fiscal year
may not have any cost impact. Where it
does, the Board believes that it would
be improper for the Government to agree
to pay increased costs caused by a volun-
tary change in accounting practices, no
matter how valid and unrelated to cost
recovery the motives of the contractor
for making the change in his fiscal year
ending date may have been. A new para-
graph (f) in $ 406.50 makes it clear that
a change in the contractor's cost ac-
counting period is a change in accounting
practices for which an adjustment in
contract prices may be required in ac-
cordance with paragraph_(a)(4)(B) of
the contract clause set out at 4 CFR
331.50.
(8) Choice of transitional period. A
public accounting firm suggested that it
might help to avoid disagreements if the
Standard made it clear as to the permis-
sible choices in selecting the transitional
period other than a year whenever a
change of fiscal year occurred. This sug-
gestion has been adopted in the new
paragraph (f) of § 406.50.
(9) Applicability to Renegotiation
Board. One commentator noted that the
Renegotiation Board, a "relevant Fed-
eral agency" under Pub. L. 91-379, de-
fines the term "fiscal year" to mean the
taxable year of the contractor or sub-
contractor under Chapter I of the Inter-
nal Revenue Code. and that it has been
the Renegotiation Board's practice to
renegotiate a contractor on the same
basis as the contracto: reports for Fed-
eral income tax purposes. Hence, it was
recommended that, especially because of
§§ 406.40 (a) (2) and 406.50 (d) of the
Standard, the Renegotiation Board be
exempted from the application of the
Standard.
The Board's research confirms the pos-
sibility that a few contractors may use
cost accounting periods which are differ-
ent from their tax years. In most cases,
however, there will be no conflict. Where
there are differences, any use of a cost
accounting period or fiscal year which is
not identical with the period used for
169
Cost Accounting Standards Board
Federal income tax reports will involve
reconciliations by the taxpayer. Contrac-
tors who presently use "model years" for
their cost accounting periods now file re-
ports with the Renegotiation Board on a
taxable year basis. The Board finds no
need to disturb this practice, and has
provided a new § 406.40 (a) (4) to ac-
knowledge it as an exception. The Board
believes that the Standard is, however.
otherwise applicable, and that there is
no need for an exemption.
(10) Comparing benefits and costs. The
Board concludes that this Standard as
published herein has, for most contrac-
tors and for the Government, almost
no cost impact. The only contrary expres-
sions received in response to our requests
have been answered by the changes de-
scribed above. One major Defense agency
expressed concern that the Standard
might result in higher cost allocations to
its contracts insofar as it did not permit
the use of short periods. While this may
be true, the Standard might also yield
•
lower cost allocations to Government .
contracts as a result of the requirement
to use a full fiscal year. No estimate of
the amount of any shifts in cost alloca-
tions was provided. Because of the differ-
ent circumstances of each application of
the requirement, both increases and de-
creases in cost allocations can be
expected.
The Board concludes that significant
benefits, far outweighing any costs of im-
plementation, will be realized from the
promulgation of this Standard. Such
benefits include reduction of disagree-
ments and disputes; increased consist-
ency, fairness, and objectivity; and im-
provement of estimates for proposals.
(11) Effective date. It is anticipated
that the effective date in § 406.80(a) may
be July 1, 1974.
There is also being published in this
document an amendment to Part 400,
Definitions, to incorporate in that part
the term "fiscal year" defined in § 406.30
of the Standard.
170
Cost Accounting Standards Board
PART 407-USE OF STANDARD COSTS
FOR DIRECT MATERIAL AND DIRECT
LABOR
Sec
407.10 General applicability.
407.20 Purpose.
407.30
407.40
407.50
407.60
407.70
Definitions.
Fundamental requirement.
Techniques for application
Illustrations.
Exemptions.
407.80 Effective date.
Supplement Preambles
AUTHORITY: 84 Stat. 796, sec. 103, 50 U.S.C.
App. 2168.
SOURCE: 39 FR 11871, Apr. 1, 1974, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (39 FR 11871, April 1, 1974) is set
forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 407.10 General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration, and set-
tlement of all negotiated prime contract
and subcontract national defense pro-
curements with the United States in ex-
cess of $100,000, other than contracts
or subcontracts where the price nego-
tiated is based on: (a) Established cata-
log or market prices of commercial items
sold in substantial quantities to the gen-
eral public, or (b) prices set by law or
regulation.
§ 407.20
Purpose.
(a) The purpose of this Cost Account-
ing Standard is to provide criteria under
which standard costs may be used for
estimating, accumulating, and reporting
costs of direct material and direct labor;
and to provide criteria relating to the es-
tablishment of standards, accumulation
of standard costs, and accumulation and
disposition of variances from standard
costs. Consistent application of these cri-
teria where standard costs are in use will
improve cost measurement and cost as-
signment.
(b) This Cost Accounting Standard is
not intended to cover the use of pre-
established measures solely for estimat-
ing.
§ 407.30
Definitions.
(a) The following definitions of terms
which are prominent in this Cost Ac-
counting Standard are reprinted from
Part 400 of this chapter for convenience.
Other terms which are used in this Cost
Accounting Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section.
(1) Labor cost at standard. A pre-es-
tablished measure of the labor element
of cost, computed by multiplying labor-
rate standard by labor-time standard.
(2) Labor-rate standard. A pre-estab-
lished measure, expressed in monetary
terms, of the price of labor.
(3) Labor-time standard. A pre-estab-
lished measure, expressed in temporal
terms, of the quantity of labor.
(4) Material cost at standard. A pre-
established measure of the material ele-
ment of cost, computed by multiplying
material-price standard by material-
quantity standard.
(5) Material-price standard. A pre-
established measure, expressed in mone-
tary terms, of the price of material.
(6) Material-quantity standard. A pre-
established measure, expressed in phys-
ical terms, of the quantity of material.
(7) Production unit. A grouping of ac-
tivities which either uses homogeneous
inputs of direct material and direct labor
or yields homogeneous outputs such that
the costs or statistics related to these
homogeneous inputs or outputs are ap-
propriate as bases for allocating vari-
ances.
(8) Standard cost. Any cost computed
with the use of pre-established measures.
(9) Variance. The difference between a
pre-established measure and an actual
measure.
(b) The following modifications of def-
initions set forth in Part 400 of this
chapter are applicable to this Cost Ac-
counting Standard:
(1) Actual cost. An amount deter-
171
Cost Accounting Standards Board
mined on the basis of cost incurred.
§ 407.40 Fundamental requirement.
Standard costs may be used for esti-
mating, accumulating, and reporting
costs of direct material and direct labor
only when all of the following criteria
are met:
(a) Standard costs are entered into
the books of account;
(b) Standard costs and related vari-
ances are appropriately accounted for at
the level of the production unit; and
(c) Practices with respect to the set-
ting and revising of standards, use of
standard costs, and disposition of vari-
ances are stated in writing and are con-
sistently followed.
§ 407.50 Techniques for application.
(a) (1) A contractor's written state-
ment of practices with respect to stand-
ards shall include the bases and criteria
(such as engineering studies, experience,
or other supporting data) used in setting
and revising standards; the period dur-
ing which standards are to remain ef-
fective; the level (such as ideal or real-
istic) at which material-quantity stand-
ards and labor-time standards are set;
and conditions (such as those expected
to prevail at the beginning of a period)
which material-price standards and
labor-rate standards are designed to
reflect.
(2) Where only either the material
price or material quantity is set at stand-
ard, with the other component stated
at actual, the result of the multiplication
shall be treated as material cost at stand-
ard. Similarly, where only either the
labor rate or labor time is set at standard,
with the other component stated at ac-
tual, the result of the multiplication shall
be treated as labor cost at standard.
(3) A labor-rate standard may be set
to cover a category of direct labor only
if the functions performed within that
category are not materially disparate
and the employees involved are inter-
changeable with respect to the functions
performed.
(4) A labor-rate standard may be set
to cover a group of direct labor workers
who perform disparate functions only
under either one of the following
conditions:
(1) Where that group of workers all
work in a single production unit yield-
ing homogeneous outputs (in this case,
the same labor-rate standard shall be ap-
plied to each worker in that group), or
(ii) Where that group of workers, in
the performance of their respective func-
tions, forms an integral team (in this
case, a labor-rate standard shall be set
for each integral team).
(b)(1) Material-price standards may
be used and their related variances may
be recognized either at the time pur-
chases of material are entered into the
books of account or at the time material
cost is allocated to production units.
(2) Where material-price standards
are used and related variances are rec-
ognized at the time purchases of mate-
rial are entered into the books of account,
they shall be accumulated separately by
homogeneous groupings of material. Ex-
amples of homogeneous groupings of ma-
terial are:
(1) Where prices of all items in that
grouping of material are expected to fluc-
tuate in the same direction and at sub-
stantially the same rate, or
(ii) Where items in that grouping of
material are held for use in a single
production unit yielding homogeneous
outputs.
(3) Where material-price variances
are recognized at the time purchases of
material are entered into the books of
account, variances of each homogeneous
grouping of material shall be allocated
(except as provided in paragraph (b) (4)
of this section), at least annually, to
items in purchased-items inventory and
to production units receiving items from
that homogeneous grouping of mate-
rial, in accordance with either one of the
following practices, which shall be
consistently followed:
(1) Items in purchased-items inven-
tory of a homogeneous grouping of mate-
rial are adjusted from standard cost to
actual cost; the balance of the material-
price variance, after reflecting these ad-
justments, shall be allocated to produc-
tion units on the basis of the total of
standard cost of material received from
that homogeneous grouping of material
by each of the production units; or
(ii) Items, at standard cost, in pur-
chased-items inventory of a homogene-
ous grouping of material, are treated,
collectively, as a production unit; the
material-price variance shall be allocated
to production units on the basis of stand-
ard cost of material received from that
homogeneous grouping of material by
each of the production units.
(4) Where material-price variances
are recognized at the time purchases of
material are entered into the books of
account, variances of each homogeneous
grouping of material which are insig-
172
Cost Accounting Standards Board
nificant may be included in appropriate
Indirect cost pools for allocation to ap-
plicable cost objectives.
(5) Where a material-price variance is
allocated to a production unit in accord-
ance with paragraph (b)(3) of this sec-
tion, it may be combined with material-
quantity variance into one material-cost
variance for that production unit. A sep-
arate material-cost variance shall be ac-
cumulated for each production unit.
(6) Where material-price variances
are recognized at the time material cost
is allocated to production units, these
variances and material-quantity vari-
ances may be combined into one mate-
rial-cost variance account.
(c) Labor-cost variances shall be rec-
ognized at the time labor cost is intro-
duced into production units. Labor-rate
variances and labor-time variances may
be combined into one labor-cost variance
account. A separate labor-cost variance
shall be accumulated for each produc-
tion unit.
(d) A contractor's established practice
with respect to the disposition of vari-
ances accumulated by production unit
shall be in accordance with one of the
following paragraphs:
(1) Variances are allocated to cost ob-
jectives (including ending in-process in-
ventory) at least annually. Where a vari-
ance related to material is allocated, the
allocation shall be on the basis of the ma-
terial cost at standard, or, where outputs
are homogeneous, on the basis of units
of output. Similarly, where a variance
related to labor is allocated, the alloca-
tion shall be on the basis of the labor
cost at standard or labor hours at stand-
ard, or, where outputs are homogeneous,
on the basis of units of output; or
(2) Variances which are immaterial
may be included in appropriate indirect
cost pools for allocation to applicable cost
objectives.
(e) Where variances applicable to cov-
ered contracts are allocated by memoran-
dum worksheet adjustments rather than
in the books of account, the bases used
for adjustment shall be in accordance
with those stated in paragraphs (b) (3)
and (d) of this section.
§ 407.60 Illustrations.
(a) Contractor A's written practice is
to set his material-price standard for an
item on the basis of average purchase
prices expected to prevail during the cal-
endar year. For that item whose usage
from month to month is stable, a pur-
chase contract is generally signed on
May 1 of each year for a one-year com-
mitment. The current purchase contract
calls for a purchase price of $3 per pound;
an increase of 5 percent, or 15¢ per
pound, has been announced by the ven-
dor when the new purchase contract
comes into effect next May. Contractor
A sets his material-price standard for
this item at $3.10 per pound for the year
([$3.00×4+$3.15×8]÷12). Since Con-
tractor A sets his material-price stand-
ard in accordance with his written prac-
tice, he complies with provisions of
§ 407.40 (c) of this Cost Accounting
Standard.
(b) Contractor B accumulates, in one
account, labor cost at standard for a de-
partment in which several categories of
direct labor of disparate functions, in
different combinations, are used in the
manufacture of various dissimilar out-
puts of the department. Contractor B's
department is not a production unit as
defined in § 407.30 (a) (7) of this Cost Ac-
counting Standard. Modifying his prac-
tice so as to comply with the definition
of production unit in § 407.30(a) (7), he
could accumulate the standard costs and
variances separatelv, (1) for each of the
several categories of direct labor, or (2)
for each of several sub-departments, with
homogeneous output for each of the sub-
departments.
(c) Contractor C allocates variances at
the end of each month. During the month
of March, a production unit has accumu-
lated the following data with respect to
labor:
Labor
Labor Labor
hours at dollars at cost
standard standard variance
Balance, March 1…….
Additions in March.
5,000
15,000
$25,000
75,000
$2,000
5,000
Total.
Transfers-out in March...
Balance, March 31……..
20,000
100,000
7,000
8,000
40,000
12,000 60,000
Using labor hours at standard as the
base, Contractor C establishes a labor-
cost variance rate of $.35 per standard
labor hour ($7,000÷20,000), and deducts
$2,800 ($.35×8,000) from the labor-cost
variance account, leaving a balance of
$4,200 ($7,000-$2,800). Contractor C's
practice complies with provisions of
§ 407.50 (d) (1) of this Cost Accounting
Standard.
(d) Contractor D, who uses materials
the prices of which are expected to fluc-
173
Cost Accounting Standards Board
tuate at different
at different rates, recognizes
material-price variances at the time pur-
chases of material are entered into the
books of account. He maintains one
purchase-price variance account for
the whole plant. Purchased items are
requisitioned by various production units
in the plant. Since prices of material are
expected to fluctuate at different rates,
this plant-wide grouping does not con-
stitute a homogenous grouping of mate-
rial. Contractor D's practice does not
comply with provisions of § 407.50(b) (2)
of this Cost Accounting Standard. How-
ever, if he would maintain several
purchased-items inventory accounts,
each representing a homogeneous group-
ing of material, and maintain a material-
price variance account for each of these
homogeneous groupings of material,
Contractor D's practice would comply
with § 407.50(b) (2) of this Cost Account-
ing Standard.
(e) Contractor E recognizes material-
price variances at the time purchases of
material are entered into the books of
account and allocates variances at the
end of each month. During the month
of May, a homogeneous grouping of ma-
terial has accumulated the following
data:
Contractor E's practice complies with
provisions of § 407.50 (b) (3)(ii) of this
Cost Accounting Standard.
(f) Contractor F makes year-end ad-
justments for variances attributable to
covered contracts. During the year just
ended, a covered contract was processed
in 4 production units, each with homo-
geneous outputs. Data with respect to
output and to labor of each of the 4
production units are as follows:
Total units Total Total
used by labor labor-
cost at
standard
Total
units
of
the
output
covered
contract
cost
vari-
ance
Production
unit 1..
Production
unit 2..
Production
unit 3..
Production
unit 4...
100,000
10,000 $400,000 $20,000
30,000
6,000 900,000 30,000
20,000
10,000
5,000 600,000 10,000
4,000 500,000 20,000
Since the outputs of each production unit
are homogeneous, Contractor F uses the
units of output as the basis of making
memorandum worksheet adjustments
concerning applicable variances, and es-
tablishes the following figures:
Material
cost at
standard
Material
price
variance
Labor-cost
variance
per unit
of output
Units
used
by the
covered
contract
Labor-co
variance
attributa-
ble to the
covered
contract
Inventory, May 1.
Additions in May..
$150,000
1,850,000
$20,000
Production unit 1..
$0.20
10,000
120,000
Total...
2,000,000
140,000
Production unit 2….
Production unit 3.
Production unit 4..
$2,000
1.00
6,000
6,000
.50
5,000
2,500
2.00
4,000
8,000
Requisitions:
Production unit 1.
-
900,000
Production unit 2.
450,000
Production unit 3.
300,000
Production unit 4.
150,000
18, 50
200,000
Inventory, May 31.
Contractor E establishes a material-
price variance rate of 7% ($140,000÷
$2,000,000) and allocates as follows:
Material
cost at
standard
Material- Material-
price price
variance variance
rate allocation
7777
Percent
Production unit 1..
$900,000
Production unit 2.
450,000
Production unit 3..
300,000
Production unit 4..
150,000
7
$63,000
31,500
21,000
10, 500
Ending inventory
of homogeneous
grouping of
material..
200,000
7
Total...
2,000,000
14,000
140,000
Total labor-
cost variance
attributable
to the cov-
ered contract..
Contractor F makes a year-end adjust-
ment of $18,500 as the labor-cost vari-
ances attributable to the covered con-
tract. Contractor F's practice complies
with provisions of § 407.50 (e) of this
Cost Accounting Standard.
§ 407.70 Exemptions.
None for this Cost Accounting Stand-
ard.
§ 407.80 Effective date.
(a) The effective date of this Cost
Accounting Standard is October 1, 1974.
(b) This Cost Accounting Standard
shall be followed by each contractor as
of the start of his next fiscal year begin-
ning after the receipt of a contract to
174
Cost Accounting Standards Board
which this Cost Accounting Standard is
applicable.
[39 FR 11871, Apr. 1, 1974, as amended at
39 FR 28869, Aug. 12, 1974]
PREAMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how
effective dates are determined.
175
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 4-1-74
Following is the preamble to the original
publication of Part 407, on April 1, 1974, at
39 FR 11869.
The Cost Accounting Standard on the
Use of Standard Costs for Direct Ma-
terial and Direct Labor published today
is one of a series being promulgated by
the Cost Accounting Standards Board
pursuant to section 719 of the Defense
Production Act of 1950, as amended, P.L.
91-379, 50 U.S.C. App. 2168, which pro-
vides for the development of Cost Ac-
counting Standards to be used in con-
nection with negotiated national defense
contracts.
Work preliminary to the development
of this Cost Accounting Standard was
initiated as the result of the recognition
that practices concerning the use of
standard costs for contract costing pur-
poses have not been well defined in Gov-
ernment procurement regulations. The
Board has undertaken research on this
subject with a view that Cost Accounting
Standards promulgated on this subject
will provide better guidance in the use
of standard costs.
Because the subject of standard costs
is extremely complex, the Board has
elected to address this subject in phases.
The Cost Accounting Standard being
promulgated covers the use of standard
costs for direct material and direct labor;
the use of standard costs for service cen-
ters and the use of standard costs for
overhead represent two other phases of
this subject that are currently under
research.
Early research on this Cost Accounting
Standard included a study of available
literature on the subject and of relevant
decisions of boards of contract appeals
and courts. Following this study, several
issues were identified. A review of Dis-
closure Statements on file suggested that
standard costs are in use by a large num-
ber of defense contractors. In an effort to
learn the reasons underlying the use or
non-use of standard costs for contract
costing purposes, and to gain a better
understanding of the standard-cost
practices by companies in different in-
dustries, the Board developed and circu-
lated a questionnaire on the use of
standard costs. Selected respondents of
this questionnaire were then visited for
further discussion. Information derived
from replies to the questionnaire and
from visits suggested the complexity of
the subject and the desirability of ad-
dressing it in phases. Accordingly, in the
preparation of a preliminary draft, the
subject was limited to the use of stand-
ard costs for direct material and direct
labor. This preliminary draft was widely
distributed for comment. Incorporating
many comments thus received, a revised
proposal was drafted and published in
the FEDERAL REGISTER of November 21,
1973, with an invitation for interested
parties to submit written views and com-
ments to the Board. The Board also sup-
plemented the invitation in the FEDERAL
REGISTER by sending copies of that issue
directly to several hundred organizations
and individuals who had expressed an
interest in the proposal or who had pro-
vided the Board with comments on the
earlier proposal.
These direct and public invitations for
comments resulted in the Board's re-
ceiving 47 sets of written comments from
individual companies, Government agen-
cies, professional associations, industry
associations, public accounting firms,
universities, and others. Some of these
commentators also supplemented their
written comments with discussions at
individual or group meetings. All of these
comments and views have been care-
fully considered by the Board. Those
issues that are of significance are dis-
cussed below, together with an explana-
tion of the changes made in the Cost
Accounting Standard
Standard being promul-
gated from the proposal published in the
Federal REGISTER of November 21, 1973.
The Board wishes to take this oppor-
tunity to express its appreciation for the
helpful suggestions and constructive
criticisms it has received, and for the
time devoted to assisting the Board in
this endeavor by the many organizations
and individuals involved.
1. Management uses of standard costs.
Several commentators emphasized the
value of information generated from the
use of standard costs for management-
control purposes and urged the Board to
retain these control features. The Board
agrees with this view and has conse-
quently modified the proposed Standard
to better assure that its use will be fully
compatible with the use of standard costs
for management-control purposes.
2. Exclusion of overhead and service
centers in the Cost Accounting Standard.
A few commentators expressed the view
that the Cost Accounting Standard being
promulgated should be broadened to in-
176
Cost Accounting Standards Board
clude the treatment of overhead and
service centers. The Board believes that
the Cost Accounting Standard being
promulgated may be used effectively
without such broadening. Further, be-
cause the use of standard costs for over-
head and for service centers involves dif-
ferent issues, the Board believes that this
Cost Accounting Standard should be pro-
mulgated as is.
3. Coverage of this standard. Many
commentators suggested that the pro-
posed Standard did not clearly state that
the use of standard costs for Govern-
ment contract costing purposes is at the
option of a contractor; they recom-
mended various changes in wording to
make this point clear. The Board has
accommodated this suggestion by appro-
priate modifications in § 407.40.
4. Use of the term production unit.
Many commentators expressed a need
for a better understanding of the mean-
ing and significance of the term produc-
tion unit. As defined in § 407.30 (a) (7), a
production unit is a grouping of activities
which either uses homogeneous inputs
of direct material and direct labor or
yields homogeneous outputs. Where a
grouping of activities meets either one
of these two criteria, it is the proper
level at which to accumulate standard
costs of direct material and direct labor,
and to accumulate variances related
thereto. Since variances are allocated on
the bases of costs and statistics of each
production unit, homogeneity of stand-
ard costs of direct material and direct
labor would assure that data thus accum-
ulated would be appropriate as bases for
allocating variances to cost objectives.
The concept of homogeneity embodied
in the term production unit, then, would
permit contractors a degree of flexibility
in setting and revising standards based
on individual needs and circumstances
and still provide for the proper cost as-
signment of variances.
To further clarify the intended mean-
ing and purpose of a production unit, the
Board has added an illustration as
§ 407.60 (b).
5. Homogeneous grouping of material.
A few commentators suggested that the
concept embodied in the term homogene-
ous grouping of material be enunciated.
The Board agrees; accordingly, the
Board has added a statement under
§ 407.50 (b) (2) and an illustration as
§ 407.60 (d).
6. Cost accounting period. Quite a few
commentators felt that relating the es-
tablishment of standards to a cost ac-
counting period, which is the subject of
a Cost Accounting Standard (4 CFR Part
406), is both undesirable and unneces-
sary, in view of the differences in in-
dustry practices and management needs
for establishing and using standards;
they urged the Board to reconsider. Upon
reconsideration, the Board finds this
argument persuasive. The Board has re-
vised § 407.50 (a) (1), which provides that
a contractor shall state the period during
which standards are to remain effective.
7. Interim revision of standards. Many
commentators stated that, to maintain
comparable information for manage-
ment - evaluation purposes, revising
standards during a cost accounting
period is undesirable and counter-pro-
ductive; they suggested the deletion of
this provision. The Board finds this sug-
gestion persuasive; accordingly, the
Board has deleted this provision from the
Cost Accounting Standard being pro-
mulgated.
8. Procedural details. Several com-
mentators felt that the proposed Cost
Accounting Standard contained too much
precedural detail. The Board does not
share this feeling. This Cost Accounting
Standard, in addressing itself to the en-
tire process of standard-cost accounting
for direct material and direct labor and
to alternatives in each step of the proc-
ess, necessitates attention to a great
many issues. The Board feels that the
provisions of this Cost Accounting Stand-
ard only reflect the complexity of the
subject matter and the diversity of prac-
tices being addressed.
9. Recording allocation of variances in
books of account. A few commentators
misconstrued the proposed Cost Account-
ing Standard and thought that certain
provisions required the recording of var-
iance allocations in formal accounting
records; they urged the Board to permit
the use of adjustments based on memo-
randum worksheets for covered con-
tracts. To avoid this misconstruction, the
Board has made appropriate revisions in
the Cost Accounting Standard being pro-
mulgated by using the term books of ac-
count to mean formal accounting rec-
ords, and by adding § 407.50 (e) to spe-
cifically permit the use of memorandum
worksheet adjustments.
10. Adjustment of material-price var-
iance recognized at the time of purchase.
Several commentators objected to a pro-
vision whereby material-price variances,
177
Cost Accounting Standards Board
recognized at the time purchases of ma-
terial are entered into books of account,
are allocated between items introduced
into production units and items remain-
ing in ending purchased-items inventory.
They argued that this provision does not
conform to their practices, particularly
where the allocation of unfavorable vari-
ances would increase inventory carrying
values, and that the provision infringes
upon financial accounting.
In all its research, the Board gives ex-
tensive consideration to existing contrac-
tor practices. In this instance, however,
the practices advocated by those con-
tractors are likely to create inequities
and are without adquate conceptual
support. As to the second argument, the
Board believes that this provision, which
concerns the proper allocation of ma-
terial-price variances between reporting
periods for cost accounting purposes, is
compatible with objectives of financial
accounting. In view of these consider-
ations, the Board has retained this pro-
vision in § 407.50(b) (3).
11. Annual allocation of variances.
Quite a few commentators felt that a
provision that permitted the allocation
of variances not more frequently than
once each cost accounting period does
not reflect industry practices and man-
agement needs. The Board finds this
argument persuasive. Accordingly, a pro-
vision that permits the allocation of var-
iances more frequently than annually has
been added under § 407.50 (d) (1).
12. Five percent materiality criterion.
Many commentators to the proposed Cost
Accounting Standard objected to the in-
clusion of a 5 percent materiality crite-
rion as a basis for determining whether
variances are allocated to cost objectives
or are included in indirect cost pools for
subsequent allocation. Several of the
commentators felt that the materiality
criterion was arbitrary; others felt that
it would delay the process of allocation
where it is undertaken monthly; and
still others felt that it could result in in-
consistencies.
The Board's early research showed
that a majority of respondents had vari-
ances below 5 percent, and quite a few
experienced variances below 2 percent.
Later, an overwhelming majority of
those commenting on a preliminary draft
of this Cost Accounting Standard, which
contained a 2 percent materiality cri-
terion, suggested that a materiality cri-
terion set at 5 percent would be
reasonable.
The intent of the materiality provision
was to permit contractors to use a sim-
pler method of allocation of variances
where the amount was below the 5 per-
cent level. Nevertheless, the Board is per-
suaded by the comments received, and
has deleted this provision from the Cost
Accounting Standard being promulgated.
In its stead, the Board, in § 407.50 (b) (4)
and (d) (2), provides that, where vari-
ances are immaterial, such variances may
be included in appropriate indirect cost
pools for subsequent allocation.
13. Cost/benefit. As to benefits, this
Standard provides needed criteria which
the Board believes will improve cost
measurement and will result in more
equitable assignment of contract costs.
As to costs, the Board anticipates little or
no cost of implementation by those con-
tractors who are currently using stand-
ard costs: the Standard permits contrac-
tors to choose from many recognized
standard cost practices. Consequently,
the Board believes that the benefits to be
derived by this Standard clearly out-
weigh any costs of implementation.
The Board expects that the effective
date of this Cost Accounting Standard
will be October 1, 1974.
There is also being published today an
amendment to Part 400, Definitions, to
incorporate in that part terms defined in
§ 407.30 (a) of this Cost Accounting
Standard.
178
Cost Accounting Standards Board
PART 408-ACCOUNTING FOR COSTS OF
COMPENSATED PERSONAL ABSENCE
Sec.
408.10 General applicability.
408.20 Purpose.
408.30
408.40
Definitions.
Fundamental requirement.
408.50 Techniques for application.
408.60
408.70
Illustrations.
Exemptions.
408.80 Effective date.
Supplement-Preambles
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168).
SOURCE: 39 FR 33684, Sept. 19, 1974, Unless
otherwise voted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER. follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (39 FR 33681, September 19,
1974) is set forth in preamble A of the
supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 408.10
General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration, and
settlement of all negotiated prime con-
tract and subcontract national defense
procurements in excess of $100,000, other
than contracts or subcontracts where
the price negotiated is based on (a)
established catalog or market prices of
commercial items sold in substantial
quantities to the general public, or (b)
prices set by law or regulation.
§ 408.20
Purpose.
The purpose of this Standard is to im-
prove, and provide uniformity in, the
measurement of costs of vacation, sick
leave, holiday, and other compensated
personal absence for a cost accounting
period, and thereby increase the proba-
bility that the measured costs are allo-
cated to the proper cost objectives.
§ 408.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are defined
in Part 400 of this chapter have the
meaning ascribed to them in that part
unless the text demands a different
definition or the definition is modified in
paragraph (b) of this section:
(1) Compensated personal absence.
Any absence from work for reasons such
as illness, vacation, holidays, jury duty
or military training, or personal activi-
ties, for which an employer pays com-
pensation directly to an employee in
accordance with a plan or custom of the
employer.
(2) Entitlement. An employee's right,
whether conditional or unconditional, to
receive a determinable amount of com-
pensated personal absence, or pay in lieu
thereof.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard.
None.
§ 408.40 Fundamental requirement.
(a) The costs of compensated personal
absence shall be assigned to the cost ac-
counting period or periods in which the
entitlement was earned.
(b) The costs of compensated personal
absence for an entire cost accounting
period shall be allocated pro-rata on an
annual basis among the final cost objec-
tives of that period.
§ 408.50 Techniques for application.
(a) Determinations. Each plan or cus-
tom for compensated personal absence
shall be considered separately in deter-
mining when entitlement is earned. If a
plan or custom is changed or a new plan
or custom is adopted, then a new deter-
mination shall be made beginning with
the first cost accounting period to which
such new or changed plan or custom
applies.
(b) Measurement of entitlement. (1)
For purposes of compliance with $408.40
(a), compensated personal absence is
earned at the same time and in the same
amount as the employer becomes liable
to compensate the employee for such ab-
sence if the employer terminates the
employee's employment for lack of work
or other reasons not involing discipli-
nary action, in accordance with a plan or
179
Cost Accounting Standards Board
custom of the employer. Where a new
employee must complete a probationary
period before the employer becomes 11-
able, the employer may nonetheless treat
such service as creating entitlement in
any computations required by this
Standard, provided that he does so con-
sistently.
(2) Where a plan or custom provides
for entitlement to be determined as of
the first calendar day or the first busi-
ness day of a cost accounting period
based on service in the preceding cost
accounting period, the entitlement shall
be considered to have been earned, and
the employer's liability to have arisen, as
of the close of the preceding cost ac-
counting period.
(3) In the absence of a determinable
liability, in accordance with paragraph
(b)(1) of this section, compensated per-
sonal absence will be considered to be
earned only in the cost accounting pe-
riod in which it is paid.
(c) Determination of employer's lia-
bility. In computing the cost of compen-
sated personal absence, the computation
shall give effect to the employer's liabil-
ity in accordance with the following
paragraphs:
(1) The estimated liability shall in-
clude all earned entitlement to com-
pensated personal absence which exists
at the time the liability is determined,
in accordance with paragraph (b) of
this section.
(2) The estimated liability shall be
reduced to allow for anticipated non-
utilization, if material.
(3) The liability shall be estimated
consistently either in terms of current
or of anticipated wage rates. Estimates
may be made with respect to individual
employees, but such individual estimates
shall not be required if the total cost
with respect to all employees in the plan
can be estimated with reasonable accu-
racy by the use of sample data, experi-
ence or other appropriate means.
(d) Adjustments. (1) The estimate of
the employer's liability for compensated
personal absence at the beginning of
the first cost accounting period for
which a contractor must comply with
this Standard shall be based on the
contractor's plan or custom applicable
to that period, notwithstanding that
some part of that liability has not pre-
viously been recognized for contract
costing purposes. Any excess of the
amount of the liability as determined
in accordance with paragraph (c) of this
section over the corresponding amount
of the liability as determined in ac-
cordance with the contractor's previous
practice shall be held in suspense and
accounted for as described in subpara-
graph (3) of this paragraph.
(2) If a plan or custom is changed
or a new plan or custom is adopted,
and the new determination made in ac-
cordance with paragraph (a) of this sec-
tion results in an increase in the esti-
mate of the employer's liability for
compensated personal absence at the
beginning of the first cost accounting
period for which the new plan is ef-
fective over the estimate made in ac-
cordance with the contractor's prior
practice, then the amount of such in-
crease shall be held in suspense and
accounted for as described in subpara-
graph (3) of this paragraph.
(3) At the close of each cost account-
ing period, the amount held in suspense
shall be reduced by the excess of the
amount held in suspense at the begin-
ning of the cost accounting period over
the employer's liability (as estimated in
accordance with paragraph (c) of this
section) at the end of that cost account-
ing period. The cost of compensated
personal absence assigned to that cost
accounting period shall be increased by
the amount of the excess.
(e) Allocations. Except where the use
of a longer or shorter period is permitted
by the provisions of the Cost Account-
ing Standard on Cost Accounting Pe-
riod (Part 406 of this chapter), the
costs of compensated personal absence
shall be allocated to cost objectives on
a pro-rata basis which reflects the total
of such costs and the total of the allo-
cation base for the entire cost account-
ing period. However, this provision shall
not preclude revisions to an allocation
rate during a cost accounting period
based on revised estimates of period
totals.
§ 408.60
Illustrations.
(a) Company A's vacation plan pro-
vides that on the anniversary of each em-
ployee's hiring date, that employee shall
become eligible to receive a two-week va-
cation with pay. Vacation entitlement
must be used within two years or for-
feited. An employee who leaves the com-
pany voluntarily will be paid for any re-
maining unused vacation entitlement
which was earned through the employee's
last anniversary date. An employee who
is laid off for lack of work will also be
180
Cost Accounting Standards Board
paid a pro-rata vacation allowance for
service since the employee's last anniver-
sary date. Company A accrues vacation
costs each month based on an estimate of
the anniversary years which will be com-
pleted in that month. At the end of its
cost accounting period, Company A ad-
justs its estimated liability to agree with
its actual liability for completed years of
service on an individual employee basis.
(1) In order to comply with § 408.50(c),
Company A must increase its estimated
liability for vacation pay at all times to
include the estimated additional amount
which would be payable to employees in
the event of layoff. The additional lia-
bility may be calculated on an individual
employee basis or it may be estimated for
the employees as a group by the use of
sample or historical data.
(2) The following illustrates one
method of estimating Company A's lia-
bility at the end of its cost accounting
period, December 31, with respect to in-
dividual employees, in accordance with
§ 408.50 (c).
John Doe, Anniversary date July 10:
Unused entitlement resulting from
completed service years, 24 hrs. at
$5
$120
Full months of service since anniver-
sary, 5:
Pro-rata entitlement on lay-off 80
hrs. x 5/12 33.3 hrs. at $5---
167
Total
287
Less estimated allowance for for-
feitures, 32 percent__‒‒
Net liability__
10
277
(b) Company B has a vacation plan
similar to Company A's, but Company B
does not pay pro-rata vacation pay on
lay-off for service since the last anni-
versary date. Company B must include in
its estimate of its liability at the end of
its cost accounting period only that un-
used vacation entitlement which results
from completed years of service, with al-
lowance for forfeitures if material.
(c) Company C's sick leave plan pro-
vides that an employee will accumulate
one-half day of sick leave entitlement for
each full month of service. Sick leave en-
titlement may be accumulated without
limit, but an employee is paid for sick
leave only during actual illness; the Com-
pany does not pay for unused sick leave
on lay-off. Despite the fact that Com-
pany C might be able to estimate the
amount which will be paid for sick leave
in a future cost accounting period with
a high degree of accuracy, it has no lia-
bility for payment for unused sick leave
entitlement in the event of lay-off.
Therefore, in accordance with § 408.50
(b) (3), it must assign to each cost ac-
counting period only the costs of sick
leave which it pays in that period.
(d) Company D's vacation plan pro-
vides that on July 1, each employee who
has been employed by the Company for
at least one year shall be entitled to two
weeks of vacation. All vacation must be
taken between July 1 and September 30.
An employee who terminates after Sep-
tember 30 and before July 1 receives no
vacation pay. Company D has a cost ac-
counting period which ends on Decem-
ber 31; however, Company D customarily
accrues its anticipated liability for vaca-
tion pay at July 1 in 12 equal installments
over the "vacation year" starting on
July 1 of the previous year and end-
ing on June 30 of the current year. Com-
pany D has no liability for vacation pay
at January 1 or at December 31. In ac-
cordance with § 408.50 (b) (3), the amount
of vacation cost which Company D must
assign to each cost accounting period is
the amount of such costs paid in that
period. Therefore, Company D may not
use the "vacation year" ending June 30
to apportion these costs between cost
accounting periods.
(e) Company E's cost accounting pe-
riod ends on December 31. Its vacation
plan provides that on January 1, each
employee who has been employed for at
least one year shall become entitled to
two weeks of vacation. The Company does
not recognize a liability for vacation pay
at December 31 because an employee
must be employed on January 1 to be
eligible.
(1) Despite the requirement that the
employee also be employed on January 1,
the necessary service was completed in
the preceding cost accounting period. If
the other terms of the plan are such that
in accordance with this Standard, Com-
pany E must recognize its vacation costs
on the accrual basis, then in accordance
with § 408.50(b)(2), Company E must
estimate its vacation costs as if the li-
ability arose on December 31 rather than
on the following January 1.
(2) Assume that Company E must
comply with this Standard beginning on
January 1, 1976. Assume that the em-
ployees of Company E earned $90,000 in
vacation pay in 1975, all of which will be
taken in 1976. Assume, further, that be-
cause of reduced employment levels, the
employees of Company E will earn only
$80,000 in vacation pay in 1976, $5,000 of
181
Cost Accounting Standards Board
which will be paid in 1976 because of lay-
offs. The following example illustrates the
computation of vacation pay costs for
Company E in 1976:
1976 beginning liability:
With Standard (§ 408.50 (d)(1))– 890, 000
Without Standard__
0
(4) Assume further, that Company E
goes out of business in 1978. All employ-
ees are terminated and paid both for the
$85,000 vacation liability at the end of
1977 and an additional $40,000 earned
in 1978. The following example illustrates
the computation of vacation pay costs
for Company E in 1978:
Amount to be held in suspense
(§ 408.50 (d) (1))
90,000
1978 ending liability.
0
Plus: Paid in 1978___
$125,000
1976 ending liability.
75,000
Plus: Paid in 1976__.
Subtotal
95,000
125,000
Less: 1978 beginning liability____
85,000
Subtotal
170,000
Less: 1976 beginning liability---
90,000
1978 vacation cost,
amount
basic
40,000
1976 vacation cost, basic
amount
80,000
Amount in suspense at beginning
of 1978___
75,000
Amount in suspense at beginning
of 1976..
Less: 1978 ending liability---
0
90,000
Less: 1976 ending liability---
75,000
Suspense to be written off in
Suspense to be written off in
1978; additional 1978 vacation
cost (§ 408.50(d) (3)) ––
75,000
1976; additional 1976 vaca-
tion cost (§ 408.50 (d) (3)) --
15,000
1978 basic vacation cost___
40,000
Plus: 1978 reduction in suspense._
75,000
1976 basic vacation cost..
Plus: 1976 reduction of suspense-
80,000
15,000
1978 total vacation cost____.
115,000
95,000
1976 total vacation cost____
(3) Assume, further, that all of the
vacation entitlement which remained at
December 31, 1976 ($75,000) is taken in
1977. Also, Company E hires a substan-
tial number of additional employees in
1977, so that the amount of vacation
entitlement earned in 1977 is $85,000. The
following example illustrates the com-
putation of vacation pay costs for Com-
pany E in 1977:
1977 ending liability.
Plus: Paid in 1977_.
Subtotal
$85,000
75,000
75,000
Less: 1977 beginning liability.
160,000
75,000
1977 vacation cost, basic amount_
85,000
Amount in suspense at beginning
of 1977 1
1977 ending liability'
1977 basic vacation cost….
85,000
Plus: 1977 reduction of suspense¹__
1977 total vacation cost_.
85,000
85,000
0
¹ Because the 1977 ending liability ex-
ceeds the amount in suspense at the begin-
ning of 1977, there is no reduction of
suspense in 1977.
(f) All of the salary costs of Company
F's salaried employees are charged to
service, administrative, or overhead
functions. No accounting entries are
made to segregate costs of compensated
personal absence of these employees from
their other salary costs, although other
records are maintained to control the
total amount of such absences.
(1) This policy does not violate the
requirement of § 408.40 (b) if such sal-
aries are charged to overhead or indirect
cost pools for subsequent allocation to
final cost objectives over annually deter-
mined allocation bases which are appro-
priate for those pools.
(2) If the same policy were followed
in the case of engineers whose salaries
were directly allocated to two or more
final cost objectives, or to both interme-
diate and final cost objectives, so that
costs of compensated personal absence
were charged directly to the jobs on
which the individuals were working when
paid, then this would violate the re-
quirement of § 408.40 (b) that these costs
be allocated among cost objectives on the
basis of the costs of the entire cost ac-
counting period. Only if all salaries were
directly allocated to a single final cost
objective, as might be the case with per-
sonnel assigned to an overseas base for
the performance of a single contract,
would this practice be in accord with that
182
Cost Accounting Standards Board
requirement.
(g) Company G determines a "charg-
ing rate" for each employee. The charg-
ing rate includes an allowance for com-
pensated personal absence based on aver-
age experience. As the employee performs
services, the related cost objectives are
charged for the services at the charging
rate, the employee is paid at his base
rate, and the excess is credited to the
accrued liability for each benefit. As ben-
efits are paid, the costs are charged
against the accrued liabilities. The
amount of each accrued liability is ad-
justed at the end of the cost accounting
period, and any difference is adjusted
through appropriate overhead accounts
in accordance with company policy.
(1) This method is not a violation of
§ 408.40 (b) if it results in allocating the
estimated annual costs of compensated
personal absence at a rate which reflects
the anticipated costs of the entire cost
accounting period.
(2) The computation itself must com-
ply with the criteria of § 408.40 (a). For
example, if the terms of the Company's
sick leave plan are such that in accord-
ance with this Standard, the costs should
be recognized in the cost accounting pe-
riod when they are paid, then the com-
putation should be intended to amortize
the expected costs of sick leave over the
activity of that cost accounting period,
leaving no accrued liability for sick leave
at the end of the cost accounting pe-
riod.
§ 408.70
Exemptions.
This Standard shall not apply to con-
tractors who are subject to the provisions
of Federal Management Circular 73-8
(Cost Principles for Educational Insti-
tutions) or Federal Management Cir-
cular 74-4 (Principles for Determining
Costs Applicable to Grants and Con-
tracts with State and Local Govern-
ments).
§ 408.80 Effective date.
(a) The effective date of this Stand-
ard is July 1, 1975.
(b) This Cost Accounting Standard
shall be followed by each contractor as of
the start of his next fiscal year beginning
after the receipt of a contract to which
this Cost Accounting Standard is ap-
plicable.
[39 FR 33684, Sept. 19, 1974, as amended at
40 FR 14737, Apr. 2, 1975; 40 FR 15865, Apr.
8, 1975]
PREMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how ef-
fective dates are determined.
183
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 9-19-74
The following is the preamble to the origi-
nal publication of Part 408, on Sept. 19, 1974,
at 39 FR 33681.
The Cost Accounting Standard on
Accounting for Costs of Compensated
Personal Absence is one of a series
being promulgated by the Cost Ac-
counting Standards Board pursuant to
section 719 of the Defense Produc-
tion Act of 1950, as amended, Pub. L.
91-379, 50 U.S.C. App. 2168, which
provides for the development of Cost
Accounting Standards to be used in
connection with
with negotiated national
defense contracts. This Standard deals
primarily with the amount and time of
recognition of costs of compensated per-
sonal absence.
Work preliminary to the development
of this Cost Accounting Standard was
initiated as a part of the study of the
larger subject of accounting for labor
costs. The costs of compenstated personal
absence are an important element of
labor costs, but under existing procure-
ment regulations there is no assurance
that the costs of compensated personal
absence are assigned to the cost account-
ing period in which the related labor
is performed and in which the related
wage or salary costs are recognized. Be-
cause the volume and mix of contracts
of a particular contractor may vary sig-
nificantly from period to period, the
assignment of costs to the proper cost
accounting periods is important.
Early research on this Cost Accounting
Standard included a study of available
literature and relevant decisions of
boards of contract appeals and courts.
Initial meetings were held with major
procurement agencies and with a number
of contractors, and certain issues were
tentatively identified. The relationship of
Government procurement regulations to
Federal Income Tax laws which govern
the accounting for costs of compensated
personal absence was explored. It was
noted that the exact nature of the em-
ployer's liability to employees under a
specific plan was an important consider-
ation in determining the income tax
treatment which might be permitted. A
review of Disclosure Statements on file
indicated a disparity in existing account-
ing practices.
A questionnaire and a statement of is-
sues were then sent to 117 companies, 40
Government agencies, and 53 others, in-
cluding industry and professional asso-
ciations, to obtain detailed information,
particularly in regard to benefit plans
and the reasons for selecting a specific
accounting method. Data on benefit
plans and accounting practices were re-
ceived from 68 companies and comments
on the issues were received from 37 re-
spondents. Analysis of the data and com-
ments indicated that the issues could be
classified broadly into two groups-those
relating to the amount and timing of
recognition of costs of compensated per-
sonal absence and those relating to
methods of allocation of these costs to
cost objectives. Some problems were
noted in connection with the charging of
costs of compensated personal absence
directly to final cost objectives at the
time of payment; these have been ad-
dressed in the Standard. Detailed criteria
for the allocation of costs of compen-
sated personal absence are not included
in this Standard. Additional study of
other labor-related costs is being under-
taken and when it has been completed
such criteria may be provided.
Based on analysis of the responses to
the questionnaire and issues paper and
on further discussions, a preliminary
draft Standard was developed and
widely distributed for comment. Com-
ments and suggestions were received
from 87 respondents; these comments
were considered in developing a revised
Standard which was published in the
FEDERAL REGISTER of March 4, 1974, with
an invitation to interested parties to sub-
mit written views and comments to the
Board. The Board also supplemented the
Invitation in the FEDERAL REGISTER by
sending copies of that issue to several
hundred organizations and individuals
who had provided the Board with com-
ments on the earlier proposal or who had
otherwise expressed interest in the pro-
posal.
Following the FEDERAL REGISTER publi-
cation, the Board received 86 sets of writ-
ten comments from companies, Govern-
ment agencies, professional associations,
industry associations, public accounting
firms, universities, and others. All com-
ments have been carefully considered by
the Board and those addressing areas of
significance are discussed below, to-
gether with explanations of the changes
made in the Cost Accounting Standard
being promulgated from the proposal
published in the FEDERAL REGISTER of
March 4, 1974.
184
Cost Accounting Standards Board
The Board wishes to take this oppor-
tunity to express its appreciation for the
helpful suggestions and constructive
criticisms it has received, and for the time
devoted to assisting the Board in this en-
deavor by the many organizations and
individuals involved.
(1) Need for a standard. The most sig-
nificant problems and issues relate to the
amount and timing of recognition of
costs of compensated personal absence
appear to stem from the reliance of exist-
ing procurement regulations on the In-
ternal Revenue Code and income tax reg-
ulations to govern accounting for these
costs. Three disadvantages arise from
this reliance. First, current regulations
and prior rulings permit, but do not
require, the use of accrual accounting
for vacation pay, and they do not specify
the amount to be accrued if accrual is
elected; of three contractors with iden-
tical vacation plans, one may elect to
recognize vacation costs pro-rata as the
related work is performed, the second in
the year the related work is completed,
and the third only at the time vacation
is taken. Consequently, current regula-
tions do not require uniformity in the
measurement of such costs among years.
Second, the Internal Revenue Code and
Treasury Department rulings have im-
posed different criteria at different times;
of two contractors with identical plans,
one historically may have been permitted
to recognize costs of compensated per-
sonal absence on the accrual basis, while
the other, who applied at a later date,
is denied the same privilege because of a
subsequent ruling. Finally, a change in
the Internal Revenue Code or income tax
regulations may not be appropriate for
contract cost accounting.
Many commentators said that they
were not aware of problems relating to
accounting for costs of compensated per-
sonal absence and they questioned the
need for a Standard on the subject. Dis-
cussions with a number of these com-
mentators disclosed, however, that they
were unaware of the lack of uniformity
created by the reliance of Government
Procurement regulations on income tax
regulations. The Board believes that the
promulgation of a Standard dealing with
accounting for costs of compensated per-
sonal absence is desirable to improve.
and provide uniformity in, the measure
ment of these costs for a cost accounting
period and thereby to increase the prob-
ability that the measured costs are allo-
cated to the proper cost objectives.
(2) Scope of the standard. Several
commentators questioned the exclusion
of such costs as severance pay or group
insurance from the Standard and they
concluded that these costs were thereby
unallowable as contract costs. This con-
clusion is not correct. A Standard does
not define which costs are or are not
allowable. Moreover, these costs were ex-
cluded from this Standard because our
research disclosed that the associated
accounting problems are sufficiently dis-
similar from those of compensated per-
sonal absence to warrant separate con-
sideration.
(3) Basis for recognition of cost. The
Standard that was published for public
comment relied on the degree of cer-
tainty of the employer's obligation as the
principal criterion for accrual or non-
accrual of costs of compensated personal
absence. Some commentators suggested
that costs not be recognized prior to pay-
ment unless the obligation to provide the
benefits were irrevocable in all circum-
stances. Using this test, most company
benefit plans which we have seen in the
course of our research would not qualify
for accrual accounting. Others suggested
that the Standard set no restrictions
whatsoever on the use of accrual ac-
counting for these costs.
After considering all of the comments
and after additional staff research and
discussions with contractors, Govern-
ment agencies, and others, the Board
has concluded that the distinction which
it previously stated between a "certain"
and a "reasonably certain" obligation for
purposes of determining liability, was un-
necessary. The Standard has been sim-
plified to state directly that the proper
measure of the liability and the criterion
for cost recognition is the amount which
would be payable if the employer were to
terminate the employment for any rea-
son not involving disciplinary action.
Under generally accepted accounting
principles, liabilities are usually recorded
when obligations to transfer assets or
provide services in the future are in-
curred. If the employee would be paid a
given amount in the event of lay-off,
then that employee must have completed
the service necessary to have earned that
amount of entitlement to benefits.
Some commentators suggested that
only so much of the employer's liability
as would be payable on voluntary ter-
mination be considered to be "earned."
The Board does not accept this position.
Even in cases where voluntary termina-
tion causes a forfeiture, the employer
185
Cost Accounting Standards Board
cannot unilaterally avoid the liability.
The employer's liability should not be
disregarded merely because an employee
may later act to relieve the employer of
actually making the payment.
Even if the obligation is viewed as one
of a contingent nature, generally ac-
cepted accounting principles provide that
where the outcome is reasonably fore-
seeable and the contingency may be ex-
pected to result in a cost, it should be re-
flected in the accounts. Based on its re-
search, the Board believes that only a
small percentage of those employees of
any contractor who are entitled to bene-
fits forfeit those benefits. Therefore, the
Board believes that the obligation should
properly be recognized (with appropriate
adjustment for anticipated forfeitures),
and to fail to do so is to misstate the costs
of compensated personal absence which
are properly assignable to that cost ac-
counting period.
(4) Utilization of benefits criterion. A
number of commentators objected to the
provision in the proposed Standard that
if the employer's obligation were not
"certain," then accrual accounting could
be used only if at least 80 percent of the
entitlement which was potentially
earned in any year would ultimately be
used by the employees. The intent of this
provision was to assure that accural ac-
counting was not permitted in situations
where the utilization rate was so low that
it was questionable whether accurals
based on estimated utilization provided
any better cost accounting information
than did actual cash disbursements. The
Board has reviewed the utilization data
of a number of contractors and finds that
by adhering to the amount which is pay-
able on involuntary termination of em-
ployment as the measure of the accural,
a utilization criterion is unnecessary. It
has therefore been deleted.
(5) Adjustments for unrecognized lia-
bilities. The Standard requires the recog-
nition of costs when the entitlement to
compensated personal absence is earned.
Initial application of the Standard or a
change of compensated personal absence
plan may necessitate an adjustment to
recognize the cost of entitlement already
earned but not yet recognized for cost
accounting purposes. The proposed
Standard made no explicit provision for
the disposition of such adjustments. A
number of commentators cited the failure
to provide explicitly for the disposition
of adjustments as a deficiency in the pro-
posed Standard. For example, it was
hypothesized that a contractor who was
recording vacation costs at the time of
payment might not recognize any vaca-
tion cost in the year an employee was
hired; on the completion of the con-
tract, the employee might be terminated
and paid for both the vacation to be
taken in the year of termination and the
vacation earned in that year. If the
Standard were applicable to the con-
tractor, he might be able to allocate only
those costs accrued in that year. As a
result, he might not recover costs paid
in that year for vacations earned before
accrual was instituted. The Board recog-
nizes the validity of this hypothesis in
some instances. However, if the con-
tractor is viewed as a going concern and
Government contracting as a continuing
process, then that hypothetical "last year
of contracting" may be infinitely far in
the future, the lay-offs may never take
place, and the contractor will continue
to receive "one year's worth of costs” in
each year.
All commentators who questioned the
method of adjustment, and certain other
contractors who did not raise the ques-
tion but who the Board believed might
be significantly affected by the Standard,
were asked to provide detailed informa-
tion concerning benefit plans involved.
the number of employees, and the esti-
mated amount of the adjustment. In ad-
dition, each contractor was asked to pro-
vide background information concerning
its history as a Government contractor
and, to the extent available, data on past
employment, labor costs, and extent of
contracts. The Board also contacted sev-
eral contractors who already record costs
of compensated personal absence on the
accrual basis to determine the circum-
stances under which this accounting
treatment had been adopted, whether
adoption resulted in adjustment and, if
so, how it had been handled.
The Board reviewed the information
submitted in response to its requests. The
Board has considered (1) refraining from
explicitly providing for handling the
adjustment, (2) providing a procedure by
which the adjustment could all be as-
signed to the year of change, and (3)
providing a procedure for amortizing the
adjustment over a fixed period of years.
The Board finds disadvantages to each
of these alternatives. If no procedure for
adjustment is provided, appropriate pro-
cedures for cost recovery may not be de-
vised by contracting parties. If the pro-
cedure resulted in assignment of the en-
tire adjustment to the year of change,
186
Cost Accounting Standards Board
then some contractors may recover more
than the appropriate cost of that year
and all of the contracts in the year of
change will be overcharged. The same de-
ficiencies, albeit to a lesser extent, exist
if the procedure provides for the adjust-
ment to be amortized over a fixed period.
The Standard has been revised to pro-
vide an explicit procedure for disposing
of the adjustment for unrecognized lia-
bility. Under it, the adjustment is ini-
tially placed in a suspense account In
the cost accounting period of change and
in any subsequent period, if the employ-
er's liability for compensated personal
absence under the related plan at the
end of a period is less than the amount
in the suspense account at the beginning
of that period, the suspense account is
reduced by the amount of the difference
That difference is assigned to that cost
accounting period as an additional cost
of compensated personal absence.
If the employer's liability remains
above that at the time of change, then
costs of compensated personal absence
are measured on the accrual basis. If the
employer's liability falls below that
amount because of additional cash pay-
ments to employees, then the costs are
measured on the cash basis. This latter
condition will arise wherever employment
levels fall below that existing at the time
of change. Whenever such conditions
occur, the costs of those periods are
measured on a cash basis until the entire
suspense has been written off. The con-
tractor is not precluded from allocating
costs which might otherwise have been
allocable, absent the Standard but he
cannot allocate more than he otherwise
would have allocated, so that premature
cost allocations cannot occur.
(6) Complexity. Many of the commen-
tators suggested that the proposed
Standard was too complex, too detailed,
or too procedural. As previously men-
tioned, the criteria for accrual have been
changed to eliminate the distinction be-
tween a "certain" and a "reasonably cer-
tain" obligation and to eliminate the
utilization test. These changes permitted
a significant reduction in the length and
complexity of the Standard. In addition,
the Board has made a number of sim-
plifying changes in the wording of the
Standard based on suggestions from
commentators.
(7) Adjustments for interim rates. A
number of commentators objected to the
requirement in the proposed Standard
that where costs of compensated personal
absence are allocated using an interim
rate, any difference between the interim
rate and actual cost must be adjusted in
the same period. They objected on the
grounds that the necessary computations
to determine the actual cost in accord-
ance with the provisions of the Standard
could not be completed by the end of the
cost accounting period. Although the
Board is not persuaded by this argument,
the provision involved has been deleted
for the following reasons. The accrual
required by this Standard is identical to
that required for any other year-end ac-
crual, and the adjustment process is not
essentially different from that which is
required to adjust any interim allocation
for a cost difference.
The requirement is well established
that if overhead costs are allocated to
Government contracts on an interim
basis, there must be an adjustment when
the actual costs are known. The Board
therefore has concluded that it is un-
necessary to restate it in the Standard.
although the requirement, of course, re-
mains in effect.
(8) Requirement to maintain records.
Some contractors were concerned about
the nature and extent of records which
might be necessary to support the deter-
minations and computations required by
the proposed Standard. In particular, the
need to maintain records of benefit utili-
zation was questioned. The benefit utili-
zation criterion has been deleted from
the Standard; consequently, the main-
tenance of special records for this pur-
pose is unnecessary. Others were con-
cerned that the proposed Standard
would require changes in their formal
accounting records. Upon further con-
sideration, the Board believes maintain-
ing appropriate records is implicit in cost
accounting and that the inclusion of ad-
ditional record-keeping requirements in
the Standard is unnecessary. In deter-
mining what records are necessary to
achieve verifiability for purposes of this
Standard, consideration should be given
to the relative ease or difficulty of mak-
ing and verifying assumptions and esti-
mates, to the materiality of the amounts
involved, and to the use of techniques
such as statistical sampling for deter-
mining the amount of the employer's
liability.
(9) Exemptions. Representatives of
educational institutions pointed out two
problems with the proposed Standard.
First, it required that where costs of com-
pensated personal absence are allocated
187
Cost Accounting Standards Board
using an interim rate, any difference be-
tween the interim rate and actual cost
must be adjusted in the same period.
These commentators pointed out that
Pub. L. 87-638 authorized use of negoti-
ated predetermined overhead rates by
these institutions and that this permis-
sion is presently set forth in Federal
Management Circular 73-8: Cost Prin-
ciples for Educational Institutions. Sec-
ond, they pointed out that many educa-
tional institutions do not record costs on
an accrual basis; but use fund account-
ing on a cash basis; and that for state
and local governmental institutions, such
accounting may be required by law. While
the Standard does not require any change
in the formal accounting records, in
many instances it would be very difficult
for these institutions to comply with the
Standard.
In view of the foregoing, the Board
does not believe it desirable to require
educational institutions or state and
local governmental agencies to account
for costs of compensated personal ab-
sence on the accrual basis. Accordingly,
the Board has exempted such institutions
and state and local governmental agen-
cies from the provisions of this Standard.
(10) Costs and benefits. The antici-
pated benefits of this Standard are im-
proved cost measurement and increased
uniformity in accounting for costs of
compensated personal absence, leading
to increased assurance that the meas-
ured costs are assigned to the proper cost
objectives.
Several commentators objected that
the Standard would not increase uni-
formity because the accounting for a
particular benefit plan would depend on
the provisions of that plan, and not all
benefit plans are alike. The Board is
aware of the diversity of benefit plans.
However, under present procurement
regulations different contractors with es-
sentially similar plans could be account-
ing differently for them and may be
prevented from using similar accounting
even if they wish to do so. To the extent
that uniformity is thus actually in-
hibited, the Standard will correct the
situation. Other past problems relating
to the measurement of these costs in the
event of layoffs, or employe transfers
would also be alleviated.
Many commentators said that they
were already accounting for costs of
compensated personal absence in the
manner required by the Standard. Some
commentators said that implementation
costs would depend on the extent of de-
tail which would be required to comply.
The Board has attempted to minimize
such detail: First, by its previous state-
ments that compliance with Standards
may be accomplished through the use of
memorandum records; second, by elimi-
nating the utilization of benefits test and,
thereby, the necessity of maintaining the
supporting utilization records; and,
finally, by emphasizing the acceptability
of estimates based on statistical sam-
pling or historical data. As a conse-
quence, the costs of implementation
should be negligible.
In summary, the Board believes that
the benefits to be derived from this
Standard clearly outweigh any costs of
implementation.
The Board expects that this Standard
will become effective on April 1, 1975.
188
Cost Accounting Standards Board
PART 409-—COST ACCOUNTING STAND-
ARD-DEPRECIATION OF TANGIBLE
CAPITAL ASSETS
Sec.
409.10 General applicability.
409.20 Purpose.
409.30
409.40
Definitions.
Fundamental requirement.
409.50 Techniques for application.
409.60
409.70
Illustrations.
Exemption.
409.80 Effective date.
Supplement Preambles
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168).
SOURCE: 40 FR 4264, Jan. 29, 1975, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the Federal Register, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (40 FR 4259, January 29, 1975) is
set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 409.10
General applicability.
This Standard shall be used by defense
contractors and subcontractors under
Federal contracts entered into after the
effective date hereof and by all relevant
Federal agencies in estimating, accumu-
lating, and reporting costs in connection
with the pricing, administration, and set-
tlement of all negotiated prime contract
and subcontract national defense pro-
curements with the United States in ex-
cess of $100,000, other than contracts or
subcontracts where the price negotiated
is based on (a) established catalog or
market prices of commercial items sold
in substantial quantities to the general
public, or (b) prices set by law or regula-
tion.
§ 409.20
Purpose.
The purpose of this Standard is to pro-
vide criteria and guidance for assigning
costs of tangible capital assets to cost
accounting periods and for allocating
such costs to cost objectives within such
periods in an objective and consistent
manner. The Standard is based on the
concept that depreciation costs identified
with cost accounting periods and benefit-
ing cost objectives within periods should
be a reasonable measure of the expira-
tion of service potential of the tangible
assets subject to depreciation. Adherence
to this Standard should provide a sys-
tematic and rational flow of the costs of
tangible capital assets to benefited cost
objectives over the expected service lives
of the assets. This Standard does not
cover nonwasting assets or natural re-
sources which are subject to depletion.
§ 409.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section:
(1) Residual value. The proceeds (less
removal and disposal costs, if any) real-
ized upon disposition of a tangible capi-
tal asset. It usually is measured by the
net proceeds from the sale or other dis-
position of the asset, or its fair value if
the asset is traded in on another asset.
The estimated residual value is a current
forecast of the residual value.
(2) Service life. The period of useful-
ness of a tangible capital asset (or group
of assets) to its current owner. The pe-
riod may be expressed in units of time
or output. The estimated service life of
a tangible capital asset (or group of
assets) is a current forecast of its service
life and is the period over which depre-
ciation cost is to be assigned.
(3) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or pos-
session beyond the current accounting
period for the services it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 409.40 Fundamental requirement.
(a) The depreciable cost of a tangible
capital asset (or group of assets) shall be
assigned to cost accounting periods in
accordance with the following criteria:
(1) The depreciable cost of a tangible
capital asset shall be its capitalized cost
less its estimated residual value.
189
Cost Accounting Standards Board
(2) The estimated service life of a
tangible capital asset (or group of assets)
shall be used to determine the cost ac-
counting periods to which the depreciable
cost will be assigned.
(3) The method of depreciation se-
lected for assigning the depreciable cost
of a tangible capital asset (or group of
assets) to the cost accounting periods
representing its estimated service life
shall reflect the pattern of consumption
of services over the life of the asset.
(4) The gain or loss which is recog-
nized upon disposition of a tangible capi-
tal asset shall be assigned to the cost
accounting period in which the disposi-
tion occurs.
(b) The annual depreciation cost of
a tangible capital asset (or group of as-
sets) shall be allocated to cost objectives
for which it provides service in accord-
ance with the following criteria:
(1) Depreciation cost may be charged
directly to cost objectives only if such
charges are made on the basis of usage
and only if depreciation costs of all like
assets used for similar purposes
charged in the same manner.
are
(2) Where tangible capital assets are
part of, or function as, an organizational
unit whose costs are charged to other cost
objectives based on measurement of the
services provided by the organizational
unit, the depreciation cost of such assets
shall be included as part of the cost of
the organizational unit.
(3) Depreciation costs which are not
allocated in accordance with (b) (1) or
(2) above shall be included in appropri-
ate indirect cost pools.
(4) The gain or loss which is recog-
nized upon disposition of a tangible
capital asset, where material in amount,
shall be allocated in the same manner as
the depreciation cost of the asset has
been or would have been allocated for
the cost accounting period in which the
disposition occurs. Where such gain or
loss is not material, the amount may be
included in an appropriate indirect cost
pool.
§ 409.50 Techniques for application.
(a) Determination of the appropriate
depreciation charges involves estimates
both of service life and of the likely pat-
tern of consumption of services in the
cost accounting periods included in such
life. In selecting service life estimates
and in selecting depreciation methods
many of the same physical and economic
factors should be considered. The follow-
ing are among the factors which may be
taken into account: quantity and quality
of expected output, and the timing there-
of; costs of repair and maintenance, and
the timing thereof; standby or incidental
use and the timing thereof; and tech-
nical or economic obsolescence of the
asset (or group of assets), or of the prod-
uct or service it is involved in producing.
(b) Depreciation of a tangible capital
asset shall begin when the asset and any
others on which its effective use depends
are ready for use in a normal or accept-
able fashion. However, where partial
utilization of a tangible capital asset is
identified with a specific operation, de-
preciation shall commence on any por-
tion of the asset which is substantially
completed and used for that operation.
Depreciable spare parts which are re-
quired for the operation of such tangible
capital assets shall be accounted for
over the service life of the assets.
(c) A consistent policy shall be fol-
lowed in determining the depreciable
cost to be assigned to the beginning and
ending cost accounting periods of asset
use. The policy may provide for any
reasonable starting and ending dates in
computing the first and last year de-
preciable cost.
(d) Tangible capital assets may be ac-
counted for by treating each individual
asset as an accounting unit, or by com-
bining two or more assets as a single ac-
counting unit, provided such treatment
is consistently applied over the service
life of the asset or group of assets.
(e) Estimated service lives initially
established for tangible capital assets (or
groups of assets) shall be reasonable ap-
proximations of their expected actual
periods of usefulness, considering the
factors mentioned in paragraph (a) of
this section. The estimate of the expected
actual periods of usefulness need not in-
clude the additional period tangible
capital assets are retained for standby
or incidental use where adequate records
are maintained which reflect the with-
drawal from active use.
(1) The expected actual periods of
usefulness shall be those periods which
are supported by records of either past
retirement or, where available, with-
drawal from active use (and retention
for standby or incidental use) for like
assets (or groups of assets) used in
similar circumstances appropriately
modified for specifically identified fac-
tors expected to influence future lives.
190
Cost Accounting Standards Board
The factors which can be used to modify
past experience include:
(i) Changes in expected physical use-
fulness from that which has been experi-
enced such as changes in the quantity
and quality of expected output.
(ii) Changes in expected economic
usefulness, such as changes in expected
technical or economic obsolescence of
the asset (or group of assets), or of the
product or service produced.
(2) Supporting records shall be main-
tained which are adequate to show the
age at retirement or, if the contractor
so chooses, at withdrawal from active
use (and retention for standby or inci-
dental use) for a sample of assets for
each significant category. Whether as-
sets are accounted for individually or by
groups, the basis for estimating service
life shall be predicated on supporting
records of experienced lives for either
individual assets or any reasonable
grouping of assets as long as that basis
is consistently used. The burden shall be
on the contractor to justify estimated
service lives which are shorter than such
experienced lives.
(3) The records required in paragraph
(e) (1) and (2) of this section, if not
available on the date when the require-
ments of this Standard must first be fol-
lowed by a contractor, shall be developed
from current and historical fixed asset
records and be available following the
second fiscal year after that date. They
shall be used as a basis for estimates of
service lives of tangible capital assets ac-
quired thereafter. Estimated service
lives used for financial accounting pur-
poses (or other accounting purposes
where depreciation is not recorded for
financial accounting purposes for some
non-commercial organizations), if not
unreasonable under the criteria specified
in paragraph (e) of this section, shall be
used until adequate supporting records
are available.
(4) Estimated service lives for tangible
capital assets for which the contractor
has no available data or no prior experi-
ence for similar assets shall be estab-
lished based on a projection of the ex-
pected actual period of usefulness, but
shall not be less than asset guideline pe-
riods (mid-range) established for asset
guideline classes under the Revenue
Procedure 72-10 published by the In-
ternal Revenue Service, and any addi-
tions, supplements or revisions thereto.
which are in effect as of the first day of
the cost accounting period in which the
assets are acquired. Use of this alterna-
tive procedure shall ceas as soon as the
contractor is able to develop estimates
which are appropriately supported by his
own experience.
(5) The contracting parties may agree
on the estimated service life of individual
tangible capital assets where the unique
purpose for which the equipment was ac-
quired or other special circumstances
warrant a shorter estimated service life
than the life determined in accordance
with the other provisions of this § 409.50
(e) and where the shorter life can be
reasonably predicted.
(f) (1) The method of depreciation
used for financial accounting purposes
(or other accounting purposes where de-
preciation is not recorded for financial
accounting purposes) shall be used for
contract costing unless (i) such method
does not reasonably reflect the expected
consumption of services for the tangible
capital asset (or group of assets) to which
applied, or (ii) the method is unaccept-
able for Federal income tax purposes. If
the contractor's method of depreciation
used for financial accounting purposes
(or other accounting purposes as pro-
vided above) does not reasonably reflect
the expected consumption of services or
is unacceptable for Federal income tax
purposes, he shall establish a method of
depreciation for contract costing which
meets these criteria, in accordance with
paragraph (f) (3) of this section.
(2) After the date of initia! appli-
cability of this Standard, selection of
methods of depreciation for newly ac-
quired tangible capital assets, which are
different from the methods currently be-
ing used for like assets in similar cir-
cumstances, shall be supported by projec-
tions of the expected consumption of
services of those assets (or groups of as-
sets) to which the different methods of
depreciation shall apply. Support in ac-
cordance with paragraph (f) (3) of this
section shall be based on the expected
consumption of services of either in-
dividual assets or any reasonable group-
ing of assets as long as the basis selected
for grouping assets is consistently used.
(3) the expected consumption of as-
set services over the estimated service
life of a tangible capital asset (or group
of assets) is influenced by the factors
mentioned in paragraph (a) of this sec-
tion which affect either potential activity
or potential output of the asset (or group
of assets). These factors may be meas-
ured by the expected activity or the ex-
191
Cost Accounting Standards Board
pected physical output of the assets, as
for example: Hours of operation, number
of operations performed, number of units
produced, or number of miles traveled.
An acceptable surrogate for expected
activity or output might be a monetary
measure of that activity or output gen-
erated by use of tangible capital assets.
such as estimated labor dollars, total cost
incurred or total revenues, to the ex-
tent that such monetary measures can
reasonably be related to the usage of spe-
cific tangible capital assets (or groups
of assets). In the absence of reliable data
for the measurement or estimation of the
consumption of asset services by the
techniques mentioned, the expected con-
sumption of services may be represented
by the passage of time. The appropriate
method of depreciation should be se-
lected as follows:
(i) An accelerated method of depre-
ciation is appropriate where the expected
consumption of asset services is signifi-
cantly greater in early years of asset life.
(ii) The straight-line method of de-
preciation is appropriate where the ex-
pected consumption of asset services
is reasonably level over the service life
of the asset (or group of assets).
(g) The estimated service life and
method of depreciation to be used for an
original complement of low-cost equip-
ment shall be based on the expected con-
sumption of services over the expected
useful life of the complement as a whole
and shall not be based on the individual
items which form the complement.
(h) Estimated residual values shall be
determined for all tangible capital assets
(or groups of assets). For tangible per-
sonal property, only estimated residual
values which exceed ten percent of the
capitalized cost of the asset (or group of
assets) need be used in establishing de-
preciable costs. Where either the de-
clining balance method of depreciation
or the class life asset depreciation range
system is used consistent with the pro-
visions of this Standard, the residual
value need not be deducted from capital-
ized cost to determine depreciable costs.
No depreciation cost shall be charged
which would significantly reduce book
value of a tangible capital asset (or group
of assets) below its residual value.
(i) Estimates of service life, consump-
tion of services, and residual value shall
be reexamined for tangible capital assets
(or groups of assets) whenever circum-
stances change significantly. Where
changes are made to the estimated
service life, residual value, or method of
depreciation during the life of a tangible
capital asset, the remaining depreciable
costs for cost accounting purposes shall
be limited to the undepreciated cost of
the assets and shall be assigned only to
the cost accounting period in which the
change is made and to subsequent peri-
ods.
(j) (1) Gains and losses on disposition
of tangible capital assets shall be con-
sidered as adjustments of depreciation
costs previously recognized and shall be
assigned to the cost accounting period in
which disposition occurs except as pro-
vided in paragraphs (j) (2) and (3) of
this section. The gain or loss for each as-
set disposed of is the difference between
the net amount realized, including in-
surance proceeds in the event of invol-
untary conversion, and its undepreciated
balance. However, the gain to be recog-
nized for contract costing purposes shall
be limited to the difference between the
original acquisition cost of the asset and
its undepreciated balance.
(2) Gains and losses on the disposi-
tion of tangible capital assets shall not
be recognized where: (i) Assets are
grouped and such gains and losses are
processed through the accumulated de-
preciation account, or, (ii) the asset is
given in exchange as part of the pur-
chase price of a similar asset and the
gain or loss is included in computing the
depreciable cost of the new asset. Where
the disposition results from an involun-
tary conversion and the asset is replaced
by a similar asset, gains and losses may
either be recognized in the period of dis-
position or used to adjust the depreciable
cost base of the new asset.
(3) The contracting parties may ac-
count for gains and losses arising from
mass or extraordinary dispositions in a
manner which will result in treatment
equitable to all parties.
(4) Gains and losses on disposition of
tangible capital assets transferred in
other than an arms-length transaction
and subsequently disposed of within 12
months from the date of transfer shall
be assigned to the transferor.
(k) Where, in accordance with § 409.40
(b)(1), the depreciation costs of like
tangible capital assets used for similar
purposes are directly charged to cost
objectives on the basis of usage, average
charging rates based on cost shall be
established for the use of such assets.
Any variances between total depreciation
cost charged to cost objectives and total
depreciation cost for the cost accounting
192
Cost Accounting Standards Board
period shall be accounted for in accord-
ance with the contractor's established
practice for handling such variances.
(1) Practices for determining depre-
ciation methods, estimated service lives
and estimated residual values need not
be changed for assets acquired prior to
compliance with this Standard if other-
wise acceptable under applicable pro-
curement regulations. However, if
changes are effected such changes must
conform to the criteria established in
this Standard and may be effected on a
prospective basis to cover the undepre-
ciated balance of cost by agreement
between the contracting parties pursuant
to negotiation under (a) (4) (B) of the
Contract Clause set out at § 331.50 of the
Board's regulations (4 CFR 331.50).
[40 FR 4264, Jan. 29. 1975; 40 FR 8321, Feb.
27, 1975]
§ 409.60
Illustrations.
The following examples are illustrative
of the provisions of this Standard.
(a) X, Y, and Z companies purchase
identical milling machines to be used for
similar purposes.
(1) Company X estimates service life
for tangible capital assets on a indi-
vidual asset basis. Its experience with
similar machines is that the average
replacement period is 14 years. Under the
provisions of the Standard, Company X
shall use the estimated service life of
14 years for the milling machine unless
it can demonstrate changed circum-
stances or new circumstances to support
a different estimate.
(2) Company Y estimates service life
for tangible capital assets by grouping
assets of the same general kind and with
similar service lives. Accordingly, all
machine tools are accounted for as a
single group. The average replacement
life for machine tools for Company Y is
12 years. In accordance with the pro-
visions of the Standard, Company Y
shall use a life of 12 years for the acqui-
sition unless it can support a different
estimate for the entire group.
(3) Company Z estimates service life
for tangible capital assets by grouping
assets according to use without regard
to service lives. Accordingly, all machin-
ery and equipment is accounted for as a
single group. The average replacement
life for machinery and equipment in
Company Z is ten years. In accordance
with the provisions of the Standard,
Company Z shall use an estimated service
life of ten years for the acquisition un-
less it can support a different estimate
for the entire group.
(b) Company X desires to charge de-
preciation of the milling machine de-
scribed in (a) directly to final cost ob-
jectives. Usage of the milling machine
can be measured readily based on hours
of operation. Company X may charge de-
preciation cost directly on a unit of time
basis provided he uses one depreciation
charging rate for all like milling ma-
chines in the machine shop and charges
depreciation for all such milling ma-
chines directly to benefiting cost objec-
tives.
(c) A contractor acquires, and capital-
izes as an asset accountability unit, a new
lathe. The estimated service life is ten
years for the lathe. He acquires, and
capitalizes as an original complement of
low-cost equipment related to the lathe,
a collection of tool holders, chucks, in-
dexing heads, wrenches, and the like.
Although individual items comprising the
complement have an average life of six
years, replacements of these items will be
made as needed and, therefore, the ex-
pected useful life of the complement is
equal to the life of the lathe. An esti-
mated service life of ten years should be
used for the original complement.
(d) A contractor acquires a test facil-
ity with an estimated physical life of ten
years, to be used on contracts for a new
program. The test facility was acquired
for $5 million. It is expected that the pro-
gram will be completed in six years and
the test facility acquired is not expected
to be required for other products of the
contractor. Although the facility will last
ten years, the contracting parties may
agree in advance to depreciate the facil-
ity over six years.
(e) Contractor acquires a building by
donation from its local Government. The
building had been purchased new by an-
other company and subsequently ac-
quired by the local Government. Con-
tractor capitalizes the building at its fair
value. Under the Standard the depreci-
able cost of the asset based on that value
may be accounted for over its estimated
service life and allocated to cost objec-
tives in accordance with contractor's cost
allocation practices.
(f) A major item of equipment which
was acquired prior to the applicability of
this Standard was estimated, at acquisi-
tion, to have a service life of 12 years and
a residual value of no more than 10 per-
cent of acquisition cost. After four years
193
Cost Accounting Standards Board
of service, during which time this Stand-
ard has become applicable, a change in
the production situation results in a well-
supported determination to shorten the
estimated service life to a total of seven
years. The revised estimated residual
value is 15 percent of acquisition cost.
The annual depreciation charges based
on this particular asset will be appro-
priately increased to amortise the re-
maining cost, less the current estimate of
residual value, over the remaining three
years of expected usefulness. This change
is not a change of cost accounting prac-
tice, but a correction of numeric esti-
mates. The requirement of § 409.50 (1)
for an adjustment pursuant to section
(a) (4) (B) of the CAS clause does not
apply.
(g) The support required by § 409.50
(e) can, in all likelihood, be derived by
sampling from almost any reasonable
fixed asset records. Of course, the more
complete the data in the records which
are available, the more confidence there
can be in determinations of asset service
lives. The following descriptions of sam-
pling methods are illustrations of tech-
niques which may be useful even with
limited fixed asset records.
(1) A company maintains an inven-
tory of assets in use. The company
should select a sampling time period
which, preferably, is significantly longer
than the anticipated life of the assets
for which lives are to be established.
Of course, the inventory must be avail-
able for each year in the sampling time
period. The company would then select
a random sample of items in each year
except the most recent year of the time
period. Each item in the sample would
be compared to the subsequent year's
inventory to determine if the asset is
still in service; if not, then the asset
had been retired in the year from which
the sample was drawn. The item is then
traced to prior year inventories to de-
termine the year in which acquired.
NOTE: Sufficient items must be drawn in
each year to assure an adequate sample.
(2) A company maintains an inven-
tory of assets in use and also has a rec-
ord of retirements. In this case the com-
pany does not have to compare the
sample to subsequent years to determine
If disposition has occurred. As in Exam-
ple (1) above the sample items are traced
to prior years to determine the year in
which acquired.
(3) A company maintains retirement
records which show acquisition dates.
The company should select a sampling
time period which, preferably, is sig-
nificantly longer than the anticipated
life of the assets for which lives are to be
estimated. The company would then
select a random sample of items retired
in each year of the sampling time period
and tabulate age at retirement.
(4) A company maintains only a rec-
ord of acquisitions for each year. The
company should select a random sample
of items acquired in the most recent com-
plete year and determine from current
records or observations whether each
item is currently in service. The acquisi-
tions of each prior year should be sam-
pled in turn to determine if sample items
are currently in service. This sampling
should be performed for a time period
significantly longer than the anticipated
life of assets for which the lives are to
be established, but can be discontinued
at the point at which sample items no
longer appear in current use. From the
data obtained, mortality tables can be
constructed to determine average asset
life.
(5) A company does not maintain ac-
counting records on fully depreciated
assets. However, property records are
maintained, and such records are re-
tained for three years after disposition
of an asset in groups by year of disposi-
tion. An analysis of these retirements
may be made by selecting the larger dol-
lar items for each category of assets for
which lives are to be determined (for
example, at least 75 percent of the ac-
quisition values retired each year).
The cases cited above are only exam-
ples and many other examples could have
been used. Also in any example, a com-
pany's individual circumstances must be
considered in order to take into account
possible biased results because of
changes in organizations, products, ac-
quisition policies, economic factors, etc.
The results from example (g) (5), for
instance, might be substantially dis-
torted if the three year period was un-
usual with respect to dispositions. There-
fore, the examples are illustrative only
and any sampling performed in compli-
ance with this Standard should take into
account all relevant information to as-
sure that reasonable results are
obtained.
[40 FR 4264, Jan. 29, 1975; 40 FR 8321, Feb.
27, 1975]
194
Cost Accounting Standards Board
§ 409.70 Exemption.
This Standard shall not apply where
compensation for the use of tangible
capital assets is based on use allowances
as provided for by the provisions of
Federal Management Circular 73-8
(Cost Principles for Educational Insti-
tutions), Federal Management Circular
74-4 (Principles for Determining Costs
Applicable to Grants and Contracts with
State and Local Governments), or other
appropriate Federal procurement regu-
lations.
§ 409.80 Effective date.
(a) The effective date of this Cost
Accounting Standard is July 1, 1975.
(b) This Cost Accounting Standard
shall be followed by each contractor for
all tangible capital assets acquired on or
after the start of his next fiscal year
beginning after the receipt of a contract
to which this Cost Accounting Standard
is applicable.
[40 FR 4264, Jan. 29, 1975, as amended at
40 FR 15865, Apr. 8, 1975]
PREAMBLES: For an explanation of how
effective dates are determined, see preamble
A of the supplement to Part 401 of this
Chapter.
195
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 1–29–75
The following is the preamble to the
original publication of Part 409, 40 FR 4259,
Jan. 29, 1975.
The Standard on Depreciation of Tan-
gible Capital Assets being published
today is one of a series being promul-
gated by the Cost Accounting Standards
Board (CASB) pursuant to sec. 719 of
the Defense Production Act of 1950, as
amended (Pub. L. 91-379, 50 U.S.C. App.
2163), which provides for the develop-
ment of Cost Accounting Standards to
be used in connection with negotiated
national defense contracts.
On February 27, 1973, the Board pro-
mulgated a Standard on Capitalization
of Tangible Assets. At that time the
Board described its work to date in the
area of fixed asset accounting in-
cluding studies of practices used for
both capitalization and depreciation.
The responses to an issues paper and
a questionnaire which were used in
the development of the capitalization
Standard were also useful in the de-
velopment of the Standard being pro-
mulgated today. A preliminary draft
of the Cost Accounting Standard on
Depreciation of Tangible Capital Assets
was widely distributed in March 1973 for
informal comment by interested parties.
The Board's further consideration of the
issues related to depreciation has been
significantly enhanced by the responses
received from well over 100 respondents
to that informal proposal.
The Board's research into fixed asset
accounting practices included a survey
of 107 profit centers selected to be rep-
resentative of the diversity of firms to
which Cost Accounting Standards apply.
Reports on their fixed asset accounting
practices and statistical information for
a five-year period were received and
analyzed. The Board was assisted in its
deliberation by information available
from the 1960 Treasury Department Sur-
vev which provided the data base for the
"Asset Guideline Lives" used in Revenue
Procedure 62-21 and data developed in
an accounting research study performed
for the American Institute of Certified
Public Accountants.
A proposed Cost Accounting Standard
dealing with depreciation was published
by the Board on June 11, 1974 (39 FR
20505). After reviewing the responses to
that publication, the Board revised its
proposal. The revised version was pub-
lished in the FEDERAL REGISTER for Octo-
ber 3, 1974 (39 FR 35678). The Board sup-
plemented both FEDERAL Register publi-
cations by sending copies of the FEDERAL
REGISTER material directly to organiza-
tions and individuals who were expected
to be interested. The Board received al-
most 200 responses to the June 11 and the
October 3 proposals. Comments were
received from individual companies,
Government agencies, professional asso-
ciations, industry associations, public
accounting firms, universities, and indi-
viduals. All of these comments have been
carefully considered by the Board. In
addition, the Board invited representa-
tives of Government agencies, profes-
sional accounting and industry associa-
tions, and defense contractors to attend
Board meetings and discuss their views
on the significant issues concerning de-
preciation practices in Government con-
tract costing. The Board takes this
opportunity to express its appreciation
for the helpful suggestions and criticisms
which have been furnished. The com-
ments furnished by organizations and
individuals have resulted in many
changes in the Standard.
The comments below summarize the
major issues discussed by respondents in
connection with both preliminary publi-
cations. They explain the major changes
which have been made since the June 11
proposal.
(1) Economic Impact of the Standard.
Many of the comments on the June 11
and October 3 proposals were concerned
with the economic impact of the Stand-
ard. They cited such concerns as delays
in cash flow, impact of inflation, incen-
tives for modernization, and administra-
tive cost of additional recordkeeping re-
quirements.
The Board's consideration of each of
these primary concerns is dealt with in
detail in other sections of these prefatory
comments. The Board has recognized the
potential overall impact of the Standard
as expressed in the comments received
and has endeavored to establish the
needed guidance on depreciation account-
ing with as little disruption as possible
to contractors and current contractual
relationships.
The Standard provides for a phasing
in of requirements over a period of time
so that the principal impact of the Stand-
ard will be a number of years in the
future. The Standard applies only to as-
sets acquired by a contractor after the
beginning of its next fiscal year after re-
ceipt of a CAS covered contract. If the
Standard were to become effective six
196
Cost Accounting Standards Board
months after submission to Congress, ap-
plication of any provisions of the Stand-
ard to any newly acquired assets would
be delayed more than six months from
date of promulgation and for most con-
tractors at least 12 months.
The Standard provides for a two-year
period to develon records on past experi-
ence to support estimates of service lives.
The same period could be used to develop
any necessary changes in accounting for
fixed asset lives. The two-year period
begins after required compliance with
the Standard, and, therefore, most con-
tractors would have at least three years
in which to apply the recordkeening
provisions for newly acquired fixed
assets.
For those contractors who use the two-
year period to develop new estimated
service lives, the effect of the use of those
new estimates would begin on assets ac-
quired in the fourth year after submis-
sion of this Standard to Congress. In the
fourth year and the next several years
thereafter the impact of changes in cash
flow because of changes in service life
estimates would be minimal, since the
difference in cash flow each year is the
difference between depreciation amounts
under the old and new estimates of serv-
ice life for the newly acquired assets. The
total impact on cash flow of changes in
estimates of service life would not occur
until the full cycle of asset replacement
is completed. In addition, the impact of
the rules on accounting for gain or loss
would only begin to take place where
new assets acquired after compliance
with the Standard would be sold or
otherwise disposed of and such impact
will be many years in the future.
It is the Board's opinion that the im-
mediate economic and administrative
impact of the Standard is minimal and
will, over time, provide for a more ap-
propriate recognition of cost accounting
considerations distinct and apart from
profit level determinations for defense
contract cost and pricing actions.
(2) Need for a Standard. The account-
ing profession has established general
principles to govern depreciation ac-
counting. These broad principles require
that depreciation practices be system-
atic and rational. Accountants consist-
ently urge that the estimates of service
lives used for depreciation should be
realistic. These broad goals are almost
universally agreed upon.
Some commentators suggested that
the Board should not promulgate any
Standard dealing with depreciation be-
cause the applicable principles have been
well established as a part of generally
accepted accounting principles. These
same commentators also argue that pro-
curement regulations have allowed con-
tractors to rely on depreciation practices
found to be acceptable for other pur-
poses; they believe that contract costing
should continue to rely entirely upon
the depreciation practices used for Fed-
eral income tax and for financial report-
ing purposes pursuant to the current
procurement regulations. The Board be-
lieves, however, that depreciation charges
based entirely on income tax and finan-
cial reporting practices do not neces-
sarily assure reasonable representation
of the costs of the services provided on
Government contracts.
Various mathematical formulas have
been suggested to represent the typical
patterns of consumption of services over
the lives of assets. Certain of these meth-
ods of depreciation have been incor-
porated into the Internal Revenue Code
as acceptable for Federal income tax
purposes. These same methods have, in
general, been accepted as systematic and
rational and therefore within the scope
of generally accepted accounting prin-
ciples. The Board finds that there has
been a range of choice as to depreciation
methods available for contract costing,
without adequate criteria for the choices
made.
The Treasury Department and In-
ternal Revenue Service have established
guidelines for determination of estimated
periods of useful service. These guideline
periods are said to be based on observed
industry experience, but lives shorter
than the averages experienced were es-
tablished so that most companies would
experience longer actual asset utilization
periods than the permitted tax lives. Tax
accounting lives for an industry are,
therefore, not good representations of
expected actual asset utilization periods
for many individual contractors within
that industry.
The Board's research has indicated
that the asset lives and depreciation
methods selected by defense contractors
under existing regulations may result in
an unduly accelerated allocation of de-
preciation to the final cost objectives of
earlier cost accounting periods in the
life of a tangible capital asset. Contrac-
tor representatives have expressed the
view that the choices are typically ap-
propriate in view of the uncertainties of
197
Cost Accounting Standards Board
Government contracting. These uncer-
tainties, however, have not precluded
utilization of assets well beyond the short
estimated service lives based on the IRS
guideline periods. Other commentators
were concerned that any Standard which
would restrict cash flow would adversely
impact profits. The Board has deter-
mined that a Cost Accounting Standard
is needed to provide more assurance that
depreciation costs identified with per-
formance of negotiated defense contracts
are appropriately measured. Considera-
tion of risk and canital investment in the
determination of the adequacy of profits
is a policy question for the procuring
agencies and not a cost accounting
problem
(3) Method of Depreciation. Many of
the comments received on depreciation
method center cn whether accelerated
methods or straightline methods are
more appropriate for contract costing
nurposes. The Board, however. believes
that no particular method is necessarily
appropriate for all contract cost ac-
counting situations. The Board is estab-
lishing criteria by which the method or
methods appropriate
appropriate in the specific
situation can be determined.
Both the June 11 proposal and the
October 3 revision provided that the
method selected "shall reflect the ex-
pected consumption of services in each
accounting period." This basic goal is
generally recognized as appropriate.
Commentators have raised questions re-
lating to the practical aspects of com-
pliance with the basic goal. What kind of
evidence should be available to support a
selection of a depreciation method? In
the absence of authoritative criteria for
selection, contractors have had no need
to support their choices, nor have they
accumulated much experience in collect-
ing evidence relevant to the consumption
of services. Thus a requirement for sup-
port of accelerated methods is seen by
some as a prohibition of the use of such
methods. However, the proposals made
no distinction between an accelerated
method or the straight-line method of
depreciation in determining the quantity
and quality of supporting evidence. The
Board's proposals included descriptions
of the techniques which should be used
to determine appropriate methods for
depreciation. The Board recognized the
difficulty which might be experienced by
contractors attempting to demonstrate
the appropriateness of their choices. The
Board's proposals included, therefore,
the provision that the method of de-
preciation used for financial accounting
purposes should generally be acceptable
for contract costing.
Representatives of the accounting prɔ-
fession pointed out that there is strong
economic motivation to choose rapid de-
preciation write-off techniques where
cost is the basis for pricing and reim-
bursement, as in the defense contracting
environment. They say that this same
motivation may not apply to external fi-
nancial accounting for the same com-
panies. Accordingly, they expect that any
Cost Accounting Standard which re-
quired that, in order to use a technique
for contract costing, a company must
use the same technique for financial ac-
counting. might create an incentive to
modify financial accounting practices
solely for the purpose of obtaining an
advantage in contract pricing. Because
of these considerations the Board would
prefer not to base it scriteria primarily
on practices used for external financial
reporting.
Most commentators have asserted that
the depreciation methods now in use for
external reporting purposes are appro-
priate methods for contract costing, too.
The Board believes that this is generally
true, and it further recognizes that a re-
quirement to change to a particular de-
preciation method might result in sig-
nificant cost to many contractors. In the
belief that the methods selected as ap-
propriate for financial accounting are
usually intended to approximate the ac-
tual consumption of services, the Board
has provided for continuance of those
methods where this is a reasonable as-
sumption. Therefore, in the October 3
proposal the word "reasonably” was used
to modify the requirement that the
method of depreciation reflect the ex-
pected consumption of services; this pro-
vision is continued in the Standard be-
ing promulgated today. In those few
cases where existing methods used for
financial accounting purposes are obvi-
ously poor representatives of the ex-
pected pattern of consumption, and in
any case when the contractor proposes to
change methods, the choice should be
made on the basis of a reasonable ex-
pectation of the future pattern of con-
sumption of services in accordance with
the criteria provided in this Standard.
It has been asserted that some assets
purchased for Government contract pur-
poses are used on an intermittent basis
with periods of use and periods of non-
use following one another in a pattern
198
Cost Accounting Standards Board
that fits neither the classical accelerated
nor straight-line models and that does
not conform with the active-standby
dichotomy. "The pattern of consumption
of services" for such an asset is difficult
to determine either prospectively or his-
torically and is not necessarily dependent
solely on use.
In circumstances such as the forego-
ing, it is not the intent of the Board to
introduce uncertainty into contract ne-
gotiation and settlement by encouraging
challenge of contractors' depreciation
methods. If the method selected is also
used for external financial reporting and
is acceptable for income tax purposes,
the Board's expectation is that it will be
accepted.
(4) Service Lives. Depreciation is to be
charged during the period of estimated
usefulness of a tangible capital asset.
Some commentators have expressed con-
cern lest the Board not give appropriate
recognition to the importance of possible
obsolescence in estimating the period of
usefulness. The Board recognizes that for
many contractors the likelihood of obso-
lescence is an important factor in esti-
mating the period of usefulness, and has
so provided in the Standard.
The June 11 proposal provided that
estimated service lives used for financial
accounting, where such lives reasonably
represented expected usefulness, were to
be used for contract costing. However,
several commentators expressed concern
that the requirement to use financial ac-
counting lives would continue to influ-
ence the motivation of some financial re-
porting entities to select for financial ac-
counting purposes those practices which
would be most advantageous for other
purposes. The Board's research showed
that defense contractors often used mini-
mum lives permitted for tax purposes for
financial accounting rather than lives
based on actual experience. Therefore,
the October 3 revised proposal placed
the primary reliance for estimation of
service lives on records of the age of as-
sets at disposal or withdrawal from ac-
tive use. The proposal further provided
that the historical data would be a base-
line for estimates of useful life which
could be adjusted based on expected
changes in physical or economic lives.
Contractors commenting on the Octo-
ber 3 proposal pointed out that they have
not been required to have records which
would show the retention periods of as-
sets. Therefore, while most contractors
have the basic information from which
they could determine typical asset reten-
tion periods, few contractors have made
analyses or summaries of the informa-
tion available. Furthermore, they stated
that contractors did not have records re-
flecting the withdrawal of assets from
active use. The contractors expressed the
opinion that to develop such records
would be costly. The Standard has been
modified to provide that the development
of records of asset withdrawal from ac-
tive use be at the option of the con-
tractor; however, it should be pointed out
that such records could be additional
support to reduce historical asset lives.
The Standard also provides a two-year
period for the development of analyses
of historical asset lives. The Board be-
lieves the two-year period should provide
adequate working time to develop such
analyses. The Standard does not pre-
scribe the nature of the analyses which
should be performed, nor does it pre-
scribe the number of prior years to be
analyzed or the extent of support neces-
sary; it recognizes that the adequacy of
records depends upon individual needs
and circumstances. The Board believes
that most contractors have adequate rec-
ords on asset retention. Estimates of ex-
perienced lives can be developed from
these existing records on the basis of
samples. Statistical sampling from exist-
ing records or judgmental samples with
analyses to support a large portion of the
dollar amounts involved may allow rea-
sonable estimates in many cases with a
relatively small sample. The Board ex-
pects that contractors will develop suf-
ficient data to support the lives used and
that procurement agencies will enforce
this requirement in a reasonable manner.
Several commentators criticized the
October 3 proposal on the basis that it
would engender disagreements about the
impact of the physical and economic fac-
tors recognized as appropriate to con-
sider in relating actual past experience to
expected future usefulness. The Board, in
effect, places a burden of proof on the
contractor who proposes that expected
changes in physical and economic factors
should be used to justify any specific re-
duction in estimate from that supported
by his records.
The Board recognizes that many con-
tractors would still be concerned not only
about the concept of developing service
life estimates from records of actual use
but also about the risk of disagreements
related to the appropriate adjustments
199
Cost Accounting Standards Board
to be made in relating actual past ex-
perience to expected future usefulness.
The Board believes that procurement
agencies generally recognize the signifi-
cance of the physical and economic fac-
tors listed in the Standard. The Board
encourages the procurement agencies to
provide written guidance for use by field
personnel, with the goal of making an
effective transition from amortization
periods derived from tax regulations to
those based on reasonable estimates of
actual useful service. The staff of the
Board will participate, if requested, in
the development of appropriate guidance
to field personnel.
(5) Reliance on Internal Revenue
Service. Many commentators, through-
out the Board's research process in the
development of this Standard, have sug-
gested that the Board should rely on the
experience accumulated by the Internal
Revenue Service. Under this general ap-
proach the Board would be expected
to concede that there is so much
uncertainty about
about depreciation that
auditors should not ask for support
of estimates from individual con-
tractors, but should accept for con-
tract purposes the operation of a
broad band of averages which have been
developed for other purposes but which
do deal with the same depreciation prac-
tices. The Board has recognized that
contract costing often deals with the
same expenditures and the same prob-
lems of allocation to time periods as are
of interest in income tax accounting.
Tax regulations, however, are intended
to achieve a variety of social goals quite
foreign to the purposes of contract cost-
ing. In this regard, the "Asset Guideline
Periods," first established in 1962, were
based on write-off periods substantially
shorter than actual average experienced
lives and these periods were subject to
further reduction under the "Asset De-
preciation Range System" in 1971.
In addition, tax assessment and col-
lection are continuous so that, except
for differences in tax rates, shifts of in-
come or expense from one year to another
generally do not have a significant effect
on total tax paid over a period of time.
However, similar shifts of cost from one
year to another could have a decided
impact on the costs chargeable to the
Government on contracts with it.
The Board has considered very seri-
ously the issues which are related to its
decision not to rely solely or necessarily
on I.R.S. regulations with respect to
depreciation. Early versions of this
Standard placed some reliance on I.R.S.
regulations. However, spokesmen for con-
tractors criticized the specific techniques
used, including the difficulty of using
lives shorter than those permitted by
I.R.S., while representatives of the ac-
counting profession tended to encourage
less reliance on I.R.S. in any way. The
Standard now being promulgated con-
tinues to make limited use of I.R.S.
regulations for estimating service lives
where more pertinent information is not
available.
(6) Beginning and Ending Periods.
Several commentators expressed con-
cern that the proposed Standard (both
the June 11 and October 3 versions,
which were alike in this regard) would
not permit accounting conventions to
be used for the beginnning and ending
periods of asset use. The Standard per-
mits the application of conventions (such
as the half-year convention) where rea-
sonable in the circumstances and con-
sistently followed. The Board sees no
need for change in this respect.
(7) Asset Groups. Some commentators
felt that the June 11 proposal implied a
desire by the Board for depreciation ac-
counting on an asset-by-asset basis. The
Board does not intend to force any
changes in decisions reasonably made
with respect to accounting in terms of
groups or of individual assets. Since de-
preciation is largely based on the appli-
cation of estimates, when groups are used
the estimates are intended to represent
the average or typical experience for all
individual assets in the group. The Octo-
ber 3 proposal was modified to make
clear the Board's acceptance of group-
ing practices in accounting for assets
and in determining applicable deprecia-
tion lives and methods. The Standard
permits accounting for assets either in-
dividually or in any reasonable grouping,
provided that the accounting treatment
is consistently applied.
(8) Use Rates. In its June 11 proposal,
the Board pointed out that the proposed
Standard is expected to be applied by
contractors in situations where deprecia-
tion cost is a factor in determining equi-
table charging rates to be used as a basis
for contract costing. For example, the
development of rate schedules for con-
struction plant and equipment and own-
ership costs for comparison to lease or
rental costs would be accomplished in
conformance with the requirements of
the proposed Standard. The proposed
200
Cost Accounting Standards Board
Standard also would have been required
to be used by educational institutions in
determining amounts to be compensated
for use of buildings, capital improve-
ments and equipment.
University commentators stated that
few colleges and universities recognize
depreciation in their accounting records.
Replacement of capital assets is often
handled by special appropriations or by
bequests and other contributions. Fed-
eral Management Circular 73-8 has pro-
vided for use allowances as recognition
for the employment of capital assets on
contract work.
A number of commentators have
pointed out that many educational insti-
tutions prefer the current use allowance
system even though they recognize that
conventional depreciation accounting
would result in higher recognized costs.
The most important reason stated is that
the administrative cost and effort in-
volved in establishing depreciation ac-
counts would be significant.
These comments have been persuasive.
Universities who choose not to incur the
additional administrative expense
should have an acceptable alternative
basis for reimbursement for the use of
tangible capital assets. The Standard has
been modified to provide that it does
not apply where FMC 73-8 use allow-
ances are a part of contract costs. How-
ever, the Standard does apply when-
ever depreciation accounting is used by
an educational institution for a covered
contract.
(9) Residual Value. Several commen-
tators expressed concern that the pro-
posed Standard defined "residual value"
even though the only available numeric
value during the service life of an asset
is that for "estimated residual value.”
The wording in the definition has been
modified to clarify the Board's recog-
nition of this point.
The proposal included permission to
disregard minor residual values (those
under ten percent of capitalized cost)
in determining a schedule of deprecia-
tion charges-until the net book value
approaches the residual value. Some
commentators suggested that residual
values be ignored completely. Others sug-
gested that they be permitted to depre-
ciate beyond actual residual values be-
cause of practicality considerations.
The Board has several times expressed
its belief that the administration of Cost
Accounting Standards should be reason-
able and not seek to deal with insignifi-
cant amounts of cost. (See, for example,
the March 1973 "Statement of Onerat-
ing Policies, Procedures and Objec-
tives.") Except for depreciable real prop-
erty, there would usually be little im-
provement in the accuracy of cost meas-
urements if estimates of minor residual
values were explicitly considered in es-
tablishing amounts to be depreciated.
However, the Board continues to believe
that the magnitude of the expected
residual value should be considered for
each asset or for each group. If the es-
timate is greater than ten percent of
capitalized cost or if it is applicable to
depreciable real property it should be
deducted from the capitalized amount in
determining the depreciable cost. The
Standard has been modified to clarify
the applicability of the ten percent mate-
riality rule to personal property only.
The June 11 proposal prohibited the
charging of any depreciation amount
which would reduce book value below
residual value. Where fixed asset ac-
counting is by groups, this provision was
not intended to require separate iden-
tification of the book values and residual
values of individual assets. For individual
assets, where actual residual values are
not material, the Board does not intend
that such immaterial amounts be iden-
tified. The criterion of materiality applies
to all Board promulgations, and there-
fore, the Board does not believe it neces-
sary to restate it in every circumstance.
(10) Gain or Loss. Both the June 11
and October 3 proposals required that
gain or loss on disposition of tangible
capital assets be assigned to the cost ac-
counting period in which disposition oc-
curs. A number of commentators sug-
gested that gain or loss on disposition, as
an adjustment of depreciation previously
recognized, should be assigned to the
cost accounting periods and cost objec-
tives to which the depreciation had been
charged. This suggestion is conceptually
sound but impractical to apply. The re-
cords necessary to identify prior depre-
ciation charges would be difficult to
maintain. In addition, where losses oc-
cur on disposition, application of the
cost to prior periods and cost objectives
would often be precluded because appli-
cable contracts may have been closed or
funding for the additional cost may not
be available. Accordingly, the Board be-
lieves it would be fair to both contractors
and the Government to adjust for gain
or loss in the current cost accounting
period.
201
Cost Accounting Standards Boards
Commentators suggested that if ad-
justment is to be made in the current
cost accounting period, it should be
made to some general indirect cost pool
so that adjustments could be absorbed
by all work of the period. The Board be-
lieves, however, that—to the extent prac-
tical-adjustments should be made to
the same cost accounts to which the de-
preciation cost of the asset had been or
would have been allocated in that cost
accounting period. To the extent that
depreciation cost is assigned to individ-
ual departments or cost centers, so
should the adjustments to depreciation
resulting from the disposition of assets.
Commentators expressed the opinion
that gains on disposition of assets in to-
day's economy are often the result of in-
flation and not adjustments of depre-
ciation expense. The Board recognizes
that assets held for long periods, espe-
cially real property, may be disposed of
for amounts in excess of net book value.
The gain may have been caused by any
of several factors, including the rising
general price level. In some situations it
may be arguable that the gains should
not be considered as corrections to pre-
vious depreciation charges. The Board
and others in the accounting profession
are examining new techniques to deal
with accounting for inflation. However,
accounting for cost on an historical basis
is now generally accepted and until the
new techniques are developed and ac-
cepted, the Board does not see a practical
way to differentiate those gains deemed
by some to be based on inflation from
those resulting from excessive deprecia-
tion charges. Because the Standard ap-
plies only to assets acquired after the
date when the Standard must first be
followed by a contractor, the impact of
the Standard on recognition of gains or
losses in some years in the future. At that
time it is expected that guidance will be
available on the appropriate treatment
for price-level changes reflected in gains
or losses from disposition of fixed assets.
Current procurement regulations of
Government agencies are not consistent
in their provisions for gains and losses.
A number of commentators were appar-
ently unaware of this diversity; they en-
couraged the Board to leave the present
situation alone. The existing procure-
ment regulations have been carefully
considered and the Board believes that
contract cost determinations will be im-
proved by more uniform treatment of
such gains and losses.
Several commentators were concerned
that the treatment of gain or loss from
involuntary conversion, while in agree-
ment with the Federal income tax treat-
ment, differed from the generally ac-
cepted financial accounting practice. The
Standard has been changed to permit the
contractor to use either basis in account-
ing for involuntary conversions.
(11) Original Complements. The
Standard on Capitalization of Tangible
Assets defined and required the capitali-
zation of original complements of low-
cost equipment. There has been some
controversy over the appropriate write-
off technique for such capitalized
amounts. Informal staff proposals to re-
quire amortization over the life of the
complement, or of the asset for which it
has been required, were challenged by
contractors as being unreasonable. The
Board recognized the intensity of this
feeling and the June 11 proposal in-
cluded a provision developed specifically
to assign such costs among cost account-
ing periods.
Some commentators pointed out that
the June 11 proposal for amortization of
original complements would have re-
quired a practice which is not at all com-
mon and would be difficult to implement.
The provisions of the proposal were
modified for the October 3 version to
require simply that an original comple-
ment be treated as a tangible capital
asset, and that the basic requirements of
the Standard be applied to it. Thus, the
costs of each original complement would
be amortized over its period of expected
usefulness, and in accordance with its
pattern of expected usage, either sep-
arately or as a part of an appropriate
group. Comments received on the Octo-
ber 3 version have suggested some mis-
understanding of the principle involved.
Some additional language has been
added to the illustration on depreciation
for original complements in § 409.60 (c)
to further clarify the principle that an
original complement is a single asset and
not a group of individual items.
(12) Retroactive Impact of Changes.
The Board called attention, in the
June 11 publication, to the conflict be-
tween some aspects of Opinion No. 20
of the Accounting Principles Board and
the treatment proposed, in § 409.50(i),
for changes made in depreciation ac-
counting during the service life of an
asset. The position proposed by the
Board, that of making changes appli-
cable prospectively only, was approved by
202
Cost Accounting Standards Board
most of those who commented on the
point. A very few commentators asked
that the Board agree with the financial
accounting principle and insist upon
retroactive impact, even though this
would require reopening settled con-
tracts. The Board was not convinced that
any improvement in costing accuracy
resulting from reopening settled con-
tracts would merit the obvious adminis-
trative inconvenience involved. The
Standard is, therefore, not changed in
this regard.
(13) Service Center Costs. The June 11
proposal provided that when depreciable
assests are part of an organizational unit
whose costs are charged to users on the
basis of service, the depreciation cost of
such assets should be included as part
of the costs of the organizational unit.
A number of commentators expressed
concern that the Standard might be
thought to require the assignment of
building depreciation separately to each
organizational unit which occupied a
building, even though the applicable
building depreciation might be only a
very minor part of the total organiza-
tional unit cost. If an organizational unit
occupies a entire building, and the de-
preciation cost of that building is signifi-
cant and can practicably be identified,
that building depreciation cost should be
included as a cost of the organizational
unit for assignment to cost objectives on
the basis of service. If, however, the total
depreciation cost of a building, which is
allocable to a number of cost objectives,
is accounted for as indirect cost and
its allocation on that basis would not
materially distort the measurement of
costs to any benefiting cost objective,
little point would be served by insisting
that each organizational unit receive a
specific charge for building depreciation.
Several commentators were concerned
that the paragraph on service centers
might restrict the base or bases used for
charging service center costs to other
cost objectives. Nothing in that para-
graph is intended to limit or prescribe the
base or bases used for charging service
center costs.
(14) Cost of Capital. Many commen-
tators have pointed out that the re-
quirements to be imposed by the Stand-
ard may result, on assets acquired after
the effective date, in less depreciation
charged in earlier years of asset life. The
resultant slowdown in recovery of funds
could, they pointed out, have an adverse
impact on the profitability of defense
contracts. Many of the comments seek
to justify rapid write-off as a partial off-
set to the costs of capital actually in-
volved but not directly recognized in
contract pricing.
The purpose of this Standard is to pro-
vide a better measurement and allocation
of depreciation cost. Accounting practices
used for these functions should be justi-
fied on the basis of their effectiveness for
such measurement and allocation. They
should not be justified on the basis of
problems identified with other aspects
(e.g., profitability) of defense contracts.
The Board has no authority to extend
itself into the area of profitability of de-
fense contracts. This is a matter for the
procuring agencies. In this regard, cur-
rent procurement regulations provide
guidance with respect to negotiating prɔ-
posed profits; this guidance includes
some implicit recognition of the cost of
capital. The Board believes that ac-
counting for the costs of capital and
determining equitable measures of profit
are issues separate from depreciation ac-
counting and these issues cannot be re-
solved effectively by adoption of any
particular depreciation practices.
(15) Modernization and Public Policy.
Many commentators have pointed out,
throughout the process of developing this
Standard, that no Cost Accounting
Standard should be adopted if it would
interfere with public policy to encourage
investment in facilities which might pro-
vide a more modern, more effective
industrial mobilization base. The Board
favors appropriate improvements in the
physical facilities used in performance of
negotiated defense contracts; its pur-
pose however does not include such
public policy decisions as the introduc-
tion or continuation of incentives to
encourage investment in certain classes
of assets. This Standard is being pro-
mulgated for the purpose of improving
the measurement and allocation of de-
preciation on acquired assets. The
Board does not believe that this purpose
is inconsistent with or a deterrent to
effective plant modernization.
(16) Inflation Accounting. Some com-
mentators were concerned with the effect
of inflation in depreciation accounting.
They suggested that this Cost Account-
ing Standard should provide for the use
of replacement cost or current value
rather than historical cost as the basis
for determining deprecable amounts.
Present Government procurement regu-
lations as well as financial and tax ac-
counting are based on historical costs.
203
Cost Accounting Standards Board
Current inflationary trends, however,
suggest that more attention should be
given to the impact of inflation on estab-
lished accounting concepts.
The Financial Accounting Standards
Board (FASB) is considering this sub-
ject. The FASB issued an Exposure Draft
on "Financial Reporting in Units of Gen-
eral Purchasing Power" on December 31,
1974. The CASB is also studying the
subject.
The cost impact of this Standard for
most contractors is some years in the
future. The Standard is required to be
followed by contractors at the start of
their next fiscal year after receipt of a
covered contract requiring compliance
with this Standard. The Standard pro-
vides for a two-year period after re-
quired compliance to accumulate neces-
sary supporting records. The require-
ment of the Standard for determining
lives applies only to new assets acquired
after the necessary records are avail-
able. Therefore, for most contractors
implementation of the requirements of
life determination will apply only to
new assets acquired in accounting pe-
riods beginning January 1, 1978, or later.
The Board sees this Standard as estab-
lishing proper techniques for the meas-
urement and allocation of depreciation
expense. The Board believes, therefore,
that this Standard can properly be
promulgated at this time. The subject
of inflation accounting concerns not
only depreciation cost but all costs, and
will be dealt with as part of the studies
now in progress by both the CASB and
the FASB.
(17) Costs and Benefits. Comments
received on the June 11 and October 3
proposals indicated that there would be
substantial administrative cost entailed
in complying with this Standard. Part
of the increased cost is attributed to
required changes in accounting prac-
tices; a greater part is alleged to be
related to increased controversy over
the acceptability of current and pro-
posed depreciation methods and lives.
A number of the administrative prob-
lems described in the comments have
been reduced or eliminated by changes
to the Standard. The requirement for
recordkeeping, however, has not been
eliminated. As discussed above, the Board
recognizes that for some companies addi-
tional cost will be incurred to implement
this aspect of the Standard. Also as dis-
cussed above, there may be some one-
time analytical effort during the next
two years to develop starting estimates
of actual retention periods. The Board
believes that these administrative costs,
when reasonably managed in light of the
purpose to be served, are warranted by
the likelihood of better measurement of
depreciation cost than has previously
been available.
The Standard does not prescribe uni-
form accounting treatment. It enunciates
principles and criteria for the imple-
mentation of these principles, which
will achieve a practical degree of in-
creased uniformity and consistency in
fixed asset depreciation accounting tech-
niques. In some cases, as for the deter-
mination of estimated service life, the
Standard requires the establishment of
records to achieve a better measurement
of cost based on the manner in which
contractors manage their fixed assets.
The benefits to be expected are better
accounting for depreciation cost and
enhanced ability to meet the responsi-
bilities of the Government and of de-
fense contractors to properly account
for the expenditure of public funds. The
Board recognizes that some additional
costs will be incurred in obtaining com-
pliance with this Standard. The benefits
to be obtained are substantial, and the
Standard contributes to fulfilling the
Board's obligation to seek improved ac-
counting for defense contracts.
There is also being published today
(40 FR 4259) an amendment to Part
400, Definitions, to incorporate in that
part terms defined in § 409.30 (a) of this
Cost Accounting Standard.
Part 409-Cost Accounting Standard
Depreciation of Tangible Capital Assets
is added to read as follows:
204
Cost Accounting Standards Board
PART 410-ALLOCATION OF BUSINESS
UNIT GENERAL AND ADMINISTRATIVE
EXPENSES TO FINAL COST OBJEC-
TIVES
Sec.
410.10
General applicability.
410.20 Purpose.
Definitions.
Fundamental requirement.
410.30
410.40
410.50
Techniques for application.
410.60
410.70
410.80
Illustrations.
Exemptions.
Effective date.
Appendix A-Transition from a cost of sales
or sales base to a cost input base.
AUTHORITY: 84 Stat. 796, sec. 103, 50 U.S.C.
App. 2168.
Ꭶ
410.10 General applicability.
General applicability of this Cost Ac-
counting Standard is established by
331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the Cost Ac-
counting Standards contract clause in
negotiated defense prime contracts and
subcontracts ($331.30 of this chapter).
§ 410.20 Purpose.
The purpose of this Cost Accounting
Standard is to provide criteria for the
allocation of business unit general and
administrative (G&A) expenses to busi-
ness unit final cost objectives based on
their beneficial or causal relationship.
These expenses represent the cost of the
management and administration of the
business unit as a whole. The Standard
also provides criteria for the allocation
of home office expenses received by a seg-
ment to the cost objectives of that seg-
ment. This Standard will increase the
likelihood of achieving objectivity in the
allocation of expenses to final cost ob-
jectives and comparability of cost data
among contractors in similar circum-
stances.
§ 410.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are de-
fined in Part 400 of this chapter have the
meanings ascribed to them in that part
unless the text demands a different defi-
nition or the definition is modified in
paragraph (b) of this section.
(1) Allocate. To assign an item of cost
or a group of items of cost. to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Business unit. Any segment of an
organization, or an entire business or-
ganization which is not divided into seg-
ments.
(3) Cost input. The cost, except G&A
expenses, which for contract costing pur-
poses is allocable to the production of
goods and services during a cost account-
ing period.
(4) Cost objective. A function, organ-
izational subdivision, contract or other
work unit for which cost data are desired
and for which provision is made to ac-
cumulate and measure the cost of proc-
esses, products, jobs, capitalized proj-
ects, etc.
(5) Final cost objective. A cost objec-
tive which has allocated to it both direct
and indirect costs, and, in the contrac-
tor's accumulation systems, is one of the
final accumulation points.
(6) General and Administrative (G&A)
expense. Any management, financial, and
other expense which is incurred by or al-
located to a business unit and which is
for the general management and admin-
istration of the business unit as a whole.
G&A expense does not include those man-
agement expenses whose beneficial or
causal relationship to cost objectives can
be more directly measured by a base
other than a cost input base represent-
ing the total activity of a business unit
during a cost accounting period.
(7) Segment. One of two or more di- '
visions, product departments, plants, or
other subdivisions of an organization re-
porting directly to a home office, usually
identified with responsibility for profit
and/or producing a product or service.
The term includes Government-owned
contractor-operated (GOCO) facilities,
and joint ventures and subsidiaries (do-
mestic and foreign) in which the orga-
nization has a majority ownership. The
term also includes those joint ventures
and subsidiaries (domestic and foreign)
in which the organization has less than
a majority of ownership, but over which
it exercises control.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 410.40
Fundamental requirement.
(a) Business unit G&A expenses shall
be grouped in a separate indirect cost
pool which shall be allocated only to
final cost objectives.
205
Cost Accounting Standards Board
(b) (1) The G&A expense pool of a
business unit for a cost accounting period
shall be allocated to final cost objectives
of that cost accounting period by means
of a cost input base representing the
total activity of the business unit except
as provided in paragraph (b) (2) of this
section. The cost input base selected shall
be the one which best represents the total
activity of a typical cost accounting
period.
(2) The allocation of the G&A expense
pool to any particular final cost objec-
tives which receive benefits significantly
different from the benefits accruing to
other final cost objectives shall be deter-
mined by special allocation, (410.50(j)).
(c) Home office expenses received by
a segment shall be allocated to segment
cost objectives as required by 410.50(g).
(d) (1) Except as provided in (d) (2)
below, any costs which do not satisfy
the definition of G&A expenses in this
Standard, but which have been classified
by a business unit as G&A expenses, can
remain in the G&A expense pool unless
they can be allocated to business unit cost
objectives on a beneficial or causal rela-
tionship which is best measured by a base
other than a cost input base.
(2) Independent Research and Devel-
opment costs and Bidding and Proposal
costs shall be treated pursuant to provi-
sions of existing laws, regulations and
other controlling factors.
§ 410.50 Techniques for application.
(a) G&A expenses of a segment in-
curred by another segment shall be re-
moved from the incurring segment's G&A
expense pool. They shall be allocated to
the segment for which the expenses were
incurred on the basis of the beneficial
or causal relationship between the ex-
penses incurred and all benefiting or
causing segments. If the expenses are
incurred for two or more segments, they
shall be allocated using an allocation
base common to all such segments.
(b) The G&A expense pool may be
combined with other expenses for allo-
cation to final cost objectives provided
that:
(1) The allocation base used for the
combined pool is appropriate both for
the allocation of the G&A expense pool
under this Standard and for the alloca-
tion of the other expenses; and
(2) Provision is made to identify the
components and total of the G&A ex-
pense pool separately from the other
expenses in the combined pool.
(c) Expenses which are not G&A ex-
penses and are insignificant in amount
may be included in the G&A expense
pool for allocation to final cost objectives.
(d) The cost input base used to allo-
cate the G&A expense pool shall include
all significant elements of that cost in-
put which represent the total activity of
the business unit. The cost input base
selected to represent the total activity of
a business unit during a cost accounting
period may be: (1) total cost input, (2)
value-added cost input, or (3) single
element cost input. The determination of
which cost input base best represents
the total activity of a business unit must
be judged on the basis of the circum-
stances of each business unit.
(1) A total cost input base is gen-
erally acceptable as an appropriate
measure of the total activity of a busi-
ness unit.
(2) Value-added cost input shall be
used as an allocation base where inclu-
sion of material and subcontract costs
would significantly distort the allocation
of the G&A expense pool in relation to the
benefits received, and where costs other
than direct labor are significant measures
of total activity. A value-added cost in-
put base is total cost input less material
and subcontract costs.
(3) A single element cost input base,
e.g., direct labor hours or direct labor
dollars, which represents the total activi-
ty of a business unit may be used to
allocate the G&A expense pool where it
produces equitable results. A single ele-
ment base may not produce equitable
results where other measures of activity
are also significant in relation to total
activity. A single element base is inap-
propriate where it is an insignificant part
of the total cost of some of the final cost
objectives.
(e) Where, prior to the effective date
of this Standard, a business unit's dis-
closed or established cost accounting
practice was to use a cost of sales or sales
base, that business unit may use the
transition method set out in Appendix
A hereof.
(f) Cost input shall include those ex-
penses which by operation of this Stand-
ard are excluded from the G&A expense
pool and are not part of a combined
pool of G&A expenses and other expenses
allocated using the same allocation base.
(g) (1) Allocations of the home office
expenses of (i) line management of par-
ticular segments or groups of segments,
(ii) residual expenses, and (iii) directly
allocated expenses related to the man-
206
Cost Accounting Standards Board
agement and administration of the re-
ceiving segment as a whole shall be
included in the receiving segment's G&A
expense pool.
(2) Any separate allocation of the ex-
penses of home office (i) centralized
service functions, (ii) staff management
of specific activities of segments, and
(iii) central payments or accruals,
which is received by a segment shall be
allocated to the segment cost objectives
in proportion to the beneficial or causal
relationship between the cost objectives
and the expense if such allocation is sig-
nificant in amount. Where a beneficial
or causal relationship for the expense is
not identifiable with segment cost ob-
jectives, the expense may be included in
the G&A expense pool.
(h) Where a segment performs home
office functions and also performs as an
operating segment having a responsi-
bility for final cost objectives, the ex-
pense of the home office functions shall
be segregated. These expenses shall be
allocated to all benefiting or causing seg-
ments, including the segment performing
the home office functions, pursuant to
disclosed or established accounting
practices for the allocation of home
office expenses to segments.
(i) For purposes of allocating the G&A
expense pool, items produced or worked
on for stock or product inventory shall
be accounted for as final cost objectives
in accordance with the following
paragraphs:
(1) Where items are produced or
worked on for stock or product inventory
in a given cost accounting period, the
cost input to such items in that period
shall be included only once in the com-
putation of the G&A expense allocation
base and in the computation of the G&A
expense allocation rate for that period
and shall not be included in the com-
putation of the base or rate for any other
cost accounting period.
(2) A portion of the G&A expense pool
shall be allocated to items produced or
worked on for stock or product inventory
in the cost accounting period or periods
in which such items are produced at the
rates determined for such periods except
as provided in (3) below.
(3) Where the contractor does not in-
clude G&A expense in inventory as part
of the cost of stock or product inventory
items, the G&A rate of the cost account-
ing period in which such items are issued
to final cost objectives may be used to
determine the G&A expenses applicable
to issues of stock or product inventory
items.
(j) Where a particular final cost ob-
jective in relation to other final cost
objectives receives significantly more or
less benefit from G&A expense than
would be reflected by the allocation of
such expenses using a base determined
pursuant to paragraph (d) of this sec-
tion, the business unit shall account for
this particular final cost objective by a
special allocation from the G&A expense
pool to the particular final cost objective
commensurate with the benefits received.
The amount of a special allocation to
any such final cost objective shall be ex-
cluded from the G&A expense pool re-
quired by section 410.40(a), and the par-
ticular final cost objective's cost input
data shall be excluded from the base
used to allocate this pool.
§ 410.60
Illustrations.
(a) Business Unit A has been includ-
ing the cost of scientific commuter oper-
ations in its G&A expense pool. The sci-
entific computer is used predominately
for research and development, rather
than for the management and adminis-
tration of the business unit as a whole.
The costs of the scientific computer
operation do not satisfy the Standard's
definition of G&A expense; however, they
may remain in the G&A expense pool
unless they can be allocated to business
unit cost objectives on a beneficial or
causal relationship which is best meas-
ured by a base other than a cost input
base representing the total activity of
a business unit during a cost accounting
period.
(b) Segment B performs a budgeting
function, the cost of which is included
in its G&A expense pool. This function
includes the preparation of budgets for
another segment. The cost of preparing
the budgets for the other segment should
be removed from B's G&A expense pool
and transferred to the other segment.
(C)
(1) Business Unit C has a per-
sonnel function which is divided into
two parts (i) a vice president of per-
207
Cost Accounting Standards Board
sonnel who establishes personnel policy
and overall guidance, and (ii) a person-
nel department which handles hirings,
testing, evaluations, etc. The expense of
the vice president is included in the
G&A expense pool. The expense of the
personnel department is allocated to the
other indirect cost pools based on the
beneficial or causal relationship between
that expense and the indirect cost pools.
This procedure is in compliance with
the requirements of this Standard.
(2) Business Unit C has included sell-
ing costs as part of its G&A expense
pool. Business Unit C wishes to continue
to include selling costs in its G&A ex-
pense pool. Under the provisions of this
Standard, Business Unit C may continue
to include selling costs in its G&A pool,
and these costs will be allocated over a
cost input base selected in accordance
with the provisions of 410.50 (d).
(3) Business Unit C has included
IR&D and B&P costs in its G&A expense
pool. C has used a cost of sales base to
allocate its G&A expense pool. As of
January 1, 1978 (assumed for purposes
of this illustration), the date on which
C must first allocate its G&A expense
pool in accordance with the require-
ments of this Standard, C has among its
final cost objectives several cost reim-
bursement contracts and fixed price con-
tracts subject to the CAS clause [re-
ferred to as the pre-existing contracts].
If C chooses to use the transition method
in 410.50(e):
(i) C shall allocate IR&D and B&P
costs during the transition period (from
January 1, 1978, to and including the
cost accounting period during which the
pre-existing contracts are completed, to
the pre-existing contracts as part of its
G&A expense pool using a cost of sales
base pursuant to 410.50(e) and Appen-
dix A.
(ii) During the transition period such
costs, as part of the G&A expense pool,
shall be allocated to new cost reimburse-
ment contracts and new fixed price con-
tracts subject to the CAS clause using
a cost input base as required by 410.50
(d) and (e) and Appendix A.
(iii) Beginning with the cost account-
ing period after the transition period
the IR&D and B&P costs as part of the
G&A expense pool shall be allocated to
all final cost objectives using a cost input
base as required by 410.50(d). If C
chooses not to use the transition method
in 410.50(e), the contractual provision
requiring appropriate equitable adjust-
ment of the prices of affected prime con-
tracts and subcontracts will be imple-
mented.
(4) Business Unit C has accounted for
and allocated IR&D and B&P costs in a
cost pool separate and apart from the
G&A expense pool, C may continue to ac-
count for these costs in a separate cost
pool under the provision of this Stand-
ard. If C is to use a total cost input base,
these costs when accounted for and allo-
cated in a cost pool separate and apart
from the G&A expense pool will become
part of the total cost input base used by
C to allocate the G&A expense pool.
(5) Business Unit C has included sell-
ing costs as part of its G&A expense pool.
Business Unit C has used a cost of sales
base to allocate the G&A expense pool.
Business Unit C desires to continue to
allocate selling costs using the costs of
sales base. Under the provisions of this
Standard, Business Unit C would ac-
count for selling costs as a cost pool
separate and apart from the G&A ex-
pense pool, and continue to allocate these
costs over a cost of sales base. If C uses a
total cost input base to allocate the G&A
expense pool, the selling costs will become
part of the total cost input base.
(d) (1) Business Unit D has accounted
for selling costs in a cost pool separate
and apart from its G&A expense pool and
has allocated these costs using a cost of
sales base. Under the provisions of this
Standard, Business Unit D may continue
to account for those costs in a separate
pool and allocate them using a cost of
sales base. Business Unit D has a total
cost input base to allocate its G&A ex-
pense pool. The selling costs will become
part of the cost input base used by Busi-
ness Unit D to allocate the G&A expense
pool.
(2) During a cost accounting period,
Business Unit D buys $2,000,000 of raw
materials. At the end of that cost ac-
counting period, $500,000 of raw materi-
als inventory have not been charged out
to contracts or other cost objectives. The
$500,000 of raw materials are not part
of the total cost input base for the cost
accounting period, because they have not
been charged to the production of goods
and services during that period. If all
of the $2,000,000 worth of raw material
had been charged to cost objectives dur-
ing the cost accounting period, the cost
input base for the allocation of the G&A
expense pool would include the entire
$2,000,000.
208
Cost Accounting Standards Board
(3) Business Unit D manufactures a
variety of testing devices. During a cost
accounting period. Business Unit D ac-
quires and uses a small building, con-
structs a small production facility using
its own resources, and keeps for its own
use one unit of a testing device that it
manufactures and sells to its customers.
The acquisition cost of the building is
not part of the total cost input base:
however, the depreciation taken on the
building would be part of the total cost
input base. The costs of construction of
the small production facility are not
part of the total cost input base. The
requirements of Cost Accounting Stand-
ard 404 provide that those G&A expenses
which are identifiable with the construc-
ted asset and are material in amount
shall be capitalized as part of the cost
of the production facility. If there are
G&A expenses material in amount and
identified with the constructed asset.
these G&A expenses would be removed
from the G&A expense pool prior to the
allocation of this pool to final cost ob-
jectives. The cost of the testing device
shall be part of the total cost input base
per the requirements of Cost Account-
ing Standard 404 which provides that
the costs of constructed assets identical
with the contractor's regular product
shall include a full share of indirect cost.
(e) (1) Business Unit E produces Item
Z for stock or product inventory. The
business unit does not include G&A ex-
pense as part of the inventory cost of
these items for costing or financial re-
porting purposes. A production run of
these items occurred during Cost Ac-
counting Period 1. A number of the units
produced were not issued during Period
1 and are issued in Period 2. However,
those units produced in Period 1 shall
be included in the cost input of that
period for calculating the G&A expense
allocation base and shall not be included
in the cost input of Period 2.
(2) Business Unit E should apply the
G&A expense rate of Period 1 to those
units of Item Z issued during Period 1
and may apply the rate of Period 2 to
the units issued in Period 2.
(3) If the practice of Business Unit E
is to include G&A expense as part of
the cost of stock or product inventory.
the inventory cost of all units of Item Z
produced in Period 1 and remaining in
inventory at the end of Period 1. should
include G&A expense using the G&A
rate of Period 1.
(f) (1) Business Unit F produced Item
X for stock or product inventory. The
business unit does not include G&A ex-
pense as part of the inventory cost of
these items. A production run of these
items was started. finished, and placed
into inventory in a single cost accounting
period. These items are issued during
the next cost accounting period.
(2) The cost of items produced for
stock or product inventory should be in-
cluded in the G&A base in the same year
they are produced. The cost of such items
is not to be included in the G&A base on
the basis of when they are issued to final
cost objectives. Therefore, the time of is-
suance of these items from inventory to a
final cost objective is irrelevant in com-
puting the G&A base.
(g) The normal productive activity of
Business Unit G includes the construc-
tion of base operating facilities for oth-
ers. G uses a total cost input base to al-
locate G&A expense to final cost objec-
tives. As part of a contract to construct
an operating facility. G agrees to acquire
a large group of trucks and other mobile
equipment to equip the base operating
facility. G does not usually supply such
equipment. The cost of the equipment
constitutes a significant part of the con-
tract cost. A special G&A allocation to
this contract shall be agreed to by the
parties if they agree that in the circum-
stances the contract as a whole receives
substantially less benefit from the G&A
expense pool than that which would be
represented by a cost allocation based on
inclusion of the contract cost in the total
cost input base.
or
(h) (1) The home office of Segment H
separately allocates to benefiting
causing segments significant home office
expenses of (i) staff management func-
tions relative to manufacturing, (ii) staff
management functions relative to engi-
neering. (iii) central payment of health
insurance costs and (iv) residual ex-
penses. H receives these expenses
separate allocations. H maintains three
indirect cost pools: (i) G&A expense.
(ii) manufacturing overhead and (iii)
engineering overhead: all home office ex-
penses allocated to H are included in
as
209
Cost Accounting Standards Board
H's G&A expense pool.
(2) This accounting practice of H
does not comply with section 410.50(g)
(2). Home office residual expenses should
be in the G&A expense pool, and the ex-
penses of the staff management func-
tions relative to manufacturing and en-
gineering should be included in the man-
ufacturing overhead and engineering
overhead pools, respectively. The health
insurance costs should be allocated in
proportion to the beneficial and causal
relationship between these costs and
H's cost objectives.
§ 410.70
Exemptions.
This Standard shall not apply to con-
tractors who are subject to the provi-
sions of Federal Management Circular
73-8 (Cost Principles for Educational
Institutions › or Circular 74-4 (Prin-
ciples for Determining Costs Applicable
to Grants and Contracts with State and
Local Governments).
§ 410.80
Effective date.
(a) The effective date of this Standard
is October 1, 1976.
(b) This Standard shall be followed
by each contractor after the start of his
next fiscal year beginning after Jan-
uary 1, 1977.
APPENDIX A
TRANSITION FROM A COST OF SALES OR
SALES BASE TO A COST INPUT BASE
A business unit may use the method de-
scribed below for transition from the use of
a cost of sales or sales base to a cost input
base.
(1) Calculate the cost of sales or sales base
in accordance with the cost accounting prac-
tice disclosed or established prior to the
date established by Section 410.80 (b) of
this Cost Accounting Standard.
(2) Calculate the G&A expense allocation
rate using the base determined in paragraph
(1) above and use that rate to allocate from
the G&A expense pool to the final cost ob-
jectives which were in existence prior to the
date on which the business unit must first
allocate costs in accordance with the require-
ments of this Cost Accounting Standard.
(3) Calculate a cost input base in com-
pliance with 410.50 (d) above.
(4) Calculate the G&A expense rate us-
ing the base determined in paragraph (3)
above and use that rate to allocate from the
G&A expense pool to those final cost ob-
jectives which arise under contracts entered
into on or after the date on which the busi-
ness unit must first allocate costs in accord-
ance with the requirements of this Cost Ac-
counting Standard.
(5) The calculations set forth in para-
graphs (1)-(4) above shall be performed
for each cost accounting period during
which final cost objectives described in (2)
are being performed.
(6) The business unit shall establish an
inventory suspense account. The amount of
the inventory suspense account shall be equal to
the beginning inventory of contracts subject to
the CAS clause of the cost accounting pe-
riod in which the business unit must first
allocate costs in accordance with the re-
quirements of this Cost Accounting Stand-
ard.
(7) In any cost accounting period. after
the cost accounting periods described in
(5) above, if the ending inventory of con-
tracts subject to the CAS clause is less than
the balance of the inventory suspense ac-
count, the business unit shall calculate two
G&A expense allocation rates, one to allocate
G&A expenses to contracts subject to the
CAS clause and one applicable to other
work.
(a) The G&A expense pool shall be divided
in the proportion which the cost input of
the G&A expense allocation base of the
contracts subject to the CAS clause bears
to the total of the cost input allocation
base, selected in accordance with § 410.50(d),
for the cost accounting period.
(b) The G&A expenses applicable to con-
tracts subject to the CAS clause shall be
reduced by an amount determined by multi-
plying the difference between the balance
of the inventory suspense account and the
ending inventory of contracts subject to the
CAS clause by the cost of sales rate, as
determined under (1) above, of the cost ac-
counting period in which a business unit
must first allocate costs in accordance with
the requirements of this Cost Accounting
Standard.
(8) In any cost accounting period in which
such a reduction is made, the balance of the
inventory suspense account shall be reduced
to be equal to the ending inventory of con-
tracts subject to the CAS clause of that cost
accounting period.
The following illustrates how a business
unit would use this transition method.
1. Business Unit R has been using a cost
of sales base to allocate its G&A expense pool
to final cost objectives. Business Unit R uses
a calendar year as its cost accounting period.
On October 1, 1976 (assumed for purposes
of this illustration) Cost Accounting Stand-
ard 410 becomes effective. On October 2, 1976,
Business Unit R receives a three-year con-
tract containing the Cost Accounting Stand-
ards clause. As a result, Business Unit R must
comply with the requirements of the Stand-
ard in the cost accounting period beginning
in January, 1978.
As of January 3, 1978, Business Unit R has
the following contracts:
(1) Contract I-A four-year
contract
·
210
Cost Accounting Standards Board
awarded in January, 1975.
(2) Contract II-A three-year contract
which was negotiated in March, 1976, and
was awarded on October 2, 1976.
(3) Contract III-A four-year contract
awarded on January 2, 1978.
If Business Unit R chooses to use the
transition method provided in § 410.50 (e), it
will allocate the G&A expense pool to these
contracts as follows:
(a) Contract I-Since Contract I was in
existence prior to January 1, 1978, the G&A
expense pool shall be allocated to it using
a cost of sales base as provided in 410.50(e)
(b) Contract II-Since this contract was
in existence prior to January 1, 1978, the
G&A expense pool shall be allocated to it
using a cost of sales base as provided in
§ 410.50 (e).
(c) Contract III-Since this contract was
awarded after January 1, 1978, the G&A ex-
pense pool shall be allocated to this contract
using a cost input base.
Having chosen to use § 410.50(e), Business
Unit R will use the transition method of allo-
cating the G&A expense pool to final cost
objectives until all contracts awarded prior
to January 1, 1978, are completed (1979 if
the contracts are completed on schedule).
Beginning with the cost accounting period
subsequent to that time, 1980, Business Unit
R will use a cost input base to allocate the
G&A expense pool to all cost objectives. Busi-
ness Unit R will also carry forward an inven-
tory suspense account in accordance with the
requirements of this Standard.
2.A
Business Unit N is first required to
allocate its costs in accordance with the
requirements of CAS 410 during the fiscal
year beginning January 1, 1978. Business
Unit N has used a cost of sales base to allo-
cate its G&A expense pool.
During the years 1978, 1979, 1980, Business
Unit N reported the following data:
Contracts after Jan. 1, 1978
Total
CAS-fixed
price
Contracts prior to Jan. 1, 1978
Non-CAS
CAS-cost
work
contracts
Non-CAS
work
work
CAS-fixed
price
work
CAS-cost
contracts
Year 1978:
Beginning inventory.
Cost input..
$500
300
200
0
0
0
0
+3000
400
600
700
500
500
300
Total
3500
700
800
700
500
500
300
Cost of sales.
-3000
600
550
700
450
400
300
Ending inventory
500
100
250
50
100
Year 1979:
Beginning inventory
500
100
250
0
50
100
Cost input.
+3000
400
600
700
500
500
300
Total
3500
500
850
700
550
600
300
Cost of sales
- 2500
450
650
700
150
250
300
Ending inventory.
1000
50
200
400
350
Year 1980:
Beginning inventory.
1000
50
200
()
100
350
()
Cost imput.
+3000
-400
600
700
500
500
300
Total
4000
450
800
700
900
850
300
Cost of sales
-3250
450
800
700
450
550
300
Ending inventory.
750
450
300
()
NOTES
Operating data is in thousands of dollars.
G. & A. expense $375,000 in accordance with the requirements of this standard.
Work existing prior to January 1, 1978
may include:
(1) Government contracts which contain
the CAS clause;
(2) Government contracts which do not
contain the CAS clause;
(3) Contracts other than Government
contracts or customer orders; and
(4) Production not specifically identified
with contracts or customer orders under
production or work orders existing prior to
the date on which a business unit must first
allocate its costs in compliance with this
Standard and which are limited in time or
quantity.
Production under standing or unlimited
work orders, continuous flow processes and
the like, not identified with contracts or
customer orders are to be treated as final
cost objectives awarded after the date on
which a business unit must first allocate
its costs in compliance with the require-
ments of this Standard.
Business Unit N may allocate the G&A
expense pool as follows:
211
Cost Accounting Standards Board
1. G. & A. expense pool..
Cost of sales rate
Cost input rate.
2. G. & A. allocations:
Prior contracts:
[In dollars]
Year 1978
Year 1979
Year 1980
375
375
375
375/3,000= .125
375/3,000= . 125
375/2,500=
375/3,000= . 125
. 15
375/3,250= .115
375/3,000=
.125
Non-CAS work.
CAS-fixed price work .
CAS-cost contracts..
600×0.125 = 75,00
550×0.125= 68.75
700X0.125= 87.50
450X0.15 = 67.50
650×0.15 = 97.50
700×0.15 =105, 00
450×0.115 = 51.75
800×0.115= 92,00
700×0.115= 80.50
After contracts:
Non-CAS work.
500X0.125= 62.50
CAS-fixed price work .
CAS-cost contracts…….
500×0.125= 62.50
300×0.125= 37.50
393.75
200
500X0.125= 62.50
500×0.125= 62.50
300X0, 125= 37.50
432.50
500×0.125= 62.50
500×0.125= 62.50
300X0.125 = 37.55
386.70
. 125
3. Inventory suspense account
G. & A. rate applicable..
1 Beginning inventory of contracts subject to the CAS clause, January 1978.
2.B
In cost accounting period 1982, Busi-
ness Unit N has an ending inventory of
contracts subject to the CAS clause of $100,-
000. This is the first cost accounting period
after the transition in which the amount
of the ending inventory is less than the
amount of the inventory suspense account.
During this cost accounting period, Business
Unit N had G&A expenses of $410,000 and
cost input of $3,500,000, $1,500,000 applicable
to contracts subject to the CAS clause and
$2,000,000 applicable to other work.
Business Unit N would compute its G&A
expense allocation rate applicable to con-
tracts subject to the CAS clause as follows:
(1) Amount of inventory suspense
$200,000
account
Amount of ending inventory-- 100, 000
Difference
G. & A. rate applicable (see A
above)
Adjustment to G. & A. expense
applicable to contracts sub-
ject to the CAS clause.
100,000
X 0.125
12, 500
(2) G. & A. expense pool---
G. & A. expenses applicable to
contracts subject to the CAS
clause ($1,500,000/$3,500,000
$410,000)
G. & A. expenses applicable to
other work_.
(3) G. & A. expenses applicable to
contracts subject to the CAS
clause
Adjustment to G. & A. expenses
applicable to contracts sub-
ject to the CAS clause.
G. & A. expenses allocable to
contracts subject to the CAS
clause
(4) G. & A. expense allocation rate
applicable to contracts sub-
ject to the CAS clause for
cost accounting period 1982
-$163,390/$1,500,000=0.109.
410,000
175, 890
234, 110
175, 890
-12, 500
163,390
The amount of the inventory suspense ac-
count would be reduced to $100,000.
[FR Doc.76-11137 Filed 4-15-76;8:45 am]
212
Cost Accounting Standards Board
SUPPLEMENT--PREAMBLES
A. Preamble to Original Publication
The Standard on Allocation of Busi-
ness Unit General and Administrative
(G&A) Expenses to Final Cost Objec-
tives being published today is one of a se-
ries being promulgated by the Cost Ac-
counting Standards Board (CASB) pur-
suant to section 719 of the Defense Pro-
duction Act of 1950, as amended (P.L.
91-379, 50 U.S.C. App. 2168), which
provides for the development of Cost Ac-
counting Standards to be used in connec-
tion with negotiated national defense
contracts.
Preliminary work on the development
of this Standard was based in part on
the "Report on The Feasibility of Apply-
ing Uniform Cost-Accounting Standards
to Negotiated Defense Contracts," which
cited the allocation of G&A expenses as
one of the most frequently encountered
problems in the area of allocation of in-
direct cost. Another basis for the early
work in this area was the absence of a
requirement in procurement agency reg-
ulations dealing specifically with the al-
location of business unit G&A expenses.
Up to now, practices related to the al-
location of G&A expenses have been cov-
ered by general provisions dealing with
allocability and indirect costs. These pro-
visions do not include criteria for the se-
lection of allocation practices in given
circumstances. The Board undertook re-
search with the view that a Cost Ac-
counting Standard on this subject should
increase the likelihood of achieving ob-
jectivity in the allocation of G&A ex-
penses to final cost objectives and com-
parability of cost data among contractors
in similar circumstances.
Early research included an extensive
review of available literature including
decisions of contract appeals boards and
courts. A preliminary analysis of ac-
counting for the allocation of G&A ex-
penses was made and significant issues
were identified. A research questionnaire
based on these issues was distributed on
July 28, 1972; it was designed to solicit
a sample of existing practices used for
the allocation of G&A expenses and the
reasons supporting existing practices.
Responses were obtained from 65
sources.
After evaluation of the responses to
the questionnaire, the Board developed
a preliminary research draft of the
Standard which was widely distributed,
on December 13, 1973, to obtain informal
comment and to ascertain the cost im-
pact of adoption of the Standard as pro-
posed. The Board's further consideration
of the issues related to the allocation of
G&A expenses has been enhanced by al-
most 100 responses to this preliminary
proposal.
A proposed Standard was published
in the FEDERAL REGISTER of Septem-
ber 24, 1974, (39 FR 34300). After re-
viewing the responses to that publica-
tion, the Board revised its proposal. As
part of its research in preparing the re-
vised proposal, the Board surveyed, as
described below, a number of companies
who use a cost of sales base to allocate
G&A expenses. The revised proposal was
published in the FEDERAL REGISTER Of
September 9, 1975, (40 FR 41801). As
part of the comments with the Septem-
ber 9, 1975 publication, the Board stated
that it was particularly interested in
receiving comments on the alternative
methods for the proposed requirement
for the transition from a cost of sales
base for allocation of the G&A expense
pool to use of a cost input base. Respond-
ents were specifically asked to comment
on the administrative cost and effort en-
tailed by each of the alternatives and
to indicate their preference between the
alternatives. The Board supplemented
both FEDERAL REGISTER publications by
sending copies of the FEDERAL REGISTER
material directly to organizations and in-
dividuals who had expressed an interest
in the work of the Board.
The Board received a total of 136
responses to both FEDERAL
both FEDERAL REGISTER
publications; 65 to the September 24,
1974 proposal and 71 to the September
9, 1975 proposal. Responses were received
from individual companies, Government
agencies, professional associations, in-
dustry associations, public accounting
firms, universities and others. The Board
takes this opportunity to express its ap-
preciation for the helpful suggestions
and criticisms which have been fur-
nished. The comments furnished by or-
ganizations and individuals have resulted
in a number of changes in the Standard.
The comments below summarize the
issues discussed by respondents in con-
nection with both proposed Standards.
They incorporate the still relevant por-
213
Cost Accounting Standards Board
tions of the comments which accom-
panied the September 24, 1974 publica-
tion. The comments also explain the
major changes which have been made
to the prior proposals.
1. SELECTION OF AN ALLOCATION BASE FOR
THE G&A EXPENSE POOL
Allocation Relationship. Commentators
expressed the view that the choice of an
allocation relationship between the G&A
expense pool and final cost objectives is
arbitrary; particularly, the selection of
any single allocation base is arbitrary.
Commentators also took the position that
the G&A expense pool cannot be al-
located on a demonstrable beneficial or
causal relationship, that G&A is not
specifically relatable to all costs, nor does
it bear any relationship to cost objec-
tives or any particular final cost objec-
tives. Other commentators stated that
the selection of the cost input base must
be based on the assumption that G&A is
caused by cost input. The commentators
with reference to the Martin-Marietta
case, ASBCA 14159, March 16, 1971,
noted that the decision in that case re-
jected this position.
While some commentators on the Sep-
tember 9, 1975 publication supported the
choice of cost input, others agreed with
the views expressed above. The Board
has concluded that the expenses in the
G&A expense pool are the expenses of
the general management and adminis-
tration of a business unit as a whole;
that the allocation base chosen should be
one which measures the total activity of
the business unit during a cost account-
ing period and not just some part of to-
tal activity, and that a cost input base
accomplishes this objective.
Cost of Sales Survey. Shortly after the
initial FEDERAL REGISTER publication, the
Board surveyed segments of a number
of companies who use a cost of sales base
to allocate G&A expenses. The survey
was designed to compare the results of
using a cost of sales base with the results
of using a cost input base to allocate
these expenses. Responses were received
from 91 segments. The results of the
survey established that in the case of
individual segments the use of a cost of
sales base as compared with a cost input
base can result in a significant differ-
ence in the G&A rate and in the alloca-
tions of G&A expenses to final cost ob-
jectives. For example. one of the seg-
ments in the survey had a G&A rate
based on cost of sales of 8.0 percent.
When that segment used a total cost in-
put rate, its G&A rate for the same pe-
riod was 10.4 percent or a 30 percent
difference. A change to a total cost in-
put rate would have resulted in substan-
tially different allocations of G&A ex-
pense to that segment's final cost objec-
tives.
Some commentators were critical of
the Board's using a single year as the
basis for the survey. These commenta-
tors noted that there could be isolated
instances where the use of a cost of
sales base would not produce equitable
results. However, they noted that over
time a cost of sales base will give equita-
ble costing results.
For a cost of sales base to provide an
equitable allocation consistent with that
of an allocation to the total activity of a
business unit during a cost accounting
period, a contractor's mix of work be-
tween Government and commercial,
types of contracts and the level of G&A
expenses would have to remain constant
over many periods. In this regard, the
cost of sales survey demonstrated that
in any given period, one period being
selected, the use of a cost of sales base
can result in significant differences in
the allocation of G&A expenses to final
cost objectives as compared with the re-
sults obtained using a cost input base.
Cost of Sales Base. A number of com-
mentators suggested that the use of cost
of sales as a measurement of the allo-
cation base for the G&A expense pool
should be permitted. Commentators as-
serted that this base has long been used
for the allocation of the G&A expense
pool and is consistent with generally ac-
cepted accounting principles and the
concept of period costs. The Board's
position is that the measurement of a
cost of sales base is representative, in
part, of the productive activities of prior
periods and is subject to fluctuations
which can distort the allocation of G&A
expenses to activities of the current pe-
riod. Although the measurement of cost
of sales is based on a recorded date of
sale, that is not necessarily an index of
the activities of a period.
Under current regulations as inter-
preted by the Armed Services Board of
Contract Appeals, the use of a cost of
sales base will not result in an equitable
allocation of G&A expenses where there
are significant changes in the mix of
business or significant changes in the
214
Cost Accounting Standards Board
beginning and ending inventory bal-
ances. The Board has considered the ex-
istence of these past disputes and cases
involving the use of a cost of sales allo-
cation base. In given circumstances, due
to the definition and accounting for
sales under various types of contracts,
the cost of similar types of productive
activities may be treated differently in
terms of the measurement of a cost of
sales allocation base. The use of a cost
of sales base can result in unwarranted
shifting of costs between different types
of final cost objectives. Therefore, the
Board has concluded that the use of a
cost of sales base is inappropriate for es-
tablishing the proper cost of final cost
objectives within a cost accounting
period.
Cost Input Base. Commentators took
the position that the use of a cost input
base would violate generally accepted ac-
counting principles used for financial ac-
counting purposes because G&A expenses
are most commonly viewed as a period
cost and not allocated to production nor
inventoried. The use of a cost input base
would result in inventorying G&A ex-
penses for contract costing purposes.
Further, commentators asserted that
there is no beneficial or causal relation-
ship between the G&A expense pool and
cost input, cost objectives or specific final
cost objectives.
The logical extension of this argument
is that these expenses should not be al-
locable to Government contracts. If no
beneficial or causal relationship can be
established then there should be no re-
covery, because for a cost to be attached
to cost objectives some beneficial or
causal relationship should exist.
There are a number of firms which in-
ventory G&A expenses on Government
contracts for financial disclosure pur-
poses. Moreover, the IRS and the SEC
have recognized that in some instances
G&A expenses are being applied to the
inventory of Government contracts, and
the G&A expense pool allocation remains
in the inventory of these contracts at
the end of the accounting period. While
the Standard does not require that G&A
expense be inventoried for financial re-
porting purposes. the inventorying of
G&A expenses on Government contracts
has been an acceptable accounting pro-
cedure for financial reporting as well as
for filing with the SEC. Under current
IRS regulations, G&A expenses may be
allocated to inventory.
The Standard being promulgated to-
day is based on the concept of full-cost-
ing of final cost objectives. For Govern-
ment contracting purposes, both direct
and indirect costs, including G&A ex-
penses, are allocable. Thus, for contract
costing purposes, the concept of period
expense is inapplicable. The Board has
concluded that there is a beneficial or
causal relationship between G&A ex-
penses and all of the final cost objectives
of a cost accounting period. Therefore,
these costs are allocable to such final
cost objectives.
Commentators also asserted that the
Standard was unduly rigid because it
permitted only one base for the alloca-
tion of the G&A expense pool. The
Standard is not limited to the use of one
allocation base; rather, the scope of the
base, the measurement of total activity,
is limited to cost input as this is the
measure of the total activity of the busi-
ness unit. The Standard provides that
the measure of cost input best represent-
ing the total activity of the business unit
during a cost accounting period is to be
the one chosen as the base. The Stand-
ard includes criteria for determining the
cost input base which will best measure
total activity. The criteria are provided
so that the allocation base for the G&A
expense pool can be selected giving con-
sideration to the differing circumstances
of individual business units.
Commentators expressed a variety of
views concerning the criteria for the se-
lection of a cost input allocation base.
Some commentators noted that the cri-
teria included the necessary guidance
and means for selecting the base. Others
expressed concern that the criteria for
selection of a particular cost input base
were not clear and could lead to disputes.
Some commentators expressed the view
that the inclusion of value-added and
single-element allocation bases was re-
dundant. Also, a contractor should be
required to demonstrate that the use of
a total cost input base would not result in an
appropriate allocation before the use of one of
the other bases was permitted. Other commen-
tators stated that explicit inclusion of direct la-
bor hours and direct dollars serves to clarify the
Standard. Commentators suggested that the se-
lection criteria should be modified to remove
any bias favoring a total cost input base.
The Board has recognized the merit of
the numerous comments and suggestions
received during the research process. The
Standard has been modified to clarify
the criteria for the selection of an al-
location base in a particular circum-
stance.
215
Cost Accounting Standards Board
Under the Standard, only a cost input
base may be used. Three cost input bases
have been provided and criteria have
been established for selection of the
appropriate base. The individual cir-
cumstances of a given business unit must
be analyzed, and the cost input base that
best represents the total activity of that
business unit would be the base selected.
The Board's research indicates that
generally total cost input, because it is
a broad measure of all of the work done
and includes all of the costs allocable to
the contracts of the period, will be a
measure that is representative of the
total activity of the cost accounting
period.
In this context the term "total activ-
ity" refers to the production of goods and
services during a cost accounting period.
This scope of activity is selected in light
of the fact that the purpose of this
Standard is to provide guidelines for the
allocation of expense to all of the work of
a given cost accounting period.
Commentators questioned whether
other indirect costs not part of cost of
goods sold, such as unallowables and
nonoperating expenses, should be part of
the measurement of cost input. These
commentators took the position that
such costs should not be part of cost in-
put. Commentators pointed out that
there could be an inconsistency in the
cost input bases used by various con-
tractors depending on
depending on whether costs
such as selling costs or IR&D and B&P
costs were included in the G&A pool or
excluded from the G&A pool and included
as part of the cost input base. Com-
mentators also questioned whether costs
such as service center costs and inter-
segment transfers should be included in
the cost input base for the allocation of
the G&A expense pool.
The cost input base has been selected
as the measure of the total activity of
the work performed during the cost ac-
counting period. Therefore, it is appropri-
ate that the costs of all activities, func-
tions, materials, services, etc., allocable
to final cost objectives during a cost ac-
counting period be included in the total
cost input base for that period. This re-
lationship is based on the scope of the
G&A expenses which represent the cost
of the general management and admin-
istration of the business unit as a whole.
For example, where a total cost input
base has been selected, all significant
costs other than the costs included in
the G&A expense pool should be included
in the base. The Board is aware that
there can be a difference in the alloca-
tion bases used depending upon the
treatment of selling costs and IR&D and
B&P costs. This result occurs from the
Board's accommodation of existing prac-
tices for accounting for selling costs and
IR&D and B&P costs within the struc-
ture of this Standard. The Board has
specifically required the inclusion of these
costs in the cost input base in paragraph
410.50(f). The illustrations concerning
the accounting for these indirect costs as
part of a cost input base have been re-
vised to clarify the required treatment.
Commentators suggested that minor
variations from the specific bases pre-
sented should be allowed. The Board
points out that the Standard requires
that the allocation base sclected should
include all significant elements of cost
input necessary to represent the total ac-
tivity. If in a given circumstance, the
exclusion of a particular item does not
invalidate the chosen base's representa-
tion of total activity, this is acceptable
under the Standard. The Board notes
that these are the kinds of decisions
which involve consideration of the indi-
vidual circumstances of a business unit;
accordingly, the Standard provides the
opportunity for the exercise of judgment
in these situations.
Commentators noted the Standard
lacks an explicit consistency requirement
for the use of the cost input base
selected. It was pointed out that alloca-
tion bases once selected are then used
for considerable periods of time, usually
as long as the underlying economic cir-
cumstances do not change. In this situa-
tion the selected base would remain rep-
resentative of the total activity of the
business unit. The Board does not intend
to change this practice. In fact, the
Board notes that in concert with Cost
Accounting Standard 401, the selection
of the allocation base for the G&A ex-
pense pool should provide the basis for
allocation of that pool until such time as
the basic economic circumstances
change. The Standard has been modified
to require that the base selected should
be one that measures activity of a typi-
cal cost accounting period.
Commentators were uncertain as to the
relationship of cost input to the purchase
of raw materials inventory and to Cost
Accounting Standard (CAS) 404-Capi-
talization of Tangible Assets. To help
clarify the relationship of this Standard
to the purchase of raw material inven-
216
Cost Accounting Standards Board
tories and to CAS 404, an illustration
has been added. Cost input is basically a
measure of the costs and expenses allo-
cated to production of goods and services
during a cost accounting period. The il-
lustration has been revised to make clear
that items purchased for raw material
inventory which have not been commit-
ted or used in production during a cost
accounting period would not be part of
the cost input base for that cost ac-
counting period. As to the acquisition
costs of assets constructed or fabricated
by a contractor, CAS 404 and the Stand-
ard must be read together. The require-
ments of CAS 404 provide that those G&A
expenses which are identifiable with the
constructed asset and are material in
amount shall be allocated to the cost of
the asset. CAS 404 also provides that the
cost of constructed assets that are iden-
tical with or similar to the contractor's
regular product shall include a full share
of indirect costs-thus, the costs of these
assets will be included in the cost input
base.
2. A TRANSITION PROVISION
Some commentators suggested that to
avoid disputes and inequities the Board
should provide a specific method of
transition for any contractor that is re-
quired to change from a cost of sales or
sales base to a cost input base. In the
September 9, 1975 publication, the Board
proposed alternative transition Methods
X and Y as a means of avoiding potential
disputes and minimizing the administra-
tive cost of implementing the change
from a cost of sales or sales base to a
cost input base. Either of the proposed
methods would have eliminated the
major portion of potential equitable ad-
justments arising from compliance with
the Standard.
Numerous comments regarding the
equity, administrative complexity, and
costs of both X and Y were received.
Some commentators asserted that Y was
more equitable in that both CAS-covered
and non-CAS covered work would be
treated alike, on the basis on which the
work was negotiated. Others felt X was
more equitable in that there would be
less impact on non-CAS covered work.
Some commentators expressed the view
that neither X nor Y was equitable in
that both methods effectively repriced
existing contracts by impacting, "squeez-
ing down" the cost input rate on new
contracts, and both methods would re-
sult in a deferral of recovery of G&A ex-
penses.
While some commentators found one
method less administratively complex
than the other method, other commen-
tators saw little difference in the ad-
ministrative cost and effort required by
either method. Most commentators ex-
pressed the view that either X or Y would
require some additional administrative
effort and the generation of data not
currently produced.
A number of alternative transition
methods were suggested including:
(1) An option to use either X or Y,
(2) An option to use X or Y or switch
over immediately,
(3) Neither X nor Y, but use equitable
price adjustment,
(4) The use of a combination method
involving the actual cost of sales and cost
input rates for a period and some type
of suspense account to prevent an over-
recovery of G&A expenses.
In addition, commentators proposed a
number of variations of each of these
basic alternatives. The Board is per-
suaded, after reviewing all of the com-
ments received on transition methods,
that a variation of one of those methods
favored by many industry associations
and several defense contractors offers
substantial promise for avoiding potential
disputes and for minimizing the impact
of shifting from a cost of sales or sales
base to a cost input base. This transition
method is set forth in Section 410.50(e)
and Appendix A of the Standard. Busi-
ness units required by the Standard to
change from their present allocation base
to a cost input base are not required to
use this transition method: rather, a
business unit has the option of choosing
this transition method or proceeding
with an immediate changeover to a cost
input base and seeking adjustment under
the equitable adjustment provision of the
contract clause.
Use of the optional transition method
will, in the Board's opinion, avoid the
need to use the equitable adjustment
provision of the contract clause to re-
price prime contracts and subcontracts
of business units using this technique.
The Board believes that this procedure
is appropriate for this Cost Accounting
Standard.
It is the Board's view, however, that
for most Standards the impact of
changes in cost accounting practices re-
quired by new Cost Accounting Stand-
ards will be accommodated by price
adjustments for covered prime contracts
217
Cost Accounting Standards Board
and subcontracts through the equitable
adjustment provisions of the contract
clause.
For any business unit which chooses
not to use the transition method set
forth at Section 410.50(e) and Appen-
dix A, the contractual provision requir-
ing appropriate equitable adjustment of
the prices of affected prime contracts
and subcontracts will, of course, be im-
plemented with consequent adjustment
of the price of such contracts and sub-
contracts.
The optional transition method pro-
vided in 410.50(e) and Appendix A per-
mits a business unit whose disclosed or
established cost accounting practice was
to use a cost of sales or sales base-and
which is performing work on final cost
objectives which came into existence
prior to the date the business unit must
first allocate its cost in compliance with
the requirements of this Standard-to
allocate the G&A expense pool to these
cost objectives using a cost of sales or
sales base. These final cost objectives
often include:
(1) Government contracts which con-
tain the CAS clause;
(2) Government contracts which do
not contain the CAS clause;
(3) Contracts other than Government
contracts, or customer orders awarded,
prior to the date the business unit must
first allocate its cost in compliance with
the requirements of this Standard; and
(4) Production not specifically iden-
tified with contracts or customer orders
under production or work orders exist-
ing prior to the date on which a business
unit must first allocate its cost in com-
pliance with this Standard and which
are limited in time or quantity.
Production under standing or unlim-
ited work orders, continuous flow proc-
esses and the like, not identified with
contracts or customer orders, are to be
treated as final cost objectives awarded
after the date on which a business unit
must first allocate its cost in compliance
with the requirements of this Standard.
The business unit will allocate its G&A
expense pool to those final cost objec-
tives which arise on or after the date on
which a business unit must first allocate
costs in compliance with the require-
ments of this Standard using a cost in-
put base calculated in compliance with
410.50(d).
A business unit will use the transition
method until all pre-existing final cost
objectives using the cost of sales or sales
base are completed. At that time the
business unit will be using and will con-
tinue to use a cost input base selected in
accordance with the requirements of
410.50(d) to allocate the G&A expense
pool to all CAS-covered contracts.
In order to prevent possible windfalls
and to provide equity to both parties to
the contracts, an inventory suspense ac-
count must be established. The amount
of the inventory suspense account shall
be the beginning inventory of contracts
subject to the CAS clause of the cost ac-
counting period in which a business unit
must first allocate costs in accordance
with the requirements of this Standard.
The G&A expense allocation rate to be
applied to the inventory suspense account is the
cost of sales rate for that first cost accounting
period.
The suspense account will be amortized in
any cost accounting period subsequent to the
last cost accounting period in which final cost.
objectives negotiated by using a cost of sales or
sales base are still being performed and in which
the amount of the ending inventory of contracts
subject to the CAS clause for that cost account-
ing period is less than the amount of the inven-
tory suspense account. The G&A expense pool
of that cost accounting period shall be reduced
by the difference between the inventory sus-
pense account and the ending inventory of con-
tracts subject to the CAS clause of that cost
accounting period times the cost of sales rate
applicable to the inventory suspense account.
The Standard must be followed after
the start of a contractor's next fiscal year
after January 1, 1977. This long lead
time provides both the Government and
contractors an opportunity to prepare
appropriate administrative procedures
for using this transition method.
3. DEFINITION OF G&A EXPENSE
G&A Expense. Some commentators
expressed the view that the definition
was consistent with their current prac-
tice; others were concerned that the
definition of G&A expense was narrower
than those definitions currently in use,
and the result might be excessive frag-
mentation of existing G&A expense pools
to remove insignificant items.
Board research indicates that while
accountants are in agreement about the
general character of G&A expenses,
practice has resulted in the cost of a va-
riety of functions and expenses being in-
cluded in the G&A expense pool. As a
result, from the early stages of this proj-
ect onward, the Board has seen a need
to provide a definition of G&A expense in
218
Cost Accounting Standards Board
order to bring some uniformity to this
area of accounting.
Commentators expressed concern
about problems involving the classifica-
tion of those persons and functions of
top level management that are con-
cerned with both the overall planning
and administration of a business unit
and the direction of a particular func-
tion. Some commentators suggested that
top level management people could keep
time records. and split their costs be-
tween the G&A expense pool and the ad-
ministration of the function which they
are directing. While this may be appro-
priate in some circumstances, the Board
believes the determination of the con-
tent of the G&A expense pool and the
identification and classification of ex-
penses in a particular circumstance must
be based on judgment giving considera-
tion to the characteristics of the indi-
vidual business units. Similarly, the dis-
tinction between those expenses which
are other indirect costs, including manu-
facturing overhead and those which are
G&A expenses must be based on the in-
dividual circumstances using the guide-
lines provided in the Standard and the
definition.
The definition has been revised to pro-
vide guidance for making those deci-
sions. The definition now requires that
for an expense to be classified as G&A
expense. it must be incurred for the
management and administration of the
business unit as a whole. Further, the
definition specifically excludes from G&A
expense those management expenses
whose beneficial or causal relationship to
cost objectives can be more directly
measured by a base other than a cost in-
put base representing the total activity
of a business unit during a cost account-
ing period.
Commentators indicated concern and
expressed some confusion regarding the
interaction of the definition of G&A ex-
pense and the requirements of para-
graph 410.40(d). Commentators were
uncertain as to if and when expenses
which do not meet the definition of G&A
expenses contained in the Standard
should be removed from the G&A ex-
pense pool. The Board has revised 410.40
(d) to clearly express the Board's intent
that those expenses which do not meet
the definition of a G&A expense and
whose beneficial or causal relationship to
business unit cost objectives is best meas-
ured by a base other than a cost input
base representing the total activity of a
business unit during a cost accounting
period should be removed from the G&A
expense pool.
Materiality. With respect to the ques-
tions about materiality, the Board has
several times expressed its belief that the
administration of Cost Accounting
Standards should be reasonable and not
seek to deal with insignificant amounts
of cost. See, for example, the March 1973
"Statement Of Operating Policies. Pro-
cedures and Objectives." The Board has
considered the comments concerning the
potential problems that could arise with-
out a clearer statement of materiality
related to the composition of the G&A
expense pool. The Board believes in this
instance a significance test will be par-
ticularly useful and the Standard has
been appropriately modified (410.50(c)).
Accounting for Specific Items of Ex-
pense in the G&A Expense Pool. Com-
mentators also expressed concern about
the treatment of specific items of ex-
pense that are sometimes found in the
G&A expense pool. In particular, com-
mentators expressed concern over the
treatment of selling and marketing costs.
independent research and development
(IR&D costs and bidding and proposal
B&P costs. Commentators questioned
whether under the Standard these costs
were G&A expenses to be included in the
G&A expense pool.
The Board recognizes that at the pres-
ent time selling costs (marketing or sell-
ing costs may constitute a significant
amount of cost and are accounted for in
a variety of ways. Some account for sell-
ing costs in a separate cost pool while
others include seiling costs as part of the
G&A expense pool.
Contractors who have included selling
costs in a cost pool separate and apart
from the G&A expense pool may continue
that practice or may change and include
selling costs in their G&A expense pool.
Further, contractors who will have to
change the allocation base used for the
G&A expense pool and who have in the
past included selling costs as part of the
G&A expense pool may account for sell-
ing costs by establishing a separate cost
pool for the selling costs and using the
allocation base they previously used for
their G&A expense pool. Where selling
costs are accounted for in a cost pool
separate and apart from the G&A ex-
pense pool and are allocated using a dif-
ferent allocation base, they shall become
part of the cost input base used to allo-
cate the G&A expense pool. Also, the
Board notes that the current ASPR pro-
219
Cost Accounting Standards Board
vision related to the accounting for IR&D
and B&P cost requires that generally the
allocation of these costs shall be on the
same basis as the contractor's allocation
of his G&A expense pool, although these
expenses are not termed G&A expenses.
Under the provisions of this Standard,
business units which have included IR&D
and B&P costs in their G&A expense
pool may continue to do so. Those busi-
ness units which choose to use the op-
tional transition method in 410.50(e) and
in which the IR&D and B&P costs remain
in the G&A expense pool will account for
these costs as follows:
(a) During the transition period, those
business units which were using a cost of
sales or sales base will continue to use
that base to allocate the G&A expense
pool to final cost objectives which were
in existence as of the date the business
unit must first allocate its costs in ac-
cordance with the requirements of this
Cost Accounting Standard.
(b) During the transition period and
subsequent to that time the G&A ex-
pense pool would be allocated to new
contracts subject to the CAS clause using
a cost input base as required by 410.50
(d).
As a result of the current ASPR pro-
vision. a business unit which is required
under this proposed Standard to change
the allocation base used for its G&A ex-
pense pool could, because of the ASPR
requirements, also be required to change
the allocation base for IR&D and B&P.
For those contractors who include IR&D
and B&P in their G&A expense pool, this
change in the business unit's method of
accounting for IR&D and B&P costs,
however, would be subject to the transi-
tion provision of the proposed Standard.
and would only affect allocation of these
costs to contracts awarded on or after
the date on which a business unit must
first allocate its costs in accordance with
the requirements of this Standard.
Commentators expressed the view that
since IR&D, B&P costs. and selling cost
could become part of the allocation base
for the G&A expense pool it might lead
to the concept that these costs are final
cost objectives themselves and should re-
ceive an individual allocation of G&A ex-
pense. As was stated in the Prefatory
Comments to the September 9. 1975 pub-
lication, the Board is currently working
on projects involving IR&D. B&P and
selling costs. The Board at this time does
not require changing the accounting for
these costs. However, where these ex-
penses are treated separately and apart
from the G&A expense pool they shall
become part of the allocation base used
to allocate the G&A expense pool to final
cost objectives and are not to be treated
as individual cost objectives in and of
themselves.
The illustrations concerning the ac-
counting for costs which are removed
from the G&A expense pool and the ac-
counting for IR&D and B&P costs and
selling costs have been clarified in re-
sponse to comments received.
Expenses Transferred from the G&A
Expense Pool. Commentators expressed
the view that those items which will be
taken out of the G&A expense pool and
transferred to the benefiting segment for
which they were incurred, are not really
G&A expenses of the segment but are
G&A-type expenses. These expenses come
out of the pool and are transferred in
what might be described as a purifica-
tion of the G&A expense pool before it is
allocated. The Board agrees with this
position, but does not believe an amend-
ment of the Standard is necessary.
4. USE OF MEMORANDUM RECORDS
Some commentators urged that the
Standard specifically permit the use of
memorandum records for the allocation
of G&A expenses to final cost objectives.
The Board notes that even in the absence
of this Standard, many contractors now
use memorandum records to perform the
allocation of G&A expenses for purposes
of Government contracts, because in
their formal records they do not make an
allocation of G&A expenses to contracts
or they do so on a diffrent basis. The
Board sees no need to disturb the prac-
tice of using memorandum records for
the allocation of G&A expenses to final
cost objectives.
5. ALLOCATION OF HOME OFFICE EXPENSES TO
FINAL COST OBJECTIVES
Commentators expressed concern about
the handling of home office expenses
which are received by a segment as re-
sidual expenses under CAS 403 or as a
lump sum which is not designated as a
particular type of expense. The Standard now
provides explicitly that individual handling of
various types of home office expenses would be
required only where a separate allocation of ex-
penses is received from a home office, and where
the amount of the allocated expense is sig-
nificant.
Other commentators suggested that in
220
Cost Accounting Standards Board
given circumstances a different allocation
base than the allocation base used for
the allocation of home office expense to
the segment may be appropriate for the
allocation of home office expense to final
cost objectives of the segment. The
Standard does not require that the same
base be used for the allocation of home
office expenses to final cost objectives of
the segment as was used for the alloca-
tion of home office expenses to the seg-
ment. The Standard requires establish-
ment of a beneficial or causal relation-
ship between the cost objectives and the
expense wherever separate and signifi-
cant allocations of home office expenses
are received by a segment. It may be ap-
propriate to use a different allocation
base for the allocation of home office ex-
penses received by a segment than the al-
location base used to allocate home of-
fice expenses to the segment.
A number of commentators stated that
allocations of home office expenses, either
in total or part, are the type of expenses
which should be accounted for as period
expenses and should not be inventoried
nor should these allocations be part of a
cost input base for the allocation of the
G&A expense pool as they are not part
of the activity being managed. The
Standard provides that certain alloca-
tions of home office expenses are always
to be included in the G&A expense pool.
Allocations of certain other types of
home office expenses, where they are sep-
arately received and significant in
amount, may or may not be included in
the segment's G&A expense pool. The
Standard provides that these costs shall
be allocated to cost objectives of the seg-
ment based on the beneficial or causal
relationship between the cost objectives
and the expense. As such, where a bene-
ficial or causal relationship between
these expenses and cost objectives of the
segment can be established, these ex-
penses shall be included in cost objectives
other than the segment's G&A expense
pool. Where a beneficial or causal rela-
tionship for the expenses is not identifi-
able with other cost objectives of the seg-
ment then the expense would be included
in the G&A expense pool.
The total cost of a final cost objective
is made up of a variety of costs and ex-
penses incurred in different manners and
at different times. The functions and
services represented by the allocation of
home office expense is recognized, for
contracting purposes, as part of the
total cost of final cost objectives. As
such, these costs are not unlike the other
costs incurred in the effort to produce
the final cost objectives. These costs shall
become part of the appropriate cost in-
put base selected to allocate the G&A ex-
pense pool. The illustrations have been
revised to clarify that a segment must
receive the home office expenses as a
separate allocation if the requirements
of 410.50(g) (2) are to be applicable.
6. ALLOCATION OF G&A EXPENSES TO
SPECIAL CONTRACTS
Commentators suggested that the spe-
cial allocation provision be stated in
terms of class of contracts or types of
situations. If the G&A expense pool
meets the requirements of the Standard,
the existence of a need for special allo-
cation to a class of contracts or type of
situation would indicate that the allo-
cation base being used is not representa-
tive of the total activity of the business
unit during a typical cost accounting
period. The Standard is designed to pro-
vide consistent accounting treatment for
all contracts, except for a particular con-
tract or other final cost objective which
is an exception to a business unit's nor-
mal operation.
The cost input allocation base for G&A
expense is a broad measure which is nor-
mally representative of the total activity
of a business unit during a cost account-
ing period. Thus, for a given final cost
objective to qualify for special treatment,
the difference in its beneficial or causal
relationship to G&A expense as com-
pared with the relationship of other final
cost objectives to G&A expenses should
be one which is apparent and capable
of being supported. The provision of the
Standard calls for the exercise of judg-
ment; nonetheless, the Board believes
a materiality criterion based on a meas-
ure of significantly different benefits is
proper for use in evaluating and estab-
lishing a separate and exceptional allo-
cation to a given final cost objective.
7. MISCELLANEOUS
Some commentators stated that the
Standard should provide for the alloca-
tion of G&A expenses to intermediate
cost objectives, such as service centers
and other overhead pools. Their position
was based on the concept that in vari-
ous types of full-cost responsibility ac-
counting systems, all costs are allocated
to cost objectives for more accurate
costing and control purposes. A few com-
mentators stated that for certain man-
agement expenses within the G&A ex-
pense pool they are able to determine a
221
Cost Accounting Standards Board
discrete beneficial or causal relationship
between these expenses and the cost ob-
jectives of the business unit. Therefore,
these expenses are allocated on a sepa-
rate allocation base to the cost objectives
of the business unit.
Where a beneficial or causal relation-
ship between certain management ex-
penses and business unit cost objectives
can be determined using an allocation
base other than the base used for the
G&A expense pool, then by definition,
these management expenses are not G&A
expenses and should be excluded from
the G&A pool. Where a beneficial or
causal relationship other than one based
on a broad measure of total activity can
be determined, generally the resulting
allocation represents improved contract
costing. However, for those expenses
which are in the G&A expense pool, the
Board's research indicates that the bene-
ficial or causal relationship between
these expenses and business unit activi-
ties of a cost accounting period is such
that if they are allocated to intermediate
cost objectives the allocation to final cost
objectives could be significantly dis-
torted.
Some commentators took the position
that G&A expenses should not be allo-
cated to stock or product inventory
items. Other commentators suggested
that the cost input of stock or product
inventory items should be included in
the G&A allocation base only in the cost
accounting period when these items are
used. The Board has taken the position
that work on stock or product inventory
items represents part of the productive
activity of the business unit for a cost
accounting period, and therefore, these
items should receive an allocation of
G&A expenses.
The Board has recognized the admin-
istrative difficulties that can arise as a
result of inventorying G&A expenses on
these items for contract costing purposes
and at the same time complying with
requirements of generally accepted ac-
counting principles for financial report-
ing. The Board has concluded that a
practical solution to this circumstance
is provided by the accounting treatments
set forth in the Standard. A contractor
can include G&A expense with the in-
ventory cost of these items for contract
costing purposes and provide his own
procedure for complying with generally
accepted accounting principles. Alterna-
tively, contractors who do not include
G&A expenses in the inventory cost of
these items in order to conform with
generally accepted accounting principles,
are permitted to apply G&A expenses
using the G&A rate of the period in which
the items are issued.
In either situation, the cost of stock
or product inventory items is to be in-
cluded in the computation of the allo-
cation base in the year produced. The
Board believes this procedure will pro-
vide the appropriate determination of
the G&A rate for each year, and the dif-
ference in the G&A rate applicable to
final cost objectives by using the G&A
rate of the year in which the items are
issued rather than manufactured will
not be significant.
The illustration dealing with the
timing of inclusion of stock or product
inventory cost input in the allocation
base has been revised to make clear that
stock or product inventory items cost
input is to be included in the year in
which the cost input is incurred.
Commentators suggested that a tran-
sition provision be provided for other
types of changes, e.g., changing from
a value-added cost input base to a total
cost input base, or removing an item of
expense from the G&A expense pool, re-
quired for compliance with the Standard.
The Board recognizes that a variety of
changes may occur as individual busi-
ness units take action necessary to com-
ply with the Standard. The Board be-
lieves that the equitable adjustment pro-
vision of the CAS contract clause pro-
vides the best means of handling the
variety of changes which may take place.
Commentators suggested that some
type of exemption threshold for this
Standard should be adopted. It was sug-
gested that the threshold could be based
on either total sales to the Government
by a business unit or corporate entity
or Government business stated as a per-
centage of total business. The Board is
currently studying the question of
whether an exemption from its regula-
tion could be appropriately based on the
proportion of total business which a con-
tractor does with the Government. Pend-
ing the results of that study, the Board
does not believe that a percentage-of-
sales exemption in individual Standards
is appropriate.
Cost-Benefit. Section 719(g) 50 U.S.C.
App. 2168(g), as amended provides "In
promulgating such standards and major
rules and regulations for the imple-
mentation of such standards, the Board
shall take into account, and shall report
222
Cost Accounting Standards Board
to the Congress in the transmittal re-
quired by Section 719(h) (3) hereof, the
probable costs of implementation, in-
cluding inflationary effects, if any, com-
pared to the probable benefits, includ-
ing advantages and improvements in the
pricing, administration and settlement
of contracts."
In a draft of the proposed Standard
that was distributed for comment, the
Board specifically requested commenta-
tors to provide data on the administra-
tive costs of compliance with that pro-
posal. In the second publication of the
proposed Standard, the Board made the
same request for data to indicate the
administrative costs of compliance with
Alternative X or Alternative Y. Of the
165 comments received, only two com-
ments on the draft proposal and one
comment on the second publication pro-
vided quantitative data. Many comments
received indicated that there would be
some administrative costs incurred in
complying with this Standard. As indi-
cated above, a number of the potential
administrative problems described in the
comments have been reduced or elimi-
nated by changes to the Standard being
promulgated today. Moreover, the prac-
tices of many contractors already con-
form with all or some of the provisions
of this Standard.
Commentators indicated that part of
the increased administrative cost is at-
tributed to the transition to a cost input
allocation base for those business units
currently using a cost of sales allocation
base. Another part of the increased ad-
ministrative cost for these same business
units is attributed to the accounting for
the G&A expense allocated to ending in-
ventory. The Board recognizes that these
administrative costs will arise in some
cases.
Among the benefits which the Board
believes will be derived from use of this
Standard No. 410 are a more equitable
treatment of all costs incurred during a
period, in terms of the G&A expense pool
allocation to final cost objectives; im-
proved measurement of the cost of final
cost objectives; a reduction in disputes
through the establishment of criteria for
evaluation and selection of the alloca-
tion base for the G&A expense pool; in-
crease in the likelihood of achieving ob-
jectivity in the allocation of G&A ex-
penses to final cost objectives; and an in-
crease in comparability of cost data
among contractors in similar circum-
stances.
The Board concludes that the costs an-
ticipated for administrative compliance
with this Standard when reasonably
managed in light of the purposes to be
served are outweighed by the probable
benefits expected to be derived from its
use.
As required by section 719(g) 50 U.S.C.
App. 2168(g), as amended, the Board has
evaluated the potential inflationary ef-
fect of this Standard. The Board has con-
ciuded that any inflationary effect of this
Standard will be insignificant.
Effective Date. The availability of the
transition method to contractors who
choose to use it requires especial care in
complying with the effective date and
application provisions of the Standard.
The following comments are offered to il-
lustrate those provisions. The comments
assume that the contractor has a Janu-
ary 1 fiscal year; contractors with dif-
rent fiscal years would of course apply
the requirements of the Standard using
different dates appropriate to their own
fiscal year. For those contractors using
a cost of sales base, having a fiscal year
beginning on January 1, and electing to
use the transition method provided in
Appendix A, all contracts entered into
prior to January 1, 1978, would be ac-
counted for using the contractor's cost
of sales base in accordance with the cost
accounting practice previously disclosed
or established. Contracts entered on or
after January 1, 1978, should be ac-
counted for using a cost input base in
accordance with the requirement of Sec-
tion 410.50(d). The transition period
would begin January 1, 1978. and con-
tinue until all contracts entered into
prior to January 1, 1978 are completed.
This situation is illustrated in Appendix
A. Illustration 1.
Under certain circumstances, a con-
tractor who has been using a cost of sales
base must be presumed, during the time
between the effective date of this Stand-
ard and the date when it becomes appli-
cable to him, to have elected to use the
transition method provided in Section
410.50(e). These circumstances arise
when (1) the contractor proposes to re-
ceive an award of a contract priced by
use of a cost of sales base for the entire
contract and (2) the period of perform-
ance specified or anticipated for the con-
tract extends beyond the date when the
Standard becomes applicable to the con-
tractor. Contracting agencies should take
appropriate action to advise the contrac-
tor that consistent with the concepts of
Part 401, Cost Accounting Standard-
223
Cost Accounting Standards Board
Consistency in Estimating. Accumulating
and Reporting Costs. his decision to price
the proposal entirely by use of a cost of
sales base is deemed an election to oper-
ate under the transition method pre-
scribed in Section 410.50(e) when this
Standard becomes applicable to him.
Those contractors using a cost of sales
base, having a January 1 fiscal year, and
electing to proceed with a complete
change-over to a cost input base on Jan-
uary 1, 1978, would have to be careful to
comply with Standard 401 in making pro-
posals for those contracts which will span
part or all of the period October 1, 1976,
through December 31, 1977. and cost ac-
counting periods beginning January 1.
1978, and thereafter. The proposal should
indicate that the cost of sales base will
be followed until the date when the re-
quirements of this Standard must be fol-
lowed; at that later time. the practice
required by this Standard, a cost input
base, should be proposed to be used as the
contractor's practice for the remaining
life of the contract.
To illustrate, assume a contractor hav-
ing a January 1 fiscal year currently
allocates G&A expense using a cost of
sales base. When the contractor makes a
proposal for a contract which will be
entered into after October 1, 1976. and
prior to January 1. 1978. his proposal
must recognize that his G&A expense
pool will be allocated by using a cost of
sales base from the date of the contract
through December 31, 1977, and by us-
ing a cost input base thereafter.
The Board expects that this Standard
will become effective on October 1, 1976.
There is also being published today
an amendment to Part 400. Definitions.
to incorporate in that part terms defined
in § 410.30(a) of this Cost Accounting
Standard.
224
Cost Accounting Standards Board
PART 411-COST ACCOUNTING STAND-
ARD-ACCOUNTING FOR ACQUISITION
COSTS OF MATERIAL
Sec.
411.10 General applicability.
411.20 Purpose.
411.30
411.40
411.50
411.60
411.70
Definitions.
Fundamental requirement.
Techniques for application.
Illustrations.
Exemptions.
411.80 Effective date.
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168).
SOURCE: 40 FR 19428, May 5, 1975, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER. follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (40 FR 19425, May 5, 1975) is
set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister. National Archives and Records Service.
Washington, D.C. 20408.
§ 411.10 General applicability.
General applicability of this Cost Ac-
counting Standard is established by
§ 331.30 of the Board's regulations on ap-
plicability, exemption, and waiver of the
requirement to include the Cost Account-
ing Standards contract clause in negoti-
ated defense prime contracts and sub-
contracts ( 331.30 of this chapter).
§ 411.20 Purpose.
(a) The purpose of this Cost Account-
ing Standard is to provide criteria for
the accounting for acquisition costs of
material. The Standard includes pro-
visions on the use of inventory costing
methods. Consistent application of this
Standard will improve the measurement
and assignment of costs to cost objec-
tives.
(b) This Cost Accounting Standard
does not cover accounting for the ac-
quisition costs of tangible capital assets
nor accountability for Government-
furnished materials.
§ 411.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Fart 400 of this
chapter for convenience. Other terms
which are used in this Standard and are
defined in Part 400 of this chapter have
the meanings ascribed to them in that
part unless the text demands a different
definition or the definition is modified in
paragraph (b) of this section:
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Business Unit. Any segment of an
organization, or an entire business or-
ganization which is not divided into seg-
ments.
(3) Category of Material. A particular
kind of goods, comprised of identical or
interchangeable units, acquired or pro-
duced by a contractor, which are in-
tended to be sold, or consumed or used in
the performance of either direct or in-
direct functions.
(4) Cost Objective. A function, organi-
zational subdivision, contract or other
work unit for which cost data are desired
and for which provision is made to ac-
cumulate and measure the cost of proc-
esses, products, jobs, capitalized projects,
etc.
(5) Material Inventory Record. Any
record used for the accumulation of ac-
tual or standard costs of a category of
material recorded as an asset for sub-
sequent cost allocation to one or more
cost objectives.
(6) Moving Average Cost. An inven-
tory costing method under which an av-
erage unit cost is computed after each
acquisition by adding the cost of the
newly acquired units to the cost of the
units of inventory on hand and dividing
this figure by the new total number of
units.
(7) Weighted Average Cost. An inven-
tory costing method under which an
average unit cost is computed periodi-
cally by dividing the sum of the cost of
beginning inventory plus the cost of ac-
quisitions, by the total number of units
included in these two categories.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 411.40 Fundamental requirement.
225
Cost Accounting Standards Board
(a) The contractor shall have, and
consistently apply, written statements
of accounting policies and practices for
accumulating the costs of material and
for allocating costs of material to cost
objectives.
(b) The cost of units of a category of
material may be allocated directly to a
cost objective provided the cost objec-
tive was specifically identified at the time
of purchase or production of the units.
(c) The cost of material which (1)
is used solely in performing indirect
functions, or (2) is not a significant ele-
ment of production cost, whether or not
incorporated in an end product, may be
allocated to an indirect cost pool. When
significant, the cost of such indirect
material not consumed in a cost ac-
counting period shall be established as
an asset at the end of the period.
(d) Except as provided in paragraphs
(b) and (c) of this section, the cost of
a category of material shall be accounted
for in material inventory records.
(e) In allocating to cost objectives
the costs of a category of material is-
sued from company-owned material in-
ventory, the costing method used shall
be selected in accordance with the pro-
visions of § 411.50, and shall be used in
a manner which results in systematic
and rational costing of issues of mate-
rial to cost objectives. The same costing
method shall, within the same business
unit, be used for similar categories of
materials.
§ 411.50 Techniques for application.
(a) Material cost shall be the acqui-
sition cost of a category of material,
whether or not a material inventory rec-
ord is used. The purchase price of ma-
terial shall be adjusted by extra charges
incurred or discounts and credits earned.
Such adjustments shall be charged or
credited to the same cost objective as
the purchase price of the material, ex-
cept that where it is not practical to do
so, the contractor's policy may provide
for the consistent inclusion of such
charges or credits in an appropriate in-
direct cost pool.
(b) One of the following inventory
costing methods shall be used when issu-
ing material from a company-owned in-
ventory:
(1) The first-in, first-out (FIFO)
method,
(2) The moving average cost method,
(3) The weighted average cost method,
(4) The standard cost method, or
(5) The last-in, first-out (LIFO)
method.
(c) The method of computation used
for any inventory costing method se-
lected pursuant to the provisions of this
Standard shall be consistently followed.
(d) Where the excess of the ending in-
ventory over the beginning inventory of
material of the type described in § 411.40
(c) is estimated to be significant in re-
lation to the total cost included in the
indirect cost pool, the cost of such un-
consumed material shall be established
as an asset at the end of the period by
reducing the indirect cost pool by a cor-
responding amount.
§ 411.60 Illustrations
(a) Contractor "A" has one contract
which requires two custom-ordered,
high-value, airborne cameras. The con-
tractor's established policy is to order
such special items specifically identified
to a contract as the need arises and to
charge them directly to the contract.
Another contract is received which re-
quires three more of these cameras,
which the contractor purchases at a unit
cost which differs from the unit cost of
the first two cameras ordered. When the
purchase orders were placed, the con-
tractor identified the specific contracts
on which the cameras being purchased
were to be used. Although these cameras
are identical, the actual cost of each
camera is charged to the contract for
which it was acquired without establish-
ing a material inventory record. This
practice would not be a violation of this
Standard.
(b) (1) A Government contract re-
quires use of electronic tubes identified
as "W." The contractor expects to re-
ceive other contracts requiring the use
of tubes of the same type. In accordance
with its written policy, the contractor
establishes a material inventory record
for electronic tube "W," and allocates
the cost of units issued to the existing
Government contract by
contract by the FIFO
method. Such a practice would conform
to the requirements of this Standard.
(2) The contractor is awarded several
additional contracts which require an
electronic tube which the contractor con-
cludes is similar to the one described in
paragraph (b)(1) of this section and
which is identified as "Y." At the time a
purchase order for these tubes is written,
the contractor cannot identify the spe-
cific number of tubes to be used on each
contract. Consequently, the contractor
226
Cost Accounting Standards Board
establishes an inventory record for these
tubes and allocates their cost to the con-
tracts on an average cost method. Be-
cause a FIFO method is used for a simi-
lar category of material within the same
business unit, the use of an average cost
method for "Y" would be a violation of
this Standard.
(c) A contractor complies with the
Cost Accounting Standard on standard
costs (Part 407 of this chapter), and he
uses a standard cost method for allocat-
ing the costs of essentially all categories
of material. Also, it is the contractor's
established practice to charge the cost of
purchased parts which are incorporated
in his end products, and which are not
a significant element of production cost
to an indirect cost pool. Such practices
conform to this Standard.
(d) A contractor has one established
inventory for type "R" transformers. The
contractor allocates by the LIFO method
the current costs of the individual units
issued to Government contracts. Such a
practice would conform to the require-
ments of this Standard.
(e) A contractor has established in-
ventories for various categories of mate-
rial which are used on Government con-
tracts. During the year the contractor
allocates the costs of the units of the
various categories of material issued to
contracts by the moving average cost
method. The contractor uses the LIFO
method for tax and financial reporting
purposes and, at year end, applies a
pooled LIFO inventory adjustment for all
categories of material to Government
contracts. This application of pooled
costs to Government contracts would be
a violation of this Standard because the
lump sum adjustment to all of the vari-
ous categories of material is, in effect, a
noncurrent repricing of the material
issues.
§ 411.70
Exemptions.
None for this Standard.
§ 411.80 Effective date.
(a) The effective date of this Standard
is January 1, 1976.
(b) This Standard shall be applied to
materials purchased or produced after
the start of the contractor's next fiscal
year beginning after receipt of a contract
to which this Standard is applicable.
[40 FR 19428, May 5, 1975, as amended at
40 FR 32823, Aug. 5, 1975]
PREAMBLES: Preamble A of the supplement
to Part 401 of this Chapter explains how
effective dates are determined.
227
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 5-5-75
The following is the preamble to the origi-
nal publication of Part 411, 40 FR 19425,
May 5, 1975.
The Standard on Accounting for Ac-
quisition Costs of Material being pub-
lished today is one of a series being
promulgated by the Cost Accounting
Standards Board (CASB) pursuant to
section 719 of the Defense Production
Act of 1950, as amended (Pub. L. 91-379.
50 U.S.C. App. 2168) which provides for
the development of Cost Accounting
Standards to be used in connection with
negotiated national defense contracts.
Preliminary work on the development
of this Standard resulted from the ab-
sence of a requirement in agency regu-
lations that the same costing method be
used for similar categories of material
within the same business unit and that
the method be consistently applied. The
Board undertook research with a view
that a Cost Accounting Standard on this
subject might improve cost assignment
and cost measurement in accounting for
acquisition costs of material.
Early research included an extensive
review of available literature and a re-
view of decisions of boards of contract
appeals and courts.
A preliminary analysis of material ac-
counting concepts was made and a num-
ber of issues were identified; comments
on this analysis were obtained from in-
terested persons. After evaluation of all
of the issues, the Board developed and
circulated preliminary research drafts of
Standards which were widely distributed
for informal comment and to ascertain
the cost impact of adoption of the
Standard as proposed. Suggestions and
comments were received from 70 re-
spondents; these comments were consid-
ered in developing a revised Standard
which was published in the FEDERAL
REGISTER of November 26, 1974, with an
invitation for interested parties to sub-
mit written views and comments to the
Board. The Board supplemented that
FEDERAL REGISTER publication by sending
copies of the FEDERAL REGISTER material
directly to organizations and individuals
who had provided the Board with com-
ments on the earlier proposal or had
otherwise expressed an interest in the
proposal.
Responses were received from 86
sources including individual companies,
Government agencies, professional asso-
ciations, industry associations, public ac-
counting firms, universities, and others.
All of these comments have been consid-
ered by the Board and those addressing
areas of particular significance are dis-
cussed below, together with explanations
of the changes made in the Cost Ac-
counting Standard being promulgated
from the proposal published in the FED-
ERAL REGISTER On November 26, 1974.
The Board takes this opportunity to
express its appreciation for the helpful
suggestions and criticisms which have
been received, and for the time devoted
to assisting the Board in this endeavor
by the many companies and individuals
involved.
1. Need for a standard. Many com-
ments were received questioning the
need for a Standard in this area. Sugges-
tions were received that because Disclo-
sure Statements at present deal with this
subject matter, the Board should accept
them in place of a Standard. Other com-
mentators contended that Standard 402,
Consistency in Allocating Costs Incurred
for the Same Purpose (4 CFR Part 402),
dealt with any problems encompassed by
this Standard. Some commentators
argued that current practices concern-
ing material costs used on Government
contracts are well defined, of long dura-
tion, and are continually monitored by
the Government. Others contended that
inventory costing methods are covered by
generally accepted accounting principles
(GAAP) and, for this reason the Board
should not issue a Standard on this
subject.
With respect to the makeup of the
draft Standard itself, some commenta-
tors said it was too broad, while others
said it was too detailed and procedural.
Some commentators stated that any
Standard in this area should deal with
direct materials only and should not con-
tain any reference to indirect materials
The Board has considered the argu-
ments raised above as well as other facets
of this particular subject matter. After
studying this matter further, the Board
has concluded that a Standard dealing
specifically with accounting for the ac-
quisition costs of material is needed to
complement the Disclosure Statement
and Cost Accounting Standard Contract
Clause requirements, and to provide con-
sistency in the application of material
costing methods. Further, the Board be-
lieves that issuance of a Standard may
be entirely appropriate even if the
Standard does no more than establish as
228
Cost Accounting Standards Board
a Cost Accounting Standard the cur-
rently prevailing procurement regula -
tions dealing with the allocation of costs
to cost objectives. Accordingly, the Board
is promulgating today a Standard, ap-
propriately revised in light of the com-
ments received, dealing with Accounting
for Acquisition Costs of Material.
2. Inventory costing methods. The
draft Standard published in the FEDERAL
REGISTER ON November 26, 1974, provided
for the use of three inventory costing
methods and asked commentators to
identify any other methods they be-
lieved should be acceptable, for contract
costing purposes, along with a justifica-
tion and criteria for the use of such
methods. Many commentators expressed
the view that the last-in, first-out
(LIFO) inventory costing method, under
which the recent costs of material aro
allocated to cost objectives and the older
costs are allocated to material remaining
in inventory, should be permitted. Some
commentators noted that LIFO should
be allowed because it is acceptable to the
Internal Revenue Service and the Se-
curities and Exchange Commission, and
because it is a recognized method for
valuing inventory under generally ac-
cepted accounting principles and it is ac-
ceptable for other purposes. Other com-
mentators expressed the view that the
LIFO method results in a better match-
ing of current costs with current reve-
nues thereby reducing the "inventory
profits" that develop during inflationary
periods.
The purpose of this Standard is to pro-
vide for better allocation and measure-
ment of material costs as they relate to
specific contracts. The accounting prac-
tices used to achieve this purpose should
be justified on the basis of their effective-
ness for such allocation and measure-
ment. They should not be justified solely
on the basis that they are practices ac-
ceptable for tax and financial reporting
purposes. Further, generally accepted ac-
counting principles do not specify the
details of cost allocations to particular
contracts but are concerned with report-
ing the financial results of operations of
the company as a whole.
The Board realizes LIFO is considered
by some as a partial answer to account-
ing for the impact of inflation. The Board
has noted, however, that most of the
companies that recommended that the
LIFO method be permitted for contract
costing purposes charge almost all of
their material to contracts at the time
the material is acquired or produced. The
direct allocation of the costs of materials
to contracts tends to counter the effects
of inflation since the current cost of the
material is charged against the contract.
Moreover, few of these companies use
LIFO for material that is issued to con-
tracts from inventory.
The Board believes that accounting for
the impact of inflation should be the sub-
ject of a separate Standard. The Cost Ac-
counting Standards Board is currently
conducting research into this subject.
The Board did not include LIFO as a
permitted inventory costing method in
the draft Standard because contractors
which currently follow LIFO for Govern-
ment contracts use it in a manner which
does not permit systematic and rational
identification of the cost of material is-
sues to specific cost objectives. The Board
believes such identification is essential in
cost accounting for Government con-
tracts. Accordingly, while the Board has
included the LIFO inventory costing
method as a permitted method in the
Standard being promulgated today, it has
also included a requirement that the
costing method used be applied in a man-
ner which results in systematic and ra-
tional costing of issues of material to
specific cost objectives. The costing of
such issues to cost objectives must be
reasonably current; it would not appear
rational to hold in abeyance for months,
pending a LIFO determination, the cost
of materials issued to a Government con-
tract.
3. Direct charging of material. The
proposed Standard included a provision
whereby the cost of a category of mate-
rial could be allocated directly to a cost
objective provided the cost objective is
specifically identified on the purchase
order at the time of purchase or on the
work order at the time of production of
material and provided there is no estab-
lished material inventory account for
that category of material. Some com-
mentators felt that contractors should be
permitted to allocate the cost of material
directly to a contract without the identi-
fication requirement. A greater number
of contractors supported the identifica-
tion requirement provided by the Board.
These commentators felt that if identi-
fication with the end use was feasible,
direct allocation should be permitted.
Most commentators objected to the
prohibition of direct allocation if a mate-
rial inventory account existed. They com-
plained that this requirement forced the
contractors to stock material at their own
229
Cost Accounting Standards Board
expense. They said this requirement
would discourage purchase of material in
economical lots. Commentators also
pointed out that this requirement would
make off-site shipments uneconomical,
and would adversely affect contractors'
compliance with requirements in other
Standards concerning their price
proposals.
The Cost Accounting Standards Board
favors the direct identification of costs
where possible. The Board stated in its
"Statement of Operating Policies, Pro-
cedures and Objectives" (March 1973):
As an ideal, each item of cost should be
assigned to the cost objective which was in-
tended to benefit from the resource repre-
sented by the cost or, alternatively, which
caused the incurrence of the cost. To ap-
proach this goal, the Board believes in the
desirability of direct identification of costs
with final cost objectives to the extent prac-
tical. The Board recognizes the need for care
in application of the concept of direct iden-
tification of costs with final cost objec-
tives *
In furtherance of this objective, the
Board has concluded that the specific
identification of the end use of a category
of material at the time of purchase or
production should remain a requirement
for the direct allocation of the cost of
material. The Board is persuaded, how-
ever, that the existence of a material
inventory account should not prohibit
the direct allocation of the cost of mate-
rial, and the Standard being promul-
gated has been revised to delete that pro-
hibition. If contractors have previously
established material inventory records
for categories of material, however, the
Standard does not require any change
in this practice.
4. Cost of material. The draft Stand-
ard provided that material costs should
be the acquisition costs of material ad-
justed to the extent practical by extra
charges paid or discounts and credits re-
ceived. Many commentators objected to
this provision since they said that it is
not in accordance with the practices cur-
rently followed by most companies. They
argued that they charge many of the
types of adjustment items referred to
above to an indirect cost account and dis-
tribute those costs to all material on a
base that they say is now acceptable to
the Government. They also allege that
there would be considerable work in-
volved in identifying these kinds of addi-
tional charges with the individual pur-
chases of material and to then spread
the charges against the categories of
material being purchased.
The Board intended this requirement
to define broadly the net acquisition cost
of material. This provision has been re-
tained in the Standard being promul-
gated. A section has been added to the
Standard stating that where it is not
practical for a contractor to handle
charges and credits as set out above, the
contractor may provide for the consistent
inclusion of such charges or credits in an
appropriate indirect cost pool.
5. Definitions. Many comments were
received on several of the definitions in-
cluded in the draft Standard. Most com-
mentators raised questions about the
definitions of "Category of Material" and
"Material Inventory Account."
Some commentators concluded that
"Category of Material" would include
items such as lubricants, paper, ink,
towels, and items of that type. The Board
intended that material such as this could
be handled as provided under § 411.40 (c)
of the promulgated Standard which per-
mits the cost of material to be allocated,
under certain conditions, to an indirect
cost pool for distribution to cost
objectives.
Other commentators felt that the re-
quirement that a category of material be
comprised of identical or interchange-
able units would be unduly restrictive.
Their contention was that different, in-
dividual items of material would have
to be considered as separate categories of
material. The Board intended its defi-
nition to be read in this way. It was not
meant that all sheet steel, for example,
should be considered as a single category
of material. Most contractors would
maintain separate inventory records of
different sizes and thicknesses of sheet
steel. Each of these would be a category
of material.
Many of the comments concerning the
definition of "Material Inventory Ac-
count" indicated that commentators as-
sumed the Board was talking only about
general ledger or subsidiary ledger ac-
counts. Such is not the case. The Board
was referring to any record used for ac-
cumulating the cost and quantity of ma-
terial for subsequent issue to one or more
cost objectives. The records the Board
had in mind could include card files,
computer data, bin tags, or other forms
of detailed information used in the com-
pany's system of accounting for receipt
and issue of material recorded as an
230
Cost Accounting Standards Board
asset.
Many commentators objected to the
inclusion of the word "quantity" and the
word "cost" in the definition of material
inventory account. Some said they main-
tained records of either cost or quantity
only. It was not the Board's intention
that each record must show both cost
and quantity. The word "quantity" has
been deleted from the definition. The
records referred to are those used to ac-
cumulate the cost of materials for alloca-
tion to specific cost objectives.
The Board has concluded that the
definition of "Category of Material" as
presented in the draft Standard pub-
lished on November 26, 1974, should be
retained. The reference to "Materi l In-
ventory Account" has been deleted and
the term "Material Inventory Record"
substituted. Several words in this defini-
tion have been changed to make it more
clear that the Board is referring to any
records maintained in support of general
ledger or subsidiary ledger financial ac-
counts.
6. Need for written policies. Many
commentators said that a requirement
for written policies should be deleted
from this Standard. They contended that
such a requirement was not in accord-
ance with their understanding of what
Cost Accounting Standards should cover.
They felt the Board was becoming too
deeply involved in procedural details
with such a requirement.
Contractors who have submitted Dis-
closure Statements felt that such sub-
mission should exempt them from a re-
quirement for written policies. They
contended that in responding to the Dis-
closure Statement, they were, in effect.
setting forth their written policies and
practices.
During the Board's development of the
Disclosure Statement, many contractors
suggested that a Disclosure Statement
such as the Board had designed was not
justified because they said they had ac-
counting manuals and similar written
documents which set forth their account-
ing practices. They contended further
that these manuals and similar written
documents were available to Government
auditors and provided sufficient informa-
tion concerning the contractor's account-
ing practices. Although these manuals
could not be used to fulfill the disclosure
requirement, the Board recognizes that
these are the kinds of documents that
should contain written policies that are
needed to permit effective implementa-
tion of this Standard. The Board also
notes that many companies which are
subject to Cost Accounting Standards are
not required to file Disclosure State-
ments.
Some commentators questioned wheth-
er there would be a need for written
policies for each category of material.
Certainly the Board does not intend that
this be the case. It is expected that con-
tractors will have written policies estab-
lishing criteria which would apply to all
of their material transactions.
Other commentators concluded that
the written policies were listed as a re-
quirement by the Board solely for the
Government's use in determining compli-
ance with the Standard. The Board feels
that written policies and practices are
beneficial as evidenced by the many
companies which have them.
7. Applicability of standard to indirect
material. The draft Standard provided a
means by which a category of material
used solely in performing indirect func-
tions or which is not a significant ele-
ment of production costs could be han-
dled through an indirect cost pool rather
than accumulated in a material inven-
tory record. There was a further require-
ment that when quantities of such mate-
rial were not consumed in a cost
accounting period and were estimated to
be significant in total costs, the cost of
such material was to be established as
an asset at the end of the period.
Many commentators stated that the
Standard should not deal with indirect
materials, while a few questioned the use
of an indirect cost pool for allocating
the cost of such material. Other com-
mentators stated that many contractors
generally do not maintain inventory
records of such material and that the
provision set forth in the first sentence
of the preceding paragraph was neces-
sary, otherwise the Standard might pre-
sent major problems for contractors.
Most of those commenting on this point
recommended the retention of this pro-
vision.
Many commentators disagreed with
the requirement to establish remaining
material of this type as an asset at the
end of the period. Some commentators
felt that this requirement contradicted
the first part of the provision. They
argued that if the material was not a
significant element of production cost
and thereby was permitted to be allo-
cated to an indirect cost pool, it did not
seem logical to require that any amounts
of such material should be established as
an asset at the end of the period. They
231
Cost Accounting Standards Board
stated that if this situation occurred,
then presumably the material should not
have been charged to cost objectives
through an indirect cost pool.
These commentators apparently mis-
interpreted the Board's intention. The
draft Standard referred to the value of
unconsumed material to be set up as an
asset, not the amount charged to an in-
direct cost pool during the cost account-
ing period. The provision deals with sig-
nificant amounts of unconsumed materi-
al of this type remaining at the end of
the period.
Another commentator stated that the
expensing of indirect supplies has long
been a generally accepted practice and,
if consistently applied, would not result
in inequities in contract costing as long
as unconsumed amounts do not fluctuate
significantly from year to year. Other
commentators were concerned that the
use of the word "significant" would gen-
erate endless disputes with Government
auditors since such a determination is
subjective and no definition of that word
was included in the Standard.
After considering all the comments the
Board has received on this point, it has
decided to retain the provision allowing
the use of an indirect cost pool for allo-
cation of the cost of material of the type
described in this provision of the Stand-
ard. The Board is also persuaded that
when quantities of such indirect material
are not consumed in a cost accounting
period and the excess of the ending in-
ventory over the beginning inventory is
estimated to be significant in relation to
the total cost included in the indirect cost
pool, the cost of such unconsumed ma-
terial is to be established as an asset at
the end of the period. The setting up of
this material as an asset is to be accom-
plished by reducing the indirect cost pool
by a corresponding amount.
On numerous occasions the Board has
stated that it agrees that the adminis-
tration of its rules, regulations, and
Standards should be reasonable and not
seek to deal with insignificant amounts
of cost. Because of this, the Board does
not believe it essential to define the term
"significant" as used in this provision of
the Standard. Generally accepted ac-
counting principles, as stated in the
American Institute of Certified Public
Accountant's Accounting Research Bul-
letin No. 43, recognize that the term "in-
ventory" includes goods to be consumed
directly or indirectly in operations, such
as supplies. The aforementioned require-
ment has therefore been retained in the
Standard being promulgated.
8. Transfers of material. The draft
Standard contained a requirement that a
transfer of the cost of material from one
cost objective to another was to be made
at the same cost that was allocated to the
initial cost objective or at the current
market value. Many commentators ob-
jected to this provision on the grounds
that it would be extremely difficult to
identify the cost that was allocated to
the initial cost objective. They contended
that this requirement would also gen-
erate disagreements with Government
auditors as to whether or not initial cost
information was, in fact, available. Also,
some commentators felt that determina-
tion of current market value would be a
difficult and time consuming chore.
While not agreeing or disagreeing with
the commentators' statements, the Board
has concluded that the transfer of mate-
rial is of sufficient significance to war-
rant consideration as a subject for a
separate Standard. The Board has ini-
tiated a research project to consider
what factors affect the cost of transfers
between cost objectives and between or-
ganizations. For this reason, the provi-
sion concerning cost of transfers of ma-
terial between cost objectives has been
deleted from this Standard.
9. Periodic vs. perpetual inventory ac-
counting. The published draft Standard
contained a provision permitting either
periodic or perpetual inventory account-
ing procedures. This was coupled with a
requirement that the period for periodic
inventory accounting should not be
longer than one quarter of a year. It was
further stated that these provisions were
not intended to establish a requirement
regarding the taking of physical inven-
tories.
Many commentators stated that this
provision appeared to contain contra-
dictory statements since the periodic in-
ventory accounting method normally
requires a physical inventory when the
inventory value is established. They
further said that as they understand that
provision, they would be required to take
physical inventories quarterly, which
they felt was unnecessarily frequent.
The Board was referring to the period
involved for the establishment of costs
of material issues, not to the taking of
physical inventories. It is the Board's
intention that costing of material issues
should be on a current basis. To achieve
this goal, the Board has inserted a re-
quirement in the Standard that the in-
232
Cost Accounting Standards Board
ventory costing method used is to be
applied in a manner which results in
systematic and rational costing of issues
of material to specific cost objectives.
10. Costs and benefits. Few comments
were received on the subject of imple-
mentation costs of the Standard. This
Standard has, for most contractors, al-
most no cost. It does require written pol-
icies; most contractors already have such
policies. A few contractors, however, may
have to establish or modify inventory
policies; for these contractors there may
be minimal costs.
The Board believes that this Standard
will result in improved understanding of
the requirements involved in accounting
for acquisition costs of material during
the negotiation and audit of contracts
and these potential benefits will outweigh
any costs of implementation.
11. Other comments. The published
draft Standard contained a provision ex-
cepting small quantities of material used
for purposes such as prototype and de-
velopmental work from the definition of
an established material inventory ac-
count. While only a few commentators
offered comments on this provision, in
view of the revisions being made to the
Standard as set out above, this provision
has been deleted from the Standard.
A number of commentators raised
questions concerning the potential con-
flict between requirements of this Stand-
ard and those set out in Standard 407,
Use of Standard Costs for Direct Mate-
rial and Direct Labor (4 CFR Part 407).
The Board recognizes the nature of the
potential conflict described by the com-
mentators, but feels that an inventory
costing method using standard costs in
accordance with the requirements of
Standard 407 would meet the inventory
costing requirements of this Standard.
Section 411.10, General applicability,
has been shortened and simplified from
the material under this section appear-
ing in earlier promulgated Cost Account-
ing Standards. The earlier material was
a restatement of the statutory require-
ments of Pub. L. 91-379. The Board be-
lieved it was helpful to repeat this ma-
terial to assist users of the Standards.
However, the Board has from time to
time provided for certain exemptions
from the requirements to follow Cost Ac-
counting Standards, and these exemp-
tions were not recognized in the "appli-
cability" sections of earlier Standards.
The Board believes that the shortened
material in § 411.10, referring users to
the Board's detailed regulations, will
provide users with helpful information
on general applicability.
There is also being published today an
amendment to Part 400, Definitions, to
incorporate in that part terms defined in
§ 411.30 (a) of this Cost Accounting
Standard.
233
Cost Accounting Standards Board
PART 412-COST ACCOUNTING STAND-
ARD FOR COMPOSITION AND MEAS-
UREMENT OF PENSION COST
Sec.
412.10 General applicability.
412.20 Purpose.
412.30
412.40
412.50
412.60
412.70
Definitions.
Fundamental requirement.
Techniques for application.
Illustrations.
Exemptions.
412.80 Effective date.
Supplement-Preambles
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168)
SOURCE: 40 FR 43878, Sept. 24. 1975, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDEral Register, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (40 FR 43873, September 24,
1975) is set forth in preamble A of the
supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
Washington, D.C. 20408.
§ 412.10 General applicability.
General applicability of this Cost Ac-
counting Standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the Cost Ac-
counting Standards contract clause in
negotiated defense prime contracts and
subcontracts (§ 331.30 of this chapter).
§ 412.20 Purpose.
The purpose of this Standard is to pro-
vide guidance for determining and meas-
uring the components of pension cost.
The Standard establishes the basis on
which pension costs shall be assigned to
cost accounting periods. The provisions
of this Cost Accounting Standard should
enhance uniformity and consistency in
accounting for pension costs and thereby
increase the probability that those costs
are properly allocated to cost objectives.
§ 412.30 Definitions.
(a) The
following
definitions of
terms which are prominent in this
Standard are reprinted from Part 400
of this chapter for convenience. Other
terms which are used in this Standard
and are defined in Part 400 of this chap-
ter have the meaning ascribed to them
in that part unless the text demands a
different definition or the definition is
modified in paragraph (b) of this sec-
tion:
(1) Accrued benefit cost method. An
actuarial cost method under which units
of benefit are assigned to each cost ac-
counting period and are valued as they
accrue that is, based on the services
performed by each employee in the pe-
riod involved. The measure of normal
cost under this method for each cost ac-
counting period is the present value of
the units of benefit deemed to be credited
to employees for service in that period.
The measure of the actuarial liability at
a plan's inception date is the present
value of the units of benefit credited to
employees for service prior to that date.
(This method is also known as the Unit
Credit cost method.)
(2) Actuarial assumption. A prediction
of future conditions affecting pension
cost; for example, mortality rate, em-
ployee turnover, compensation levels,
pension fund earnings, changes in values
of pension fund assets.
(3) Actuarial cost method. A technique
which uses actuarial assumptions to
measure the present value of future pen-
sion benefits and pension fund admin-
istrative expenses, and which assigns the
cost of such benefits and expenses to cost
accounting periods.
(4) Actuarial gain and loss. The effect
on pension cost resulting from differences
between actuarial assumptions and actu-
al experience.
(5) Actuarial liability. Pension cost at-
tributable, under the actuarial cost
method in use, to years prior to the date
of a particular actuarial valuation. As of
such date, the actuarial liability repre-
sents the excess of the present value of
the future benefits and administrative
expenses over the present value of fu-
ture contributions for the normal cost
for all plan participants and benefici-
aries. The excess of the actuarial lia-
bility over the value of the assets of a
pension plan is the Unfunded Actuarial
Liability.
(6) Defined-benefit pension plan. A
pension plan in which the benefits to be
paid or the basis for determining such
benefits are established in advance and
234
Cost Accounting Standards Board
the contributions are intended to pro-
vide the stated benefits.
(7) Defined-contribution pension plan.
A pension plan in which the contribu-
tions to be made are established in ad-
vance and the benefits are determined
thereby.
(8) Funded pension cost. The portion
of pension costs for a current or prior
cost accounting period that has been paid
to a funding agency or, under a pay-as-
you-go plan, to plan participants or bene-
ficiaries.
(9) Funding agency. An organization
or individual which provides facilities to
receive and accumulate assets to be used
either for the pavment of benefits under
a pension plan, or for the purchase of
such benefits.
(10) Multiemployer pension plan. A
plan to which more than one employer
contributes and which is maintained pur-
suant to one or more collective bargain-
ing agreements between an emplovee or-
ganization and more than one employer.
(11) Normal cost. The annual cost at-
tributable, under the actuarial cost
method in use, to years subsequent to a
particular valuation date.
(12) Pay-as-you-go cost method. A
method of recognizing pension cost only
when benefits are paid to retired employ-
ees or their beneficiaries.
(13) Pension plan. A deferred compen-
sation plan established and maintained
by one or more employers to provide sys-
tematically for the payment of benefits
to plan participants after their retire-
ment, provided that the benefits are paid
for life or are payable for life at the op-
tion of the employees. Additional benefits
such as permanent and total disability
and death payments, and survivorship
payments to beneficiaries of deceased
employees may be an integral part of a
pension plan.
(14) Projected benefit cost method.
Any of the several actuarial cost meth-
ods which distribute the estimated total
cost of all of the employees' prospective
benefits over a period of years, usually
their working careers.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 412.40
Fundamental requirement.
(a) Components of pension cost. (1)
For defined-benefit pension plans, the
components of pension cost for a cost ac-
counting period are (i) the normal cost
of the period, (ii) a part of any un-
funded actuarial liability, (iii) an in-
terest equivalent on the unamortized por-
tion of any unfunded actuarial liability,
and (iv) an adjustment for any actuarial
gains and losses.
(2) For defined-contribution pension
plans, the pension cost for a cost account-
ing period is the net contribution re-
quired to be made for that period, after
taking into account dividends and other
credits, where applicable.
(b) Measurement of pension cost. (1)
For defined-benefit pension plans, the
amount of pension cost of a cost ac-
counting period shall be determined by
use of an actuarial cost method which
measures separately each of the com-
ponents of pension cost set forth in para-
graph (a)(1) of this section, or which
meets the requirements set forth in
§ 412.50 (b) (2).
(2) Each actuarial assumption used to
measure pension cost shall be separately
identified and shall represent the con-
tractor's best estimates of anticipated ex-
perience under the plan, taking into ac-
count past experience and reasonable ex-
pectations. The validity of the assump-
tions used may be evaluated on an ag-
gregate, rather than on an assumption-
by-assumption, basis.
(c) Assignment of pension cost. The
amount of pension cost computed for a
cost accounting period is assignable only
to that period. Except for pay-as-you-go
plans, the cost assignable to a period is
allocable to cost objectives of that period
to the extent that liquidation of the li-
ability for such cost can be compelled or
liquidation is actually effected in that
period. For pay-as-you-go plans, the en-
tire cost assignable to a period is alloca-
ble to cost objectives of that period only
if the payment of benefits earned by plan
participants can be compelled. If such
payment is optional with the company,
the amount of assignable costs allocable
to cost objectives of that period is lim-
ited to the amount of benefits actually
paid to retirees or beneficiaries in that
period.
§ 412.50
Techniques for application.
(a) Components of pension cost. (1)
Any portion of an unfunded actuarial
liability included as a separately identi-
fied part of the pension cost of a cost ac-
counting period shall be included in equal
annual installments. Each installment
shall consist of an amortized portion of
the unfunded actuarial liability plus an
235
Cost Accounting Standards Board
interest equivalent on the unamortized
portion of such liability. The period of
amortization shall be established as
follows:
(i) If amortization of an unfunded ac-
tuarial liability has begun prior to the
date this Standard first becomes appli-
cable to a contractor, no change in the
amortization period is required by this
Standard.
(ii) If amortization of an unfunded
actuarial liability has not begun prior to
the date this Standard first becomes
applicable to a contractor, the amortiza-
tion period shall begin with the period
in which the Standard becomes appli-
cable and shall be no more than 30 years
nor less than 10 years. However, if the
plan was in existence as of January 1,
1974, the amortization period shall be
no more than 40 years nor less than 10
years.
(iii) Each unfunded actuarial liability
resulting from the insutution of new
pension plans or from adoption of im-
provements to pension plans subsequent
to the date this Standard first becomes
applicable to a contractor shall be amor-
tized over no more than 30 years nor less
than 10 years.
(2) Pension costs applicable to prior
years that were specifically unallowable
in accordance with then existing Govern-
ment contractual provisions shall be sep-
arately identified and eliminated from
any unfunded actuarial liability being
amortized pursuant to the provision of
paragraph (a)(1) of this section, or from
future normal costs if the actuarial cost
method in use does not separately de-
velop an unfunded actuarial liability. In-
terest earned on funded unallowable pen-
sion costs, based on the valuation rate
of return, need not be included by con-
tractors as a reduction of future years'
computations of pension costs made pur-
suant to this Standard.
(3) A contractor shall establish and
consistently follow a policy for select-
ing specific amortization periods for un-
funded actuarial liabilities, if any, that
are developed under the actuarial cost
method in use. Such policy may give
consideration to factors such as the size
and nature of unfunded actuarial liabil-
ities.
(4) Actuarial assumptions used in cal-
culating the amount of an unfunded ac-
tuarial liability shall be the same as those
used for other components of pension
cost. If any assumptions are changed
during an amortization period, the re-
sulting increase or decrease in an un-
funded actuarial liability shall be sep-
arately amortized over no more than 30
years nor less than 10 years.
(5) Actuarial gains and losses shall be
identified separately from unfunded ac-
tuarial liabilities that are being amor-
tized pursuant to the provisions of this
Standard. The accounting treatment to
be afforded to such gains and losses shall
be consistently applied for each pension
plan.
(6) An excise tax assessed pursuant to
a law or regulation because of inadequate
or delayed funding of a pension plan is
not a component of pension cost.
(7) If any portion of the pension cost
computed for a cost accounting period is
not funded in that period, no amount
for interest on the portion not funded in
that period shall be a component of pen-
sion cost of any future cost accounting
period. Conversely, if a contractor pre-
maturely funds pension costs in a cur-
rent cost accounting period, the interest
earned on such premature funding,
based on the valuation rate of return,
may be excluded from future years' com-
putations of pension cost made pursuant
to this Standard.
(8) For purposes of this Standard, de-
fined-benefit pension plans funded ex-
clusively by the purchase of individual
or group permanent insurance or annuity
contracts shall be treated as defined-
contribution pension plans. However, all
other defined-benefit pension plans ad-
ministered wholly or in part through in-
surance company contracts shall be sub-
je t to the provisions of this Standard
relative to defined-benefit pension plans.
(9) If a pension plan is supplemented
by a separately-funded plan which pro-
vides retirement benefits to all of the
participants in the basic plan, the two
plans shall be considered as a single plan
for purposes of this Standard. If the ef-
fect of the combined plans is to provide
defined-benefits for the plan partici-
pants, the combined plan shall be treated
as a defined-benefit plan for purposes of
this Standard.
(10) A multiemployer pension plan es-
tablished pursuant to the terms of a col-
lective bargaining agreement shall be
considered to be a defined-contribution
pension plan for purposes of this Stand-
ard.
(11) A pension plan applicable to col-
leges and universities that is part of a
State pension plan shall be considered
236
Cost Accounting Standards Board
to be a defined-contribution pension
plan for purposes of this Standard.
(b) Measurement of pension cost. (1)
The amount of pension cost assignable to
cost accounting periods shall be meas-
ured by the accrued benefit cost method
or by a projected benefit cost method
which identifies separately normal costs,
any unfunded actuarial liability, and
periodic determinations of actuarial
gains and losses, except as provided in
paragraph (b) (2) of this section.
(2) Any other projected benefit cost
method may be used, provided that:
(i) The method is used by the con-
tractor in measuring pension costs for
financial accounting purposes;
(ii) The amount of pension cost as-
signed to a cost accounting period com-
puted under such method is reduced by
the excess, if any, of the value of the
assets of the pension fund over the actu-
arial liability of the plan as determined
by a projected benefit cost method set
forth in paragraph (b)(1) of this
section;
(iii) The contractor accumulates sup-
plementary information identifying the
actuarial gains and losses (and, sep-
arately, gains or losses resulting from
changed actuarial assumptions) that
have occurred since the last determina-
tion of gains and losses and the extent
to which such gains and losses have been
amortized through subsequent pension
contributions or offset by gains and losses
in subsequent cost accounting periods,
and
(iv) The cost of future pension bene-
fits is spread over the remaining average
working lives of the work force.
(3) Irrespective of the projected ben-
making salary projections for plans
whose benefits are based on salaries and
wages, or from considering improved
benefits for plans which provide that
such improved benefits must be made.
(7) If the evaluation of the validity of
actuarial assumptions shows that, in the
aggregate, the assumptions were not
reasonable, the contractor shall (i) iden-
tify the major causes for the resultant
actuarial gains or losses and (ii) provide
information as to the basis and rationale
used for retaining or revising such as-
sumptions for use in the ensuing cost ac-
counting period(s).
(c) Assignment of pension cost. (1)
Amounts funded in excess of the pen-
sion cost computed for a cost account-
ing period pursuant to the provisions of
this Standard shall be applied to pen-
sion costs of future cost accounting
periods.
(2) Evidence that the liquidation of
a liability for pension cost can be com-
pelled includes (i) provisions of law such
as the funding provisions of the Em-
ployee Retirement Income Security Act
of 1974, except as provided in paragraph
(c)(3) of this section, (ii) a contractual
agreement which requires liquidation of
the liability, or (iii) the existence of
rights by a third party to require liqui-
dation of the liability.
(3) Any portion of pension cost com-
puted for a cost accounting period that
is deferred to future periods pursuant
to a waiver granted under provisions of
the Employee Retirement Income Secu-
rity Act of 1974, shall not be assigned
to the current period. Rather, such costs
shall be assigned to the cost accounting
period(s) in which the funding takes
place.
efit cost method used, the calculation pla
of normal cost shall be based on a per-
centage of payroll for plans where the
pension benefit is a function of salaries
and wages and on employee service for
plans where the pension benefit is not a
function of salaries and wages.
(4) The cost of benefits under a pay-
as-you-go pension plan shall be meas-
ured in the same manner as are the costs
of defined-benefit plans whose benefits
are provided through a funding agency.
(5) Actuarial assumptions should re-
flect long-term trends so as to avoid dis-
tortions caused by short-term fluctua-
tions.
(6) Pension cost shall be based on pro-
visions of existing pension plans. This
shall not preclude contractors from
(4) A liability for pension cost for a
cost accounting period (or, for pay-as-
you-go plans, for payments to retirees
or beneficiaries for a period) shall be
considered to be liquidated in the period
if funding is effected by the date estab-
lished for filing a Federal income tax
return (including authorized exten-
sions). For contractors not required to
file Federal income tax returns, the date
shall be that established for filing Fed-
eral corporation income tax returns.
[40 FR 43878, Sept. 24. 1975; 40 FR 45417,
Oct. 2, 1975]
§ 412.60
Illustrations.
(a) Components of pension cost. (1)
Contractor A has a defined-benefit pen-
sion plan for its employees. The con-
237
Cost Accounting Standards Board
tractor's policy has been to compute and
fund as annual pension cost normal cost
plus only interest on the unfunded actu-
arial liability. Pursuant to § 412.40(a)
(1), the components of pension cost for
a cost accounting period must now in-
clude not only the normal cost for the
period and interest on the unfunded
actuarial liability, but also an amortized
portion of the unfunded actuarial lia-
bility. The amortization of the liability
and the interest equivalent on the un-
amortized portion of the liability must
be computed in equal annual install-
ments.
(2) Contractor B has insured pen-
sion plans for each of two small groups
of
employees. One plan is funded
through a group permanent insurance
contract; the other plan is funded
through a group deferred annuity con-
tract. Both plans provide for defined
benefits. Pursuant to § 413.50 (a) (8), for
purposes of this Standard the plan fi-
nanced through a group permanent in-
surance contract shall be considered to
be a defined-contribution pension plan;
the net premium required to be paid
for a cost accounting period (after de-
ducting dividends and any credits) shall
be the pension cost for that period.
However, the group deferred annuity
plan is subject to the provisions of this
Standard that are applicable to defined-
benefit plans.
(3) Contractor C provides pension
benefits for certain hourly employees
through a multiemployer defined-benefit
plan. Under the collective bargaining
agreement, the contractor pays six cents
into the fund for each hour worked by
the covered employees. Pursuant to
§ 412.50 (a) (10), the plan shall be con-
sidered to be a defined-contribution pen-
sion plan. The payments required to be
made for a cost accounting period shall
constitute the assignable pension cost
for that period.
(4) Contractor D provides pension
benefits for certain employees through
a defined-contribution pension plan.
However, the contractor has a separate
fund which is used to supplement pen-
sion benefits provided for all of the par-
ticipants in the basic plan in order to
provide a minimum monthly retirement
income to each participant. Pursuant to
§ 412.50 (a) (9), the two plans shall be
considered as a single plan for purposes
of this Standard. Because the effect of
the supplemental fund is to provide
defined-benefits for the plan's partici-
pants, the provisions of this Standard
relative to defined-benefit pension plans
shall be applicable to the combined plan.
(b) Measurement of pension cost. (1)
Contractor E has a pension plan whose
costs are assigned to cost accounting pe-
riods by use of an actuarial cost method
which does not separately identify ac-
tuarial gains and losses or the effect on
pension cost resulting from changed ac-
tuarial assumptions. If this cost method
is used to measure costs for financial
accounting purposes, it may be used for
purposes of this Standard, provided that
the contractor develops the supplemen-
tary information set forth in § 412.50(b)
(2) (iii) regarding such gains and losses
and changed actuarial assumptions. In
addition, the contractor must develop an
actuarial liability determined by a pro-
jected benefit cost method set forth in
§ 412.50(b) (1). If the resultant actuarial
liability is less than the value of the
pension fund, the pension cost computed
for the cost accounting period must be
reduced by that amount (§ 412.50 (b) (2)
(ii)).
(2) For a number of years Contractor
F has had a pay-as-you-go pension plan
which provides for payments of $200 a
month to employees after retirement.
The contractor is currently making such
payments to several retired employees
and charges such payments against cur-
rent income as its pension cost. For the
current cost accounting period, the con-
tractor paid benefits totaling $24.000.
Contractor F's method of accounting for
pension cost does not comply with the
provisions of this Standard relative to
pay-as-you-go plans as set forth in
$$ 412.40 (c) and 412.50(b) (4). The con-
tractor should:
(i) Compute, by use of an actuarial
cost method, its actuarial liability for
benefits earned by plan participants.
This entire liability is always unfunded
for a pay-as-you-go plan.
(ii) Compute a level amount which,
including an interest equivalent, would
amortize the unfunded actuarial liability
over a period of no less than 10 or more
than 40 years.
(iii) Compute, by use of the actuarial
cost method selected, a normal cost for
the period.
The sum of paragraphs (b)(2) (ii) and
(iii) of this section represents the
amount of pension cost assignable to the
period. If payment of benefits earned by
plan participants can be compelled, the
238
Cost Accounting Standards Board
entire amount of cost assignable to the
period is allocable to cost objectives of
that period. If such payments cannot be
compelled, the amount of assignable cost
allocable to cost objectives of that period
is limited to the amount of benefits ac-
tually paid in that period ($24,000).
(3) Contractor G has two defined-
benefit pension plans which provide for
fixed dollar payments to hourly em-
ployees. Under one plan, the contractor's
actuary believes that the contractor will
be required to increase the level of bene-
fits by specified percentages over the next
several years. In calculating pension
costs, the contractor may not assume
future benefits greater than that cur-
rently required by the plan. With regard
to the second plan, a collective bargain-
ing agreement negotiated with the em-
ployee's labor union provided that pen-
sion benefits will increase by specified
percentages over the next several years.
Because the improved benefits are re-
quired to be made, the contractor can
consider such increased benefits in com-
puting pension costs for the current cost
accounting period (§ 412.50(b) (6)).
(c) Assignment of pension cost. Con-
tractor H has a trusteed pension plan for
its salaried employees. It computes $1
million of pension cost for a cost ac-
counting period. Pursuant to the fund-
ing provisions of the Employee Retire-
ment Income Security Act of 1974, the
company must fund at least $800,000.
Because liquidation of the liability for
the portion of pension cost required by
law to be funded ($800,000) can be com-
pelled, such cost is allocable to cost ob-
jectives of the period, in accordance
with § 412.40 (c). If Contractor H can be
compelled by the trustee or the plan
participants to fund the remaining
$200,000, the liability therefor is also
allocable to cost objectives of that period
§ 412.70 Exemptions.
None for this Standard.
§ 412.80 Effective date.
(a) The effective date of this Standard
is January 1, 1976.
(b) This Standard shall be followed
by each contractor on or after the start
of his next cost accounting period be-
ginning after the receipt of a contract to
which this Cost Accounting Standard is
applicable.
140 FR 43878. Sept. 24, 1975, as amended at
40 FR 58281, Dec. 16, 1975]
PREAMBLES: Preamble A of the supplement
to Part 401 of this Chapter explains how
effective dates are determined.
239
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Original Publication, 9-24-75
The following is the preamble to the
original publication of Part 412. 40 FR 43873
Sept. 24, 1975.
The Cost Accounting Standard on
Composition and Measurement of Pen-
sion Cost is one of a series being promul-
gated by the Cost Accounting Standards
Board pursua t to section 715 of the De-
fense Production Act of 1950, as amend-
ed, Pub. L. 91-379, 50 U.S.C. app. 2168,
which provides for the development of
Cost Accounting Standards to be used
in connection with negotiated national
defe se contracts. This Standard estab-
lishes the components of pension cost,
the bases for measuring such cost, and
the criteria for assigning pension costs
to cost accounting periods.
As part of the Board's early research
relating to the subject of pension costs.
it developed an Issues Paper in August
1973, and a preliminary draft Standard
in September 1974. Both the Issues Paper
and preliminary Standard were sent to a
large cross-section of companies, Gov-
ernment agencies, industry and profes-
sional associations, actuaries, and other
interested individuals. The Board re-
ceived responses to these research papers
which were useful in identifying the key
issues involved in pension cost account-
ing and in developing a proposed Stand-
ard which was published in the FEDERAL
REGISTER Of May 5, 1975, with an invita-
tion to interested parties to submit writ-
ten views and comments to the Board.
The Board also supplemented the invita-
tion in the FEDERAL REGISTER by sending
copies of the proposed Standard to sev-
eral hundred organizations and indi-
viduals who had provided the Board with
comments on the preliminary proposal
or who had otherwise expressed interest
in the subject of the Standard.
The Board received 80 sets of written
comments from companies, Government
agencies, professional associations, in-
dustry associations. public accounting
firms, universities, actuaries and others
in response to the FEDERAL REGISTER pro-
posal. All of these comments have been
carefully considered by the Board. The
Board's views on each of the major issues
discussed by commentators are outlined
below, together with explanations of the
changes made in the Cost Accounting
Standard being promulgated.
helpful suggestions and
and constructive
criticisms it has received, and for the
time devoted to assisting the Fcard in
this endeavor by the many organizations
and individuals involved.
(1) RELATIONSHIP TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF
1974 AND TO GENERALLY ACCEPTED AC-
COUNTING PRINCIPLES
The Board received a variety of com-
ments relative to the relationship
between the proposed Standard, the Em-
ployee Retirement Income Security Act
of 1974 (ERISA), and generally accepted
accounting principles set forth in "Ac-
counting for the Cost of Pension Plans,"
Opinion No. 8 by the Accounting
Principles Board (APB-8). Some stated
that, with the enactment of ERISA, Con-
gress has expressed its will relative
to pensions and a Cost Accounting
Standard on pension costs which is dif-
ferent than ERISA is unnecessary.
Others stated that APB-8 is a viable and
proven document which provides suf-
ficient guidance for both financial ac-
counting and cost accounting purposes.
Others stated that the combination of
ERISA and APB-8 provides all the
guidance needed for cost accounting pur-
poses. Still others stated that a Standard
should be deferred until the Federal
regulations required by ERISA have been
promulgated, and/or the Financial Ac-
counting Standards Board (FASB) com-
pletes its reevaluation of APB-8.
The purpose of the Board in promul-
gating this Standard is to establish the
accounting bases for measuring the
proper amount of pension cost to be as-
signed to cost accounting periods for sub-
sequent allocation to negotiated Govern-
ment contracts.
ERISA establishes, among other
things, minimum funding standards for
pension plans and provisions affecting
deductibility of pension costs for tax
purposes. Although there is some com-
monality between the funding provisions
of ERISA and the provisions of the
Standard, ERISA does not provide for
the measurement of pension costs for
assignment among cost accounting
periods or for the subsequent allocation
of such costs to contracts. Accordingly,
the Standard contains requirements, not
contained in ERISA, to accomplish these
purposes. Nevertheless. on the basis of
its research, the Board is confident that
the Standard being promulgated is com-
patible with the requirements of ERISA,
The Board wishes to take this opor-
tunity to express its appreciation for the
240
Cost Accounting Standards Board
i.e., compliance with the provisions of
the Standard does not violate the pro-
visions of ERISA, although certain pro-
visions of the Standard are more restric-
tive than is permitted by ERISA.
APB-8 provides criteria for accounting
for the cost of pension plans for finan-
cial accounting purposes. The Board
believes that certain of these criteria
are not appropriate for Government con-
contract costing purposes. For example,
a fundamental concept of APB-8 is that
the annual pension cost to be charged
to expense for financial accounting pur-
poses is not necessarily determined by
the funding of a pension plan. The Board
believes that a requirement of law for
annual minimum funding of rension
costs on an irrevocable basis, is strong
evidence that an obligation for at least
such period.
The Board is aware of the FASB's
projects to establish financial accounting
and reporting Standards for employee
benefit plans and to reevaluate APB-8, as
well as the need for the cognizant Gov-
ernment agencies to devlop regulations
relative to ERISA. It is our understand-
ing that the FASB reev luation of APB-8
is not likely to result in a Standard
that would be applicable before the end
of calendar year 1976. The Board
believes, however, that the issuance of a
Cost Accounting Standard is needed
promptly for contract costing purposes.
For example, there does not now exist
any authoritative guidance which sets
forth the components of pension cost that
are properly includable and excludable
for contract costing purposes. In addi-
tion, there are no existing criteria to
resolve how the components of pension
cost, once determined, shall be measured
and assigned to cost accounting periods.
The need for such measurement and as-
signment criteria for contracts is partic-
ularly critical because of the long-range
projections used in computing pension
cost and because the many techniques
available for measuring and assigning
such cost have significant impacts there-
on. The significant amounts involved in
annual pension cost calculations, the
changes in the mix of contractors' Gov-
ernment and commercial business, and
the settlement of individual contracts
long before actual pension costs can be
determined create a special need to pro-
vide criteria relative to the assignment
of pension costs among cost accounting
periods and the allocation of such costs
to the cost objectives of the periods.
In developing the accompanying Cost
Accounting Standard, the Board has at-
tempted to stay within the general con-
straints of APB-8 and the funding provi-
sions of ERISA. The Board recognizes
that in the FASB's reconsideration of
APB-8, the FASB could make significant
changes in the manner in which pension
costs are to be treated for financial ac-
counting purposes and that the FASB's
project on financial accounting and re-
porting for employee benefit plans may
influence the conclusions reached in the
reevaluation of APB-8. However, any
such changes would be directed to ex-
ternal financial reporting and would not
necessarily impact contract costing. The
Board is also aware that Federal regula-
tions which may be issued could conflict
with a provision of this Standard. The
Board maintains constant liaison with
the FASB with regard to the two Boards'
respective responsibilities for developing
Standards. It also maintains liaison with
the legislative and regulatory bodies re-
sponsible for developing and administer-
ing ERISA. The Board will review what-
ever pronouncements these bodies may
issue and will make whatever revisions
to the Standard it deems appropriate for
contract costing purposes.
(2) NEED FOR TWO STANDARDS RELATIVE
TO PENSION COST
Several commentators suggested that
this Standard should deal not only with
the composition and measurement of
pension cost, but also with actuarial gains
and losses' and the allocation of pension
costs. The Board believes that the devel-
opment of a separate Standard covering
the latter two areas is advisable. First,
the development of a single Standard
would result in an extremely large and
complex Standard that could create
many problems in implementation and
administration. For example, the Issues
Paper developed by the Board set forth
a total of 50 distinct accounting issues
requiring resolution; the Standard being
promulgated covers only 24 of these is-
sues. In addition, the Board believes that
the subjects covered by the two Stand-
ards are separable; a Standard can be is-
sued relative to the composition and
measurement of pension cost without
creating a concurrent need for a Stand-
ard relative to the adjustment and al-
location of such costs. Moreover, in
computing actuarial gains and losses, it
1 "The effect on pension cost resulting from
differences between actuarial assumptions
and actual experience."
241
Cost Accounting Standards Board
is necessary to determine how fund assets
should be valued. APB-8 does not cover
this aspect of pension cost accounting. In
its project on accounting for pension
funds, the FASB is endeavoring to specify
the manner in which assets should be
valued. The Board intends, as part of its
continuing liaison with the FASB on this
matter, to exchange research so that any
possible differences in concept or ap-
proach could be minimized or eliminated
entirely.
(3) TREATMENT OF ACTUARIAL GAINS AND
LOSSES
The FEDERAL REGISTER proposal noted
that an adjustment for actuarial gains
or losses is a component of pension cost.
Several commentators expressed concern
over the Board's intent. Some commen-
tators interpreted the proposed Standard
as requiring that actuarial gains and
losses be spread over a number of years.
Other commentators believed that the
proposed Standard required the immedi-
ate recognition of actuarial gains and
losses.
The Board emphasizes that the Stand-
ard does not delineate how actuarial
gains and losses shall be accounted for
at this time. The Standard being pro-
mulgated neither requires nor prohibits
immediate recognition of gains and losses
or the spreading of such gains and losses
to future years. Therefore, actuarial
gains and losses should be accounted for
in accordance with pertinent laws and
regulations, and should be consistently
applied. Section 412.50(a) (5) has been
amended to clarify this concept.
(4) ACTUARIAL COST METHODS'
Many commentators expressed their
concern over the section of the FEDERAL
REGISTER proposal which limited accept-
able actuarial cost methods to the ac-
crued benefit cost method" or to a
projected benefit cost method' which
separately identifies unfunded actuarial
liabilities and actuarial gains and
losses. This section, in effect, ruled out
B
"A technique which uses actuarial as-
sumptions to measure the present value of
future pension benefits and pension fund
administrative exepnses, and which assigns
the cost of such benefits and expenses to
cost accounting periods.
• "An actuarial cost method under which
units of benefit are assigned to each cost
accounting period and are valued as they
accrue—that is, based on the services per-
formed by each employee in the period
involved. The measure of normal cost under
the use of an aggregate * cost method for
measuring pension costs for negotiated
Government contracts. Most of these
commentators noted that ERISA and
APB-8 permit these methods to be used.
The Board's primary reason for pro-
hibiting the use of an aggregate cost
method in the proposed Standard was
because such a method does not disclose
actuarial gains and losses. Any method
that does not disclose actuarial gains
and losses impairs the ability to deter-
mine whether actuarial assumptions"
are reasonable. Actuarial assumptions
are significant underlying factors for
determining the amount of pension costs
to be assigned among cost accounting
periods. It is only when such assump-
tions are visible that a determination
can be made that they are reasonable.
The most appropriate means for deter-
mining such reasonableness is to com-
pare assumed events with actual events.
Also, because most aggregate cost
methods do not develop unfunded
actuarial liabilities, the Government
cannot ascertain the funding status of a
plan, i.e., whether it is excessively funded
at any point in time. Consequently, the
this method for each cost accounting period
is the present value of the units of benefit
deemed to be credited to employees for
service in that period. The measure of the
actuarial liability at a plan's inception date
is the present value of the units of bene-
fit credited to employees for service prior
to that date. (This method is also known as
the Unit Credit cost method.)”
"Any of the several actuarial cost meth-
ods which distribute the estimated total
cost of all of the employees' prospective
benefits over a period of years, usually their
working careers.”
"Pension cost attributable, under the
actuarial cost method in use, to years prior
to the date of a particular actuarial valua-
tion. As of such date, the actuarial liability
represents the excess of the present value
of the future benefits and administrative ex-
penses over the present value of future con-
tributions for the normal cost for all plan
participants and beneficiaries. The excess of
the actuarial liability over the value of the
assets of a pension plan is the Unfunded
Actuarial Liability."
• As used herein, an aggregate cost meth-
od is any actuarial cost method which
spreads the entire cost of future pension
benefits over the average future service lives
of the current work force and which does
not develop actuarial gains or losses.
"A prediction of future conditions af-
fecting pension cost; for example, mortality
rate, employee turnover, compensation levels,
pension fund earnings, changes in values
of pension fund assets.”
242
Cost Accounting Standards Board
Government could be making larger re-
imbursements than is required to defray
its fair share of pension costs incurred by
contractors. Many of the comments re-
ceived acknowledge that most aggregate
cost methods do not disclose overfunded
situations.
Nevertheless, the Board is impressed by
certain of the views of commentators who
advocate the use of an aggregate method.
The Board recognizes that aggregate
methods are widely used and that they
generally spread pension costs evenly and
within the periods established in the
Standard for amortizing unfunded ac-
tuarial liabilities. The Board also notes
that commentators stated that a required
change in actuarial cost methods may re-
sult in substantial actuarial fees and, in
some cases, could result in contractors
violating current labor commitments.
The Board's solution to this problem
was provided generally in several of the
comments received. First, several com-
mentators who recognized that an ag-
gregate cost method does not disclose the
funding status of a plan, suggested that
contractors using such a cost method
develop an alternative computation to
determine such status. They pointed out
that such a computation is required un-
der the full funding limitation of ERISA
and is often required by the IRS when it
believes a plan may be overfunded.
Other commentators suggested that
contractors who use an aggregate cost
method provide supplemental informa-
tion identifying actuarial gains and
losses that have occurred and the extent
to which such gains and losses have been
amortized through subsequent pension
contributions or offset by gains and losses
in subsequent accounting periods. These
commentators informed us that the in-
cremental costs of providing such addi-
tional information would be relatively
minor.
Accordingly, the Board has added a
section (412.50(b)(2)) which permits a
contractor to use any projected benefit
cost method if the contractor (1) makes
an alternative computation (under a
projected benefit cost method which
separately discloses unfunded actuarial
liabilities and actuarial gains and losses)
to disclose the funding status of the plan
and reduce pension cost as indicated by
such computation, (2) provides supple-
mental information relative to actuarial
gains and losses and gains or losses re-
sulting from changed actuarial assump-
tions, and (3) uses that method in
developing costs for financial account-
ing purposes.
The third requirement was added be-
cause the Board has tried unsuccessfully
to ascertain criteria for determining the
circumstances under which an aggregate
cost method is a preferable method for
assigning costs to cost accounting periods
for Government contracting purposes.
Finally, to assure that the aggregate
cost method used spreads pension costs
within the time frames set forth in this
Standard for other projected benefit cost
methods, § 412.50(b) (2) requires that
such aggregate cost methods spread the
cost of future pension benefits over the
average remaining working lives of the
work force.
(5) ACTUARIAL ASSUMPTIONS
A large number of commentators were
concerned with the manner in which the
FEDERAL REGISTER proposal dealt with ac-
tuarial assumptions. They were particu-
larly concerned with that provision of
the proposed Standard which stated that
when an actuarial assumption differs
significantly from historical experience,
the contractor shall provide evidence
supporting its conclusion that such ex-
perience is no longer appropriate. Most
commentators who objected to this pro-
vision in the Standard interpreted it as
requiring separate gain and loss analy-
ses for each assumption each time an
actuarial valuation is performed. They
cited the large cost of performing such
analyses and noted that ERISA merely
requires that actuarial assumptions be
reasonable "in the aggregate."
Although the Board believes that the
basis and rationale for each assumption
should be made visible by contractors, it
believes that the test of reasonableness
of such assumptions should be applied
to the end result. It is not the intent of
the Board to require a separate gain or
loss analysis for each assumption each
time an actuarial valuation is made.
Rather, the intent is that contractors
not use an undocumented composite fac-
tor to represent all assumptions used in
measuring pension costs, as this practice
would inhibit any evaluation of the rea-
sonableness of individual assumptions as
applied to future periods. Such evalua-
tions may be necessary when assump-
tions, taken in the aggregate, are found
to be unreasonable, as discussed below.
Once individual actuarial assumptions
have been set forth by contractors, the
243
Cost Accounting Standards Board
Board believes that the validity of these
assumptions can be evaluated by the
overall results obtained. Therefore, the
Standard provides that the validity of
the assumptions used may be evaluated
in the aggregate. However, if an actuarial
valuation discloses that the assumptions
were not reasonable in the aggregate. the
Stand rd requires that the contractor
shall identify the major causes for the
resultant actuarial gains and losses and
set forth the bases and rationale used for
either retaining or revising each such as-
sumption.
In order to recognize the long-term
nature of pension plans. the Standard
provides in § 412.50 (b) (5) that actuarial
assumptions should reflect long-term
trends, rather than short-term fluctua-
tions. Also, the Standard does not specify
how often determinations of actuarial
gains and losses should be made. ERISA
provisions require that such determina-
tions be made not less frequently than
once every three years except that more
frequent determinations may be pre-
scribed by regulation in particular cases,
i.e., for plans which have sustained sub-
stantial gains or losses for several peri-
ods in succession. The Board believes
that the ERISA requirements with re-
spect to the frequency of determinations
for gains and losses is equally appropri-
ate for compliance with the provisions of
the Standard at this time.
In addition to the foregoing, several
commentators stated that the Standard
should provide that the judgment of en-
rolled actuaries, as set forth in ERISA,
should be determinate with respect to as-
sumptions as well as other actuarial
determinations. The Board recognizes
the importance of the functions per-
formed by enrolled actuaries with respect
to actuarial determinations. However,
contract terms are not imposed on
actuaries; rather, it is the contractors
who are parties to contracts with the
Government and must bear the responsi-
bility for compliance with the terms
thereof.
(6) CALCUlations of NORMAL COSTⓇ
The FEDERAL REGISTER proposal pro-
vided that the calculations of normal cost
should be the sum of the calculations for
the individual employees in the plan, ex-
cept that homogeneous groupings and
"The annual cost attributable, under the
actuarial cost method in use, to years sub-
sequent to a particular valuation date."
averages could be used if the results sub-
stantially agree with the results based on
individual employee calculations. A num-
ber of commentators objected to this
provision. They said that it would appear
to require that two calculations be made
in order to show that the use of groupings
and averages gives results that agree with
the results based on individual employee
calculations. Some commentators stated
that this requirement is unrealistic be-
cause actuaries frequently use aggregate
calculations and that such aggregations
can be tested against individual company
or industry-wide experience. Other com-
mentators stated that this provision
would result in a single calculation for
determining the assumed entry age of
planned participants.
The comments received indicate that
there are divergent opinions as to how
normal costs shall be calculated under
projected benefit cost methods. Never-
theless, the Board concludes that the
methods commonly used would not ma-
terially affect the results of normal cost
calculations. Accordingly, the require-
ment to compute normal costs on an
individual basis for projected benefit cost
methods has been deleted from the
Standard.
The proposed Standard provided also
that the calculation of normal cost shall
be based on a percentage of payroll.
Many commentators stated that this re-
quirement does not recognize the fact
that many pension benefits are not re-
lated to salaries. In order to accom-
modate these views, the Board has revised
the Standard ($ 412.50(b) (3)) to pro-
vide that the calculation of normal cost
shall be based on a percentage of payroll
for plans where the pension benefit is a
function of salaries and wages and be
based on employee service for plans
where the pension benefit is not related
to salaries and wages.
(7) PAY-As-You-GO PENSION METHODS '
Several commentators apparently as-
sumed that the FEDERAL REGISTER pro-
posal prohibited the recognition of pen-
sion costs of plans that provide benefits
or. a pay-as-you-go basis. One commen-
tator stated that the Standard prohibited
the recognition of the costs of pay-as-
you-go plans which are not qualified for
Federal income tax purposes.
"A method of recognizing pension cost
only when benefits are paid to retired em-
ployees or their beneficiaries."
244
Cost Accounting Standards Board
The Board's view, as expressed in the
FEDERAL REGISTER proposal, is not to pro-
hibit recognizing the cost of pension
benefits provided on a pay-as-you-go
basis. Rather, the Board's intent is to
specify how the cost of such benefits
shall be measured and assigned among
cost accounting periods. Moreover, the
accounting treatment to be afforded to
the costs of pay-as-you-go plans is not
dependent on the Federal income tax
status of the plan.
Accordingly, the Board has revised the
provisions of the Standard relative to
pay-as-you-go methods (§ 412.50(b) (4))
and has added an illustration (§ 412.60
(b) (2)) to clarify its intent.
(8) UNALLOWABLE PENSION COSTS
The FEDERAL REGISTER proposal pro-
vided that pension costs applicable to
prior years that were disallowed in ac-
cordance with then-existing Government
contractual provisions should be sep-
arately identified and eliminated from
any unfunded actuarial liability being
amortized pursuant to the provisions of
the Standard. Several commentators
stated that this provision is not equitable
because ERISA requires that
amounts be funded.
such
The Board recognizes that all elements
comprising an unfunded actuarial lia-
bility, including unallowable costs in-
cluded therein, are required to be amor-
tized pursuant to the funding provisions
of ERISA. However, ERISA does not deal
with contract costing and therefore does
not deal with unallowable contract costs.
The Board believes that for contract
costing purposes, pension costs which
were assignable to prior periods and
which were specifically determined to be
unallowable under then-existing con-
tractual provisions should not be as-
signable to periods subsequent to the
effective date of this Standard. It should
be noted that the treatment of amounts
funded in excess of the pension cost for
a cost accounting period is separately
covered in § 412.50 (c) (1).
(9) AMORTIZATION OF UNFUNDED
ACTUARIAL LIABILITIES
The FEDERAL REGISTER proposal in-
cluded a provision requiring contractors
to establish and consistently follow a
policy for selecting specific amortization
periods for any unfunded actuarial lia-
bilities. The proposed Standard stated
that such policy should give considera-
tion to the size and nature of unfunded
actuarial liabilities. Several commenta-
tors stated that they did not believe that
the size and nature of such liabilities
should govern the choice of amortization
periods. The Board's intent was to per-
mit contractors to establish different
amortization periods for different types
and sizes of unfunded actuarial liabili-
ties. The Board still believes that con-
tractors should be permitted to establish
such different amortization periods. Ac-
cordingly, the Standard has been revised
(§ 412.50 (a) (3)) to clarify that such de-
terminations are permissive rather than
mandatory.
10 INTEREST RESULTING FROM DELAYED
FUNDING OF PENSION PLANS
The FEDERAL REGISTER proposal pro-
vided that if any portion of pension
cost computed for a cost accounting
period is not funded by the time es-
tablished by the funding provisions of
the plan, an interest equivalent on the
amount not funded shall not be a com-
ponent of pension cost of any other cost
accounting period. Several commentators
stated that this provision is inequitable
because, in order for a pension plan to be
viable, an amount equivalent to interest
should be added to pension costs to com-
pensate the fund for interest that would
have been earned if the cost had been
funded in a timely manner. Some com-
mentators added that APB-8 requires
that interest equivalents be added to pen-
sion accruals under such circumstances.
Still others understood the proposed
Standard to say that such interest equiv-
alent is not a cost; they therefore dis-
agreed with the proposed Standard.
The Board agrees that an interest
equivalent should be recognized in order
to determine whether the plan is prop-
erly funded. However, the Board believes
that interest cost resulting from the de-
layed funding of a pension plan is a con-
sequence of an investment decision and
is, therefore, an investment cost rather
than a component of pension cost. The
interest was caused by a decision of man-
agement to use its funds for other pur-
poses: in effect, management borrowed
from the pension trust fund.
Several commentators stated that they
compute pension cost at the beginning of
a cost accounting period and add interest
at the valuation rate to the normal cost
to the date of funding. They questioned
245
Cost Accounting Standards Board
whether the Standard would prohibit this
practice. The Standard being promul-
gated does not prohibit this practice:
Provided. That funding is made by the
end of the cost accounting period. Ac-
cordingly, the Board
the Board has amended
§ 412.50(a) (7) to state that if any por-
tion of the cost computed for a cost ac-
counting period is not funded in that pe-
riod an amount equivalent to interest
computed on that portion beyond the end
of that period shall not be a component
of pension cost of the current or any
future cost accounting period.
(11) ASSIGNMENT OF PENSION COST
Certain commentators expressed their
disagreement with the sections of the
FEDERAL REGISTER proposal dealing with
the assignment of pension costs among
cost accounting periods. The concept set
forth in the proposal related the assign-
ment of costs to the validity of the liabil-
ity for such costs. Commentators referred
to the concept set forth in APB-8 that
the accrual of pension expenses and the
funding of pensions are not necessarily
related. They stated that cost should be
assigned to cost accounting periods ir-
respective of whether or when funded.
The Board believes that assigning pen-
sion costs to cost accounting periods on
a cash basis is inappropriate from an ac-
counting viewpoint and could lead to the
improper assignment of pension costs
among periods. The Board believes also
that the concept which states that fund-
ing is unrelated to pension accruals is
not appropriate for contract costing be-
cause, under such a concept, pension
costs could be assigned to cost accounting
periods and never be funded; yet such
costs would
would be reimbursed by the
Government.
The underlying concept of the Stand-
ard is that when a valid liability exists,
the corresponding costs may be accrued
irrespective of when the liability is liqui-
dated. If the liability (to the pension
fund or, for pay-as-you-go plans, to re-
tirees) is not valid, it cannot be accrued;
in order for it to be allocated to cost
objectives of the current period, it must
be liquidated (funded) in that period or
within a reasonable period of time there-
after. In order to clarify its intent with
regard to the allocation of pension costs
to cost objectives of individual cost ac-
counting periods, the Board has revised
the wording of § 412.40 (c) of the
Standard.
In the FEDERAL REGISTER proposal, the
Board noted that the requirement to
fund a pension cost pursuant to ERISA
made the liability valid and therefore
made the cost assignable to the current
period. Several commentators stated
that ERISA permits such costs to be
waived and funded over a 15-year period.
They reasoned that under such circum-
stances it is no longer appropriate to
assign such pension cost in the year for
which such costs were computed. The
Board believes that if the financial posi-
tion of a contractor is such that it re-
quests and obtains such a waiver there is
doubt as to validity of the liability and
therefore of the cost incurred. Accord-
ingly, it has amended the Standard to
provide, in § 412.50 (c) (3), that if a con-
tractor receives such a waiver the pen-
sion costs shall be assigned to the cost
accounting periods in which the funding
of such cost takes place.
(12) INSURED PLANS
Several commentators stated that the
section of the FEDERAL REGISTER proposal
dealing with insured plans was confusing.
They stated that the definition of a
"separate insurance account" set forth
in the proposed Standard conflicted with
this section. Commentators stated that
this section would seem to eliminate from
the major requirements of this Standard
various forms of insured plans such as
deposit administration and immediate
participation guarantee contracts.
10
The Board's intent with regard to in-
sured plans is to treat defined-benefit
plans funded exclusively by the pur-
chase of individual or group permanent
insurance contracts as defined-contribu-
tion plans." The Board's view relative to
such plans is consistent with ERISA
whose minimum funding requirements
are not applicable to these plans. All
other insured pension plans are subject
to the provisions of this Standard. The
Board has revised § 412.50 (a) (8) accord-
ingly and has eliminated the definition of
separate insurance account.
(13) DEFINITIONS
The Board has received a significant
10 "A pension plan in which the benefits
to be paid or the basis for determining such
benefits are established in advance and the
contributions are intended to provide the
stated benefits."
"“A pension plan in which the contribu-
tions to be made are established in advance
and the benefits are determined thereby.”
246
Cost Accounting Standards Board
number of comments relative to the defi-
nitions used in the Standard. Some com-
mentators stated that the Board should
use the definitions contained in ERISA.
Others stated that the Board should use
the APB-8 definitions. Still others recom-
mended that the Board should establish
a single glossary of actuarial terms.
The Board recognizes that a major
problem in the field of pension account-
ing has been the use of various terms
which have the same meaning. For ex-
ample, the term "prior service costs"
used in APB-8, "past service costs" used
in ASPR, "accrued liability" used in
ERISA, and "supplemental liability”
used by many actuaries have virtually
the same meaning. In researching the
definitions currently in use, the Board
noted that one factor seemed to prevail:
The glossaries in use were tailor-made
for the particular documents which ap-
plied to the terms. For example, the
definitions in APB-8 were written in the
context of the way in which the words
were intended for use in that Opinion.
Similarly, the definitions used in ERISA
were fashioned to be in consonance with
the specific provision of the Act. The
Board's primary objective in developing
the definitions in this Standard is simi-
lar; the definitions should help provide
a clear understanding of the concept
used therein, while at the same time
maintaining consistency with the thrust
of the definitions used in APB-8 and
ERISA.
The Board received some additional
comments with regard to specific defini-
tions set forth in the FEDERAL REGISTER
proposal. One commentator expressed
confusion at the terms "accrued pension
liability" and "unfunded accrued pension
liability" because the word "accrued" has
a specific meaning in an accounting sense
which is different than that intended in
the Standard. The Board believes that
this comment has merit and, accordingly,
the Standard has been revised to use the
terms "actuarial liability” and “un-
funded actuarial liability.'
""
Other commentators requested elabo-
ration of the definition of a pension plan.
Specifically, they questioned whether the
definition is applicable to execute com-
pensation plans, excess benefit plans, and
other plans that may not be "qualified"
for Federal income tax purposes. The
Standard provides the accounting treat-
ment for the cost of all pension plans
which fall within the definition of a pen-
sion plan. Such accounting treatment is
not contingent on the manner in which
IRS may categorize plans for income tax
purposes.
Several additional commentators ques-
tioned that portion of the definition of a
pension plan which states that benefits
shall be paid for life or be payable for
life at the option of the employee. They
questioned whether a life income settle-
ment for an employee would fall within
the meaning of this definition. The Board
believes that such a settlement is, in ef-
fect, equivalent to a payment for life
and thus falls within the intent of the
definition.
(14) COSTS AND BENEFITS
The anticipated benefits of this Stand-
ard are improved cost measurement and
increased consistency and uniformity in
accounting for pension costs and assign-
ing such costs to cost accounting periods,
leading ot increased assurance that the
measured and assigned costs will be al-
located to the proper cost objectives, in-
cluding Government contracts.
When the preliminary draft Standard
on pension cost was submitted to a wide
cross-section of companies and individ-
uals, the recipients were specifically
asked to comment on the costs of im-
plementing the Standard. The over-
whelming majority of the respondents
stated that the incremental costs of im-
plementation should be small. In com-
menting on the proposed Standard pub-
lished in the FEDERAL REGISTER, Several
respondents stated that the prohibition
against use of an aggregate projected
benefit cost method and the requirement
to make annual gain or loss analyses of
each actuarial assumption would involve
additional administration costs of any
significance. Since the Board has essen-
tially eliminated these problem areas in
the Standard, it believes that increased
administrative costs occasioned by this
Standard will be minimal. In summary,
the Board believes that the benefits to
be derived from this Standard clearly
outweigh the costs of implementation.
The Board expects that this Standard
will become effective on January 1, 1976.
There is also being published today an
Amendment to Part 400, Definitions, to
incorporate in that part terms defined in
§ 412.30 (a) of this Cost Accounting
Standard.
Part 412-Cost Accounting Standard
for Composition and Measurement of
Pension Cost is added to read as follows:
247
Supp. No. 3
Cost Accounting Standards Board
Sec.
PART 413-ADJUSTMENT AND
ALLOCATION OF PENSION COST
413.10 General applicability.
413.20 Purpose.
413.30
Definitions.
413.40 Fundamental requirement.
413.50 Techniques for application.
413.60
413.70
Illustrations.
Exemptions.
413.80 Effective date.
AUTHORITY: 84 Stat. 796, Sec. 103, 50 U.S.C.
App. 2168.
§ 413.10 General applicability.
General applicability of this Cost Ac-
counting Standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the Cost Ac-
counting Standards contract clause in
negotiated defense prime contracts and
subcontracts (4 CFR 331.30).
§ 413.20 Purpose.
A purpose of this Standard is to pro-
vide guidance for adjusting pension cost
by measuring actuarial gains and losses
and assigning such gains and losses to
cost accounting periods. The Standard
also provides the bases on which pension
cost shall be allocated to segments of an
organization. The provisions of this Cost
Accounting Standard should enhance
uniformity and consistency in account-
ing for pension costs.
§ 413.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are de-
fined in Part 400 of this chapter have
the meanings ascribed to them in that
part unless the text demands a different
definition or the definition is modified
in paragraph (b) of this section:
(1) Actuarial assumption. A prediction
of future conditions affecting pension
cost; for example, mortality rate, em-
ployee turnover, compensation levels,
pension fund earnings, changes in values
of pension fund assets.
(2) Actuarial cost method. A technique
which uses actuarial assumptions to
measure the present value of future pen-
sion benefits and pension fund admin-
istrative expenses, and which assigns the
cost of such benefits and expenses to
cost accounting periods.
(3) Actuarial gain and loss. The effect
on pension cost resulting from differences
between actuarial assumptions and actu-
al experience.
(4) Actuarial liability. Pension cost
attributable, under the actuarial cost
method in use, to years prior to the date
of a particular actuarial valuation. As of
such date, the actuarial liability repre-
sents the excess of the present value of
the future benefits and administrative
expenses over the present value of future
contributions for the normal cost for
all plan participants and beneficiaries.
The excess of the actuarial liability over
the value of the assets of a pension plan
is the Unfunded Actuarial Liability.
(5) Actuarial valuation. The deter-
mination, as of a specified date, of the
normal cost, actuarial liability, value of
the assets of a pension fund, and other
relevant values for the pension plan.
(6) Immediate-gain actuarial cost
method. Any of the several actuarial cost
methods under which actuarial gains and
losses are included as part of the un-
funded actuarial liability of the pension
plan, rather than as part of the normal
cost of the plan.
(7) Normal cost. The annual cost at-
tributable, under the actuarial cost
method in use, to years subsequent to a
particular valuation date.
(8) Pension plan. A deferred compen-
sation plan established and maintained
by one or more employers to provide sys-
tematically for the payment of benefits
to plan participants after their retire-
ment, provided that the benefits are paid
for life or are payable for life at the
option of the employees. Additional bene-
fits such as permanent and total disa-
bility and death payments, and survivor-
ship payments to beneficiaries of de-
ceased employees may be an integral part
of a pension plan.
(9) Pension plan participant. Any em-
ployee or former employee of an em-
ployer, or any member or former member
of an employee organization, who is or
may become eligible to receive a benefit
from a pension plan which covers em-
ployees of such employer or members of
such organization who have satisfied the
plan's participation requirements, or
whose beneficiaries are receiving or may
be eligible to receive any such benefit. A
participant whose employment status
with the employer has not been ter-
minated is an active participant of the
employer's pension plan.
(10) Projected benefit cost method.
Any of the several actuarial cost methods
which distribute the estimated total cost
248
Supp. No. 3
Cost Accounting Standards Board
of all of the employees' prospective bene-
fits over a period of years, usually their
working careers.
(11) Segment. One of two or more divi-
sions, product departments, plants, or
other subdivisions of an organization re-
porting directly to a home office, usually
identified with responsibility for profit
and/or producing a product or service.
The term includes Government-owned
contractor-operated (GOCO) facilities,
and joint ventures and subsidiaries (do-
mestic and foreign) in which the organi-
zation has a majority ownership. The
term also includes those joint ventures
and subsidiaries (domestic and foreign)
in which the organization has less than a
majority of ownership, but over which it
exercises control.
(12) Spread-gain actuarial cost
method. Any of the several projected
benefit actuarial cost methods under
which actuarial gains and losses are in-
cluded as part of the current and future
normal costs of the pension plan.
(13) Termination gain or loss. An
actuarial gain or loss resulting from the
difference between the assumed and
actual rates at which plan participants
separate from employment for reasons
other than retirement, disability, or
death.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 413.40 Fundamental requirement.
(a) Assignment of actuarial gains and
losses. Actuarial gains and losses shall be
calculated annually and shall be assigned
to the cost accounting period for which
the actuarial valuation is made and sub-
sequent periods.
(b) Valuation of the assets of a pension
fund. The value of all pension fund assets
shall be determined under an asset valu-
ation method which takes into account
unrealized appreciation and deprecia-
tion of pension fund assets, and shall be
used in measuring the components of
pension cost.
(c) Allocation of pension cost to seg-
ments. Contractors shall allocate pension
cost to each segment having participants
in a pension plan. A separate calculation
of pension cost for a segment is required
when the conditions set forth in § 413.50
(c) (2) and (3) are present. When these
conditions are not present, allocations
may be made by calculating a composite
pension cost for two or more segments
and allocating this cost to these segments
by means of an allocation base.
§ 413.50 Techniques for application.
(a) Assignment of actuarial gains and
losses. (1) In accordance with the pro-
visions of 4 CFR Part 412, actuarial gains
and losses shall be identified separately
from unfunded actuarial liabilities being
amortized.
(2) Actuarial gains and losses deter-
mined under a pension plan whose costs
are measured by an immediate-gain
actuarial cost method shall be amortized
over a 15-year period in equal annual
installments, beginning with the date as
of which the actuarial valuation is made.
The installment for a cost accounting
period shall consist of an element for
amortization of the gain or loss and an
element for interest on the unamortized
balance at the beginning of the period.
If the actuarial gain or loss determined
for a cost accounting period is not ma-
terial, the entire gain or loss may be in-
cluded as a component of the current or
ensuing year's pension cost.
(3) Actuarial gains and losses appli-
cable to a pension plan whose costs are
measured by a spread-gain actuarial
cost method shall be included as part of
current and future normal cost and
spread over the remaining average work-
ing lives of the work force.
(b) Valuation of the assets of a pen-
sion fund. (1) The actuarial value of the
assets of a pension fund shall be used (i)
in measuring actuarial gains and losses,
and (ii) for purposes of measuring other
components of pension cost.
(2) The actuarial value of the assets
of a pension fund may be determined by
the use of any recognized asset valuation
method which provides equivalent rec-
ognition of appreciation and deprecia-
tion of pension fund assets. However, the
total asset value produced by the method
used shall fall within a corridor from
80 to 120 percent of the market value of
the assets, determined as of the valua-
tion date. If the method produces a
value that falls outside the corridor, the
value of the assets shall be adjusted to
equal the nearest boundary of the cor-
ridor.
(3) The method selected for valuing
pension fund assets shall be consistently
applied from year to year within each
plan.
(4) The provisions of paragraphs (b)
(1) through (3) of this section are not
applicable to plans that are funded with
insurance companies under contracts
248A
Supp. No. 3
Cost Accounting Standards Board
where the insurance company guaran-
tees benefit payments.
(c) Allocation of pension cost to seg-
ments. (1) For contractors who compute
a composite pension cost covering plan
participants in two or more segments,
the base to be used for allocating such
costs shall be representative of the fac-
tors which the pension benefits are
based. For example, a base consisting of
salaries and wages shall be used for pen-
sion costs that are calculated as a per-
centage of salaries and wages; a base
consisting of the number of employees
shall be used for pension costs that are
calculated as an amount per employee.
(2) Separate pension cost for a seg-
ment shall be calculated whenever any
of the following conditions exist for that
segment, provided that such condi-
tion(s) materially affect the amount of
pension cost allocated to the segment:
(i) There is a material termination gain
or loss attributable to the segment, (ii)
The level of benefits, eligibility for bene-
fits, or age distribution is materially dif-
ferent for the segment than for the
average of all segments, or (iii) The ap-
propriate assumptions relating to termi-
nation, retirement age, or salary scale
are, in the aggregate, materially differ-
ent for the segment than for the aver-
age of all segments. Calculations of
termination gains or losses shall give
consideration to factors such as unex-
pected early retirements, benefits be-
coming fully vested, and reinstatements
or transfers without loss of benefits. An
amount may be estimated for future re-
employments.
(3) Pension cost shall also be sepa-
rately calculated for a segment under
circumstances where (i) The pension
plan for that segment becomes merged
with that of another segment, and (ii)
The ratios of assets to actuarial liabili-
ties for each of the merged plans are
materially different from one another
after applying the benefits in effect after
the merger.
(4) Whenever the pension cost of a
segment is required to be calculated
separately pursuant to paragraphs (c)
(2) and (3) of this section, such calcula-
tions shall be prospective only; pension
costs need not be redetermined for prior
years.
(5) For a segment whose pension costs
are required to be calculated separately
pursuant to paragraph (c) (2) of this
section, there shall be an initial alloca-
tion of a share in the undivided pension
fund assets to that segment, as follows:
(i) If the necessary data are readily de-
terminable, the amount of assets to be
allocated to the segment shall be the
amount of funds contributed by, or on
behalf of, the segment, increased by in-
come received on such funds, and de-
creased by benefits and expenses paid
from such funds; (ii) if the data speci-
fied in subdivision (i) of this subpara-
graph, are not readily determinable, the
actuarial value of the pension fund's as-
sets shall be allocated to the segment in
a manner consistent with the actuarial
cost method or methods used to compute
pension cost. For a segment whose pen-
sion costs are required to be calculated
separately pursuant to paragraph (c) (3)
of this section, the initial allocation of
assets to the segment shall be the market
value of the segment's assets as of the
date of the merger.
(6) If prior to the time a contractor is
required to use this Standard, it has
been calculating pension cost separately
for individual segments, the amount of
assets previously allocated to those seg-
ments need not be changed.
(7) After the initial allocation of as-
sets, the contractor shall maintain a rec-
ord of the portion of subsequent con-
tributions, income, benefit payments, and
expenses attributable to the segment and
paid from the pension fund; income and
expenses shall include a portion of any
investment gains and losses attributable
to the assets of the pension fund. Fund
income and expenses shall be allocated
to the segment in the same proportion
that the assets allocated to the segment
bears to total fund assets as of the begin-
ning of the period for which fund income
and expenses are being allocated.
(8) If plan participants transfer
among segments, contractors need not
transfer assets or liabilities unless a
transfer is sufficiently large to distort the
segments' ratio of fund assets to actu-
arial liabilities.
(9) Contractors who separately cal-
culate the pension cost of one or more
segments may calculate such cost either
for all pension plan participants assign-
able to the segment(s) or for only the
active participants of the segment(s). If
costs are calculated only for active par-
ticipants, a separate segment shall be
created for all of the inactive partici-
pants of the pension plan and the cost
thereof shall be calculated. When a con-
tractor makes such an election, assets
shall be allocated to the segment for in-
248B
Supp. No. 3
Cost Accounting Standards Board
active participants in accordance with
paragraphs (c) (5), (6), and (7) of this
section. When an employee of a segment
becomes inactive, assets shall be trans-
ferred from that segment to the segment
established to accumulate the assets and
actuarial liabilities for the inactive plan
participants. The amount of funds trans-
ferred shall be that portion of the actu-
arial liabilities for these inactive partici-
pants that have been funded. If inactive
participants become active funds and
liabilities shall similarly be transferred
to the segments to which the participants
are assigned. Such transfers need be
made only as of the last day of a cost
accounting period. The total annual pen-
sion cost for a segment having active
lives shall be the amount calculated for
the segment plus an allocated portion of
the pension cost calculated for the in-
active participants. Such an allocation
shall be on the same basis as that set
forth in paragraph (c)(1) of this sec-
tion.
(10) Where pension cost is separately
calculated for one or more segments, the
actuarial cost method used for a plan
shall be the same for all segments, as
required by 4 CFR 412.50(b). Unless a
separate calculation of pension cost for
a segment is made because of a condi-
tion set forth in paragraph (c) (2) (iii)
of this section, the same actuarial as-
sumptions may be used for all segments
covered by a plan.
(11) If a pension plan has participants
in the home office of a company, the
home office shall be treated as a segment
for purposes of allocating the cost of the
pension plan. Pension cost allocated to a
home office shall be a part of the costs to
be allocated in accordance with the ap-
propriate requirements of 4 CFR Part
403.
(12) If a segment is closed, the con-
tractor shall determine the difference
between the actuarial liability for the
segment and the market value of the
assets allocated to the segment, irrespec-
tive of whether or not the pension plan
is terminated. The determination of the
actuarial liability shall give considera-
tion to any requirements imposed by
agencies of the United States Govern-
ment. In computing the market value of
assets for the segment, if the contractor
has not already allocated assets to the
segment, such an allocation shall be
made in accordance with the require-
ments of paragaraph (c) (5) (i) and (ii)
of this section. The market value of the
assets allocated to the segment shall be
the segment's proportionate share of the
total market value of the assets of the
pension fund. The calculation of the
difference between the market value of
the assets and the actuarial liability shall
be made as of the date of the event (e.g.,
contract termination) that caused the
closing of the segment. If such a date
cannot be readily determined, or if its
use can result in an inequitable calcula-
tion, the contracting parties shall agree
on an appropriate date. The difference
between the market value of the assets
and the actuarial liability for the seg-
ment represents an adjustment of previ-
ously-determined pension costs.
§ 413.60 Illustrations.
(a) Assignment of actuarial gains and
losses. Contractor A has a defined-benefit
pension plan whose costs are measured
under an immediate-gain actuarial cost
method. The contractor makes actuarial
valuations every other year. In the past,
at each valuation date, the contractor
has calculated the actuarial gains and
losses that have occurred since the pre-
vious valuation date and has merged
such gains and losses with the unfunded
actuarial liabilities that are being
amortized. Pursuant to § 413.40 (a), the
contractor must make an actuarial valu-
ation annually. Any actuarial gains or
losses measured must be separately
amortized over a 15-year period begin-
ning with the period for which the actu-
arial valuation is made (§ 413.50 (a) (1)
and (2)).
(b) Valuation of the assets of a pen-
sion fund. Contractor B has a defined
benefit pension plan, the assets of which
are invested in equity securities, debt se-
curities, and real property. The contrac-
tor, whose cost accounting period is the
calendar year, has an annual actuarial
valuation of the pension fund in June
of each year; the effective date of the
valuation is the beginning of that year.
The contractor's method for valuing the
assets of the pension fund is as follows:
debt securities expected to be held to
maturity are valued on an amortized
basis running from initial cost at pur-
chase to par value at maturity; land and
buildings are valued at cost less depreci-
ation taken to date; all equity securities
and debt securities not expected to be
held to maturity are valued on the basis
of a 5-year moving average of market
values. In making an actuarial valua-
tion, the contractor must compare the
values reached under the asset valuation
248C
Supp. No. 3
Cost Accounting Standards Board
method used with the market values of
all of the assets (§ 413.40(b)). In this
case, the assets are valued as of January
1 of that year. The contractor established
the following values as of the valuation
date.
Cash
Asset
valuation Market
method
$100,000
Equity securities.
6,000,000
$100,000
7,800,000
Debt securities expected to be
held to maturity.
550,000
Other debt securities_
600,000
Land and buildings, net of depre-
ciation....
400,000
600,000
750,000
750,000
Total..
7,650,000 10, 000, 000
Section 413.50(b) (2) requires that the
total value of the assets of the pension
fund fall within a corridor from 80 to
120 percent of market. The corridor for
the plan's assets as of January 1 is from
$12 million to $8 million. Because the
asset value reached by the contractor-
$7,650,000-falls outside the corridor,
the value reached must be adjusted to
equal the nearest boundary of the cor-
ridor: $8 million. In subsequent years
the contractor must continue to use the
same method for valuing assets (413.50
(b) (3)). If the value produced falls in-
side the corridor, such value shall be
used in measuring pension cost.
(c) Allocation of pension cost to seg-
ments. (1) Contractor C has a defined-
benefit pension plan covering employees
at five segments. Pension cost is com-
puted by use of an immediate-gain actu-
arial cost method. One segment (X) is
devoted primarily to performing work
for the Government. During the current
cost accounting period, Segment X had
a large and unforeseeable reduction of
employees because of a contract termi-
nation at the convenience of the Gov-
ernment and because the contractor did
not receive an anticipated follow-on
contract to one that was completed dur-
ing the period. As a result, the plan has
a large net termination gain. As a con-
sequence of this gain a separate calcula-
tion of the pension cost for Segment X
would result in a materially different
allocation of costs to that segment than
would a composite calculation and allo-
cation by means of a base. Accordingly,
pursuant to § 413.50(c) (2), the contrac-
tor must calculate a separate pension
cost for Segment X. In doing so, the en-
tire termination gain must be assigned
to Segment X and amortized over 15
years. If the actuarial assumptions for
Segment X continue to be substantially
the same as for the other segments, the
termination gain may be separately
amortized and allocated only to Seg-
ment X; all other Segment X computa-
tions may be included as part of the
composite calculation. After the gain is
amortized, the contractor is no longer
required to separately calculate the costs
for Segment X unless subsequent events
require such separate calculation.
a
(2) Contractor D has a defined-bene-
fit pension plan covering employees at
ten segments, all of which have some
contracts subject to Cost Accounting
Standards. The contractor uses
spread-gain actuarial cost method and
calculates pension cost by developing a
pension cost rate and applying that rate
to the salaries and wages of the work
force. One of the segments (Segment Y)
is entirely devoted to Government work.
The contractor's policy is to place junior
employees in this segment. The age dis-
tribution of the employees of the seg-
ment is so different from that of the
other segments that the pension cost for
Segment Y would be materially different
if computed separately than if computed
as part of a computation which averages
the ages of all employees covered by the
plan. Pursuant to § 413.50 (c) (2), the
contractor must compute the pension
cost for Segment Y as if it were a sepa-
rate pension plan. Accordingly, the con-
tractor must allocate a portion of the
pension fund's assets to Segment Y.
Memorandum records may be used in
making the allocation. However, because
this portion cannot be readily deter-
mined, § 413.50 (c) (5) (ii) permits the
allocation to be made on the basis of the
actuarial cost method or methods used
to calculate prior years' pension cost for
the plan. Once the assets have been al-
located, in future cost accounting peri-
ods the contractor shall make separate
pension cost calculations for Segment Y
based on the actual age distribution for
the segment. Because the factors com-
prising pension cost for the other nine
segments are relatively equal, the con-
tractor may compute pension cost for
these nine segments by using composite
factors and developing a percentage of
payroll for the nine segments. The pen-
sion cost allocated to each of the nine
segments shall be the product of the
percentages developed and the payroll of
each segment (§ 413.50 (c) (1)).
(3) Contractor E has a defined-bene-
248D
Supp. No. 3
Cost Accounting Standards Board
fit pension plan which covers employees
at 12 segments. The contractor uses com-
posite actuarial assumptions to develop a
pension cost for all segments. Three of
these segments primarily perform Gov-
ernment work; the work at the other
nine segments is primarily commercial.
Employee turnover at the segments per-
forming commercial work is relatively
stable. However, employment experience
at the Government segments has been
very volatile; there have been large
fluctuations in employment levels and
the contractor assumes that this pat-
tern of employment will continue to
occur. It is evident that separate termi-
nation assumptions for the Government
segments and the commercial segments
will result in materially different pension
costs for the Government segments.
Therefore, the cost for these segments
must be separately calculated, using the
appropriate termination assumptions for
these segments (§ 413.50 (c) (2) (iii)).
(4) Contractor F has a defined-benefit
pension plan covering employees at 25
segments. Twelve of these segments pri-
marily perform Government work; the
remaining segments perform primarily
commercial work. The contractor's rec-
ords show that the termination experi-
ence and projections for the 12 segments
are so different from that of the average
of all of the segments that separate pen-
sion cost calculations are required for
these segments pursuant to § 413.50(c)
(2). However, because the termination
experience and projections are about the
same for all 12 segments, contractor F
may calculate a composite pension cost
for the 12 segments and allocate the
cost to these segments by use of an
appropriate allocation base.
(5) After this Standard becomes ap-
plicable to Contractor G, it acquires
Contractor H and makes it Segment H.
Prior to the merger, each contractor had
its own defined-benefit pension plan.
Under the terms of the merger, Con-
tractor H's pension plan and plan as-
sets were merged with those of Con-
tractor G. The actuarial assumptions,
current salary scale, and other plan
characteristics are about the same for
Segment H and Contractor G's other
segments. However, based on the same
benefits at the time of the merger, the
plan of Contractor H had a dispropor-
tionately larger unfunded actuarial lia-
bility than did Contractor G's plan. Any
combining of the assets and actuarial
liabilities of both plans would result in
materially different pension cost allo-
cation to Contractor G's segments than
if pension cost were computed for Seg-
ment H on the basis that it had a sepa-
rate pension plan. Accordingly, pursu-
ant to § 413.50(c) (5), Contractor G
must allocate to Segment H a portion of
the assets of the combined plan. The
amount to be allocated shall be the
market value of Segment H's pension
plan assets at the date of the merger,
adjusted for subsequent receipts and ex-
penditures applicable to the segment
(§ 413.50 (c) (7)). Contractor G must use
these amounts of assets as a basis for
calculating the annual pension cost ap-
plicable to Segment H.
(6) Contractor I has a defined-benefit
pension plan covering employees at
seven segments. The contractor has been
making a composite pension cost calcu-
lation for all of the segments. However,
the contractor determines that, pursu-
ant to this Standard, separate pension
costs must be calculated for one of the
segments. In accordance with § 413.50
(c) (9), the contractor elects to allocate
fund assets only for the active partici-
pants of that segment. The contractor
must then create a segment to accumu-
late the assets and actuarial liabilities
for the plan's inactive participants.
When active participants of a segment
become inactive, the contractor must
transfer assets to the segment for inac-
tive participants to cover the actuarial
liabilities for the participants that be-
come inactive. However, the amount to
be transferred shall be proportionate to
the percentage of such liabilities that
are funded.
(7) Contractor J has a defined-benefit
pension plan covering employees at ten
segments. The contractor makes a com-
posite pension cost calculation for all seg-
ments. The contractor's records show
that the termination experience for one
segment-primarily performing Govern-
ment work-has been significantly dif-
ferent from the average turnover experi-
ence of the other segments. Moreover,
the contractor assumes that such differ-
ent experience will continue. Because of
this fact, and because the application of
a different termination assumption would
result in significantly different costs
being charged to the Government, the
contractor must develop separate pension
cost for that segment. In accordance
with § 413.50 (c) (2), the amount of pen-
sion cost must be based on an acceptable
248E
Supp. No. 3
Cost Accounting Standards Board
termination assumption for that seg-
ment; however, as provided in § 413.50 (c)
(10), all other assumptions for that seg-
ment may be the same as those for the
remaining segments.
(8) Contractor K has a five-year con-
tract to operate a Government-owned
facility. The employees of that facility
are covered by the contractor's overall
defined-benefit pension plan which cov-
ers salaried and hourly employees at
other locations. At the conclusion of the
five-year period, the Government decides
not to renew the contract. Although some
employees are hired by the successor con-
tractor, as far as Contractor K is con-
cerned, the facility is closed. Pursuant to
§ 413.50 (c) (12), Contractor K must com-
pute an unfunded actuarial liability for
the pension plan for that facility. The
contractor first calculates the actuarial
liability as of the date the contract ex-
pired. Because many of Contractor K's
employees are terminated from the pen-
sion plan, the Internal Revenue Service
considers it to be a partial plan termina-
tion, and thus requires that the termi-
nated employees become fully vested in
their accrued benefits to the extent such
benefits are funded. Taking this factor
into consideration, the actuary calculates
the actuarial liability as amounting to
$12.5 million. The contractor must then
determine the market value of the pen-
sion fund assets allocable to the facility,
pursuant to § 413.50 (c) (5), as of the date
agreed to by the contracting parties
(§ 413.50 (c) (12))—the date the contract
expired. In making this determination
the contractor establishes the ratio of the
actuarial value of the assets allocable to
the segment to the total actuarial value
of the assets of the pension fund. The
product of this ratio and the market
value of all pension fund assets is the
market value of the assets allocated to
the segment. In this case, the market
value of the segment's assets amounted
to $13.8 million. Thus, for this facility the
value of pension fund assets exceeded the
actuarial liability by $1.3 million. This
amount indicates the extent to which the
Government over-contributed to the
pension plan for the segment and, ac-
cordingly, indicates the extent to which
prior years' pension costs are subject to
adjustment.
§ 413.70 Exemptions.
None for this Standard.
§ 413.80 Effective date.
(a) The effective date of this Standard
is March 10, 1978.
(b) This Standard shall be followed by
each contractor on or after the start of
his next cost accounting period begin-
ning after the receipt of a contract to
which this Cost Accounting Standard is
applicable.
ARTHUR SCHOENHAUT,
Executive Secretary.
[FR Doc.77-20913 Filed 7-19-77;8:45 am]
248F
Supp. No. 3
Cost Accounting Standards Board
SUPPLEMENT - PREAMBLES
A. Original publication of Part 413; 7-20-77
PART 413-COST ACCOUNTING STAND-
ARDS FOR ADJUSTMENT AND ALLO-
CATION OF PENSION COST
The Cost Accounting Standard on Ad-
justment and Allocation of Pension Cost
is one of a series being promulgated by
the Cost Accounting Standards Board
pursuant to section 719 of the Defense
Production Act of 1950, as amended, Pub.
L. 91–379, 50 U.S.C. app. 2168, which pro-
vides for the development of Cost Ac-
counting Standards to be used in connec-
tion with negotiated national defense
contracts.
This Standard is the second Standard
dealing with pension costs. The first
Standard, 4 CFR Part 412, establishes
requirements covering the composition
of pension cost and the bases to be used
for measuring such cost. The Standard
being promulgated today establishes the
basis for assigning actuarial gains and
losses to cost accounting periods and for
allocating pension cost to segments of an
organization.
As part of the Board's early research
relating to the subject of pension cost,
it submitted an issues paper to a large
cross-section of companies, Government
agencies, industry and professional as-
sociations, actuaries, and other inter-
ested individuals. On June 18, 1976, this
staff draft Standard was sent to those
interested parties who had expressed a
desire to assist the Board in its research
efforts. The responses to the staff draft
Standard were considered in developing
a proposed Standard which was pub-
lished in the FEDERAL REGISTER of Febru-
ary 3, 1977, with an invitation to readers
to submit written views and comments to
the Board. The Board also supplemented
the invitation in the FEDERAL REGISTER
by sending copies of the proposed Stand-
ard to over 1,000 organizations and in-
dividuals.
The Board received 67 sets of written
comments from companies, Government
agencies, professional associations, in-
dustry associations, public accounting
firms, actuaries, universities, and others
in response to the FEDERAL REGISTER pro-
posal. All of these comments have been
carefully considered by the Board. The
Board's views on each of the major is-
sues discussed by commentators are out-
lined below, together with explanations
of the changes made to the proposed
Cost Accounting Standard.
The Board wishes to take this oppor-
tunity to express its appreciation for the
helpful suggestions and constructive
criticisms it has received, and for the
time devoted to assisting the Board in
this endeavor by the many organizations
and individuals involved.
(1) Relationship to the Employee Re-
tirement Income Security Act of 1974
and to the Financial Accounting Stand-
ards Board. The Board received a num-
ber of comments relative to the relation-
ship between the proposed Standard and
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA). Many of the
respondents stated that the proposed
Standard contained requirements which
are either inconsistent with, more re-
strictive than, or in conflict with the
provisions of ERISA.
The purpose of the Board in promul-
gating its Standards on pension cost is
to establish the criteria for measuring
the proper amount of pension cost to be
assigned to cost accounting periods for
subsequent allocation to negotiated Gov-
ernment contracts. ERISA establishes,
among other things, minimum funding
Standards for pension plans and pro-
visions affecting deductibility of pension
cost for tax purposes. Although there is
some commonality between the funding
provisions of ERISA and the Standard
being promulgated today, ERISA does
not provide for the measurement of pen-
sion costs for assignment among cost
accounting periods or for the subsequent
allocation of such costs to contracts.
Notwithstanding the differences in
objectives between the proposed Stand-
ard and ERISA, the Board believes that
compliance with the provisions of the
Standard being promulgated today will
not violate any provision of ERISA. The
Internal Revenue Service confirmed the
Board's view on this matter.
One commentator expressed concern
over the issuance of a Cost Accounting
Standard at this time in view of the
active involvement by the Financial Ac-
counting Standards Board in refining
the accounting and reporting for both
pension plans and employer pension
costs. The Board is aware that the FASB
may issue a Standard which could be
different from the Standard being pro-
mulgated today. The Board maintains
constant liaison with the FASB with re-
248G
Supp. No. 3
Cost Accounting Standards Board
gard to the two Boards' respective re-
sponsibilities for developing Standards.
It also maintains liaison with the legis-
lative and regulatory bodies responsible
for developing and administering ERISA.
The Board will review whatever pro-
nouncements these bodies may issue and
will consider whether revisions to this
Standard are appropriate.
(2) Definitions. The Board has re-
ceived a number of comments relative
to the definitions used in the proposed
Standard. Some commentators were
concerned that the Board is developing
still another glossary of actuarial terms.
One of the problems in the field of pen-
sion accounting has been the words used
to express concepts used. Different
meanings have been ascribed to the same
terms; different terms have been used
to describe the same circumstances; and
some terms have inferred meanings
which have not been present and have
not been intended. Thus, the Board's ob-
jective in developing the definitions in
this Standard is to help provide a clear
understanding of the concepts used
therein.
With regard to the specific definitions
used in the proposed Standard, the most
common problem related to the term
"segment." Some commentators con-
strued the term to mean any group of
employees performing work for the Gov-
ernment. The definition used in the pro-
posed Standard is the same as that set
forth in 4 CFR Part 400. As defined, a
segment is an organizational unit which
reports directly to a home office of that
organization. The designation of orga-
nizational units as segments is the re-
sponsibility of the contractor; the
proposed Standard does not change such
designations.
(3) Assignment of Actuarial Gains
and Losses to Cost Accounting Periods.
Section 413.50 (a) (2) of the proposed
Standard required that, for contractors
using an immediate-gain actuarial cost
method, actuarial gains and losses shall
be amortized over a 15-year period. Sev-
eral commentators stated that immedi-
ate recognition of actuarial gains and
losses should be required when there are
"abnormal forfeitures" (i.e., exceptional-
ly large termination gains). Some com-
mentators expressed a desire for a 10–15-
year amortization period; some desired a
10-20-year period; others merely wanted
sufficient flexibility to permit them to
use whatever amortization period they
deem appropriate.
The 15-year amortization period is the
same as that set forth in the minimum
funding provisions of ERISA. It is also
consistent with Opinion No. 8 of the Ac-
counting Principles Board (APB-8) cov-
ering the accounting for the cost of pen-
sion plans. The Board believes that the
amortization period set forth in ERISA
is a reasonable basis for adjusting past
pension cost accruals without creating
significant distortions to current year's
accruals. The Board is opposed to the
use of various amoritization periods be-
cause it would be contrary to the Board's
objective of attaining greater consistency
and uniformity in the measurement of
pension cost and the assignment of such
costs to cost accounting periods.
The Board believes also that there is
no valid basis for immediate recognition
of gains or losses simply because they are
exceptionally large. Recognizing gains
and losses in the current year generally
is not appropriate because the gains or
losses are often an adjustment of costs
of a number of years. In this regard,
the Board notes that APB-8 states also
that gains and losses should be recog-
nized immediately only if they arise from
a single occurrence not directly related
to the operation of the pension plan such
as the closing of a plant. The Standard is
consistent with this concept. According-
ly the 15-year amortization period has
been retained in the Standard being
promulgated today.
(4) Annual calculation of actuarial
gains and losses. A number of commenta-
tors objected to the requirement in § 413.-
40 (a) of the proposed Standard that ac-
tuarial gains and losses be developed an-
nually. They pointed out that this
provision, in effect, requires an annual
actuarial valuation. They stated that
such a requirement may impose a bur-
den on small contractors, is contrary to
ERISA which requires a valuation no
less frequently than once every three
years, and will result in increased ad-
ministrative costs.
The Board's primary reason for requir-
ing annual calculations of actuarial gains
and losses is to assure that the proper
cost is assigned to each cost accounting
period. Postponing such calculations may
well obscure large fluctuations in pen-
sion costs which should be recognized
on a timely basis. Because many con-
tracts begin and end within a two or
three-year period, such postponements
can result in incorrect costs being allo-
cated to these contracts. The Board notes
248H
Supp. No. 3
Cost Accounting Standards Board
that the overwhelming majority of con-
tractors perform annual actuarial valu-
ations.
In addition, it should be noted that
annual actuarial valuations need not be
made for all pension plans. Section 412.40
(a) (2) of 4 CFR Part 412 provides that
for defined-contribution pension plans,
the pension cost for a cost accounting pe-
riod is the net contribution required to
be paid for that period. Similarly, § 412.-
50(a) of 4 CFR, Part 412 provides that
multiemployer plans, certain insured
plans, and certain plans applicable to
colleges and universities shall be con-
sidered to be defined-contribution pen-
sion plans. Accordingly, the requirement
to develop actuarial gains and losses an-
nually is not applicable to these plans.
With regard to small contractors, the
Board notes that it has not received a
single comment from a small contractor
stating that the requirement for an an-
nual actuarial valuation for certain pen-
sion plans will result in a financial hard-
ship to the contractor. Every comment it
has received on this point has come from
a major contractor. As for increased ac-
tuarial fees, the Board was informed by
several actuaries that the difference be-
tween the cost of three annual valuations
and the cost of a single, three-year valu-
ation is relatively small.
In view of these considerations, the
Board has retained the requirement for
annual development of actuarial gains
and losses.
(5) Valuation of pension fund assets.
A substantial number of commentators
objected to the provision of § 413.50 (b)
(2) of the proposed Standard which re-
quired that the value of pension fund
assets be within 80 to 120 percent of
the market value of such assets. Some
commentators stated that such an ap-
proach could have a significant impact
on pension cost in a year in which there
is a large market fluctuation. Many of
these seemed particularly concerned
that a substantial drop in the market
value of fund assets would cause an in-
crease in pension costs. Other commen-
tators stated that such a requirement
is inconsistent with the fundamental re-
quirement of the proposed Standard
which stated that the method in use
should minimize the effect of short-
term market fluctuations. Some sug-
gested various modifications to the pro-
posed Standard to minimize the possible
impact of this provision. For example,
it was suggested that the average mar-
ket value of the fund on several dates
be used to determine whether an ad-
justment is required, or that no adjust-
ment should be required unless the value
of the fund is outside of the corridor for
a period of several years. Some com-
mentators were of the opinion that the
corridor approach was reasonable and
should be used except in cases where
certain asset valuation methods are
used; the most common method cited
was the 5-year moving average. Several
commentators noted that ERISA re-
quires that, for minimum funding pur-
poses, assets shall be valued on a basis
which gives consideration to fair market
values. They suggested that this provi-
sion obviates a need for a corridor.
The Board notes that there is no op-
position to the concept that the actu-
arial value of pension fund assets
should take into account the market
value of such assets. It recognizes that
there are numerous asset valuation
methods which take into account market
value in varying degrees. In order to
achieve an acceptable relationship be-
tween the actuarial value of pension
fund assets and their market values,
the Board could have restricted the use
of any of these market valuation meth-
ods. In the absence of such restrictions,
however, the Board believes some limits
must be provided to assure that the
actuarial value of fund assets on a given
date gives adequate recognition to their
market value. The Board reiterates its
often stated concept that assignment of
costs to the proper period is of para-
mount importance in determining con-
tract costs. Total reliance on valuation
methods which fail to produce actuarial
values within the specified corridor is
not acceptable for contract costing pur-
poses. For the same reasons, the Board
does not accept the suggested modi-
fications to the use of a single asset
valuation date because these modifica-
tions could defeat the objective of assur-
ing that the value of the fund bears
an appropriate relationship to current
market values.
The Board notes that the requirement
to adjust pension fund assets to within a
certain range of market value is not a
new concept with this Standard. The
Armed Services Procurement Regula-
tions (ASPR) has for many years re-
quired that appreciation in equity se-
curities be recognized to the extent that
80 percent of their market value exceeds
their adjusted book value. The require-
248 I
Supp. No. 3
Cost Accounting Standards Board
ment for upward adjustments of pen-
sion fund assets in the Standard being
promulgated today is thus similar to the
existing ASPR provision. No known
problems with this provision for upward
adjustments have come to the attention
of the Board. Early research in connec-
tion with the pension cost Standards
did, however, indicate widespread dis-
satisfaction with the existing ASPR pro-
visions because they did not permit ad-
justment of pension fund assets below
cost. The Standard being promulgated
today will correct this apparent in-
equity.
The Board notes also that many of the
commentators apparently did not realize
that the adjustment to pension fund as-
sets required pursuant to § 413.50(b)
would result in an actuarial gain or loss
subject to the 15-year amortization
period specified in § 413.50 (a) (2). It
should be recognized that the 15-year
amortization period minimizes the effect
of short-term market fluctuations in two
ways. First, the cost impact of the
actuarial gain or loss for any year is
spread over 15 years. Secondly, in com-
puting a single year's pension cost, there
could be adjustments resulting from
market fluctuations in as many as 15
prior years. If, as can be expected, some
of these adjustments will be increases to
the year's pension costs while others will
be decreases, the effect of market fluctua-
tions on a year's pension cost will be fur-
ther minimized. Accordingly, § 413.50
(b)(2), in conjunction with § 413.50
(a) (2), is considered to assure adequate
recognition of the market value of pen-
sion fund assets, while at the same time
assuring that the effect of short-term
market fluctuations is minimized.
In summary, the Board continues of
the view that wide latitude should be
provided for selecting an asset valuation
method, but that such latitude should
be coupled with the requirement that the
assets valued under the method selected
fall within a range of the market value of
such assets. The requirement that as-
sets be valued at least at 80 percent of
market value is consistent with the
present provision of ASPR. The require-
ment that assets be valued at no more
than 120 percent of market value is a
needed and equitable change to the
ASPR concept. These requirements are
not expected to result in severe pension
cost fluctuations which concerned some
of the commentators. Under the circum-
stances the Board has not adopted those
recommendations aimed at deleting or
revising the requirement that pension
fund assets be valued within 80 to 120
percent of market value.
(6) Valuation of bonds in a pension
fund. Several commentators expressed
their disagreement with the provision of
§ 413.60(b) of the proposed Standard
which required that, in establishing the
corridor, market values must be used for
all assets, including bonds. They stated
that the use of amortized amounts will,
over time, produce values less susceptible
to short-term market fluctuations than
will be produced by the use of market
values. They noted also that, for mini-
mum funding purposes, ERISA permits
bonds to be valued at cost less amortiza-
tion. The Board's research shows that
assets of a pension fund are acquired for
investment purposes and may be
liquidated whenever pension fund man-
agers believe that the proceeds therefrom
can generate more income elsewhere.
The Board's research shows also that
the frequent turnover of pension fund
assets is the rule rather than the excep-
tion. Therefore, the Board continues of
the view, that in establishing the cor-
ridor, all assets should be valued on the
basis of market and no change has been
made to paragraph 413.60 (b) to provide
otherwise. However, the Standard per-
mits a contractor to use amortized values
for bonds as a part of the asset valuation
method.
248J
(7) Allocation of pension cost to seg-
ments of an organization. Section 413.40
(c) of the proposed Standard provided
that pension costs for a segment may
always be developed by separate com-
putation. It further provided that com-
posite pension costs for two or more seg-
ments may be computed and allocated by
means of an allocation base "unless dis-
tortions are created." Section 413.50
(c) (2) provided that "unless an equitable
allocation of pension costs to segments
can be made by means of an allocation
base." separate pension costs for the
segment shall be calculated under
certain specified conditions.
Some commentators were opposed to
a requirement to calculate separate pen-
sion costs for a segment under any
conditions. Others thought that the pro-
posed Standard was unclear as to when
separate segment pension cost calcula-
tions were required. A number of com-
mentators concluded that separate cal-
culations would have to be made in any
event in order to prove that the use of
Supp. No. 3
Cost Accounting Standards Board
an
allocation base is acceptable. A
number of these stated that such
separate calculations would be costly.
Normally, pension costs are "central
payments or accruals" as that term is
used in 4 CFR Part 403. Therefore, where
pension costs can be computed for an in-
dividual segment, 4 CFR Part 403 would
ordinarily require that the amount so
computed be the amount allocated to
such segment. The calculation of in-
dividual segment costs is, in effect, a di-
rect allocation which is not only con-
sistent with CAS 403 but is also con-
sistent with the Board's cost allocation
concepts as set forth in the Board's Re-
statement of Objections, Policies and
Concepts (May 1977). Under the circum-
stances, the Board does not agree with
those commentators who are of the
view that computation of separate seg-
ments pension costs should never be re-
quired. Nevertheless, the Board recog-
nizes that the calculation of separate
segments pension costs cannot be made
without some additional cost and effort.
Consistent with its long-standing con-
cepts on materiality, the Board believes
that the calculation of separate segment
pension cost should be mandatory only
when such separate calculations pro-
duce materially different results than
would result from the use of an alloca-
tion base. Therefore the Board sought to
provide, in the proposed Standard, cri-
teria to determine when separate calcu-
lations would be required.
It is evident that many reviewers of
the proposed Standard were uncertain as
to when separate segment pension cost
calculations would be required and when
an allocation base could be used. Accord-
ingly, § 413.40 (c) has been revised to
clearly state that a separate calculation
of pension cost for a segment is required
only when the conditions set forth in
§ 413.50 (c) (2) and (3) are present. Ap-
propriate changes have also been made
in these paragraphs.
The Board recognizes whether sepa-
rate segment pension cost calculations
are required depends in the final anal-
ysis on what is considered to be "mate-
rial" for the purposes of $ 413.50 (c) (2)
and (3). The proposed Standard pro-
vided that separate segment costs are to
be computed for a segment which had
"significant" termination gains; "sig-
nificantly" different than average bene-
fits, eligibility criteria, or age distribu-
tion; or "significantly" different actu-
arial assumptions.
The concern of many commentators
that they would have to make separate
segment pension cost calculations in
order to prove that the use of a base is
acceptable apparently stemmed in part
from uncertainty as to what was meant
by "significant." The Board is on record
as stating that Cost Accounting Stand-
ards should be reasonable and not seek to
deal with insignificant amounts of costs.
The Board has previously published in its
Statement of Operating Policies, Pro-
cedures and Objectives certain criteria
to be considered in determining whether
a transaction or a decision about an ac-
counting practice is material. Such cri-
teria have also been proposed for inclu-
sion in the Board's regulations. It is in-
tended that these criteria be considered
in determining whether separate seg-
ment pension cost calculations are re-
quired.
To clarify that the Board's existing
materiality criteria apply in this in-
stance, § 413.50 (c) (2) and (3) in the
Standard being promulgated today use
the words "material" or "materially" in
lieu of the words "significant" or "sig-
nificantly" contained in the proposed
Standard. More importantly, a statement
has been added to § 413.50 (c) (2) to state
that separate pension cost calculations
are required when the listed conditions
are present only if "such conditions ma-
terially affect the amount of pension
costs allocated to the segment." The
Board believes that, in most cases, it will
be obvious to the contracting parties
whether the presence of one or more of
these conditions for a segment will ma-
terially affect the pension cost for that
segment. In cases where the impact is
not obviously known, the Board con-
templates that the contracting parties
will rely on summary estimates as a basis
for determining whether separate calcu-
lations are required. The Board believes
that over time, the need for such sum-
mary estimates will diminish. The Board
emphasizes that separate calculations
are not routinely required, even though
no two segments are likely to be identical
with respect to the actuarial factors set
forth in the Standard. The Board intends
that separate segment calculations will
be required only in those instances where
they would result in a materially differ-
ent pension cost allocation to a segment.
Several commentators noted that there
248K
Supp. No. 3
Cost Accounting Standards Board
are pension plans covering several seg-
ments that are almost completely de-
voted to performing work for the Gov-
ernment. Others noted that they had
segments which perform a relatively
negligible amount of Government work.
In either case, according to these com-
mentators, even significant differences
in pension cost factors among segments
covered by the plan would not materially
affect the amount of pension costs allo-
cated to Government contracts. Accord-
ingly, they recommended that the provi-
sions of the Standard relative to sepa-
rate computations for a segment not be
applicable to such segments.
One of the Board's primary objectives
in the Standard being promulgated to-
day is to allocate the proper amount of
pension costs to each segment. This ob-
jective is appropriate, irrespective of the
mix of Government and commercial
work of a segment or among all seg-
ments covered by a pension plan. Even
if several segments are entirely devoted
to performing work for the Government,
the allocation of pension costs among
such segment could materially affect the
amount of pension costs that are allo-
cated to particular types of contracts
in a cost accounting period. The Board
recognizes, however, that if a relatively
immaterial amount of a segment's work
is performed for the Government, any
revised allocation of pension cost for
that segment would probably have little
or no effect on the costs allocated to
Government contracts. In such a case,
the Board urges the contracting parties
give due consideration to the Board's
views on materiality.
(8) Allocation bases. The proposed
Standard required in § 413.50 (c)(1) that
contractors who compute a composite
pension cost for two or more segments
must allocate such costs on a base con-
sisting either of the salary and wages of
the participants or the number of par-
ticipants, except where the contracting
parties agree to the use of a different
base. A number of commentators stated
that in certain cases a better beneficial
or causal relationship can be obtained by
the use of other than the specified bases.
The most commonly listed practice was
the use of one base to allocate normal
cost and another base to allocate un-
funded actuarial liabilities. The Board
recognizes that in many cases the use of
other bases or a combination of bases
would provide an equitable means for al-
locating pension costs to segments. The
Board believes that it should not preclude
the use of any appropriate base. There-
fore, § 413.50 (c)(1) of the Standard
being promulgated today has been re-
vised to provide that the base to be used
for allocating composite pension costs
shall be representative of the factors on
which the pension benefits are based.
The Board still believes, however, that
under certain circumstances, a specific
base provides the best means for allo-
cating pension cost. Accordingly, § 413.50
(c) (1) still requires the use of salaries
and wages as an allocation base where
costs are calculated as a percentage of
salaries and wages, and the use of a base
consisting of the number of employees
where costs are calculated as an amount
per employee.
(9) Allocation of pension fund assets
to segments. When pension cost must be
separately calculated for a segment, it
will generally be necessary to allocate
pension fund assets to such segments.
Section 413.50(c) (5) (iii) of the proposed
Standard provided that if contractors
used different actuarial cost methods in
prior years, the allocation of assets must
be based on actuarial liabilities developed
under the Accrued Benefit actuarial cost
method. Several commentators noted
that this provision could result in an
allocation of assets to segments which is
inconsistent with the bases used to ac-
cumulate the assets. The Board agrees
with this observation. Accordingly,
§ 413.50(c) (5) of the Standard being
promulgated today provides that the
allocation of assets shall be made in a
manner consistent with the actuarial
cost method or methods used to give rise
to such assets. It should be noted, how-
ever, that such an allocation is permitted
only when contributions, disbursements,
income, and expenditures made by, or in
behalf of, a segment are not readily
determinable.
Several commentators suggested that
the Standard should be clarified with re-
gard to whether the value of the assets
to be allocated shall be the cost of the
assets, the actuarial value of the assets,
or the market value of the assets. Ac-
cordingly, the Board has provided in
§ 413.50 (c) (5) (ii) of the Standard that
the allocation shall be the actuarial value
of the assets.
Several other commentators ex-
pressed concern that the Standard
would require that specific assets be al-
located to segments. The Board never
intended an allocation of specific as-
248L
Supp. No. 3
Cost Accounting Standards Board
sets; rather, it intended that there be
an initial allocation of assets for ac-
counting purposes only. All of the assets
of a pension fund remain available to
provide benefit payments for partici-
pants in any segment. To clarify this
point, § 413.50 (c) (5) of the Standard
being promulgated today has been re-
vised to state that there shall be an
initial allocation of a share in the un-
divided pension fund assets.
During the course of the Board's re-
search several contractors and actuaries
questioned whether the proposed asset
allocation requirements prohibited con-
tractors from establishing a separate
fund for a segment. The Board does not
intend such a prohibition in the Stand-
ard being promulgated today.
(10) Pension costs of inactive partici-
pants. The proposed Standard provided
in § 413.50(c) (7) that inactive pension
plan participants shall be considered as
constituting a separate segment. This
provisions was included on the basis of
research indicating that the accumula-
tion of pension costs applicable to in-
active employees would facilitate the al-
location of such costs. However, a large
number of commentators objected to
this provision, stating that it would be
much simpler and less costly to merely
assign inactive participants to segments.
The Board continues to believe that in
certain cases the use of a separate seg-
ment to accumulate costs applicable to
inactive employees will facilitate cost al-
location. It recognizes, however, that in
other cases assignment of inactive em-
ployees to active segments will ease ad-
ministrative problems. The Board be-
lieves that either technique should re
sult in an equitable allocation of pension
cost. Accordingly, the Standard being
promulgated today specifically provides
in § 413.50 (c) (9) for the use of either
technique.
Paragraph 413.50 (c) (10) of the pro-
posed Standard required that the pen-
sion cost calculated for the segment
created for inactive participant shall
be allocated to the active segments on
the basis of the pension cost calculated
for those segments. Several commenta-
tors pointed out that such a basis may
be inappropriate in some cases. The
Board concurs and has revised § 413.50
(c) (9) of the Standard to permit more
flexibility in selecting an allocation base
under such circumstances.
(11) Other cost allocation matters.
Several commentators questioned
whether contractors must always al-
locate assets, and continue developing
fund data for a segment simply for the
purpose of amortizing an identified one-
time actuarial gain or loss attributable
to a segment. If an equitable allocation
of pension cost can be achieved without
allocating assets, it is not necessary to
do so. For example, in the case of a one-
time termination gain or loss, a contrac-
tor could isolate this gain or loss from
the other composite actuarial gains or
losses and separately credit or charge
the former gain or loss over the next
fifteen years to the segment from which
it arose. The contractor could then con-
tinue using the composite cost allocation
method (except for such separate ad-
justment) so long as there is no further
unusual experience for that segment.
The Board has amended the illustration
in § 413.60 (c) (1) of the Standard to em-
body this concept.
Paragraph 413.50 (c)(1) of the pro-
posed Standard contained a require-
ment that costs shall be calculated on a
segment basis under circumstances
where (1) a pension plan for a seg-
ment was, or becomes, merged with that
of another segment, and (2) the ratioc
of assets to actuarial liabilities for each
of the merged plans are significantly
different from one another after apply-
ing the benefits in effect after the merg-
er. In illustrating this point in § 413.60
(c) (3), it was indicated that this provi-
sion is applicable to mergers which oc-
curred prior to the effective date of the
Standard. Several commentators ex-
pressed concern over the provision, stat-
ing that retroactivity was inequitable.
They stated that it would be difficult
and expensive to analyze prior years'
pension cost, especially in cases where
the mergers arose many years ago. The
Board believes that these comments
have merit. Accordingly, the Standard
being promulgated today specifically
provides in § 413.50 (c) (4) that a re-
quirement for separate segment pension
cost calculations for mergers shall have
prospective impact only and that pen-
sion costs need not be adjusted for prior
years. Paragraph 413.60 (c) (5) has also
been revised.
One commentator noted that its seg-
ments performing Government work had
different pension cost factors than did
the other segments of the company.
However, the commentator noted that
these factors were homogeneous for the
segments performing Government work.
The commentator asked whether the
Standard requires a separate cost calcu-
248M
Supp. No. 3
Cost Accounting Standards Board
lation for each segment under such cir-
cumstances. The contractor can make a
composite calculation for the Govern-
ment segments and allocate the cost to
these segments by means of an alloca-
tion base. The contractor can, of course,
do this for the other segments. To high-
light this point the Board has added an
illustration in § 413.60 (c) (4) of the
Standard.
Two commentators asked whether a dif-
ference between the amount of pension
cost required to be funded under ERISA,
and the sum of the pension costs de-
veloped for all segments could be allo-
cated to the various segments. The Board
recognizes that it is theoretically pos-
sible for the sum of all pension costs
calculated for segments of an organiza-
tion to be materially less than the mini-
mum amount required to be funded
pursuant to ERISA. However, such a dif-
ference may not be assigned to the
period for which funding is required. The
Board has previously emphasized that
the amount of pension cost assignable to
a cost accounting period is not neces-
sarily the same as the amount funded
for that period. If the amount required
to be funded exceeds the amount calcu-
lated, the excess amount funded is sub-
ject to the provisions of 4 CFR Part 412
§ 412.50 (c) (1)) which states that
"Amounts funded in excess of the pen-
sion cost computed for a cost accounting
period pursuant to the provisions of this
Standard shall be applied to pension
costs of future cost accounting periods.”
(12) Closing of a segment. The pro-
posed Standard contained a requirement
in § 413.50 (c) (13) that when a segment
is closed and a significant number of em-
ployees are terminated, the contractor
shall calculate a gain or loss from the
plan applicable to that segment, irre-
spective of whether the pension plan is
terminated. A number of commentators
express their concern over this provision.
Some questioned whether the "net gain
or loss" was an actuarial gain or loss and,
if so, how it related to other sections of
the Standard. Other commentators pre-
sumed that this section dealt with the
termination of a plan; they stated that,
in such an event, the provisions of ERISA
and regulations of the Pension Benefit
Guarantee Corporation would prevail.
They suggested that this section of the
Standard be made applicable only to pen-
sion plans that are being continued.
As a general rule, the Standard being
promulgated today is based on the con-
cept that material actuarial gains and
losses applicable to a segment will be
taken into account in future cost ac-
counting periods in determining the costs
for the segment. However, a problem
arises in cases where a segment is closed.
Because there are no future periods in
which to adjust previously-determined
pension costs applicable to that segment,
a means must be developed to provide a
basis for adjusting such costs. This ad-
justment is not an actuarial gain or loss
as defined in the Standard. To clarify its
intent, the Board has revised § 413.50
(c) (12) of the Standard and the related
illustration in § 413.60 (c) (8). The
Standard now states that when a seg-
ment is closed, the contractor shall de-
termine the difference between the ac-
tuarial liability for the segment and the
market value of the assets allocated to
the segment.
The Board recognizes that, in some
cases, the closing of a segment could be
associated with a termination of a plan.
Several commentators noted that, in
such a case, the actuarial liability for
that segment could be greatly influenced
by regulations developed pursuant to the
provisions of ERISA. The Standard spe-
cifically permits the effect of such regu-
lations to be considered in determining
the actuarial liability for the segment.
It should be noted that the provisions
of this section are appropriate whenever
a segment performing a material amount
of Government business is closed, ir-
respective of whether the closing is
caused by the completion of a contract or
an organizational change, or whether the
closing results in a complete or partial
termination of the plan. The Board em-
phasizes that the purpose of this provi-
sion is to serve as a basis for recognizing
and adjusting pension costs previously
allocated to the segment being termi-
nated. Such a requirement is independent
of whether employees are terminated
from the plan.
(13) Application to defined-contribu-
tion and certain other plans. A number
of commentators questioned whether the
provisions of the proposed Standard are
applicable to defined-contribution and
multiemployer pension plans. The Board
notes that Standard 412 specifically pro-
vides that, for a defined contribution
pension plan, the pension cost for a cost
accounting period is the net contribution
required to be made for that period.
Standard 412 provides also that a multi-
employer pension plan established pur-
suant to the terms of a collective bar-
gaining agreement shall be considered to
248N
Supp. No. 3
Cost Accounting Standards Board
be a defined-contribution pension plan
for purposes of this Standard. Thus, the
only provisions of this Standard that are
applicable to these plans are those
dealing with the allocation of costs to
segments.
Specific questions were raised with re-
gard to the applicability of the asset
valuation requirements to insured plans.
Paragraph 413.50 (b) (4) of the proposed
Standard provided that the asset valua-
tion requirements therein are not appli-
cable to insured plans whose funds are
commingled with those of the insurance
company. Several commentators stated
that this provision was unclear; they
questioned whether group deposit admin-
istration annuity contracts, immediate
participation guarantee contracts, or
separate accounts deposit administration
contracts are subject to the asset valua-
tion provisions of the Standard. The
Board intends that such contracts be
subject to these provisions of the Stand-
ard. However, the asset valuation pro-
visions do not apply to contracts under
which insurance companies guarantee a
rate of return. The Board believes that,
in such circumstances, the recognition of
unrealized appreciation or depreciation
on pension fund assets does not alter the
basic contractual agreement entered into
between the plan sponsor and the insur-
ance company. Paragraph 413.50(b) (4)
of the Standard has been revised to
clarify this point.
(14) Costs and benefits. The antici-
pated benefits of this Standard are in-
creased consistency and uniformity in
measuring actuarial gains and losses and
assigning them to cost accounting peri-
ods, and better allocation of pension costs
to segments of an organization. The
Board believes that such improved
measurements and allocations will result
in more equitable allocation of pension
costs to cost objectives, including Gov-
ernment contracts. By providing criteria
for controversial aspects of pension cost
accounting, the Standard is also expected
to reduce disagreements among contract-
ing parties.
In its research leading to the develop-
ment of this Standard, the Board noted
a number of disagreements between con-
tracting parties relating to the disposi-
tion of termination gains attributable to
segments performing Government con-
tracts. The Board believes that the
Standard will diminish, if not eliminate,
such disagreements.
On May 19, 1977, the Comptroller Gen-
eral of the United States issued a report
to the Congress entitled "Contractor
Pension Plan Costs: More Control Could
Save the Department of Defense Mil-
lions." The General Accounting Office
selected, at random, nine Department of
Defense prime contractors and examined
the pension costs of these contractors.
The report states that a substantial
amount of questionable pension plan
costs were, or may be, charged to Gov-
ernment contracts. The report at-
tributes much of the questionable pen-
sion costs to the inequitable allocation of
pension plan costs between Government
and commercial business. The report
states that the Standard being pro-
mulgated today deals with, and should
correct, many of the problems cited. The
following are examples of these prob-
lems and the provision of the Standard
which deals with them.
(a) A contractor, which calculates pen-
sion cost by segment, does not equitably al-
locate assets to these segments each year;
the amounts allocated do not recognize net
annual capital contributions by the seg-
ments nor the segments shares in the capital
growth of pension fund investments. Sec-
tion 413.50(c) (5), (6) and (7) deals with
this subject.
(b) The pension fund of a contractor
which acquired a commercial subsidiary is
in a surplus position. As a result, pension
contributions are not being made for either
the Government segments or the commercial
subsidiary. Because the surplus was ac-
cumulated mainly through Government
reimbursements that exceeded the amounts
required, the Government's proportional
share of the surplus has been diluted by the
annual pension plan costs of the commercial
subsidiary. Section 413.50 (c) (3) deals with
this subject.
(c) One contractor used corporate-wide
assumptions to calculate pension cost. How-
ever, the Government-oriented segments had
much higher employee termination rates
than did the other segments. The cost to
the Government would have been much less
if separate pension cost calculations were
made for the Government-oriented segments,
using the appropriate termination assump-
tions. Section 413.50 (c) (2) deals with this
subject.
The Board recognizes that the imple-
mentation of this Standard may result
in some increased administrative costs
by defense contractors. The Board's re-
search shows that any incremental ad-
ministrative costs incurred will be pre-
dominantly reiated to increased actuarial
fees. After discussing with actuaries the
nature and scope of increased actuarial
work required, the Board is confident
248 0
Supp. No. 3
Cost Accounting Standards Board
that the increased
administrative costs
required to implement the proposed
Standard are relatively small and do not
approach the benefits that will be
achieved by the proposed Standard.
As required by 719(g) of the Defense
Production Act of 1950, as amended, the
Board has evaluated the potential infla-
tionary effect of this Standard. The
Standard may cause a shift of pension
costs from earlier periods to later periods
or vice versa. It may also cause a shift
of pension costs among various portions
of a contractor's business. In the long
run, however, total pension costs will not
increase or decrease as a result of this
Standard. As already noted, increased
administrative costs attributable to the
Standard are expected to be minimal.
Accordingly, the Board concludes that
this Standard will have no inflationary
effect.
(15) Effective date. At the time of pro-
mulgation of each previous Standard, the
Board followed the policy of reserving
the effective date of the Standard, pend-
ing the expiration of 60 calendar days
of continuous session of the Congress fol-
lowing the date on which the Standard
was transmitted. Section 413.80 of the
Standard being promulgated today spec-
ifies the effective date. The date is in-
cluded at this time to afford contractors
and contracting agencies the earliest pos-
sible notification so that they can begin
to make implementation plans. In the
event any subsequent event makes it
necessary to rescind or amend that date,
such action will be taken by appropriate
notice in the FEDERAL REGISTER.
248P
Supp. No. 3
Cost Accounting Standards Board
(RESERVED)
249
Cost Accounting Standards Board
PART 414-COST ACCOUNTING STAND-
ARD COST OF MONEY AS AN ELE-
MENT OF THE COST OF FACILITIES
CAPITAL
Sec.
414.10 General applicability.
414.20 Purpose.
414.30
414.40
414.50
414.60
414.70
Definitions.
Fundamental requirement.
Technique for application.
Illustrations.
Exemptions.
414.80 Effective date.
AUTHORITY. Sec. 719 of the Defense Produc-
tion Act of 1950, as amended. Pub. L. 91–379.
50 USC App. 2168.
§ 414.10 General applicability.
General applicability of this Cost Ac-
counting Standard is established by
$ 331.30 of the Board's regulations on ap-
plicability, exemption, and waiver of the
requirement to include the Cost Account-
ing Standards contract clause in negoti-
ated defense prime contracts and sub-
contracts (4 CFR 331.30).
§ 414.20 Purpose.
The purpose of this Cost Accounting
Standard is to establish criteria for the
measurement and allocation of the cost
of capital committed to facilities as an
element of contract cost. Consistent ap-
plication of these criteria will improve
cost measurement by providing for allo-
cation of cost of contractor investment in
facilities capital to negotiated contracts.
§ 414.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are defined
in Part 400 of this chapter have the
meanings ascribed to them in that part
unless the text demands a different defi-
nition or the definition is modified in par-
agraph (b) of this section:
(1) Business Unit. Any segment of an
organization, or an entire business or-
ganization which is not divided into
segments.
(2) Cost of Capital Committed to Fa-
cilities. An imputed cost determined by
applying a cost of money rate to facili-
ties capital.
(3) Facilities Capital. The net book
value of tangible capital assets and of
those intangible capital assets that are
subject to amortization.
(4) Intangible Capital Asset. An asset
that has no physical substance, has more
than minimal value, and is expected to
be held by an enterprise for continued
use or possession beyond the current ac-
counting period for the benefits it yields.
(5) Tangible Capital Asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or
possession beyond the current account-
ing period for the services it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 414.40 Fundamental requirement.
(a) A contractor's facilities capital
shall be measured and allocated in ac-
cordance with the criteria set forth in
this Standard. The allocated amount
shall be used as a base to which a cost of
money rate is applied.
(b) The cost of money rate shall be
based on interest rates determined by
the Secretary of the Treasury, pursuant
to Pub. L. 92-41 (85 Stat. 97).
(c) The cost of capital committed to
facilities shall be separately computed
for each contract using facilities capital
cost of money factors computed for each
cost accounting period.
§ 414.50 Techniques for application.
(a) The investment base used in com-
puting the cost of money for facilities
capital shall be computed from account-
ing data used for contract cost purposes.
The form and instructions stipulated in
this Standard shall be used to make the
computation.
(b) The cost of money rate for any
cost accounting period shall be the arith-
metic mean of the interest rates specified
by the Secretary of the Treasury pursu-
ant to Pub. L. 92-41 (85 Stat 97). Where
the cost of money must be determined on
a prospective basis the cost of money rate
shall be based on the most recent avail-
able rate published by the Secretary of
the Treasury.
(c) (1) A facilities capital cost of
money factor shall be determined for
each indirect cost pool to which a signifi-
cant amount of facilities capital has been
allocated and which is used to allocate
indirect costs to final cost objectives.
(2) The facilities capital cost of
money factor for an indirect cost pool
shall be determined in accordance with
Form CASB-CMF, and its instructions
which are set forth in Appendix A. One
form will serve for all the indirect cost
pools of a business unit.
250
Cost Accounting Standards Board
(3) For each CAS-covered contract,
the applicable cost of capital committed
to facilities for a given cost accounting
period is the sum of the products ob-
tained by multiplying the amount of al-
location base units (such as direct labor
hours, or dollars of total cost input)
identified with the contract for the cost
accounting period by the facilities capital
cost of money factor for the correspond-
ing indirect cost pool. In the case of
process cost accounting systems the con-
tracting parties may agree to substitute
an appropriate statistical measure for
the allocation base units identified with
the contract.
§ 414.60 Illustrations.
The use of Form CASB-CMF and other
computations anticipated for this Cost
Accounting Standard are illustrated in
Appendix B.
§ 414.70 Exemption.
(a) This Standard shall not apply to
any prime contract or subcontract pro-
viding that (i) the date of award of such
contract, or (ii) if the contractor has
submitted cost or pricing data, the date
of final agreement on price as shown on
the contractor's signed certificate of cur-
rent cost or pricing data, precedes the
effective date of this Standard.
(b) This Standard shall not apply
where compensation for the use of tangi-
ble capital assets is based on use rates
or allowances such as provided by the
provisions of Federal Management Cir-
cular 73-8 (Cost Principles for Educa-
tional Institutions), Federal Manage-
ment Circular 74-4 (Principles for De-
termining Costs Applicable to Grants
and Contracts with State and Local Gov-
ernments), § 15.402-1 (a) of the Armed
Services Procurement Regulation, or
other appropriate Federal procurement
regulations.
§ 414.80 Effective date.
The effective date of this Cost Ac-
counting Standard is October 1, 1976.

FORM CASB-CMF
CONTRACTOR:
BUSINESS UNIT:
COST ACCOUNTING PERIOD:
APPENDIX A
FACILITIES CAPITAL
COST OF MONEY FACTORS COMPUTATION
1. APPLICABLE
COST OF MONEY
RATE
2. ACCUMULATION
BUTION OF N.B.V.
& DIRECT DIST RI-
BUSINESS
UNIT
FACILITIES
CAPITAL
RECORDED
LEASED PROPERTY
CORPORATE OR GROUP
TOTAL
UNDISTRIBUTED
DISTRIBUTED
OVERHEAD
POOLS
G&A EXPENSE
POOLS
. TOTAL
ADDRESS:
3. ALLOCATION
OF
UNDISTRIBUTED
4. TOTAL
5. COST OF MONEY
6. ALLOCATION
NET BOOK
VALUE
FOR THE COST
ACCOUNTING PERIOD
BASE FOR
THE PERIOD
7. FACILITIES
CAPITAL COST OF
MONEY FACTORS
BASIS OF
ALLOCATION
COLUMNS
2+3
COLUMNS
1X4
IN UNIT(S)
OF MEASURE
///.
COLUMNS
251
Cost Accounting Standards Board
APPENDIX A
INSTRUCTIONS FOR FORM Case-CMF
Purpose
The purpose of this form is to (a) accu-
mulate total facilities capital net book values
allocated to each business unit for the con-
tractor cost accounting period and (b) con-
vert those values to facilities capital cost of
money factors applicable to each overhead
or G&A expense allocation base employed
within a business unit.
Basis
All data pertain to the cost accounting
period for which the contractor prepares
overhead and G&A expense allocations. The
cost of money computations should be con-
patible with those
those allocation procedures.
More specifically, facilities capital values used
should be the same values that are used to
generate depreciation or amortization that
is allowed for Federal Government contract
costing purposes; land which is integral to
the regular operation of the business unit
shall be included.
Applicable Cost of Money Rate (Col. 1)
Enter here the rate as computed in ac-
cordance with § 414.50(b).
Accumulation and Direct Distribution of Net
Book Value (Col. 2)
Recorded, Leased Property, Corporate.—
The net book value of facilities capital items
in this column shall represent the average
balances outstanding during the cost ac-
counting period. This applies both to items
that are subject to periodic depreciation or
amortization and also to such items as land
that are not subject to periodic write-offs.
Unless there is a major fluctuation, it will
be adequate to ascertain the net book of
these assets at the beginning and end of
each cost accounting period, and to compute
an average of those two sets of figures. “Re-
corded" facilities are the facilities capital
items owned by the contractor, carried on the
books of the business unit and used in its
regular business activity. "Leased property"
is the capitalized value of leases for which
constructive costs of ownership are allowed
in lieu of rental costs under Government
procurement regulations. Corporate or group
facilities are the business unit's allocable
share of corporate-owned and leased facili-
ties. The net book value of items of facilities
capital which are held or controlled by the
home office shall be allocated to the business
unit on a basis consistent with the home of-
fice expense allocation.
Distributed and Undistributed.—All facili-
ties capital items that are identified in the
contractor's records as solely applicable to
an organizational unit corresponding to a
specific overhead, G&A or other indirect cost
pool which is used to allocate indirect costs
to final cost objectives, are listed against the
applicable pools and are classified as "dis-
tributed." "Undistributed" is the remainder
of the business unit's facilities capital. The
sum of "distributed" and "undistributed"
must also correspond to the amount shown
on the "total" line.
Allocation of Distributed.-List in the
narrative column all the overhead and G&A
expense pools to which "distributed" facili-
ties capital items have been allocated. Enter
the corresponding amounts in (Col. 2). The
sum of all the amounts shown against specific
overhead and G&A expense pools must corre-
spond to the amount shown in the "dis-
tributed" line.
Allocation of Undistributed (Col. 3)
Business unit “undistributed" facilities are
allocated to overhead and the G&A expense
pools on any reasonable basis that approxi-
mates the actual absorption of depreciation
or amortization of such facilities. For in-
stance, the basis of allocation of undistrib-
uted assets in each business unit between,
e.g., engineering overhead pool and the man-
ufacturing overhead pool, should be related
to the manner in which the expenses gener-
ated by these assets are allocated between
the two overhead pools. Detailed analysis of
this allocation is not required where esscn-
tially the same results can be obtained by
other means. Where the cost accounting sys-
tem for purposes of Government contract
costing uses more than one "charging rate"
for allocating indirect costs accumulated in
a single cost pool, one representative bass
may be substituted for the multiplicity of
bases used in the allocation process. The net
book value of service center facilities capital
items appropriately allocated should be in-
cluded in this column. The sum of the en-
tries in Column 3 is equal to the entry in
the undistributed line, Column 2.
A supporting work sheet of this allocation
should be prepared if there is more than
one service center or other similar "inter-
mediate" cost objective involved in the re-
allocation process.
Alternative Allocation Process-As an al-
ternative to the above allocation process all
the undistributed assets for one or more serv-
ice centers or similar intermediate cost ob-
jectives may be allocated to the G&A ex-
pense pool. Consequently, the cost of money
for these undistributed assets will be dis-
tributed to the final cost objectives on the
same basis that is used to allocate G&A ex-
pense. This procedure may be adopted for
any cost accounting period only when the
contracting parties agree (a) that the de-
preciation or amortization generated by these
undistributed assets is immaterial or (b)
that the results of this alternative procedure
are not likely to differ materially from those
which would be obtained under the "regular"
allocation process described previously.
Total Net Book Value (Col. 4)
The sum of Columns 2 and 3. The total of
this column should agree with the business
unit's total shown in Column 2.
252
Cost Accounting Standards Board
Cost of Money for the Cost Accounting Pe-
riod (Col. 5)
Multiply the amounts in Column 4 by the
percentage rate in Column 1.
Allocation Base for the Period (Col. 6)
Show here the total units of measure used
to allocate overhead and G&A expense pools
(e.g., direct labor dollars, machine hours, to-
tal cost input, etc.). Include service centers
that make charges to final cost objectives.
Each base unit-of-measure must be compati-
ble with the bases used for applying overhead
in the Federal Government contract cost
computation.
The total base unit of measure used for
allocation in this column refers to all work
done in an organizational unit associated
with the indirect cost pool and not to Gov-
ernment work alone.
Facilities Capital Cost of Money Factors
(Col. 7)
The quotients of cost of money for the
cost accounting period (Col. 5) separately
divided by the corresponding overhead or
G&A expense allocation bases (Col. 6). Carry
each computation to five decimal places.
This factor represents the cost of money
applicable to facilities capital allocated to
each unit of measure of the overhead or G&A
expense allocation base.
APPENDIX B
EXAMPLE.—ABC CORPORATION
ABC Corporation has a home office that
controls three operating divisions (Business
Units A, B & C). The home office includes
an administrative computer center whose
costs are allocated separately to the busi-
ness units. The separate allocation conforms
to the requirements specified in the Cost Ac-
counting Standard No. 403. Tables I through
VI deal with home office expense allocations
to business units.
The A Division is a business unit as defined
by the CASB, and it uses one engineering
and one manufacturing overhead pool to ac-
cumulate costs for charging overhead to final
cost objectives. In addition the indirect cost
allocation process also uses two "service cen-
ters" with their own indirect cost pools: oc-
cupancy and technical computer center.
The costs accumulated in the occupancy
pool are allocated among manufacturing
overhead, engineering overhead, and the
technical computer center on the basis of
floor space occupied. The costs accumulated
in the technical computer center cost pool
are allocated to users on the basis of a CPU
hourly rate. Some of these allocations are
made to engineering or manufacturing over-
head while others are allocated direct to final
cost objectives.
At the business unit level, all the indirect
expense incurred is regarded either as an en-
gineering or manufacturing expense. Thus
the sole item that enters into the business
unit G&A expense pool is the allocation re-
ceived by the A Division from the home office.
Operating results for the A Division are
given in Table VII. Facilities capital items
for the division are given in Table IX.
The example is based on a single set of il-
lustrative contract cost data given in Table
VIII. Since two methods, the "regular" and
the "alternative" method, are potentially
available for computing cost of money on fa-
cilities capital items two sets of different re-
sults can be considered.
In addition, total cost input is used in the
example as the allocation base for the G&A
expense. Two variations of this example have
been prepared to illustrate the impact of ex-
cluding or including cost of money from to-
tal cost input. Variation I, summarized in
Table XIII, excludes cost of money from the
cost input allocation base. Variation II, sum-
marized in Tables XVII and XVIII, includes
cost of money in the cost input allocation
base.
Throughout the example, where appropri-
ate, cross references have been made to the
text of the relevant parts of the Standard.
253
Cost Accounting Standards Board
VARIATION I.—Total Cost Input ALLOCATION BASE Excludes CoST OF MONEY
TABLE I.-Net book value of home office facilities capital
Administrative computer center facilities capital.
Other home office facilities capital…….
Total..
Dec. 31, 1974
Dec. 31, 1975
$550,000
420,000
$450,000
380,000
970,000
830,000
The assets in the above table generate allowable depreciation or amortization, as explained in Instructions for
Form CASB-CMF (Basis). Thus they should be included in the asset base for cost of money computation.
TABLE II.-Home office facilities capital annual average balances
Administrative computer center facilities capital.
Other home office facilities capital………
Total.
$500,000
400,000
900,000
The above averages are based on data in Table 1 computed in accordance with the criteria in Instructions for
Form CASB-CMF (Recorded, Leased Property, Corporate).
$970,000+$830,000-$1,800,000÷2-$900,000
TABLE III.—Home office depreciation and amortization for 1975
Administrative computer center facilities capital..
Other home office facilities capital..
Total.
$100,000
40,000
140,000
TABLE IV.—Allocation of ABC home office expenses to divisions (business units)
Total
expense
Allocation to business units
A
B
C
Administrative computer center.
Other home office.
Total.
$1,800,000
4,800,000
$900,000
2,400,000
$900,000
1,200,000
$1,200,000
6,600,000
3,300,000
2,100,000
1,200,000
The above allocation is carried out in accordance with 4 CFR Part 403. The expense allocated to individual business
units above includes depreciation and amortization as reflected in Table V.
TABLE V.-Depreciation and amortization component of ABC home office expense
Administrative computer center.
Other home office.
Total.
Total deprecia-
tion and amorti-
zation expense
A
Allocation to business units
B
C
$100,000
40,000
140,000
$50,000
20,000
70,000
$50,000
10,000
$10,000
60,000
10,000
TABLE VI.—Allocation of home office facilities capital to business units
(a) Depreciation and amortization allocation in Table V converted to percentages.
Administrative computer center.
Other home office.
Total depre-
ciation and
Allocation to business units (in percent)
amortization
expense
(in percent)
A
B
C
100
100
50
☺☺
50
915995
50
25
25
(b) Application of percentages in (a) to average net book values in Table II, in accordance with criteria in Instruc-
tions for Form CASB-CMF (Recorded, Leased Property, Corporate).
Administrative computer center facilities capital.
Other home office facilities capital…….
Total..
Total net
book value
Allocation to business units
A
B
C
$500,000
400,000
900,000
$250,000
200,000
450,000
$250,000
100,000
350,000
$100,000
100,000
254
Cost Accounting Standards Board
TABLEVII.—“A” division 1975 operating results
1
Total cost input
and G. & A.
Fixed price,
CAS-covered
contracts
Cost
reimbursement, Commercial and
CAS-covered
contracts
other work
Direct material:
Purchased parts.
Subcontract items.
Total
Direct labor and overhead:
Engineering labor.
$2, 000, 000
21, 530, 000
$100,000
11,750,000
$100,000
7, 205, 000
$1,800,000
2,575,000
23, 530,000
11, 850,000
7,305,000
4,375,000
2,000,000
.1,500,000
Engineering overhead (80 pct of direct
500,000
engineering labor).
1,600,000
1,200,000
Manufacturing labor…
400,000
3,000,000
1,200,000
Manufacturing overhead (200 pet of
200,000
1,600,000
direct management labor).
6,000,000
Other direct charges:
2,400,000
400,000
3,200,000
Technical computer center direct
charge-2,280 h at $250/h.
570,000
200,000
370,000
Total cost input (excluding cost of
money)..
G. & A. (8.99 pct of cost input)
36, 700,000
Total..
3,300,000
40, 000, 000
18, 350, 000
1,650,000
.. 20, 000, 000
9,175,000
825,000
10, 000, 000
9,175,000
825,000
10, 000, 000
TABLE VIII.—Cost data for the contract
Purchased parts.
Subcontract items.
Technical computer time 280 h at $250/h
Engineering labor
Engineering overhead at 80 pct.
Manufacturing labor…
Manufacturing overhead at 200 pct.
Total cost input (excluding cost of money).
G. & A. at 8.99 pct. ---
Total cost input and G. & A. (excluding cost of money).
TABLE IX.-Division A facilities capital
$85,000
990,000
70,000
330,000
264,000
1,210,000
2,420,000
5, 369,000
483,000
5,852,000
Average net book values are computed in accordance with Instructions to Form CASB-CMF. Average figures
only are given, the underlying beginning and ending balances for 1975 have not been reproduced.
Name of indirect cost pool the asset is associated with
Engineering overhead..
Manufacturing overhead
Technical computer center..
Occupancy
Facilities capital recorded by division A (see form CASB-CMF instructions for
description of recorded)
Allocated from home office, table VI.
Total division A………
Average
net book value
Annual
depreciation
$320,000
4,500,000
$40,000
900,000
450,000
90,000
3,000,000
200,000
8, 270, 000
450,000
1,230,000
8,720,000
TABLE X.-Allocation of undistributed facilities capital
(a) Occupancy Pool Assets. Total occupancy pool expenses are assumed to be $1,000,000 of which $200,000 is deprecia-
tion per Table IX. Allocation of the $3,000,000 net book value of assets per Table IX is performed on the basis of
floor space utilization.
Engineering
Manufacturing.
Technical computer.
Total..
Indirect cost pool
Occupancy
expense and
depreciation
allocation
Percent of total
floor space
utilized
Asset
allocation
$200,000
750,000
50,000
20
75
225
$600,000
2,250,000
150,000
$1,000,000
100
$3,000,000
(b) Technical Computer Center Assets. Total technical computer center expenses for the year are assumed to be
$770,000 including $90,000 depreciation per Table IX and $50,000 charge from the occupancy pool per (a) above. A
charging rate of $250 per hour is computed assuming a total of 3,080 chargeable CPU hours per annum. The net book
value of assets amounting to $600,000 ($450,000 per Table IX plus the $150,000 allocated per (a) above] is allocated on the
basis of CPU hours utilized.
255'
Cost Accounting Standards Board
TABLE X.-Allocation of undistributed facilities capital-Continued
Overhead pool or cost objective
Hours
charged
Amount
charged
Percent
Asset
allocation
Fixed price contracts, table VII..
Cost reimbursement contracts, table VII
800
1,480
$200,000
26
$156,000
370,000
Engineering overhead pool……..
800
200,000
098998
48
288,000
26
156,000
Total....
3,080
770,000
100
600,000
(c) Summary of Undistributed Facilities Capital Allocation. Undistributed (per Table IX).
Technical computer center..
Occupancy.
$450,000
3, 000, 000
Total..
3, 450, 000
Distribution per (a) or (b) above of balances to overhead pools that result in charges direct to final cost objectives.
Overhead pool
(a)
(b)
Total
Engineering.
Manufacturing..
$600,000
2,250,000
$156,000
Technical computer center (direct charge to contracts)-
Total..
2,850,000
444, 000
600, 000
$756, 000
2,250,000
444, 000
3,450,000

FORM CASB.CMP
TABLE XI
FACILITIES CAPITAL
COST OF MONEY FACTORS COMPUTATION
("Regular" Method Cost of Money
Excluded from Total Cost Input)
-
ADDRESS:
CONTRACTOR:
BUSINESS UNIT:
ABC Corp.
A Division
COST ACCOUNTING PERIOD: Y.E.
1. APPLICABLE
COST OF
RATE
MONEY
BUSINESS
UNIT
FACILITIES
CAPITAL
12/31/75
RECORDED
2. ACCUMULATION
A DIRECT DIST RI-
BUTION OF N.B.V.
3. ALLOCATION
OF
UNDISTRIBUTED
4. TOTAL
NET BOOK
VALUE
5. COST OF MONEY
FOR THE COST
ACCOUNTING PERIOD
6. ALLOCATION
BASE FOR
THE PERIOD
7. FACILITIES
|CAPITAL COST OF
MONEY FACTORS
Table IX
8,270,000
BASIS OF
ALLOCATION
COLUMNS
2+3
COLUMNS
1X4
LEASED PROPERTY
CORPORATE OR GROUP Table VI
TOTAL
UNDISTRIBUTED
450,000
8,720,000
Worksheet
Table X
DISTRIBUTED
3,450,000
5,270,000
IN UNIT(S)
OF MEASURE
Table VII
COLUMNS
Engineering
Table IX
Manufacturing
Table IX
320,000
4,500,0^ი
Technical Computer
756,000 1,076,000
2,250,000 6,750,000
444,000 444,000
86,080
540,000
35,520
$2,000,000
$3,000,000
2,280 hr 15.57895
.04304
18
OVERHEAD
POOLS
G&A Expense
Table VI
450,000
GOA EXPENSE
POOLS
TOTAL
450,000
36,000
$36,700,000
.00098
5,270,000
3,450,000 8,720,000
697,600 /////////
256
Cost Accounting Standards Board

FORM CASU-CMP
CONTRACTOR:
ABC Corp.
BUSINESS UNIT: A Division
TABLE XII
FACILITIES CAPITAL
COST OF MONEY FACTORS COMPUTATION
("Alternative" Method - Cost of Money
Excluded from Total Cost Input)
ADDRESS:
1. APPLICABLE
2. ACCUMULATION
COST ACCOUNTING PERIOD: Y.E.
COST OF MONEY
RATE
2
& DIRECT DIST RI-
BUTION OF N.B.V.
3. ALLOCATION
OF
UNDISTRIBUTED
12/31/75
RECORDED
Table IX
8,270,000
BASIS OF
ALLOCATION
LEASED PROPERTY
BUSINESS
UNIT
CORPORATE OR GROUP Table VI
450,000
FACILITIES
CAPITAL
TOTAL
UNDISTRIBUTED
8.720.000
3,450,000
All to G&A
Expense
Pool
DISTRIBUTED
5,270,000
- 10 -
OVERHEAD
POOLS
4. TOTAL
NET BOOK
VALUE
5. COST OF MONEY
FOR THE COST
| ACCOUNTING PERIOD
6. ALLOCATION
BASE FOR
THE PERIOD
7. FACILITIES
CAPITAL COST OF
MONEY FACTORS
COLUMNS
2+3
COLUMNS
1X4
IN UNIT(S)
OF MEASURE
COLUMNS
Table VII
Engineering
Table IX
Manufacturing
320,000
Table IX 4,500,000
320,000
4,500,000
25,600
360,000
$2,000,000
$3,000,000
.0128
.12
G&A Expense
Table VI
450,000 3,450,000 3,900,000
312,000
$36,700,000
.00850
G&A EXPENSE
POOLS
TOTAL
5,270,000 3,450,000 8,720,000 697,600
TABLE XIII.—Summary of cost of money computation on facilities capital (cost of money excluded from total cost input)
Computation
Allocated
using regular
Allocation base
to contract
table VIII
cost of money
Computation
using alternative
facilities, capital Amount facilities capital,
factor, table XI
Amount
cost of money
factor, table XII
Engineering labor..
Manufacturing labor.
Technical computer time.
Cost input..
$330,000
$1,210,000
1 280
$5,369,000
0.04304
. 18
15.57895
.00098
$14, 203
217,800
0.0128
.12
4,362
5, 261
.00850
$4, 224
145, 200
45, 636
Total cost of money on facilities
capital...
241, 626
195, 060
1 Hours.
VARIATION II. TOTAL COST INPUT ALLOCATION BASE INCLUDES COST OF MONEY
TABLE XIV.—Recomputation of “A” division total cost input to reflect inclusion of cost of money
(a) Regular method:
Total cost input per table VII.
Cost of money applicable to facilities capital identified with overhead pools per subtotal in
column 5, table XV...
$36, 700, 000
661, 600
Total cost input including cost of money..
37, 361, 600
(b) Alternative method:
Total cost input per table VII..
Cost of money applicable to facilities capital identified with overhead pools per subtotal in
column 5, table XVI..
Total cost input including cost of money.
36,700,000
385, 600
37,085,600
257
Cost Accounting Standards Board

FORM CASB-CMP®
CONTRACTORI
ABC Corp.
BUSINESS UNIT: A Division
TABLE XY
FACILITIES CAPITAL
COST OF MONEY FACTORS COMPUTATION
("Regular" Method - Cost of Money
Included in Total Cost Input)
ADORESS:
1. APPLICABLE
2. ACCUMULATION
COST ACCOUNTING PERIOD: Y.E. COST OF NO
HONEY
12/31/75
RATE.
& DIRECT DIST RI-
BUTION OF N.S.V.
1 ALLOCATION
OF.
UNDISTRIBUTED
4. TOTAL
NET BOOK
VALUE
•
RECORDED
Table IX
8,270,000
BASIS OF
ALLOCATION
COLUMNS
2+3
LEASED PROPERTY
BUSINESS
UNIT
CORPORATE Or group Table VI
450,000
FACILITIES
CAPITAL
TOTAL
UNDISTRIBUTED
8,720,000
Worksheet
Table X
DISTRIBUTED
3,450,000
5,270,000
13
S. COST OF MONEY
FOR THE COST
ACCOUNTING PERIOD
6. ALLOCATION
BASE FOR
THE PERIOD
7. FACILITIES
CAPITAL COST OF
MONEY FACTORS
COLUMNS
1X4
IN UNIT(S)
OF MEASURE
COLUMNS
Table VII
&
Table XIV
Engineering
Manufacturing
Table IX
Table IX
320,00
4,500,000
Technical Computer
756,000 1,076,000
2,250,000 6.750.000
444,000 444,000
86,080
$2,000,000
.04304
540.000
$3.000.000
18
35,520
2,280 hr 15.57895
OVERHEAD
POOLS
Subtotal: Cost of Money
to be included in Total
Cost Input
G&A Expense
Table VI
450,000
G&A EXPENSE
POOLS
TOTAL
FORM CASD-CMP
661,600
450,000
36,000
$37,361,600
.00096
5,270,000
3,450,000 | 8,720,00
697,600

TABLE XVI
FACILITIES CAPITAL
COST OF MONEY FACTORS COMPUTATION
("Alternative" Method - Cost of Money
Included in Total Cost Input)
ADDRESS:
CONTRACTOR:
ABC Corp.
EUSINESS UNIT: A Division
COST ACCOUNTING PERIOD: Y.E.
1. APPLICABLE
COST OF
RATE
MONE
2. ACCUMULATION
& DIRECT DIST RI-
BUTION OF N.B.V.
3. ALLOCATION
OF
UNDISTRIBUTED
4. TOTAL
NET BOOK
VALUE
5. COST OF MONEY
FOR THE COST
| ACCOUNTING PERIOD
6. ALLOCATION
BASE FOR
THE PERIOD
7. FACILITIES
CAPITAL COST OF
MONEY FACTORS
14 -
BUSINESS
UNIT
FACILITIES
CAPITAL
12/31/75
RECORDED
Table IX
LEASED PROPERTY
CORPORATE Or groupTable VI
TOTAL
UNDISTRIBUTED
DISTRIBUTED
8,270,000
BASIS OF
ALLOCATION
COLUMNS
450,000
8,720,000
3,450,0
5.270.000
All to G&A
Expense
Pool
COLUMNS
1X4
IN UNIT(S)
OF MEASURE
COLUMNS
Table VII
&
Table XIV
Engineering
Table IX
Manufacturing Table IX
320,000
4,500,000
320,000
4,500,000
25,600
360,000
$2.000.000
$3,000,000
0128
.12
OVERHEAD
POOLS
Subtotal: Cost of Money
to be included in Total
Cost Input
385,600
G&A Expense
Table VI
450,000 3,450,0 3,900,000
312,000 $37,085,60
00841
GLA EXPENSE
POOLS
TOTAL
5,270,000 3,450, k,720,000
697,600
258
Cost Accounting Standards Board
TABLE XVII.-Summary of cost of money computation on facilities capital (cost of money included in total cost input-
Engineering labor.
Allocation base
Manufacturing labor.
Technical computer time.
Cost of money related to overheads.
Cost of money above to be included in cost input.
Cost input, table VIII.
Cost input including cost of money.
Total cost of money on facilities capital..
¡ Ilours.
regular method)
Allocated to
contract,
table VIII
$330,000
$1,210,000
i 280
$236, 365
$5, 369, 000
Computation
using regular
facilities, capital
cost of money
factor, table XV
Amount
0.04304
.18
15.57895
$14, 203
217,800
4,362
236, 365
$5,605, 365
.00096
5,381
241, 746
TABLE XVIII.-Summary of cost of money computation on facilities capital (cost of money included in total cost input-
Engineering labor.
Manufacturing labor.
Allocation base
Cost of money related to overheads.
Cost of money above to be included in cost input
Cost input, table VIII
Cost input including cost of money
Total cost of money on facilities capital.
alternative method)
Allocated to
contract,
table VIII
$330,000
1,210,000
$149, 424
5, 369, 000
Computation
using alternative
facilities, capital
cost of money
factor, table XVI
Amount
0.0128
.12
$4,224
145, 200
149, 424
$5,518, 424
.00841
46, 410
195, 834
ARTHUR SCHOENHAUT,
[FR Doc.76–15736 Filed 6–1–76;8:45 am]
Executive Secretary.
259
Cost Accounting Standards Board
SUPPLEMENT
PART 414-COST ACCOUNTING STAND-
ARD-COST OF MONEY AS AN ELE-
MENT OF THE COST OF FACILITIES
CAPITAL
The Standard on Cost of Money as an
Element of the Cost of Facilities Capital
being published today is one of a series
being promulgated by the Cost Account-
ing Standards Board (Board) pursuant
to section 719 of the Defense Production
Act of 1950, as amended (Pub. L. 91–379.
50 U.S.C. App. 2168), which provides for
the development of Cost Accounting
Standards to be used in connection with
negotiated national defense contracts.
Performance under negotiated con-
tracts usually requires the use of fa-
cilities which represent significant con-
tractor investments. Accounting princi-
ples applicable to financial reporting do
not provide for any explicit recognition of
the cost of capital committed to facili-
ties. The Board has long been interested
in identifying, as a contract cost. a part
of the contractor's total cost of capital.
The Board distributed three research pa-
pers dealing with the cost of capital in
connection with negotiated contracts.
These mailings were in June 1974, April
1975, and December 1975. The responses
received to all three of those research
mailings were useful in the development
of the proposal published by the Board
on March 5, 1976 (41 FR 9562).
The Board supplemented that March 5
FEDERAL REGISTER request for comments
by sending copies of the FEDERAL REGIS-
TER material directly to organizations and
individuals who were expected to be in-
terested. The Board has received 82 com-
ments on the March 5 proposal. All of
these comments have been carefully con-
sidered. The Board appreciates the help-
ful suggestions and criticisms which have
been furnished.
The comments below summarize the
major issues discussed by respondents
and the significant changes which have
been made from the March 5 version of
the proposed Standard.
A. GENERAL COMMENTS
(1) Impact on Contract Prices. Com-
mentators who represented contractors
and the accounting profession tended to
favor the proposal, while those who rep-
resented some Government agencies were
cpposed. Government representatives
were joined by some other commentators
who expressed the belief that the cost of
money as an element of the cost of capi-
tal committed to facilities should remain,
explicit or otherwise, a consideration in
determining contract profit compensa-
tion, rather than be treated as an ele-
ment of cost. The Board's early research
into the broad question of measurement
of the costs related to capital commit-
ment included a number of inquiries
about the propriety of a change in the
basic concepts of contract cost to include
this element.
The cost to be measured, even though
imputed, is real and is relevant for con-
tract costing. The Board is persuaded
that there has not been adequate agree-
ment on techniques for measuring it. A
Cost Accounting Standard is, therefore,
appropriate.
Some commentators have expressed
concern that contract profit levels may
be reduced when this new element of con-
tract cost is recognized, and that there
will thus be no real financial benefit from
the issuance of the Standard. Such com-
ments are based on a misunderstanding
of the Board's mission. The Standard is
intended to improve contract cost meas-
urement and understanding by the con-
tracting parties and to provide for great-
er uniformity by specifying techniques
appropriate to types of circumstances ac-
tually encountered. Capital asset com-
mitment varies widely among contracts.
The Board has developed a technique
that takes explicit account of such dif-
ferences in capital intensity. The pro-
curement agencies are now considering
their pricing policies and the Board ex-
pects the agencies in doing this to give
appropriate recognition to this Standard.
(2) Exclusion of Working Capital. As
the Board pointed out in its publication
on March 5, 1976, its staff has investi-
gated the problems related to measure-
ment of the costs related to investments
in operating, or working, capital. Most
commentators, while generally favoring
the Board's proposal as to the cost of
facilities capital, urged that the final
promulgation include explicit cost recog-
nition based on the contractor's invest-
ment in working capital. The Board is
not prepared at this time to make deter-
minations on all the issues related to
working capital. The economic impact
of contractor investment in facilities is,
by itself. important enough to warrant
recognition as a contract cost without
delay. The Board will seek to resolve the
problems related to measurement of the
contract cost attributable to the invest-
260
Cost Accounting Standards Board
ment in working capital.
(3) Withdrawal of Proposed CAS No.
413. A number of commentators expressed
future as in the past, inflationary expec-
tation may indeed be less than the rate
of inflation subsequently experienced;
but at times it may also be greater.
regret that the Board had withdrawn its obviously the single interest rate spec-
་
proposed Cost Accounting Standard No.
413 on Adjustment of Historical Depre-
ciation Costs for Inflation, which was
published on October 9, 1975. As the
Board pointed out in its March 5, 1976
publication, inflation has an impact on
interest rates. Research shows that over
time there is a strong correlation between
interest rates and the rate of change of
the price level. The interest rates which
were available for measuring the cost
of capital would unavoidably include
some allowance for inflation. Although
a number of respondents denied any over-
lap, the promulgation of both CAS Nɔ.
413 and CAS No. 414 as proposed would
have resulted in some duplication of cov-
erage.
The accounting profession continues
to consider various approaches to the
financial reporting problems related to
inflation. The Board will continue to
observe the various efforts within the pro-
fession, and will consider the usefulness
for contract costing purposes of each new
statement of generally accepted account-
ing principles related to inflation.
Should the Board consider it appro-
priate at some future time to measure
the impact of inflation in some other way
for contracts, it will, of course, recon-
sider the rate as well as the method
selected for measurement of the cost
of money as an element of the cost of
facilities capital.
B. CONTENT OF THE STANDARD
(1) The Renegotiation Board Rate.
The Board's March 5 publication specified
the use of the semiannual interest rate
established in accordance with Public
Law 92-41 to serve as a cost of money
rate for determining the imputed cost
of capital committed to facilities. That
law requires that the "rate shall be de-
termined by the Secretary of the Treas-
ury, taking into consideration current
private commercial rates of interest for
new loans maturing in approximately
five years." (section 2, 85 Stat. 97).
Some commentators have pointed out
that the interest rate specified under Pub.
L. 92-41 was, during 1973-1974, less than
the actually experienced rate of general
inflation, and thus could not have re-
alistically reflected the rate of inflation.
The rate includes provision for the ex-
pected impacts of future inflation. In the
ified under Pub. L. 92-41 and used as 2
cost of money rate in this Standard will
rarely be the precise borrowing rate of
any particular contractor.
(2) Allocation of Facilities. For con-
tract costing purposes, the cost of capital
committed to facilities must be related
to contracts. The following three sub-
sections deal with the techniques pro-
posed to establish this relationship.
Simplified Procedure: The Standard
being promulgated today is based on al-
location to negotiated contracts of an
appropriate share of the total cost of
money which can be identified with the
facilities employes in a business unit.
This allocation is made by first identify-
ing the total facilities capital associated
with each indirect cost pool. The im-
puted interest cost is then assigned to
contracts on the basis of the same meas-
ures used to allocate other costs from
those indirect cost pools.
Interested parties almost universally
accepted this basic approach. A few have
expressed concern, however, that the
proposed procedure might entail more
effort than would be warranted by the
improved precision obtained as com-
pared with a much simpler procedure to
approximate the desired allocation.
The March 5 proposal included a pro-
vision for a simple allocation technique,
based on the established procedure for
distribution of G&A expenses. This alter-
native was to be used "only where the
contracting parties agree that the results
are not likely to differ materially from
those which would be produced under
the procedure (otherwise described in
the proposed Standard)."
use
Critics of the proposal suggest that the
only way the two parties could agree to
the alternative simple procedure
would be to recreate the detail of an al-
location using the "regular" method as
a comparison. But if the "regular"
method must thereby be applied in any
case, then there would be no reason to
pursue the alternative. The Board has
confidence in the reasonableness of the
contracting parties in finding ways to
achieve the purpose of this Standard.
Where the total amount of facilities capi-
tal is minor in relation to the estimated
incurred cost, for example, the parties
could be expected to agree in advance
to use the simpler alternative procedure.
261
Cost Accounting Standards Board
Similarly, if the contractor has a variety
of service centers and other indirect cost
pools, which are generally used to serve
all productive activities, and which do
not individually involve significant fa-
cility investments, the alternative pro-
cedure could be expected to provide sig-
nificant administrative convenience, and
should probably be used. The situation
would be different if a relatively signifi-
cant portion of the total facilities invest-
ment were identified with a service cen-
ter which is obviously not used with the
same intensity for all final cost objectives
of the contractor; the imputed cost re-
lated to such an investment should be
assigned on the basis of the use of the
facilities rather than on the basis of some
overall allocation procedure.
The instructions in the Standard have
been modified slightly to clarify the
availabe flexibility. The Board expects
that administrative convenience and the
likelihood of significant distortion will
be considered in decisions about the use
of the simplified alternative procedure
permitted.
Basic Allocation Technique. Some
commentators criticized the complexity
of the regular procedure provided in the
March 5 publication. The instructions
called for the identification of assets to
pools "on any reasonable basis that ap-
proximates the actual absorption of de-
preciation and the related costs of such
facilities. The basis of allocation of un-
distributed assets in each business unit
between, for example, the engineering
overhead pool and the manufacturing
overhead pool, should be related to the
manner in which the expenses generated
by these assets are absorbed in the two
overhead rates. The choice of the basis
for allocation is up to the contractor
within the limits stated above." Those
critics who feel that the instructions re-
quire too much detailed analysis in the
case of elaborate overhead distribution
systems seem not to have understood the
intent of the quoted portion. Consolida-
tion and simplification to a limited num-
ber of pools and allocation bases is justi-
fied in the typical situation where there
are many service centers. Minor editorial
changes have been made in the instruc-
tions, but the Board has not seen the
need for any major change in this
regard.
Application to Process Cost Systems.
The Standard provides a means for allo-
cating the imputed cost to final cost ob-
jectives by developing facilities capital
cost factors for indirect cost pools. To de-
termine the cost of money applicable to
a given final cost objective, these factors
must be multiplied by the corresponding
allocation base units identified with the
final cost objective. A few commentators
questioned the technique for applying
this procedure for process cost systems.
In a process cost system all the pro-
duction costs, including overhead costs,
are usually accumulated in cost pools
associated with "process cost centers"
and are then allocated to final cost ob-
jectives or products by means of an indi-
vidual cost center "charging rate." The
procedures outlined in this Standard for
developing facilities capital cost of money
factors for overhead and G&A expense
pools are equally applicable to "process
cost centers" in case of a process cost
system. However, difficulties may arise in
computing the appropriate amount of
cost of money applicable to each cost
objective or product. The difficulties will
emerge where the cost records of indi-
vidual contracts or other final cost ob-
jectives do not, as a matter of course,
identify any amount of allocation base
units related to these final cost objectives
in the various "process cost centers." In
those circumstances it is anticipated that
the contracting parties could agree upon
one of several possible acceptable courses
of action. Thus it should not be difficult
to develop an acceptable allocation basis
using statistical methods where appro-
priate. In addition, the "alternative
method," described in instructions to
Form CASB-CMF, could be applied in
suitable circumstances.
(3) Inclusion in "Cost Input". A few
commentators questioned whether the
imputed cost of capital committed to fa-
cilities should be included in the cost
input typically to be used as the basis
for distribution of G&A expenses under
the terms of Cost Accounting Standard
No. 410. This element of contract cost is
indeed a part of total cost. The term
"cost input" is defined as "the cost, ex-
cept G&A expenses, which for contract
costing purposes is allocable to the pro-
duction of goods and services during a
cost accounting period." In principle, the
cost of capital committed to facilities,
other than those facilities identified with
the G&A expense pool, should be included
in the total cost input base.
The Board believes that as a practical
matter the allocation of the cost of money
for the cost accounting period (See. Col.
5 Form CASB-CMF) would not be ma-
262
Cost Accounting Standards Board
terially affected by the inclusion or ex-
clusion of cost of money from "cost in-
put." The cost of money for the business
unit as a whole would not change. How-
ever, to the extent that cost input is used
as an allocation base some difference in
the allocation to individual contracts
can be anticipated. As indicated earlier,
however, this difference generally should
be immaterial.
In view of the amount of cost ac-
counting data that may be affected by
the introduction of cost of money as an
element of contract cost and the idio-
syncracies of the systems designed to
handle that data, the Board believes
that administrative expediency should
not be ignored. Therefore, at this time
it does not prescribe whether this ele-
ment of cost should be included in or
excluded from the cost input allocation
base. Although the imputed cost of
capital committed to facilities should be
included in the total cost input alloca-
tion base whenever practicable, exclu-
sion of this element will be acceptable
whenever the contractor chooses such
exclusion on the basis of reasonable ad-
ministrative convenience. The illustra-
tion in Appendix B is prepared showing
the inclusion of this cost and also, as an
alternative, showing the exclusion of this
element of cost from the measure used
as an allocation base for G&A expenses.
C. ADMINISTRATION
(1) Accounting Records. The Board's
March 5 proposal included the acknowl-
edgement that the imputed cost to be
recognized has not been treated under
the generally accepted accounting prin-
ciples applicable to external financial re-
porting. Even so, several commentators
felt the need to point out to the Board
that the proposal would involve a cost
not currently recognized in published
corporate financial reports.
The Board has often emphasized that
memorandum records, not necessarily a
part of the contractor's formal account-
ing system, can furnish adequate ac-
counting support for contract purposes,
where these purposes differ from those
for which the accounting system was
developed. The imputed cost to be recog-
nized under this Standard is no excep-
tion. The Standard provides the tech-
niques by which this cost will be meas-
ured, starting with data already in the
accounting records.
(2) Preparation of Estimates. The
March 5 proposal included the provi-
sions that "where the cost of money
*
must be determined on a prospective
basis the cost of money rate shall be
based on the most recent available rate
published *
Some commentators
urged that the Standard make more
clear the relationship of the published
rate to the rate to be used in estimates.
Some urged that the published rate be
required, and others asked
others asked for the
publication of official forecasts, which
should be used for estimates.
Other commentators pointed out that
the determination of the cost of money
applicable to a proposed contract re-
quires estimation of a number of as-
set values and allocation rates. They
asked that the Board provide clear in-
structions as to prospective application.
The Board has never undertaken to
advise the contracting parties as to tech-
niques for estimating or for agreeing
upon specific amounts of estimated
costs. In the case of the imputed cost of
capital committed to facilities, as for
other elements of cost, the clear deter-
mination of the procedure by which "ac-
tual" cost will later be measured can
eliminate confusion as to the nature of
the estimate. The parties may, of course,
use any techniques which seem appro-
priate for agreeing on the numeric values
to be included in contract cost estimates.
(3) Compliance with Standard No. 401.
The Board has earlier promulgated a
Standard (4 CFR 401) which requires
that the practices used in pricing a pro-
posal (estimating) shall be consistent
with the cost accounting practices used
in accumulating and reporting costs. One
of the essential features of that Stand-
ard is the requirement that any signifi-
cant element of cost in the estimate can
be compared with the corresponding ac-
tual cost. A number of commentators
have expressed concern about the appli-
cability of that Standard to an imputed
cost.
For the purposes of complying with
Standard No. 401 the Board believes that
any reasonable estimating technique
which establishes the cost of money as a
separate amount is acceptable. It is not
necessary in estimating to follow pre-
cisely the procedures, including Form
CASB-CMF, incorporated in the Stand-
ard.
D. APPLICABILITY
(1) Use Rates. Contractors are some-
times compensated for the use of facili-
ties by means of "use rates" authorized
under Government procurement policies.
263
Cost Accounting Standards Board
INDEX
FEDERAL REGISTER PUBLICATIONS
COST ACCOUNTING STANDARDS BOARD
STANDARDS, RULES AND REGULATIONS
1971
36 F.R.
Page
301 Added
302 Added
23916 403.50 (c) (2) amended__.
23917 403.70 (a) amended_.
30730
30730
303 Added
23923
403.80 Added
7447
304 Added
305 Added
1972
23924
404 Added
5321
23924
404.30 (a) (4) revised.
30730
404.80 Added
12319
405 Added
24198
87 F.R.
405.80 Added
31813
Page
406 Added
30732
331
added__
4143
331.3 Text designated (a); (b)
1974
added
12784
39 FR
Heading revised; (b)(4), (5)
Page
and (6) added_
26098
351
added.
4145
331.30
(b) (7) added___
3655
400
added__
4171
(c) (4) revised_____
33681
400.1 Amended
26680
(a) revised; (b) (8) added_.
44391
400.2 Added
9609
331.40 (a) revised_
44391
401 Added
4172
331.50 (d) revised.
44391
401.80 Added
9609
351.40 (a) revised__
44391
402 Added
4173
351.41 Reinstated in CFR_
44030
402.80 Added
9609
351.50 (c)
Reinstated in CFR___ 44030
403 Added, eff. 9–30–73--
22683
351.70 Reinstated in CFR___ 44030
351.130 (a) revised__
44391
400.1 (a) amended….
11869, 33681
1973
406.80 (a) revised_
10115
407 Added
407.80 (a) revised_
408 Added
11871
28869
33684
1
1
38 FR
Page
303.5
Revised
5455, 19831
304.3 Added
5621
304.4
Added
19831
1975
331 Revised
30725
331.3 (c) redesignated from 331.6
(c) and revised___.
40 FR
Page
4238
303.5 Revised
4445, 18541
331.6 (c) redesignated as 331.3
Corrected
T
5135
(c)
4238
303.9 Revised
4445, 18541
351 Revised
30728
Corrected
5135
351.7
351.41
Corrected
Added
13321
351.40 (e) revised; (f) added___
32749
27508
Amendatory
language cor-
351.50 (c) added_.
27508
rected
33819
351.70 Amended
351.41 Removed
27508
32749
351.50
351.140
Amended
34260
(a) and (c) revised; (d)
added
32749
351.145
Added
34260
400.1
(a) amended___.
5318,
401.30
24195, 30730, 30732
(a)(2) and (4) revised___ 30730
402.30 (a) (2) and (6) revised___ 30730
403.30 (a) (2) and (5) revised___ 30730
351.120 (d) revised; (e) added__ 32749
400.1 (a) amended__ 4259, 19429, 43873
(a) corrected__
403.70 (a) revised
45417
32750
Amendatory language
rected
cor-
33819
Cost Accounting Standards Board
added)
408.80 (a) revised (effective date
409 Added
409.50 (i) and (j) (1) corrected__
14737, 15865
4264
8321
409.60 (f) corrected___.
8321
409.80 (a) revised (effective date
added)
15865
411 Added
19428
411.80 (a) revised__.
32823
412 Added
43878
412.50
(a) (1) (i) corrected_
45417
412.80 (a) revised____
58281
1976
4 CFR
41 FR
Page
Chapter 1
1 Revised ...
20 Technical correction
20.2 (b)(3) corrected
56 Revised
❤
Chapter III
331.30 (*)(9) added ..
400.1 (a) amended.
401 Appendix added
402 Appendix added
410 Added
Technical corrections
•
·
•
35155
. 2367
. 2073
•
53769
16141,22244,31799
410 Appendix A corrected
410.50 (d) and (g) corrected
410.60 (a) corrected
4812
52428
24692
16141
22241
22241
22241
·
22241
27311
22244
37091
31799
410.80 (a) effective date added
414 Added .
•
414.80 Amended
415 Added .
Supp. No. 3
1-2
>
T
1.1
J


E
7
1:
t.


•EYM - doesn't har.
maine val.
Su
1063-D-1

Storage COST
KF
OOL
ment #5
The University
of Michigan
Reference
24 ACCOUNTING
STANDARDS
BOARD

CCOUNTING
COST
STANDARDS
BOARD

Standards
Rules
UNIVERSITY OF MICH
& Regulations
APR 0 3 1979
DEPOSITED BY THE
UNITED STATES OF AMERICA
3
រ
...
1
i
་
#
་་
が
​Cost Accounting Standards Board
STANDARDS, RULES AND REGULATIONS
SUPPLEMENT NO. 5
FOREWORD
This supplement adds various amendments of the Board's regulations which were
published in the Federal Register on June 8, September 20 and November 14, 1978. In
summary the changes to the regulations were as follows:
1. An exemption was established for most contracts awarded to colleges and
universities. See $331.30(b)(3). See p. 21C
2. An exemption was established for contracts awarded to foreign governments
and their agencies and to foreign concerns, except for Standards 401 and 402.
See Section 331.30(b)(5). See p. 21C
3. Section .10, General Applicability, of Standards 401 through 409 was
amended.
4. Standard 416, Accounting for Insurance Costs, has been added together with
its preamble. See Part 416, pp. 276-289.
FILING INSTRUCTIONS
REMOVE OLD PAGES
FILE NEW PAGES
i-ii
21B-22
39H-6-391
109B-110
111B-116
119C-120A
i-ii
21B-22
39-H-6-391
109 B-110
111B-116
119C-120A
129-130
129-130
133-134
133-134
143-144
143-144
153-154
153-154
163-164
163-164
171-172
171-172
179-180
179-180
183-184
183-184
189-190
189-190
209-210
209-210
275-276
275-290
COST ACCOUNTING STANDARDS BOARD
STANDARDS, RULES AND REGULATIONS
Page
Introduction
Legislation
Public Law 91-379 as amended by Public Law 94-152
Administration
.. iii
Part
Title
301 General Information and Organization
1
302 Responsibilities and Conduct
3
303 Release of Information ..
16
304 Delegations of Authority
. 18
305 Cost Accounting Standards Board By Laws
Procurement Practice
.. 19
Part
Title
331 Contract Coverage
Supplement
332 Modified Contract Coverage
Supplement.
Disclosure Statement
Part
Title
351 Basic Requirements
. 20
27
. . 39 G
. .39 J
Supplement
40
... 94
Cost Accounting Standards.
Part
Title
400 Definitions
...110
401 Consistency in Estimating, Accumulating and
Reporting
..115
Supplement
..118
402 Consistency in Allocating Costs Incurred for
the Same Purpose
...120
Supplement
..126
i
Cost Accounting Standards (Continued)
Part
Title
403 Allocation of Home Office Expenses to Segments
..129
Supplement
..135
404 Capitalization of Tangible Assets
..143
Supplement
..147
405 Accounting for Unallowable Costs
Supplement
153
...157
406 Cost Accounting Period
..164
Supplement
..167
407 Use of Standard Costs for Direct Material and
Direct Labor
..171
Supplement
..176
408 Accounting for Costs of Compensated Personal Absence
..179
Supplement
..184
409 Depreciation of Tangible Capital Assets
..189
Supplement
..196
410 Allocation of Business Unit General and Administrative
Expenses to Final Cost Objectives
...205
Supplement
..213
411 Accounting for Acquisition Costs of Material
.225
Supplement
..228
412 Composition and Measurement of Pension Costs
•
234
Supplement.
413
Adjustment and Allocation of Pension Cost
Supplement.
.240
248
..248 G
414 Cost of Money as an Element of the Cost of
Facilities Capital.
Supplement
415 Accounting for the Cost of Deferred Compensation
..250
..260
.266
Supplement
416 Accounting for Insurance Costs
•
Supplement..
271
276
. 281
INDEX TO FEDERAL REGISTER
PUBLICATIONS OF CASB
STANDARDS, RULES AND REGULATIONS
Supp. No. 5
ii
Cost Accounting Standards Board


Description of change
1. Changes in the interest rate levels in the national
economy have invalidated the prior actuarial as-
sumption with respect to anticipated investment
earnings. The pension plan administrators adopted
an increased (decreased) interest rate actuarial as-
sumption. The company allocated the resulting pen-
sion costs to all final cost objectives.
Accounting treatment
1. Adopting the increase (decrease) in the interest
rate actuarial assumption is not a change in cost
accounting practice.
3. The initial adoption of an accounting practice
for the first time incurrence of a cost is not a
change in cost accounting practice.
2. The basic benefit amount for a company's pension 2. The increase in the amount of the benefits is not
plan is increased from $8 to $10 per year of credited a change in cost accounting practice.
service. The change increases the dollar amount of
pension cost allocated to all final cost objectives.
3. A contractor who has never paid pensions estab-
lishes for the first time a pension plan. Pension costs
for the first year amounted to $3.5 million.
4. A contractor maintained a Deferred Incentive Com-
pensation Plan. After several years' experience, the
plan was determined not to be attaining its objective,
so it was terminated, and no future entitlements
were paid.
5. A contractor eliminates a segment that was operated
for the purpose of doing research for development of
products related to nuclear energy.
6. For a particular class of assets for which technologi-
cal changes have rarely affected asset lives, a con-
tractor starts with a five year average of historical
lives to estimate future lives. He then considers tech-
nological changes and likely use. For the past several
years the process resulted in an estimated future life
of ten years for this class of assets. This year a tech-
nological change leads to a prediction of a useful life
of seven years for the assets acquired this year for
this class of assets.
7. The marketing department of a segment has report-
ed directly to the general manager of the segment.
The costs of the marketing department have been
combined as part of the segment's G&A expense
pool. The company reorganizes and requires the
marketing department to report directly to a vice
president at corporate headquarters.
(k) A “small business concern" is any
concern, firm, person, corporation, part-
nership, cooperative or other business
enterprise which pursuant to 15 U.S.C.
637(b)(6) and the rules and regulations
of the Small Business Administration
set forth in Part 121 of Title 13 of the
Code of Federal Regulations, is deter-
mined to be a small business concern
for the purpose of Government procure-
ment.
[43 FR 9775, Mar. 10, 1978]
PREAMBLE: For preamble relating to
$331.20, see preamble J of the supple-
ment to this part.
§ 331.30 Applicability, exemption, and
waiver.
(a) The head of each relevant Fed-
eral agency shall cause or require the
clause set forth in 8331.50 captioned
4. There was a termination of the Deferred Incen-
tive Compensation Plan. Elimination of a cost is
not a change in cost accounting practice.
5. The projects and expenses related to nuclear
energy projects have been terminated. No trans-
fer of these projects and no further work in this
area is planned. This is an elimination of cost
and not a change in cost accounting practice.
6. The change in estimate (not in method) is not a
change in cost accounting practice. The contrac-
tor has not changed the method or technique
used to determine the estimate. The methodolo-
gy applied has indicated a change in the estimat-
ed life, and this is not a change in cost account-
ing practice.
7. After the organizational change in the compa-
ny's reporting structure, the parties agree that
the appropriate recognition of the beneficial or
causal relationship between the costs of the mar-
keting department and the segment is to contin-
ue to combine these costs as part of the seg-
ment's G&A expense pool. Thus, the organiza-
tional change has not resulted in a change in
cost accounting practice.
Cost Accounting Standards to be in-
serted in all negotiated defense con-
tracts in excess of $100,000, except as
provided in paragraph (b) of this sec-
tion, other than contracts entered into
by the agency where the price is based
on: (1) Established catalog or market
prices of commercial items sold in sub-
stantial quantities to the general public,
or (2) prices set by law or regulation.
Additionally, all solicitations, likely to
result in a contract in which the clause
set forth in § 331.50 must be inserted,
shall include the notice set forth in
§ 331.40 captioned Disclosure State-
ment Cost Accounting Practices and
Certification.
(b) The requirements of paragraph
(a) of this section shall not be applica-
ble to:
(1) Any contract or subcontract
awarded to a small business concern.
21B
Supp. No. 4
Cost Accounting Standards Board
(2) Any contract or subcontract
awarded to a contractor for performance
in a business unit which is eligible to use
the provisions of Part 332 of the Board's
regulations and which elects to use that
part.
(3) Any contract made with an edu-
cational institution whose cost princi-
ples are subject to Federal Manage-
ment Circular 73-8 except contracts
that are to be performed by a federal-
ly funded research and development
center (FFRDC) operated by such an
institution. A FFRDC is a laboratory
or similar operation which is designat-
ed as such by the National Science
Foundation. If a contract or any part
of a contract awarded to an exempt
educational institution is to be per-
formed by a FFRDC, the contract
shall contain the clause set forth in
§ 331.50 or § 332.50, as appropriate, and
the requirements of that clause shall
be applicable to that part of the con-
tract effort, and the costs thereof,
which are performed by the FFRDC.
Costs incurred by the institution
which may be allocated to the FFRDC
are specifically exempted by this pro-
vision as is the requirement to prepare
part VIII of the disclosure statement
CASB-DS-1 or CASB-DS-2).
(4) Any contract made with a labor
surplus area concern pursuant to proce-
dures providing for a partial set-aside
for such concern as set out in ASPR 1-
804, 32 CFR 1.804; and FPR 1-1.804, 41
CFR 1-1.804
(5) Any contract or subcontract
awarded to a foreign government or an
agency or instrumentality of such gov-
ernment or, insofar as the require-
ments of Cost Accounting Standards
403 (4 CFR Part 403) or any subse-
quent standards are concerned, any
contract or subcontract awarded to a
foreign concern.
(NOTE. This exemption does not relieve for-
eign concerns of any obligation to comply
with the Cost Accounting Standards set
forth in 4 CFR Parts 401 and 402 and to
submit a Disclosure Statement.)
(6) Any contract awarded to Western
Electric Co. for materials, supplies, or
services which are standard items of the
Bell System. This paragraph 6 expires
on June 30, 1973.
(7) Any subcontract to be performed
outside the United States either by an
agency of a foreign government or by a
foreign concern in connection with the
class of hydrofoil guided missile ship
known as the "NATO PHM Ship."
(8) Any contract or subcontract of
$500,000 or less, unless it is awarded to a
contractor who, on the date of such
award, (i) has already received a con-
tract or subcontract in excess of $500,000
and (ii) has not received notification of
final acceptance of all items of work to be
delivered on that contract or subcon-
tract and on all other contracts or sub-
contracts awarded after January 1, 1975,
which were subject to the cost account-
ing standards clause. For the purposes
of this paragraph (b) (8), an intra-cor-
porate transfer shall be considered to be
a subcontract. Notwithstanding this ex-
emption, any contractor entitled to an
exemption under this paragraph (b)(8)
may elect to comply with the cost ac-
counting standards clause. The contrac-
tor may elect to comply in connection
with the receipt of its first contract or
subcontract awarded after January 1,
1975, which but for this paragraph (b)
(8) would be subject to the clause. A
contractor who does not elect to comply
with the clause in connection with the
receipt of the first contract or subcon-
tract, may thereafter make such an elec-
tion only if it receives a contract or sub-
contract of the type described, at a time
when it has no other contract or subcon-
tract of that type on which notificaion of
final aceptance of all items or work to be
delivered has not been received.
(9) Any contract or subcontract
made with a United Kingdom contractor
for performance substantially in the
United Kingdom: Provided, That the
contractor has filed with the U.K.
Ministry of Defence, for retention by the
Ministry, a completed Disclosure State-
ment (Form CASB-DS-1) which shall
adequately describe its cost accounting
practices. Whenever that contractor is
already required to follow U.K. Govern-
ment Accounting Conventions, the dis-
closed practices shall be in accord with
the requirements of those Conventions.
Such contract or subcontract shall also
contain the following provision:

CONSISTENCY IN COST ACCOUNTING
PRACTICES
The contractor agrees that it will con-
sistently follow the cost accounting prac-
tices disclosed on Form CASB-DS-1 in esti-
mating, accumulating and reporting costs
under this contract. In the event the con-
tractor fails to follow such practices, it agrees
that the contract price shall be adjusted, to-
gether with payment of interest, if such fail-
ure results in increased costs paid by the
U.S. Government. Interest shall be deter-
mined in accordance with the rules and reg-
21C
Supp. No. 5
Cost Accounting Standards Board
ulations of the Cost Accounting Standards
Board. The contractor agrees that the Dis-
closure Statement filed with the U.K.
Ministry of Defence shall be available for
inspection and use by representatives of the
contracting agency, the Cost Accounting
Standards Board, and the Comptroller Gen-
eral of the United States.
(c)(1) Upon request of the Secretary
of Defense, the Deputy Secretary of
Defense, an Under Secretary of De-
fense, or the Deputy Under Secretary
of Defense, Research and Engineering
(Acquisition Policy), or outside the De-
partment of Defense, of officials in
equivalent positions,
positions, the Cost Ac-
counting Standards Board may waive
all or any part of the requirements of
paragraph (a) of this section with re-
spect to a contract or subcontract to
be performed within the United
States, or a contract or subcontract to
be performed outside the United
States by a domestic concern. A do-
mestic concern is an incorporated con-
cern incorporated in the United States
or an unincorporated concern having
its principal place of business in the
United States. (In the context of this
subparagraph, "concern" refers to a
prospective or actual contractor. Thus,
a contract with a foreign subsidiary or
foreign branch or business office of a
U.S. corporation would not be a con-
tract with a domestic concern. Con-
versely, a contract executed by a for-
eign salesman or agency on behalf of a
domestic concern would nevertheless
be a contract with a domestic concern
since the basic contractual and legal
responsibility resides with the domes-
tic concern.) Any request for a waiver
shall describe the proposed contract or
subcontract for which waiver is sought
and shall contain (i) an unequivocal
statement that the proposed contrac-
tor or subcontractor refuses to accept
a contract containing all or a specified
part of the Cost Accounting Standards
clause and the specific reason for that
refusal, (ii) a statement whether the
proposed contractor or subcontractor
has accepted any prime contract or
subcontract with any Federal depart-
ment or agency containing the Cost
Accounting Standards clause, (iii) the
amount of the proposed award and the
sum of all awards by the department
or agency requesting the waiver to the
proposed contractor or subcontractor
in each of the preceding 3 years, (iv) a
statement that no other source of the
supplies or services being procured is
available to satisfy the needs of the
agency on a timely basis, (v) a state-
ment of any alternative methods of
fulfilling the project or program needs
and the agency's reasons for rejecting
such alternatives, (vi) a statement of
the steps being taken by the procuring
agency to establish other sources of
supply for future procurements of the
products or services for which a waiver
is being requested, and (vii) any other
information that may aid the Board in
evaluating the requested waiver.
(2) Upon request of the Secretary of
Defense, the Deputy Secretary of De-
fense, an Under Secretary of Defense,
or the Deputy Under Secretary of De-
fense, Research and Engineering (Ac-
quisition Policy), or outside the De-
partment of Defense, of officials in
equivalent positions, the Cost Ac-
counting Standards Board may waive
all or any part of the requirements of
paragraph (a) of this section with re-
spect to a proposed contract or sub-
contract to be performed outside the
United States by a foreign concern. A
foreign concern is a concern that is
not a domestic concern. as defined in
paragraph (c)(1) of this section. Any
request for a waiver shall describe the
proposed contract or subcontract for
which waiver is sought and shall con-
tain (i) the amount of the proposed
award and the sum of all awards by
the department or agency requesting
the waiver to the proposed contractor
or subcontractor in each of the preced-
ing three years, (ii) a statement that
no other source of the supplies or serv-
ices being procured is available to sat-
isfy the needs of the agency on a
timely basis, (iii) a statement of any
alternative methods of fulfilling the
project or program needs and the
agency's reasons for rejecting such al-
ternatives, (iv) a statement of the
steps being taken by the procuring
agency to establish other sources of
supply for future procurements of the
products or services for which a waiver
is being requested, and (v) any other
information that may aid the Board in
evaluating the requested waiver.
(3) In the event the agency head de-
termines that it is impractical to secure
a required Disclosure Statement in ac-
cordance with the contract clause and
§ 331.60, he may authorize award of such
contract or subcontract. He shall within
Supp. No. 5
21D
Cost Accounting Standards Board
30 days thereafter submit a report to the
Cost Accounting Standards Board, set-
ting forth all material facts.
(4) Except as provided herein, the au-
thority in paragraph (c) of this section
shall not be delegated. For any contract
or subcontract for the procument of sub-
stantially the same product or service
from the same contractor for which, pur-
suant to subparagraph (1) or (2) of this
paragraph, a waiver has previously been
requested and granted by the Cost Ac-
counting Standards Boards, authority
contained in those subparagraphs (1)
and (2) may be delegated by the Secre-
tary of Defense to the Secretaries of the
Military Departments and to the Direc-
tor, Defense Supply Agency, and by the
heads of other agencies to officials in
equivalent positions.
[38 FR 30725, Nov. 7, 1973, as amended at
39 FR 3655, Jan. 29, 1974; 39 FR 33681,
Sept. 19, 1974; 39 FR 44390, Dec. 24, 1974;
43 FR 24819, June 8, 1978; 43 FR 52693,
Nov. 14, 1978.
PREAMBLES: For preambles relating to
§331.30, see preambles D, E, F, K and L of the
supplement to this part. For preambles to su-
perseded regulations, see preambles A, B, and C
of the supplement.
§ 331.40 Solicitation notice.
DISCLOSURE STATEMENT-COST ACCOUNTING
PRACTICES AND CERTIFICATION
(a) Any contract in excess of $100,000 re-
sulting from this solicitation, except con-
tracts where the price negotiated is based
on: (1) Established catalog or market prices
of commercial items sold in substantial
quantities to the general public, or (2) prices
set by law or regulation, and except for
contracts which may be exempt under the
provisions of 4 CFR 331.30 (b), will be sub-
ject to the requirements of the Cost Ac-
counting Standards Board. Any offeror sub-
mitting a proposal which, if accepted, will
result in a contract subject to the require-
ments of the Cost Accounting Standards
Board must, as a condition of contracting,
submit a disclosure statement as required by
regulations of the Board. The disclosure
statement must be submitted as a part of the
offeror's proposal under this solicitation
unless, in compliance with agency proce-
dures, the offeror has already submitted a
Disclosure Statement disclosing the prac-
tices used in connection with the pricing of
this proposal, or unless post-award submis-
sion has been authorized by the contracting
officer in accordance with regulations of the
Cost Accounting Standards Board (see 4 CFR
331.60). If an applicable disclosure statement
has already been submitted, the offeror may
satisfy the requirement for submission by
providing the following information: 2
CERTIFICATION (APPLICABLE ONLY TO PROPOS-
ALS RESULTING IN CONTRACTS SUBJECT TO
COST ACCOUNTING STANDARDS BOARD RE-
QUIREMENTS)
2 (The agency issuing the
issuing the solicitation
should specify the data which it will accept
if any in lieu of resubmission of a Disclosure
Statement already submitted.)
22
Supp. No. 5
Cost Accounting Standards Board
not desirable from the Government's
point of view, the Board sees no justi-
fication for permitting the contractor
to realize economic benefits on exist-
ing contracts from the change.
The Board's regulation merely rec-
ognizes the contracting officer's posi-
tion and does not encroach on the ad-
ministrative responsibilities of the pro-
curement agencies. A contracting offi-
cer would routinely make certain that
a contractor's proposed change is not
detrimental to the Government before
agreeing to allow increases in contract
prices.
Some suggested alternative words
for "desirable" were: "Appropriate,
warranted, equitable, fair or reason-
able." The Board concludes that all of
these tests are encompassed by the
Board's language. Accordingly, this
statement has not been changed.
The Board expects administrative
agencies to publish regulations they
feel necessary to define what they
conclude is "desirable and is not detri-
mental to the interest of the Govern-
ment." Thus, the Board does not agree
that it is getting involved in adminis-
trative matters.
The Board agrees with the com-
mentators who suggested that the
second sentence of § 331.51, which re-
quired that the contracting officer
document the basis for his finding, be
eliminated. The Board believes that
the stated documentation requirement
is redundant with other language in
this subparagraph, and accordingly,
that sentence has been eliminated.
WITHDRAWAL OF PROPOSED ALTERNA-
TIVE METHOD OF DETERMINING "IN-
CREASED Costs"
On December 29, 1976, a proposal
was published in the FEDERAL REGISTER
to amend § 331.70(b) which, if adopted,
would have permitted procurement
agencies to use either an estimate-to-
complete approach or an original-ne-
gotiation-data approach to determine
increased costs paid by the United
States. As proposed, agencies would
have been authorized to use the esti-
mate-to-complete method when nego-
tiations had not been based on cost es-
timates or such estimates were not
readily determinable by the procuring
agency.
Most of the comments received ex-
pressed opposition to all or part of the
proposal. Upon reexamining the sub-
ject in light of the comments received,
the Board concludes that the proposed
alternative method would not provide
sufficient improvement in the admin-
istration of Standards to warrant its
adoption. Additionally, none of the al-
ternatives suggested by the commenta-
tors appears likely to benefit the pro-
curement process materially. Accord-
ingly, the proposal to amend
§ 331.70(b), Contract Coverage, as pub-
lished in the FEDERAL REGISTER of De-
cember 29, 1976, is hereby withdrawn.
This subject will be considered in the
Board's comprehensive review of Part
331.
Costs and BENEFITS
The definitions promulgated today
fill a void that had been recognized in
numerous comments to the Board and
the procurement agencies. The Board
believes that the material being pro-
mulgated today is in keeping with its
responsibility and authority as pro-
vided in Pub. L. 91–379. The Board be-
lieves further that the appropriate use
of the definitions can significantly
reduce the time and effort involved in
the administration of Cost Accounting
Standards. The Board concludes,
therefore, that there will be virtually
no costs involved in implementing
these regulations and that there will
be significant benefits with no infla-
tionary effects.
MISCELLANEOUS AMENDMENTS
A number of miscellaneous amend-
ments are being published today to
conform language in certain para-
graphs of Title 4 CFR Parts 351, 403,
406 and 409. These amendments add
references to the new § 331.50(a)(4)(C).
K. Preamble to amendment of 6-8-78. This
amendment added a new paragraph (3) to
section 331.30(b), exempting most educa-
tional institutions. The amendment and this
preamble were published at 43 FR24819,
June 8, 1978.
The Cost Accounting Standards Board
is authorized by Pub. L. 91-379 to pre-
scribe rules and regulations exempting
from its requirements such classes or
categories of defense contractors or
subcontractors under contracts negoti-
ated in connection with national de-
fense procurements as it determines
on the basis of the size of the con-
39H-6
Supp. No. 5
Cost Accounting Standards Board
tracts involved or otherwise, are ap-
propriate and consistent with the pur-
poses sought to be achieved by the
Act.
The Cost Accounting Standards
Board has been requested by several
Federal agencies and by representa-
tives of educational institutions to
consider the extent to which its stand-
ards, rules, and regulations should
apply to educational institutions that
are subject to Federal Management
Circular 73-8 or OMB Circular A-21
and to consider whether an exemption
for such institutions from Board pro-
mulgations is appropriate. The Board
had provided exemptions for them in
certain specific standards where the
application would not be appropriate.
On March 15, 1978, the Board pub-
lished for comment in the FEDERAL
REGISTER (43 FR 10699) a proposal to
exempt most educational institutions.
The exemption would not apply to
contracts with federally funded re-
search and development centers oper-
ated by such educational institutions.
Forty-seven comments have been re-
ceived, all of which favored the pro-
posed action by the Board although
some respondents requested minor
changes and clarifications.
A few commentators expressed con-
cern that an educational institution
receiving a contract from the Govern-
ment could apportion the contract
effort between the university and the
FFRDC to take advantage of differ-
ences in cost accounting required
under CAS and under FMC 73-8. If
this becomes a problem, the procuring
agencies are able to take the necessary
corrective action.
Several commentators noted that
there could be some misunderstanding
concerning the applicability of CAS
403 to the university which is func-
tioning as a "home office" for an
FFRDC. The Board intends that CAS
403 not be applicable to the university
in this situation and minor changes
have been made to the language to
clarify its intent.
One commentator indicated that the
definition of FFRDC is not meaning-
ful and suggested that the Board list
the criteria by which NSF designates
an FFRDC. Since coverage is intended
only for those organizations designat-
ed as FFRDC's by the NSF based on
whatever criteria they deemed appro-
priate, inclusion of their current crite-
ria would not be useful. Accordingly,
no changes have been made in the
definition included in § 331.30(b)(3).
One commentator noted that the re-
moval of current exemptions from
CAS 403, 408, and 410 for FFRDC's
will require a transitional period. It is
considered that the provisions of
§§ 403.70(a), 408.80, and 410.80 will fur-
nish sufficient time for compliance by
the FFRDC's with those standards.
Section 403.70(a) provides that a con-
tractor, if not exempt, shall be re-
quired to comply at the start of his
first cost accounting period following
receipt of the award of a negotiated
national defense contract making the
standard applicable. A contract award-
ed after August 1, 1978, will make the
standard applicable to a FFRDC. Con-
sequently, a FFRDC must comply
with CAS 403 as of the start of its
next cost accounting period after re-
ceipt of a contract after August 1.
Standards 408 and 410 apply in the
same way. It is recognized that all
FFRDC's do not necessarily receive a
new contract each year and that
annual funding may be by means of an
amendment to an existing contract.
Applicability would be at the start of a
cost accounting period after receipt of
a new contract or after receipt of the
annual extension of an existing con-
tract.
The Board having found the exemp-
tion appropriate and consistent with
purposes sought to be achieved by
Pub. L. 91-379, is modifying its regula-
tions as set forth below.
L. preamble to amendment of 11-17-78. This
amendment revised paragraph (5) to section
331.30(b) to exempt contracts with foreign
government and from CAS 403 et seq. con-
tracts with foreign concerns. Amendment and
this preamble published at 43 FR 52643, Nov.
14, 1978.
The Cost Accounting Standards Board
is today promulgating amendments to
its regulations dealing with exemp-
tions for contracts and subcontracts
performed by foreign governments
and foreign concerns. On July 31,
1978, the Cost Accounting Standards
Board published a proposal under
which contracts or subcontracts with
foreign concerns could be exempted
from certain individual standards if an
authorized official of a relevant Feder-
al agency determines that application
of the standards to such contracts or
subcontracts is inappropriate. The
Board received 12 comments on the
proposal.
39H-7
Supp. No. 5
Cost Accounting Standards Board
One commentator opposed the pro-
posal as unnecessary because the
Board itself has authority to grant ex-
emptions when such action is appro-
priate and asserted that delegation is
undesirable because such decisions are
too important to be delegated. The
Board agrees that decisions concern-
ing exemptions are important and has
carefully considered the proposed
action in the light of all comments and
other available information. Based on
that consideration the Board has con-
cluded that it should grant a specific
categoric exemption. Consequently no
delegations are needed. Moreover be-
cause of the categoric exemption, the
need to amend individual standards is
obviated.
One government agency to whom
delegation of authority was proposed
noted that in implementing the dele-
gation, one of the factors it would con-
sider in determining whether the ap-
plication of an individual standard is
appropriate is the matter of sovereign-
ty. Because of the action being taken
today, there is no need to comment on
the appropriate weight to be assigned
to that factor.
Another commentator also discussed
sovereignty and suggested that the
United States has no legal right to
impose the requirements of its laws
and regulations on foreign contracts.
To support this assertion, the com-
mentator cited an official of the De-
partment of Defense who attributed
some of the difficulties in foreign pro-
curements to the insistence upon con-
tracts rather than general agreements.
Whether a contract or some other in-
strument is used is something to be de-
cided by other agencies of the Govern-
ment and not by the CASB. The
Board has long recognized that its
Standards are not applicable to non-
contractual arrangements and agrees
with the suggestion that if the procur-
ing agencies used some noncontractual
arrangement to transact business with
foreign contractors, CAS would be in-
applicable to the transaction. Howev-
er, when the parties agree to use a ne-
gotiated national defense contract or
subcontract as the vehicle for tran-
sacting business, the agreement must
include the standards, rules, and regu-
lations of the Board.
One commentator expressed the
opinion that no substantial benefit
would accrue to the United States
under the limited exemption originally
proposed but that a complete exemp-
tion from all Cost Accounting Stand-
ards Board requirements would be
beneficial. Instead of the proposed ex-
emption and delegation, that commen-
tator recommended that all contracts
and subcontracts with foreign firms
and governments be exempt from all
CAS requirements. The Board does
not agree that a limited exemption
would produce no significant benefits
but that a complete exemption would.
Significant benefits accrue to the
United States Government from all
standards, in part because each stand-
ard enhances the likelihood of achiev-
ing the goal of uniformity and consist-
ency set forth in Pub. L. 91-379. The
Board believes that by exempting for-
eign contracts from some standards
there is a detriment rather than a
benefit insofar as the public law itself
is concerned. Nonetheless the Board
has been advised that the requirement
to apply some standards has become a
significant impediment to efficient,
successful contracting with foreign
concerns and foreign governments.
The exemption being granted today
will remove that impediment while
continuing to provide protection
through the application of CAS 401
and 402. In addition, foreign concerns
will still be required to file Disclosure
Statements.
The requirements of CAS 401 and
402 are fundamental to any sound cost
accounting program. In the Board's
view application of these standards is
essential to provide some assurance
that a contractor's cost accounting
practices are sufficient to provide reli-
able information on which to base the
negotiation, administration, and settle-
ment of contracts. Similarly, the re-
quirement for disclosure which is also
being continued unchanged, serves to
assure that necessary information
about cost accounting practices is
available to the Government.
Several commentators recommended
that in addition to contracts with for-
eign contractors, the Board should
exempt contracts with foreign govern-
ments. The Board has concluded that
this recommendation has merit and
the exemption being promulgated
today has been amended accordingly.
Because the exemption established in
1972 for the Canadian Commercial
39H-8
Supp. No. 5
Cost Accounting Standards Board
Corp., an agency of the Canadian Gov-
ernment, is included in today's exemp-
tion action, the 1972 exemption is
being withdrawn.
One commentator suggested a need
to define "foreign concerns" and an-
other recommended that "perform-
ance" be defined. The term "foreign
concern" has already been defined by
the Board in § 331.30(c)(2).
As to what constitutes "perform-
ance," the Board believes that in gen-
eral it encompasses the contractor's
activity under the contract up to the
point of inspection and acceptance of
the items called for by the contract.
However, because of the complexity
and variety of contracts, the Board be-
lieves that the contracting agency can
best determine whether a specific con-
tract is to be performed outside the
United States.
A number of commentators suggest-
ed various changes in the delegation
procedures proposed by the Board.
Since the Board is withdrawing the
delegation, there is no need to consid-
er these suggestions.
One commentator suggested that
the reference in § 331.30(c) to the As-
sistant Secretary of Defense (Installa-
tions and Logistics) be changed to re-
flect organizational changes in the De-
partment of Defense. This revision has
been made.
Accordingly 4 CFR Part 331 is
amended as follows:
39H-9
Supp. No. 5
Cost Accounting Standards Board
(This page left blank intentionally)
39H-10
Supp. No. 5
Cost Accounting Standards Board
PART 332-MODIFIED CONTRACT
COVERAGE
Add a new Part 332 as follows:
Sec.
332.10 Purpose.
332.20
Definition.
332.30 Applicability.
Solicitation.
332.40
332.50
Contract clause.
332.60
332.70
Post-award disclosure.
Interpretation.
332.80 Effective date.
AUTHORITY: Sec. 103, 84 Stat. 796; 50 U.S.C.
App. 2168.
§ 332.10
Purpose.
The regulations contained in this part
are promulgated to provide modified con-
tract coverage for certain classes of busi-
ness units.
§ 332.20
Definition.
The definitions set forth in § 331.20 of
this chapter and the following definitions
shall apply to this part.
(a) A "covered contract" is any nego-
tiated national defense prime contract
or subcontract which exceeds $100,000
and pursuant to requirements of the
Cost Accounting Standards Board is re-
quired to include a Cost Accounting
Standards clause (see 4 CFR Part 331
and this chapter).
(b) A "business unit" is any segment
of an organization, or an entire business
organization which is not divided into
segments.
(c) A "segment" is one of two or more
divisions, product departments, plants,
or other subdivisions of an organization
reporting directly to a home office, usu-
ally identified with responsibility for
profit and/or producing a product or
service. The term includes Government-
owned contractor-operated (GOCO) fa-
cilities, and joint ventures and subsidiar-
ies (domestic and foreign) in which the
organization has a majority ownership.
The term also includes those joint ven-
tures and subsidiaries (domestic and for-
eign) in which the organization has less
than a majority of ownership, but over
which it exercises control.
§ 332.30 Applicability.
(a) Except for the award of a single
covered contract of $10 million or more
the provisions of this part may be ap-
plied in lieu of Part 331 of this chapter
to any covered contract received by a
business unit which in its immediately
preceding cost accounting period re-
391
ceived less than $10 million in awards
of covered contracts: Providing, That
the sum of such awards equals less than
10 percent of the business unit's total
sales during that period.
(b) If in any cost accounting period
the provisions of this part are applied to
any one award to a business unit, they
must be applied to all covered contracts
awarded to that unit during that period,
except under the following conditions. If
the business unit receives a single con-
tract award of $10 million or more, that
contract must contain the clause set
forth in § 331.50 of this chapter. There-
after any covered contract awarded in
the same cost accounting period must
also contain that clause.
(c) Any covered contract awarded
subject to this part shall remain subject
thereto even if a portion of the contract
is performed in a subsequent cost ac-
counting period in which the business
unit is exempt from the requirements of
the Cost Accounting Standards Board or
ineligible to use this part.
§ 332.40
Solicitation.
Any covered contract awarded subject
to this part shall have been made in
conformity with the requirements of
§ 331.40, Solicitation Notice, of the
Board's regulations.
§ 332.50 Contract clause.
Upon appropriate certification by the
offeror that he is eligible and elects to
use this part, the following clause shall
be inserted in any resulting contract in
lieu of the clause prescribed in § 331.50
of this chapter.
DISCLOSURE AND CONSISTENCY OF COST
ACCOUNTING PRACTICES
(a) The contractor, in connection with
this contract shall: (1) Comply with the re-
quirements of 4 CFR Parts 401, Consistency
in Estimating, Accumulating and Reporting
Costs, and 402, Consistency in Allocating
Costs Incurred for the Same Purpose, in ef-
fect on the date of award of this contract.
(2) If it is a business unit of a company
required to submit a Disclosure Statement,
disclose in writing its cost accounting prac-
tices as required by regulations of the Cost
Accounting Standards Board. The required
disclosures must be made prior to contract
award unless the Contracting Officer provides
a written notice to the contractor authorizing
post-award submission in accordance with
regulations of the Cost Accounting Standards
Board. If the contractor has notified the Con-
tracting Officer that the Disclosure Statement
contains trade secrets and commercial or
financial information which is privileged and
Supp. No. 4
Cost Accounting Standards Board
(This page left blank intentionally)
109B
Cost Accounting Standards Board
Sec.
400.1
400.2
COST ACCOUNTING STANDARDS 1
PART 400-DEFINITIONS
Definitions.
Effective date.
AUTHORITY: The provisions of this Part
400 are issued under sec. 103, 84 Stat. 796;
50 U.S.C. App. 2168.
NOTE: Each of these definitions is followed
by a bracketed note which tells the number
of the section where it first appeared, and
the location of the preamble to the docu-
ment which added it.
§ 400.1 Definitions.
(a) This part defines various terms
used in standards promulgated by the
Cost Accounting Standards Board. Un-
less the text of a particular standard
demands a different definition or the def-
inition is expressly modified for a partic-
ular standard, terms defined herein
whenever used in any standard shall have
the meanings ascribed to them in this
part. For convenience, the definitions of
terms which are prominent in an indi-
vidual standard are reprinted in that
standard. The selection or non-selection
of a particular definition to be reprinted
in an individual standard, however, does
not affect the applicability of all defi-
nitions in this part to that standard.
Accrued Benefit Cost Method. An actu-
arial cost method under which units of
benefit are assigned to each cost account-
ing period and are valued as they ac-
crue—that is, based on the services per-
formed by each employee in the period
involved. The measure of normal cost un-
der this method for each cost account-
ing period is the present value of the
units of benefit deemed to be credited to
employees for service in that period. The
measure of the actuarial liability at a
plan's inception date is the present value
of the units of benefit credited to employ-
ees for service prior to that date. (This
method is also known as the Unit Credit
cost method.)
[This definition first appeared in § 412.30;
for the preamble see preamble A of the sup-
plement to Part 412]
Accumulating Costs. The collecting of
cost data in an organized manner, such
as through a system of accounts.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Actual cash value. The cost of re-
placing damaged property with other
property of like kind and quality in
37 F.R. 4171, Feb. 29, 1972.
110
the physical condition of the property
immediately prior to the damage.
[See $416.30; for preamble, see preamble A of
supplement to Part 416]
Actual cost. An amount determined
on the basis of cost incurred as distin-
guished from forecasted cost. Includes
standard cost properly adjusted for ap-
plicable variance.
[See §§ 401.30 and 407.30; for preamble, see
preamble B of supplement to Part 401 and
preamble A of supplement to Part 407]
Actuarial Assumption. A prediction of
future conditions affecting pension cost;
for example, mortality rate, employee
turnover, compensation levels, pension
fund earnings, changes in values of pen-
sion fund assets.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Cost Method. A technique
which uses actuarial assumptions to
measure the present value of future pen-
sion benefits and pension fund adminis-
trative expenses, and which assigns the
cost of such benefits and expenses to cost
accounting periods.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Gain and Loss. The effect on
pension cost resulting from differences
between actuarial assumptions and actu-
al experience.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial Liability. Pension cost attrib-
utable, under the actuarial cost method
in use, to years prior to the date of a par-
ticular actuarial valuation. As of such
date, the actuarial liability represents the
excess of the present value of the future
benefits and administrative expenses over
the present value of future contributions
for the normal cost for all plan partici-
pants and beneficiaries. The excess of
the actuarial liability over the value of
the assets of a pension plan is the Un-
funded Actuarial Liability.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Actuarial valuation. The determination, as of a
specified date, of the normal cost, actuarial lia-
bility, value of the assets of a pension fund, and
other relevant values for the pension plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
Supp. No. 5
Cost Accounting Standards Board
(This page left blank intentionally)
111B
Cost Accounting Standards Board
Home office. An office responsible for
directing or managing two or more, but
not necessarily all, segments of an orga-
nization. It typically establishes policy
for, and provides guidance to the seg-
ments in their operations. It usually per-
forms management, supervisory, or ad-
ministrative functions, and may also
perform service functions in support of
the operations of the various segments.
An organization which has intermediate
levels, such as groups, may have several
home offices which report to a common
home office. An intermediate organiza-
tion may be both a segment and a home
office.
Labor Cost at Standard. A pre-estab-
lished measure of the labor element of
cost, computed by multiplying labor-rate
standard by labor-time standard.
[See §407.30; for preamble, see preamble A
of supplement to Part 407]
Labor-Rate Standard. A pre-estab-
lished measure, expressed in monetary
terms, of the price of labor.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Labor-Time Standard. A pre-estab-
lished measure, expressed in temporal
terms, of the quantity of labor.
[See § 407.30; for preamble, see preamble A
[See § 403.30; for preamble, see preamble B of supplement to Part 407]
of supplement to Part 403]
Immediate-Gain Actuarial Cost Meth-
od. Any of the several actuarial cost
methods under which actuarial gains and
losses are included as part of the un-
funded actuarial liability of the pension
plan, rather than as part of the normal
cost of the plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
Indirect Cost. Any cost not directly
identified with a single final cost objec-
tive, but identified with two or more final
cost objectives or with at least one in-
termediate cost objective.
[See § 402.30; for preamble, see preamble A
of supplement to Part 402]
Indirect cost pool. A grouping of in-
curred costs identified with two or more
objectives but not identified specifically
with any final cost objective.
[See §§ 401.30; for preamble, see preamble
A of supplement to part 401]
Insurance administration expenses.
The contractor's costs of administer-
ing an insurance program, e.g., the
costs of operating an insurance or risk-
management department, processing
claims, actuarial fees, and service fees
paid to insurance companies, trustees,
or technical consultants.
[See $416.30; for preamble, see preamble A of
supplement to Part 416]
Intangible Capital Asset. An asset
that has no physical substance, has more
than minimal value, and is expected to
be held by an enterprise for continued
use or possession beyond the current ac-
counting period for the benefits it yields.
112
Material Cost at Standard. A pre-
established measure of the material ele-
ment of cost, computed by multiplying
material-price standard by material-
quantity standard.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Material Inventory Record. Any rec-
ord used for the accumulation of actual
or standard costs of a category of mate-
rial recorded as an asset for subsequent
cost allocation to one or more cost ob-
jectives.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Material-Price Standard. A pre-estab-
lished measure, expressed in monetary
terms, of the price of material.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Material-Quantity Standard. A pre-
established measure, expressed in physi-
cal terms, of the quantity of material.
[See § 407.30; for preamble, see Preamble A
of supplement to Part 407]
Moving Average Cost. An inventory
costing method under which an average
unit cost is computed after each acquisi-
tion by adding the cost of the newly ac-
quired units to the cost of the units of
inventory on hand and dividing this
figure by the new total number of units.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
Multiemployer Pension Plan. A plan to
which more than one employer contrib-
utes and which is maintained pursuant to
one or more collective bargaining agree-
ments between an employee organization
and more than one employer.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Supp. No. 5
Cost Accounting Standards Board
i
Normal Cost. The annual cost attrib-
utable, under the actuarial cost method
in use, to years subsequent to a particular
valuation date.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Operating revenue. Amounts accrued
or charged to customers, clients, and
tenants, for the sale of products manu-
factured or purchased for resale, for
services, and for rentals of property held
primarily for leasing to others. It in-
cludes both reimbursable costs and fees
under cost-type contracts and percent-
age-of-completion sales accruals except
that it includes only the fee for man-
agement contracts under which the con-
tractor acts essentially as an agent of the
Government in the erection or operation
of Government-owned facilities. It ex-
cludes incidental interest, dividends,
royalty, and rental income, and proceeds
from the sale of assets used in the
business.
[See § 403.30; for preamble, see preamble A
of supplement to Part 403]
Original complement of low cost equip-
ment. A group of items acquired for the
initial outfitting of a tangible capital
asset or an operational unit, or a new ad-
dition to either. The items in the group
individually cost less than the minimum
amount established by the contractor
for capitalization for the classes of as-
sets acquired but in the aggregate they
represent a material investment. The
group, as a complement, is expected to be
held for continued service beyond the
current period. Initial outfitting of the
unit is completed when the unit is ready
and available for normal operations.
[See § 408.30; for preamble, see preamble A
of supplement to Part 408]
Pay-As-You-Go Cost Method. A meth-
od of recognizing pension cost only when
benefits are paid to retired employees or
their beneficiaries.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Pension Plan. A deferred compensation
plan established and maintained by one
or more employers to provide systemati-
cally for the payment of benefits to plan
participants after their retirement: Pro-
vided, That the benefits are paid for life
or are payable for life at the option of
the employees. Additional benefits such
as permanent and total disability and
death payments, and survivorship pay-
ments to beneficiaries of deceased em-
113
ployees may be an integral part of a
pension plan.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Pension Plan Participant. Any em-
ployee or former employee of an em-
ployer or any member or former mem-
ber of an employee organization, who is
or may become eligible to receive a bene-
fit from a pension plan which covers em-
ployees of such employer or members of
such organization who have satisfied
the plan's participation requirements, or
whose beneficiaries are receiving or may
be eligible to receive any such benefit. A
participant whose employment status
with the employer has not been termi-
nated is an active participant of the em-
ployer's pension plan.
[See § 413.30; for preamble, see preamble A of
supplement to Part 412]
Pricing. The process of establishing the
amount or amounts to be paid in return
for goods or services.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Production Unit. A grouping of activi-
ties which either uses homogeneous in-
puts of direct material and direct labor
or yields homogeneous outputs such that
costs or statistics related to these homo-
geneous inputs or outputs are ap-
propriate as bases for allocating
variances.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Projected average loss. The estimat-
ed long-term average loss per period
for periods of comparable exposure to
risk of loss.
[See § 416.30; for preamble, see preamble
A of supplement to part 416]
Projected Benefit Cost Method. Any of
the several actuarial cost methods which
distribute the estimated total cost of all
of the employees' prospective benefits
over a period of years, usually their
working careers.
[See § 412.30; for preamble, see preamble A
of supplement to Part 412]
Proposal. Any offer or other submis-
sion used as a basis for pricing a con-
tract, contract modification or termina-
tion settlement or for securing payments
thereunder.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Supp. No. 5
Cost Accounting Standards Board
Repairs and maintenance. Mainte-
nance is the regularly recurring activity
of keeping assets in normal or expected
operating condition. Repair is the ac-
tivity of putting them back into normal
or expected operating condition. The to-
tal endeavor to obtain the expected serv-
ice during the life of tangible capital
assets is generally called repairs and
maintenance.
[See § 404.30; for preamble, see preamble A
of supplement to Part 404]
Reporting Costs. Provision of cost in-
formation to others. The reporting of
costs involves selecting relevant cost data
and presenting it in an intelligible man-
ner for use by the recipient.
[See § 401.30; for preamble, see preamble A
of supplement to Part 401]
Residual value. The proceeds (less re-
moval and disposal costs, if any, realized
upon disposition of a tangible capital
asset. It usually is measured by the net
proceeds from the sale or other disposi-
tion of the asset, or its fair value if the
asset is traded in on another asset. The
estimated residual value is a current
forecast of the residual value.
[See § 409.30; for preamble, see preamble A
of supplement to Part 409]
Self-insurance. The assumption or
retention of the risk of loss by the
contractor, whether voluntarily or in-
voluntarily. Self-insurance includes
the deductible portion of purchased
insurance.
[See $416.30; for preamble, see preamble A of
supplement to Part 416]
Self-insurance charge. A cost which
represents the projected average loss
under a self-insurance plan.
[See $416.30; for preamble, see preamble A of
supplement to Part 416]
Segment. One of two or more divisions,
product departments, plants, or other
subdivisions of an organization reporting
directly to a home office, usually identi-
fied with responsibility for profit and/or
producing a product or service. The term
includes Government-owned contractor-
operated (GOCO) facilities, and joint
ventures and subsidiaries (domestic and
foreign) in which the organization has a
majority ownership. The term also in-
cludes those joint ventures and subsidi-
aries (domestic and foreign) in which the
organization has less than a majority of
ownership, but over which it exercises
control.
[See § 403.30; for preamble, see preamble A
of supplement to Part 403]
Service life. The period of usefulness
of a tangible capital asset (or group of
assets) to its current owner. The period
may be expressed in units of time or
output. The estimated service life of a
tangible capital asset (or group of assets)
is a current forecast of its service life
and is the period over which depreciation
cost is to be assigned.
[See § 409.30; for preamble, see preamble A
of supplement to Part 409]
Spread-Gain Actuarial Cost Method.
Any of the several projected benefit
actuarial cost methods under which ac-
tuarial gains and losses are included as
part of the current and future normal
costs of the pension plan.
[See § 413.30; for preamble, see preamble A
of supplement to Part 413]
Standard Cost. Any cost computed with
the use of pre-established measures.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
Tangible capital asset. An asset that
has physical substance, more than mini-
mal value, and is expected to be held by
an enterprise for continued use or pos-
session beyond the current accounting
period for the services it yields.
[See § 404.30; for preamble, see preamble A
of supplement to Part 404]
Termination Gain or Loss. An actu-
arial gain or loss resulting from the dif-
ference between the assumed and actual
rates at which plan participants separate
from employment for reasons other than
retirement, disability, or death.
[See § 413.30; for preamble, see preamble A of
supplement to Part 413]
Unallowable cost. Any cost which,
under the provisions of any pertinent
law, regulation, or contract, cannot be
included in prices, cost reimbursements,
or settlements under a Government con-
tract to which it is allocable.
[See § 405.30; for preamble, see preamble A
of supplement to Part 405]
Variance. The difference between a
pre-established measure and an actual
measure.
[See § 407.30; for preamble, see preamble A
of supplement to Part 407]
{Weighted Average Cost. An inventory
costing method under which an average
unit cost is computed periodically by
dividing the sum of the cost of begin-
ning inventory plus the cost of acquisi-
114
Supp. No. 5
Cost Accounting Standards Board
tions, by the total number of units in-
cluded in these two categories.
[See § 411.30; for preamble, see preamble A
of supplement to Part 411]
[37 F.R. 4171, Feb. 29, 1972, as amended at
37 FR 26680, Dec. 14, 1972; 38 FR 5318,
Feb. 27, 1973; 38 FR 24195, Sept. 6, 1973; 38
FR 30739, Nov. 7, 1973; 38 FR 30732, Nov. 7,
1973; 39 FR 11869, Apr. 1, 1974; 39 FR 33681,
Sept. 19, 1974; 40 FR 4259, Jan. 29, 1975; 40
FR 19429, May 5, 1975; 40 FR 43873, Sept. 24,
1975; 40 FR 45417, Oct. 2, 1975]
§ 400.2
Effective date.
July 1, 1972.
[37 F.R. 9609, May 13, 1972]
114A
Cost Accounting Standards Board
(This page left blank intentionally)
114B
Cost Accounting Standards Board
PART 401-COST ACCOUNTING
STANDARD-CONSISTENCY IN ES-
TIMATING, ACCUMULATING AND
REPORTING COSTS
Sec.
401.10 General applicability.
401.20 Purpose.
401.30
Definitions.
401.40 Fundamental requirement.
401.50 Techniques for application.
401.60 Illustrations.
401.70
Exemptions.
401.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part 401
are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168.
SOURCE: The provisions of this Part 401
appear at 37 F.R. 4172, Feb. 29, 1972, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4172, February 29, 1972)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections; see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 401.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense
defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 401.20
Purpose.
The purpose of this Cost Accounting
Standard is to insure that each con-
tractor's practices used in estimating
costs for a proposal are consistent with
cost accounting practices used by him in
accumulating and reporting costs. Con-
sistency in the application of cost ac-
counting practices is necessary to en-
hance the likelihood that comparable
transactions are treated alike. With re-
spect to individual contracts, the consist-
ent application of cost accounting prac-
tices will facilitate the preparation of
reliable cost estimates used in pricing a
proposal and their comparison with the
costs of performance of the resulting
contract. Such comparisons provide one
important basis for financial control
over costs during contract performance
and aid in establishing accountability
for costs in the manner agreed to by both
parties at the time of contracting.
The comparisons also provide an im-
proved basis for evaluating estimating
capabilities.
§ 401.30 Definitions.
(a) The following definitions of terms
which are prominent in this standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in subpara-
graph (b) of this paragraph.
(1) Accumulating Costs. The collect-
ing of cost data in an organized manner,
such as through a system of accounts.
(2) Actual cost. An amount deter-
mined on the basis of cost incurred as
distinguished from forecasted cost. In-
cludes standard cost properly adjusted
for applicable variance.
(3) Estimating costs. The process of
forecasting a future result in terms of
cost, based upon information available
at the time.
(4) Indirect cost pool. A grouping of
incurred costs identified with two or more
objectives but not identified specifically
with any final cost objective.
(5) Pricing. The process of establish-
ing the amount or amounts to be paid
in return for goods or services.
(6) Proposal. Any offer or other sub-
mission used as a basis for pricing a con-
tract, contract modification or termina-
tion settlement or for securing payments
thereunder.
(7) Reporting costs. Provision of cost
information to others.
The reporting of costs involves selecting
115
Supp. No. 5
Cost Accounting Standards Board
relevant cost data and presenting it in
an intelligible manner for use by the
recipient.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this standard:
None.
[37 FR 4172, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES:
For preambles relating to
§ 401.30, see preambles A and B of the sup-
plement to this part.
§ 401.40 Fundamental requirement.
(a) A contractor's practices used in
estimating costs in pricing a proposal
shall be consistent with his cost account-
ing practices used in accumulating and
reporting costs.
(b) A contractor's cost accounting
practices used in accumulating and re-
porting actual costs for a contract shall
be consistent with his practices used in
estimating costs in pricing the related
proposal.
(c) The grouping of homogeneous
costs in estimates prepared for proposal
purposes shall not per se be deemed an
inconsistent application of cost account-
ing practices under paragraphs (a) and
(b) of this section when such costs are
accumulated and reported in greater de-
tail on an actual cost basis during con-
tract performance.
§ 401.50 Techniques for application.
(a) The standard allows grouping of
homogeneous costs in order to cover
those cases where it is not practicable to
estimate contract costs by individual
cost element or function. However, costs
estimated for proposal purposes shall be
presented in such a manner and in such
detail that any significant cost can be
compared with the actual cost accumu-
lated and reported therefor. In any event
the cost accounting practices used in
estimating costs in pricing a proposal
and in accumulating and reporting costs
on the resulting contract shall be con-
sistent with respect to: (1) The classi-
fication of elements or functions of cost
as direct or indirect; (2) the indirect cost
pools to which each element or function
of cost is charged or proposed to be
charged; and (3) the methods of allocat-
ing indirect costs to the contract.
(b) Adherence to the requirement of
§ 401.40 (a) of this standard shall be de-
termined as of the date of award of the
contract, unless the contractor has sub-
mitted cost or pricing data pursuant to
Public Law 87-653, in which case ad-
herence to the requirement of § 401.40(a)
shall be determined as of the date of
final agreement on price, as shown on
the signed certificate of current cost or
pricing data. Notwithstanding § 401.40
(b), changes in established cost account-
ing practices during contract perform-
ance may be made when authorized by
standards, rules, and regulations issued
by the Cost Accounting Standards
Board.
§ 401.60
Illustrations.
(a) The following examples are illus-
trative of applications of cost account-
ing practices which are deemed to be
consistent.
Practices used in estimating costs for
proposals
1. Contractor estimates an average direct
labor rate for manufacturing direct labor
by labor category or function.
2. Contractor estimates an average cost for
minor standard hardware items, including
nuts, bolts, washers, etc.
8. Contractor uses an estimated rate for
an estimated rate for
manufacturing overhead to be applied to
an estimated direct labor base. He identifies
the items included in his estimate of
manufacturing overhead and provides
supporting data for the estimated direct
labor base.
Practices used in accumulating and reporting
costs of contract performance
1. Contractor records manufacturing direct
labor based on actual cost for each indi-
vidual and collects such costs by labor
category or function.
2. Contractor records actual cost for minor
standard hardware items based upon in-
voices or material transfer slips.
3. Contractor accounts for manufacturing
overhead by individual items of cost which
are accumulated in a cost pool allocated
to final cost objectives on a direct labor
base.
116
Cost Accounting Standards Board
factors for estimating direct material
costs is an estimating practice which,
pursuant to Part 401, must be consistent
with the cost accounting practices used
in accumulating and reporting costs. The
Board notes however that Part 401
neither prescribes nor precludes any par-
ticular cost accounting practice. The
Board recognizes that the consistency
requirement of Part 401, as it pertains
to direct material costs, could be met in
a variety of ways. The Board is therefore
of the view that it would be neither ap-
propriate nor practical to prescribe by
means of this Interpretation the amount
of detail in accumulating and reporting
costs which is deemed to be consistent
with the use of percentage factors in
estimating costs. The Board believes that
the amount of detail which should be
maintained with respect to direct ma-
terial costs is a matter which is best left
for decision by the appropriate Govern-
ment procurement authorities on the
basis of facts and circumstances of each
situation. The Interpretation being pub-
lished today has been revised accordingly
and all references to the type of records
to be maintained or analyses to be per-
formed have been deleted.
6. APPLICATION TO DEVELOPMENTAL AND
RESEARCH TYPE CONTRACTS
Many commentators urged that this
Interpretation not apply to develop-
mental and research type contracts. They
said that since only material issued to
these kinds of contracts is charged to
such contracts, there would be no over-
statement of material costs. They urged
further that it would be impossible to
maintain actual cost records by contract
to record the additional material required
and that it was extremely difficult to esti-
mate additional material requirements
because of the lack of past experience.
Also, the commentators contended that
material requirements on such contracts
were not significant. Other commentators
suggested that this Interpretation should
not apply to cost type contracts.
It appears that these comments were
generated mainly by the impression that
the proposed Interpretation required
records or analyses to be maintained by
individual contract. As noted above, the
Interpretation has been revised to make
clear that no particular record or anal-
ysis is required by Part 401. The require-
ment for consistency in estimating, ac-
cumulating and reporting costs, how-
ever, applies to all contracts. The fact
that a development contract or cost-type
contract is involved does not remove this
requirement. The Board feels that the
changes made in the Interpretation
should serve to minimize the problems
described by these contractors.
7. APPLICATION TO STANDARD COST
ACCOUNTINg Systems
Several commentators suggested that
this Interpretation not apply to standard
cost systems. They argued that costs are
not accumulated by contract or product
and, therefore, compliance with the In-
terpretation would require a complicated
and expensive recording system. They
felt further that in setting standards,
they use past experience plus engineer-
ing adjustments and could be charged by
the Government with the need to comply
with the records requirement of the In-
terpretation for each of their Standards.
Contractors using standard costs for
material must comply with Part 407, the
Use of Standard Costs for Direct Mate-
rial and Direct Labor, which addresses
the accounting for direct material and
variances from standard costs of mate-
rial. In the opinion of the Board, these
contractors will be in compliance with
Part 401 as interpreted.
8. APPLICATION TO SPECIFIC FACTORS
Various commentators inquired about
the application of this Interpretation to
certain specific factors used in estimat-
ing contract price prosposals, not neces-
sarily related to the cost of additional
direct materials. Among the factors men-
tioned were those to provide for inflation,
contingencies resulting from indefinite or
incomplete bills of material, losses in
common inventory accounts, and miscel-
laneous small parts and hardware items.
As noted in the Interpretation, its need
was prompted by questions about the use
of percentage factors to estimate the
costs of "additional direct materials";
i.e., generally those direct materials not
incorporated in end items. Factors such
as those used to provide for inflation or
allowances for incomplete bills of mate-
rial do not represent costs of "additional
direct materials," as that phrase is used
in the Interpretation. In the opinion of
the Board, this interpretation does not
apply to the costs represented by such
factors.
Factors used in a proposal to provide
for inventory losses represent the costs of
additional materials which are governed
by this Interpretation. With respect to
119C
Supp. No. 1
Cost Accounting Standards Board
factors for small parts, the Board notes
that in accordance with Part 401, Para-
graph 401.60, Illustrations, a practice of
estimating an average cost for a minor
standard hardware item is considered to
be consistent with the practice of record-
ing the actual costs of such items.
The amount of detail to be used in
accumulating and recording such costs,
however, is a matter to be decided in ac-
cordance with this Interpretation.
9. APPLICATION OF INTERPRETATION TO
DIRECT LABOR
A number of commentators raised
questions concerning the applicability of
the Interpretation to direct labor. Sev-
eral commentators said it should not
apply to such labor but should be clearly
limited to direct materials. One com-
mentator felt that the Interpretation
was equally applicable to direct labor
and should so state.
As already noted in paragraph 1, above,
Part 401 includes specific provisions on
the consistency requirements regarding
direct labor. Accordingly, the Board is of
the opinion that no further specific cov-
erage of direct labor is required in this
Interpretation.
Therefore, the following Appendix is
added to Part 401:
D. preamble to amendment of 6-8-78. Material
below is preamble to revision to Section .10 of
Parts 401 through 409 as published in 43 FR
24819, June 8, 1978.
In the Federal Register of February 16,
1977 (42 FR 9391), the Board proposed
to amend section .10, General Applica-
bility, of standards 401 through 409 to
conform these sections to the general
applicability section as it appears in
standard 410 et seq. No comments were
received on this proposed amendment.
The Board considers this change to be ap-
propriate and is amending standards 401
through 409.
119D
Supp. No. 5
Cost Accounting Standards Board
PART 402-COST ACCOUNTING
STANDARD—CONSISTENCY IN AL-
LOCATING COSTS INCURRED FOR
THE SAME PURPOSE
Sec.
402.10 General applicability.
402.20 Purpose.
402.30
Definitions.
402.40 Fundamental requirement.
402.50 Techniques for application.
402.60
Illustrations.
402.70 Exemptions.
402.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part
402 are issued under sec. 103, 84 Stat. 796;
50 U.S.C. App. 2168.
SOURCE: The provisions of this Part 402
appear at 37 F.R. 4173, Feb. 29, 1972, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 4137, February 29, 1972)
is set forth in preamble A of the supple-
ment.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 402.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 402.20
Purpose.
The purpose of this standard is to re-
quire that each type of cost is allocated
only once and on only one basis to any
contract or other cost objective. The cri-
teria for determining the allocation of
costs to a product, contract, or other
cost objective should be the same for all
similar objectives. Adherence to these
cost accounting concepts is necessary to
guard against the overcharging of some
cost objectives and to prevent double
counting. Double counting occurs most
commonly when cost items are allocated
directly to a cost objective without elimi-
nating like cost items from indirect cost
pools which are allocated to that cost
objective.
§ 402.30
Definitions.
(a) The following definitions of terms
which are prominent in this standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this standard and are de-
fined in Part 400 of this chapter have
the meanings ascribed to them in that
part unless the text demands a differ-
ent definition or the definition is modi-
fied in paragraph (b) of this section.
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Cost objective. A function, organi-
zational subdivision contract or other
work unit for which cost data are de-
sired and for which provision is made to
accumulate and measure the cost to
processes, products, jobs, capitalized
projects, etc.
(3) Direct cost. Any cost which is
identified specifically with a particular
final cost objective. Direct costs are not
limited to items which are incorporated
in the end product as material or labor.
Costs identified specifically with a con-
tract are direct costs of that contract.
All costs identified specifically with other
final cost objectives of the contractor are
direct costs of those cost objectives.
(4) Final cost objective. A cost ob-
jective which has allocated to it both di-
rect and indirect costs, and, in the
contractor's accumulation system, is one
of the final accumulation points.
(5) Indirect cost. Any cost not di-
rectly identified with a single final cost
objective, but identified with two or
more final cost objectives or with at
least one intermediate cost objective.
(6) Indirect cost pool. A grouping of
incurred costs identified with two or
more cost objectives but not identified
specifically with any final cost objective.
Supp. No. 5
120
Cost Accounting Standards Board
(This page left blank intentionally)
120A
Cost Accounting Standards Board
PART 403-ALLOCATION OF HOME
OFFICE EXPENSES TO SEGMENTS
Sec.
403.10 General applicability.
403.20 Purpose.
403.30
Definitions.
403.40 Fundamental requirement.
403.50 Techniques for application.
403.60
403.70
Пlustrations.
Exemptions.
403.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part
403 are issued under sec. 103, 84 Stat. 796; 50
U.S.C. App. 2168.
SOURCE: The provisions of this Part 403
appear at 37 F.R. 22683, Dec. 14, 1972, unless
otherwise noted.
EFFECTIVE DATE: The provisions of this Part
403 must be followed for a contractor's fiscal
year beginning after Sept. 30, 1973.
NOTE: A Supplement, consisting of the
preambles to these regulations as they ap-
peared in the FEDERAL REGISTER, follows the
text of this part. These preambles, which are
intended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (37 FR 22683, December 14, 1972)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 403.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 403.20 Purpose.
(a) The purpose of this Cost Account-
ing Standard is to establish criteria for
allocation of the expenses of a home office
to the segments of the organization based
on the beneficial or causal relationship
between such expenses and the receiving
segments. It provides for (1) identifica-
tion of expenses for direct allocation to
segments to the maximum extent prac-
tical; (2) accumulation of significant
nondirectly allocated expenses into
logical and relatively homogeneous pools
to be allocated on bases reflecting the
relationship of the expenses to the seg-
ments concerned; and (3) allocation of
any remaining or residual home office
expenses to all segments. Appropriate im-
plementation of this Standard will limit
the amount of home office expenses
classified as residual to the expenses of
managing the organization as a whole.
(b) This Standard does not cover the
reallocation of a segment's share of home
office expenses to contracts and other
cost objectives.
§ 403.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this
chapter for convenience. Other terms
which are used in this Standard and
are defined in Part 400 of this chapter
have the meanings ascribed to them in
that part unless the text demands a
different definition or the definition is
modified in
in paragraph (b) of this
section:
129
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indi-
rect cost pool.
(2) Home office. An office responsible
for directing or managing two or more,
but not necessarily all, segments of an
organization. It typically establishes pol-
icy for, and provides guidance to the
segments in their operations. It usually
performs management, supervisory, or
administrative functions, and may also
perform service functions in support of
the operations of the various segments.
An organization which has intermediate
levels, such as groups, may have several
home offices which report to a common
home office. An intermediate organiza-
tion may be both a segment and a home
office.
(3) Operating revenue. Amounts ac-
crued or charged to customers, clients,
and tenants, for the sale of products
manufactured or purchased for resale,
for services, and for rentals of property
•
Supp. No. 5
Cost Accounting Standards Board
held primarily for leasing to others. It
includes both reimbursable costs and
fees under cost-type contracts and per-
centage-of-completion sales accruals ex-
cept that it includes only the fee for
management contracts under which the
contractor acts essentially as an agent
of the Government in the erection or op-
eration of Government-owned facilities.
It excludes incidental interest, dividends,
royalty, and rental income, and proceeds
from the sale of assets used in the busi-
ness.
(4) Segment. One of two or more divi-
sions, product departments, plants, or
other subdivisions of an organization re-
porting directly to a home office, usually
identified with responsibility for profit
and/or producing a product or service.
The term includes Government-owned
contractor-operated (GOCO) facilities,
and joint ventures and subsidiaries (do-
mestic and foreign) in which the orga-
nization has a majority ownership. The
term also includes those joint ventures
and subsidiaries (domestic and foreign)
in which the organization has less than
a majority of ownership, but over which
it exercises control.
(5) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or
possession beyond the current account-
ing period for the services it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this standard:
None.
[37 FR 22683, Dec. 14, 1972, as amended at 38
FR 30730, Nov. 7, 1973]
PREAMBLES: For preambles to amendments
to § 403.30, see preambles A and B of the sup-
plement to this part.
§ 403.40 Fundamental requirement.
(a)(1) Home office expenses shall be
allocated on the basis of the beneficial
or causal relationship between support-
ing and receiving activities. Such ex-
penses shall be allocated directly to
segments to the maximum extent prac-
tical. Expenses not directly allocated, if
significant in amount and in relation to
total home office expenses, shall be
grouped in logical and homogeneous ex-
pense pools and allocated pursuant to
paragraph (b) of this section. Such al-
locations shall minimize to the extent
practical the amount of expenses which
may be categorized as residual (those of
managing the organization as a whole).
These residual expenses shall be allo-
cated pursuant to paragraph (c) of this
section.
(2) No segment shall have allocated to
it as an indirect cost, either through a
homogeneous expense pool, or the resid-
ual expense pool, any cost, if other costs
incurred for the same purpose have been
allocated directly to that or any other
segment.
(b) The following subparagraphs pro-
vide criteria for allocation of groups of
home office expenses.
(1) Centralized service functions. Ex-
penses of centralized service functions
performed by a home office for its seg-
ments shall be allocated to segments on
the basis of the service furnished to or
received by each segment. Centralized
service functions performed by a home
office for its segments are considered
to consist of specific functions which, but
for the existence of a home office, would
be performed or acquired by some or all
of the segments individually. Examples
include centrally performed personnel
administration and centralized data
processing.
(2) Staff management of certain spe-
cific activities of segments. The expenses
incurred by a home office for staff man-
agement or policy guidance functions
which are significant in amount and in
relation to total home office expenses
shall be allocated to segments receiving
more than a minimal benefit over a base,
or bases, representative of the total spe-
cific activity being managed. Staff man-
agement or policy guidance to segments
is commonly provided in the overall di-
rection or support of the performance of
discrete segment activities such as man-
ufacturing, accounting, and engineering
(but see subparagraph (6) of this
paragraph).
(3) Line management of particular
segments or groups of segments. The ex-
pense of line management shall be allo-
cated only to the particular segment or
group of segments which are being man-
aged or supervised. If more than one seg-
ment is managed or supervised, the ex-
pense shall be allocated using a base or
bases representative of the total activity
of such segments. Line management is
considered to consist of management or
supervision of a segment or group of seg-
ments as a whole.
(4) Central payments or accruals. Cen-
tral payments or accruals which are
made by a home office on behalf of its
segments shall be allocated directly to
130
Cost Accounting Standards Board
not limited to foreign subsidiaries,
GOCO's, domestic subsidiaries with less
than a majority ownership, and joint
ventures.
(3) The portion of residual expenses to
be allocated to a segment pursuant to
§ 403.40 (c) (3) shall be the cost of esti-
mated or recorded efforts devoted to the
segments.
(e) Home office functions may be per-
formed by an organization which for
some purposes may not be a part of the
legal entity with which the Government
has contracted. This situation may arise,
for example, in instances where the
Government contracts directly with a
corporation which is wholly or partly
owned by another corporation. In this
case, the latter corporation serves as a
“home office," and the corporation with
which the contract is made is a "seg-
ment" as those terms are defined and
used in this Standard. For purposes of
contracts subject to this Standard, the
contracting corporation may only accept
allocations from the other corporation to
the extent that such allocations meet the
requirements set forth in this Standard
for allocation of home office expenses to
segments.
[37 FR 4173, Feb. 29, 1972, as amended
at 38 FR 30730, Nov. 7, 1973 and at 43
FR 9775, Mar. 10, 1978]
PREAMBLES: For preambles relating to
§ 403.50, see preambles A and B of the
supplement to this part, except for pre-
amble on deletion of 403.50(c)(2). For
preamble on that amendment see pre-
amble J in supplement to part 331.
§ 403.60
Illustrations.
(a) The following table lists some
typical pools, together with illustrative
allocation bases which could be used in
appropriate circumstances:
Home office expense or function
Centralized service functions:
1. Personnel administration__
2. Data processing services___.
3. Centralized
tracting.
purchasing and subcon-
4. Centralized warehousing--.
5. Company aircraft service__
6. Central telephone service__
(b) The selection of a base for allo-
cating centralized service functions shall
be governed by the criteria established
in § 403.50(b).
(c) The listed allocation bases in this
Illustrative allocation bases
1. Number of personnel, labor hours, pay-
roll, number of hires.
2. Machine time, number of reports.
3. Number of purchase orders, value of pur-
chases, number of items.
4. Square footage, value of material, volume.
5. Actual or standard rate per hour, mile,
passenger mile, or similar unit.
6. Usage costs, number of instruments.
section are illustrative. Other bases for
allocation of home office expenses to seg-
ments may be used if they are substan-
tially in accordance with the beneficial or
casual relationships outlined in § 403.40.
133
Supp. No. 4
Cost Accounting Standards Board
Home office expense or function
Staff management of specific activities:
1. Personnel management.
2. Manufacturing policies (quality control,
industrial engineering, production,
scheduling, tooling, inspection and
testing, etc.).
3. Engineering policies.
4. Material/purchasing policies.
5. Marketing policies.
Central payments or accruals:
1. Pension expenses...
2. Group insurance expenses…---
3. State and local income taxes and fran-
chise taxes.
§ 403.70
Exemptions.
(a) Any contractor or subcontractor
which together with its subsidiaries did
not receive net awards of negotiated
national defense prime contracts during
Federal fiscal year 1971 (July 1, 1970,
through June 30, 1971) totaling more
than $30 million is exempt from this
Standard This exemption expires on
March 10, 1978. Any contractor, unless
otherwise exempt, who receives a nego-
tiated national defense contract after
March 10, 1978, shall be required to com-
ply at the start of his first cost account-
ing period following receipt of that
award.
(b) This standard shall not apply to
contractors who are subject to the pro-
visions of Federal Management Circu-
lar 74-4 (Principles for Determining
Costs Applicable to Grants and Con-
tracts with State and Local Govern-
-ments).
Illustrative allocation bases
1. Number of personnel, labor hours, payroll,
number of hires.
2. Manufacturing cost input, manufacturing
direct labor.
8. Total engineering costs, engineering di-
rect labor, number of drawings.
4. Number of purchase orders, value of pur-
chases.
5. Sales, segment marketing costs.
1. Payroll or other factor on which total
payment is based.
2. Payroll or other factor on which total
payment is based.
3. Any base or method which results in an
allocation that equals or approximates a
segment's proportionate share of the tax
imposed by the jurisdiction in which the
segment does business, as measured by
the same factors used to determine tax-
able income for that jurisdiction.
[37 FR 4173, Feb. 29, 1972, as amended at 40
FR 32749, Aug. 4, 1975 and 43 FR 24819,
June 8, 1978]
PREAMBLES: For preambles affecting § 403.70
see preambles A C and D of the supplement to
this part and preamble K in the supplement to
Part 331. For preamble to superseded regula-
tions, see preamble B of the supplement.
§ 403.80
Effective date.
(a) This standard shall be followed by each
contractor as of the beginning of his
next fiscal year after September 30, 1973.
The effective date of this standard is
July 1, 1973.
[38 FR 7447, Mar. 22, 1973]
PREAMBLES: Preambles A and Dof the sup
plement to this part explains how effective
dates are determined.
134
Supp. No. 5
Cost Accounting Standards Board
Sec.
PART 404-CAPITALIZATION OF
TANGIBLE ASSETS
404.10 General applicability.
404.20 Purpose.
404.30
404.40
404.50
404.60
404.70
Definitions.
Fundamental requirement.
Techniques for application.
Illustrations.
Exemptions.
404.80 Effective date.
Supplement-Preambles
AUTHORITY: 84 Stat. 796, sec. 103, 50 U.S.C
App. 2168.
SOURCE: 38 FR 5321, Feb. 27, 1973, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDeral RegisTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 5318, February 27, 1973)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to; Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 404.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30
(§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 404.20 Purpose.
This Standard requires that, for pur-
poses of cost measurement, contractors
establish and adhere to policies with re-
spect to capitalization of tangible assets
which satisfy criteria set forth herein.
Normally, cost measurements are based
on the concept of enterprise continuity;
this concept implies that major asset ac-
quisitions will be capitalized, so that the
cost applicable to current and future
accounting periods can be allocated to
cost objectives of those periods. A capi-
143
talization policy in accordance with this
Standard will facilitate measurement of
costs consistently over time.
§ 404.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are defined
in Part 400 of this chapter have the
meanings ascribed to them in that part
unless the text demands a different defil-
nition or the definition is modified in
paragraph (b) of this section:
(1) Asset accountability unit. A tan-
gible capital asset which is a component
of plant and equipment that is capital-
ized when acquired or whose replacement
is capitalized when the unit is removed,
transferred, sold, abandoned, demolished,
or otherwise disposed of.
(2) Original complement of low cost
equipment. A group of items acquired
for the initial outfitting of a tangible
capital asset or an operational unit, or
a new addition to either. The items in
the group individually cost less than
the minimum amount established by the
contractor for capitalization for the
classes of assets acquired but in the ag-
gregate they represent a material invest-
ment. The group, as a complement, is
expceted to be held for continued service
beyond the current period. Initial out-
fitting of the unit is completed when
the unit is ready and available for nor-
mal operations.
(3) Repairs and maintenance. Main-
tenance is the regularly recurring activ-
ity of keeping assets in normal or ex-
pected operating condition. Repair is the
activity of putting them back into nor-
mal or expected operating condition. The
total endeavor to obtain the expected
service during the life of tangible capital
assets is generally called repairs and
maintenance.
(4) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or
possession beyond the current accounting
period for the service it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
Supp. No. 5
Cost Accounting Standards Board
[87 FR 4173, Feb. 29, 1972, as amended at 38
FR 30730, Nov. 7, 1978]
PREAMBLES: For preambles to amendments
to § 404.30, see preambles A and B of the
supplement to this part.
§ 404.40 Fundamental requirement.
(a) The acquisition cost of tangible
capital assets shall be capitalized. Capi-
talization shall be based upon a written
policy that is reasonable and consistently
applied.
(b) The contractor's policy shall des-
ignate economic and physical character-
istics for capitalization of tangible
assets.
(1) The contractor's policy shall des-
ignate a minimum service life criterion,
which shall not exceed 2 years, but which
may be a shorter period. The policy shall
also designate a minimum acquisition
cost criterion which shall not exceed
$500, but which may be a smaller
amount.
(2) The contractor's policy may desig-
nate other specific characteristics which
are pertinent to his capitalization policy
decisions (e.g., class of asset, physical
size, identifiability and controllability,
the extent of integration or independ-
ence of constituent units).
(3) The contractor's policy shall pro-
vide for identification of asset account-
ability units to the maximum extent
practical.
(4) The contractor's policy may desig-
nate higher minimum dollar limitations
for original complement of low cost
equipment and for betterments and im-
provements than the limitation estab-
lished in accordance with paragraph (b)
(1) of this section, provided such higher
limitations are reasonable in the con-
tractor's circumstances.
(c) Tangible assets shall be capital-
ized when both of the criteria in the
contractor's policy as required in para-
graph (b)(1) of this section are met,
except that assets described in para-
graph (b)(4) of this section shall be
capitalized in accordance with the cri-
teria established in accordance with that
paragraph.
(d) Costs incurred subsequent to the
acquisition of a tangible capitai asset
which result in extending the life or in-
creasing the productivity of that asset
(e.g., betterments and improvements)
and which meet the contractor's estab-
lished criteria for capitalization shall be
capitalized with appropriate accounting
for replaced asset accountability units.
However, costs incured for repairs and
maintenance to a tangible capital asset
which either restore the asset to, or
maintain it at, its normal or expected
service life or production capacity shall
be treated as costs of the current period.
§ 404.50 Techniques for application.
(a) The cost to acquire a tangible
capital asset includes the purchase price
of the asset and costs necssary to pre-
pare the asset for use.
(1) The purchase price of an asset
shall be adjusted to the extent practical
by premiums and extra charges paid or
discounts and credits received which
properly reflect an adjustment in the
purchase price.
(1) Purchase price is the consideration
given in exchange for an asset and is
determined by cash paid, or to the extent
payment is not made in cash, in an
amount equivalent to what would be the
cash price basis. Where this amount is
not available, the purchase price is deter-
mined by the current value of the con-
sideration given in exchange for the
asset. For example, current value for a
credit instrument is the amount imme-
diately required to settle the obligation
or the amount of money which might
have been raised directly through the use
of the same instrument employed in
making the credit purchase. The current
value of an equity security is its market
value. Market value is the current or pre-
vailing price of the security as indicated
by recent market quotations. If such
values are unavailable or not appropriate
(thin market, volatile price movement,
etc.), an acceptable alternative is the
fair value of the asset acquired.
(ii) Donated assets which, at the time
of receipt, meet the contractor's criteria
for capitalization shall be capitalized at
their fair value at that time.
(2) Costs necessary to prepare the as-
set for use include the cost of placing the
asset in location and bringing the asset
to a condition necessary for normal or
expected use. Where material in amount.
such costs, including initial inspection
and testing, installation and similar ex-
penses, shall be capitalized.
(b) Tangible capital assets constructed
or fabricated by a contractor for its own
use shall be capitalized at amounts which
include all indirect costs properly allo-
cable to such assets. This requires the
capitalization of general and administra-
tive expenses when such expenses are
identifiable with the constructed asset
144
Cost Accounting Standards Board
Sec.
PART 405-ACCOUNTING FOR
UNALLOWABLE COSTS
405.10 General applicability.
405.20 Purpose.
405.30
Definitions.
405.40 Fundamental requirement.
405.50 Techniques for application.
405.60 Пlustrations.
405.70
Exemptions.
405.80 Effective date.
Supplement-Preambles
AUTHORITY: The provisions of this Part 405
are issued under 84 Stat. 796, Sec. 103 (50
U.S.C. App. 2168).
SOURCE: 38 FR 24198, Sept. 6, 1973, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 24198, September 6, 1973)
is set forth in preamble A of the supple-
ment.
For preambles to amendments and revisions
which affect only certain sections, see the
references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 405.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter)
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
403]
§ 405.20
Purpose.
(a) The purpose of this Cost Account-
ing Standard is to facilitate the negotia-
tion, audit, administration and settle-
ment of contracts by establishing
guidelines covering: (1) Identification
of costs specifically described as unallow-
able, at the time such costs first become
defined or authoritatively designated as
unallowable; and (2) the cost account-
153
ing treatment to be accorded such iden-
tified unallowable costs in order to pro-
mote the consistent application of sound
cost accounting principles covering all
incurred costs. The Standard is predi-
cated on the proposition that costs in-
curred in carrying on the activities of
an enterprise-regardless of the allow-
ability of such costs under Government
contracts are allocable to the cost ob-
jectives with which they are identified
on the basis of their beneficial or causal
relationships.
(b) This Standard does not govern
the allowability of costs. This is a func-
tion of the appropriate procurement or
reviewing authority.
§ 405.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section:
(1) Directly associated cost. Any cost
which is generated solely as a result of
the incurrence of another cost, and which
would not have been incurred had the
other cost not been incurred.
(2) Expressly unallowable cost. A
particular item or type of cost which,
under the express provisions of an ap-
plicable law, regulation, or contract, is
specifically named and stated to be un-
allowable.
(3) Indirect cost. Any cost not di-
rectly identified with a single final cost
objective, but identified with two or more
final cost objectives or with at least one
intermediate cost objective.
(4) Unallowable cost. Any cost
which, under the provisions of any perti-
nent law, regulation, or contract, cannot
be included in prices, cost reimburse-
ments, or settlements under a Govern-
ment contract to which it is allocable.
(b) The following modifications of
definitions set forth is Part 400 of this
chapter are applicable to this Standard:
None.
§ 405.40 Fundamental requirement.
(a) Costs expressly unallowable or
mutually agreed to be unallowable, in-
cluding costs mutually agreed to be un-
Supp. No. 5
Cost Accounting Standards Board
allowable directly associated costs, shall
be identified and excluded from any bill-
ing, claim, or proposal applicable to a
Government contract.
(b) Costs which specifically become
designated as unallowable as a result of a
written decision furnished by a contract-
ing officer pursuant to contract disputes
procedures shall be identified if included
in or used in the computation of any
billing, claim, or proposal applicable to a
Government contract. This identification
requirement applies also to any costs in-
curred for the same purpose under like
circumstances as the costs specifically
identified as unallowable under either
this paragraph or paragraph (a) of this
section.
(c) Costs which, in a contracting
officer's written decision furnished pur-
suant to contract disputes procedures,
are designated as unallowable directly
associated costs of unallowable costs cov-
ered by either paragraph (a) or (b) of
this section shall be accorded the identi-
fication required by paragraph (b) of this
section.
(d) The costs of any work project not
contractually authorized, whether or not
related to performance of a proposed or
existing contract, shall be accounted for,
to the extent appropriate, in a manner
which permits ready separation from the
costs of authorized work projects.
(e) All unallowable costs covered by
paragraphs (a) through (d) of this sec-
tion shall be subject to the same cost
accounting principles governing cost al-
locability as allowable costs. In circum-
stances where these unallowable costs
normally would be part of a regular
indirect-cost allocation base or bases,
they shall remain in such base or bases.
Where a directly associated cost is part
of a category of costs normally included
in an indirect-cost pool that will be al-
located over a base containing the unal-
lowable cost with which it is associated,
such a directly associated cost shall be
retained in the indirect-cost pool and be
allocated through the regular allocation
process.
(f) Where the total of the allocable
and otherwise allowable costs exceeds a
limitation-of-cost or ceiling-price provi-
sion in a contract, full direct and indirect
cost allocation shall be made to the con-
tract cost objective, in accordance with
established cost accounting practices and
Standards which regularly govern a given
entity's allocations to Government con-
tract cost objectives. In any determina-
tion of unallowable cost overrun, the
amount thereof shall be identified in
terms of the excess of allowable costs
over the ceiling amount, rather than
through specific identification of partic-
ular cost items or cost elements.
§ 405.50 Techniques for application.
(a) The detail and depth of records
required as backup support for proposals,
billings, or claims shall be that which is
adequate to establish and maintain visi-
bility of identified unallowable costs (in-
cluding directly associated costs), their
accounting status in terms of their
allocability to contract cost objectives,
and the cost accounting treatment which
has been accorded such costs. Adherence
to this cost accounting principle does not
require that allocation of unallowable
costs to final cost objectives be made in
the detailed cost accounting records. It
does require that unallowable costs be
given appropriate consideration in any
cost accounting determinations govern-
ing the content of allocation bases used
for distributing indirect costs to cost ob-
jectives. Unallowable costs involved in
the determination of rates used for
standard costs, or for indirect-cost bid-
ding or billing, need be identified only at
the time rates are proposed, established,
revised or adjusted.
(b) The visibility requirement of para-
graph (a) above may be satisfied by any
form of cost identification which is ade-
quate for purposes of contract cost de-
termination and verification. The
Standard does not require such cost
identification for purposes which are not
relevant to the determination of Govern-
ment contract cost. Thus, to provide
visibility for incurred costs, acceptable
alternative practices would include (1)
the segregation of unallowable costs in
separate accounts maintained for this
purpose in the regular books of account,
(2) the development and maintenance
of separate accounting records or work-
papers, or (3) the use of any less formal
cost accounting techniques which estab-
lishes and maintains adequate cost
identification to permit audit verification
of the accounting recognition given un-
allowable costs. Contractors may satisfy
the visibility requirements for estimated
costs either (1) by designation and de-
scription (in backup data, workpapers,
etc.) of the amounts and types of any
unallowable costs which have specifically
been identified and recognized in making
the estimates, or (2) by description of
154
Cost Accounting Standards Board
will be substantial and will greatly out-
weigh any added costs.
11. Effective date and application.—
With respect to the date that this stand-
ard becomes effective, it is anticipated
that its provisions will be applicable to
all solicitations issued on or after Janu-
ary 1, 1974, which are likely to lead to
contracts covered by Standards, rules,
and regulations of the Cost Accounting
Standards Board.
There is also being published today an
amendment to Part 400. Definitions, to
incorporate in that part the words and
phrases defined in § 405.30 of the
Standard.
163
Cost Accounting Standards Board
PART 406-COST ACCOUNTING STAND-
ARD-COST ACCOUNTING PERIOD
Sec.
406.10 General applicability.
406.20 Purpose.
406.30
Definitions.
406.40 Fundamental requirement.
406.50 Techniques for application.
406.60
406.70
Illustrations.
Exemptions.
406.80 Effective date.
Supplement_Preambles
AUTHORITY: Sec. 719, Defense Production
Act of 1950, as amended (Pub. L. 91-379, 50
U.S.C. app. 2168).
SOURCE: 38 FR 30732, Nov. 7, 1973 unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (38 FR 30732, November 7, 1973)
is set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 406.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 406.20
Purpose.
The purpose of this Cost Accounting
Standard is to provide criteria for the
selection of the time periods to be used
as cost accounting periods for contract
cost estimating, accumulating, and re-
porting. This Standard will reduce the
effects of variations in the flow of costs
within each cost accounting period. It
will also enhance objectivity, consistency,
and verifiability, and promote uniformity
and comparability in contract cost meas-
urements.
§ 406.30 Definitions.
(a) The following definitions which are
prominent in this Standard are reprinted
from Part 400 of this chapter for con-
venience. Other terms which are used in
this Standard and are defined in Part
400 of this chapter have the meanings
ascribed to them in that part unless the
text demands a different definition or the
definition is modified in paragraph (b)
of this section.
164
(1) Allocate. To assign an item of cost,
or a group of items of cost, to one or
more cost objectives. This term includes
both direct assignment of cost and the
reassignment of a share from an indirect
cost pool.
(2) Cost objective. A function, organi-
zational subdivision, contract or other
work unit for which cost data are desired
and for which provision is made to ac-
cumulate and measure the cost of proc-
esses, products, jobs, capitalized projects,
etc.
(3) Fiscal year. The accounting period
for which annual financial statements
are regularly prepared, generally a pe-
riod of 12 months, 52 weeks, or 53 weeks.
(4) Indirect cost pool. A grouping of
incurred costs identified with two or
more cost objectives but not identified
specifically with any final cost objective.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable: None.
§ 406.40
Fundamental requirement.
(a) A contractor shall use his fiscal
year as his cost accounting period, except
that:
(1) Costs of an indirect function which
exists for only a part of a cost accounting
period may be allocated to cost objectives
of that same part of the period as pro-
vided in § 406.50(a).
(2) An annual period other than the
fiscal year may, as provided in § 406.50
(d), be used as the cost accounting period
if its use is an established practice of the
contractor.
(3) A transitional cost accounting pe-
riod other than a year shall be used
whenever a change of fiscal year occurs.
(4) Where a contractor's cost account-
ing period is different from the reporting
Supp. No. 5
Cost Accounting Standards Board
PART 407-USE OF STANDARD COSTS
FOR DIRECT MATERIAL AND DIRECT
LABOR
Sec
407.10 General applicability.
407.20 Purpose.
407.30
407.40
Definitions.
Fundamental requirement.
407.50 Techniques for application
407.60
407.70
Illustrations.
Exemptions.
407.80 Effective date.
Supplement-Preambles
AUTHORITY: 84 Stat. 796, sec. 103, 50 U.S.C.
App. 2168.
SOURCE: 39 FR 11871, Apr. 1, 1974, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDeral RegisTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (39 FR 11871, April 1, 1974) is set
forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 407.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401}
§ 407.20
Purpose.
(a) The purpose of this Cost Account-
ing Standard is to provide criteria under
which standard costs may be used for
estimating, accumulating, and reporting
costs of direct material and direct labor;
and to provide criteria relating to the es-
tablishment of standards, accumulation
of standard costs, and accumulation and
disposition of variances from standard
costs. Consistent application of these cri-
teria where standard costs are in use will
improve cost measurement and cost as-
signment.
(b) This Cost Accounting Standard is
not intended to cover the use of pre-
established measures solely for estimat-
ing.
§ 407.30
Definitions.
(a) The following definitions of terms
which are prominent in this Cost Ac-
counting Standard are reprinted from
Part 400 of this chapter for convenience.
Other terms which are used in this Cost
Accounting Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section.
(1) Labor cost at standard. A pre-es-
tablished measure of the labor element
of cost, computed by multiplying labor-
rate standard by labor-time standard.
(2) Labor-rate standard. A pre-estab-
lished measure, expressed in monetary
terms, of the price of labor.
(3) Labor-time standard. A pre-estab-
lished measure, expressed in temporal
terms, of the quantity of labor.
(4) Material cost at standard. A pre-
established measure of the material ele-
ment of cost, computed by multiplying
material-price standard by material-
quantity standard.
(5) Material-price standard. A pre-
established measure, expressed in mone-
tary terms, of the price of material.
(6) Material-quantity standard. A pre-
established measure, expressed in phys-
ical terms, of the quantity of material.
(7) Production unit. A grouping of ac-
tivities which either uses homogeneous
inputs of direct material and direct labor
or yields homogeneous outputs such that
the costs or statistics related to these
homogeneous inputs or outputs are ap-
propriate as bases for allocating vari-
ances.
(8) Standard cost. Any cost computed
with the use of pre-established measures.
(9) Variance. The difference between a
pre-established measure and an actual
measure.
(b) The following modifications of def-
initions set forth in Part 400 of this
chapter are applicable to this Cost Ac-
counting Standard:
171
(1) Actual cost. An amount deter-
Supp. No. 5
Cost Accounting Standards Board
mined on the basis of cost incurred.
§ 407.40 Fundamental requirement.
Standard costs may be used for esti-
mating, accumulating, and reporting
costs of direct material and direct labor
only when all of the following criteria
are met:
(a) Standard costs are entered into
the books of account;
(b) Standard costs and related vari-
ances are appropriately accounted for at
the level of the production unit; and
(c) Practices with respect to the set-
ting and revising of standards, use of
standard costs, and disposition of vari-
ances are stated in writing and are con-
sistently followed.
§ 407.50 Techniques for application.
(a) (1) A contractor's written state-
ment of practices with respect to stand-
ards shall include the bases and criteria
(such as engineering studies, experience,
or other supporting data) used in setting
and revising standards; the period dur-
ing which standards are to remain ef-
fective; the level (such as ideal or real-
istic) at which material-quantity stand-
ards and labor-time standards are set;
and conditions (such as those expected
to prevail at the beginning of a period)
which material-price standards and
labor-rate standards are designed to
reflect.
(2) Where only either the material
price or material quantity is set at stand-
ard, with the other component stated
at actual, the result of the multiplication
shall be treated as material cost at stand-
ard. Similarly, where only either the
labor rate or labor time is set at standard,
with the other component stated at ac-
tual, the result of the multiplication shall
be treated as labor cost at standard.
(3) A labor-rate standard may be set
to cover a category of direct labor only
if the functions performed within that
category are not materially disparate
and the employees involved are inter-
changeable with respect to the functions
performed.
(4) A labor-rate standard may be set
to cover a group of direct labor workers
who perform disparate functions only
under either
either one of the following
conditions:
(1) Where that group of workers all
work in a single production unit yield-
ing homogeneous outputs (in this case,
the same labor-rate standard shall be ap-
plied to each worker in that group), or
(ii) Where that group of workers, in
the performance of their respective func-
tions, forms an integral team (in this
case, a labor-rate standard shall be set
for each integral team).
(b)(1) Material-price standards may
be used and their related variances may
be recognized either at the time pur-
chases of material are entered into the
books of account or at the time material
cost is allocated to production units.
(2) Where material-price standards
are used and related variances are rec-
ognized at the time purchases of mate-
rial are entered into the books of account,
they shall be accumulated separately by
homogeneous groupings of material. Ex-
amples of homogeneous groupings of ma-
terial are:
(1) Where prices of all items in that
grouping of material are expected to fluc-
tuate in the same direction and at sub-
stantially the same rate, or
(ii) Where items in that grouping of
material are held for use in a single
production unit yielding homogeneous
outputs.
(3) Where material-price variances
are recognized at the time purchases of
material are entered into the books of
account, variances of each homogeneous
grouping of material shall be allocated
(except as provided in paragraph (b)(4)
of this section), at least annually, to
items in purchased-items inventory and
to production units receiving items from
that homogeneous grouping of mate-
rial, in accordance with either one of the
following practices, which shall be
consistently followed:
(1) Items in purchased-items inven-
tory of a homogeneous grouping of mate-
rial are adjusted from standard cost to
actual cost; the balance of the material-
price variance, after reflecting these ad-
justments, shall be allocated to produc-
tion units on the basis of the total of
standard cost of material received from
that homogeneous grouping of material
by each of the production units; or
(ii) Items, at standard cost, in pur-
chased-items inventory of a homogene-
ous grouping of material, are treated,
collectively, as a production unit; the
material-price variance shall be allocated
to production units on the basis of stand-
ard cost of material received from that
homogeneous grouping of material by
each of the production units.
(4) Where material-price variances
are recognized at the time purchases of
material are entered into the books of
account, variances of each homogeneous
grouping of material which are insig-
172
Cost Accounting Standards Board
PART 408-ACCOUNTING FOR COSTS OF
COMPENSATED PERSONAL ABSENCE
Sec.
408.10 General applicability.
408.20 Purpose.
Definitions.
408.30
408.40
Fundamental requirement.
408.50
Techniques for application.
408.60
408.70
Illustrations.
Exemptions.
408.80 Effective date.
Supplement_Preambles
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168).
SOURCE: 39 FR 33684, Sept. 19, 1974, Unless
otherwise voted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDeral Register, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (39 FR 33681, September 19,
1974) is set forth in preamble A of the
supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 408.10
General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 24819, June 8, 1978; for pre-
amble, see preamble D in supplement to Part
401]
§ 408.20
Purpose.
The purpose of this Standard is to im-
prove, and provide uniformity in, the
measurement of costs of vacation, sick
leave, holiday, and other compensated
personal absence for a cost accounting
period, and thereby increase the proba-
bility that the measured costs are allo-
cated to the proper cost objectives.
§ 408.30
Definitions.
(a) The following definitions of terms
which are prominent in this Standard
are reprinted from Part 400 of this chap-
ter for convenience. Other terms which
are used in this Standard and are defined
in Part 400 of this chapter have the
meaning ascribed to them in that part
unless the text demands a different
definition or the definition is modified in
paragraph (b) of this section:
(1) Compensated personal absence.
Any absence from work for reasons such
as illness, vacation, holidays, jury duty
or military training, or personal activi-
ties, for which an employer pays com-
pensation directly to an employee in
accordance with a plan or custom of the
employer.
(2) Entitlement. An employee's right,
whether conditional or unconditional, to
receive a determinable amount of com-
pensated personal absence, or pay in lieu
thereof.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard.
None.
§ 408.40 Fundamental requirement.
(a) The costs of compensated personal
absence shall be assigned to the cost ac-
counting period or periods in which the
entitlement was earned.
(b) The costs of compensated personal
absence for an entire cost accounting
period shall be allocated pro-rata on an
annual basis among the final cost objec-
tives of that period.
179
§ 408.50 Techniques for application.
(a) Determinations. Each plan or cus-
tom for compensated personal absence
shall be considered separately in deter-
mining when entitlement is earned. If a
plan or custom is changed or a new plan
or custom is adopted, then a new deter-
mination shall be made beginning with
the first cost accounting period to which
such new or changed plan or custom
applies.
(b) Measurement of entitlement. (1)
For purposes of compliance with $408.40
(a), compensated personal absence is
earned at the same time and in the same
amount as the employer becomes liable
to compensate the employee for such ab-
sence if the employer terminates the
employee's employment for lack of work
or other reasons not involing discipli-
nary action, in accordance with a plan or
Supp. No. 5
Cost Accounting Standards Board
custom of the employer. Where a new
employee must complete a probationary
period before the employer becomes li-
able, the employer may nonetheless treat
such service as creating entitlement in
any computations required by this
Standard, provided that he does so con-
sistently.
(2) Where a plan or custom provides
for entitlement to be determined as of
the first calendar day or the first busi-
ness day of a cost accounting period
based on service in the preceding cost
accounting period, the entitlement shall
be considered to have been earned, and
the employer's liability to have arisen, as
of the close of the preceding cost ac-
counting period.
(3) In the absence of a determinable
liability, in accordance with paragraph
(b)(1) of this section, compensated per-
sonal absence will be considered to be
earned only in the cost accounting pe-
riod in which it is paid.
(c) Determination of employer's lia-
bility. In computing the cost of compen-
sated personal absence, the computation
shall give effect to the employer's liabil-
ity in accordance with the following
paragraphs:
(1) The estimated liability shall in-
clude all earned entitlement to com-
pensated personal absence which exists
at the time the liability is determined,
in accordance with paragraph (b) of
this section.
(2) The estimated liability shall be
reduced to allow for anticipated non-
utilization, if material.
(3) The liability shall be estimated
consistently either in terms of current
or of anticipated wage rates. Estimates
may be made with respect to individual
employees, but such individual estimates
shall not be required if the total cost
with respect to all employees in the plan
can be estimated with reasonable accu-
racy by the use of sample data, experi-
ence or other appropriate means.
(d) Adjustments. (1) The estimate of
the employer's liability for compensated
personal absence at the beginning of
the first cost accounting period for
which a contractor must comply with
this Standard shall be based on the
contractor's plan or custom applicable
to that period, notwithstanding that
some part of that liability has not pre-
viously been recognized for contract
costing purposes. Any excess of the
amount of the liability as determined
in accordance with paragraph (c) of this.
section over the corresponding amount
of the liability as determined in ac-
cordance with the contractor's previous
practice shall be held in suspense and
accounted for as described in subpara-
graph (3) of this paragraph.
(2) If a plan or custom is changed
or a new plan or custom is adopted,
and the new determination made in ac-
cordance with paragraph (a) of this sec-
tion results in an increase in the esti-
mate of the employer's liability for
compensated personal absence at the
beginning of the first cost accounting
period for which the new plan is ef-
fective over the estimate made in ac-
cordance with the contractor's prior
practice, then the amount of such in-
crease shall be held in suspense and
accounted for as described in subpara-
graph (3) of this paragraph.
(3) At the close of each cost account-
ing period, the amount held in suspense
shall be reduced by the excess of the
amount held in suspense at the begin-
ning of the cost accounting period over
the employer's liability (as estimated in
accordance with paragraph (c) of this
section) at the end of that cost account-
ing period. The cost of compensated
personal absence assigned to that cost
accounting period shall be increased by
the amount of the excess.
(e) Allocations. Except where the use
of a longer or shorter period is permitted
by the provisions of the Cost Account-
ing Standard on Cost Accounting Pe-
riod (Part 406 of this chapter), the
costs of compensated personal absence
shall be allocated to cost objectives on
a pro-rata basis which reflects the total
of such costs and the total of the allo-
cation base for the entire cost account-
ing period. However, this provision shall
not preclude revisions to an allocation
rate during a cost accounting period
based on revised estimates of period
totals.
§ 408.60
Illustrations.
(a) Company A's vacation plan pro-
vides that on the anniversary of each em-
ployee's hiring date, that employee shall
become eligible to receive a two-week va-
cation with pay. Vacation entitlement
must be used within two years or for-
feited. An employee who leaves the com-
pany voluntarily will be paid for any re-
maining unused vacation entitlement
which was earned through the employee's
last anniversary date. An employee who
is laid off for lack of work will also be
180
Cost Accounting Standards Board
requirement.
(g) Company G determines a "charg-
ing rate” for each employee. The charg-
ing rate includes an allowance for com-
pensated personal absence based on aver-
age experience. As the employee performs
services, the related cost objectives are
charged for the services at the charging
rate, the employee is paid at his base
rate, and the excess is credited to the
accrued liability for each benefit. As ben-
efits are paid, the costs are charged
against the accrued liabilities. The
amount of each accrued liability is ad-
justed at the end of the cost accounting
period, and any difference is adjusted
through appropriate overhead accounts
in accordance with company policy.
(1) This method is not a violation of
§ 408.40(b) if it results in allocating the
estimated annual costs of compensated
personal absence at a rate which reflects
the anticipated costs of the entire cost
accounting period.
(2) The computation itself must com-
ply with the criteria of § 408.40(a). For
example, if the terms of the Company's
sick leave plan are such that in accord-
ance with this Standard, the costs should
be recognized in the cost accounting pe-
riod when they are paid, then the com-
putation should be intended to amortize
the expected costs of sick leave over the
activity of that cost accounting period,
leaving no accrued liability for sick leave
at the end of the cost accounting pe-
riod.
§ 408.70
Exemptions.
This standard shall not apply to con-
tractors who are subject to the provi-
sions of Federal Management Circular
74-4 (Principles for Determining Costs
Applicable to Grants and Contracts
with State and Local Governments).
[Amended 43 FR 24819, June 8, 1978; for pre-
amble, see preamble K in supplement to Part
331]
§ 408.80 Effective date.
(a) The effective date of this Stand-
ard is July 1, 1975.
(b) This Cost Accounting Standard
shall be followed by each contractor as of
the start of his next fiscal year beginning
after the receipt of a contract to which
this Cost Accounting Standard is ap-
plicable.
[39 FR 33684, Sept. 19, 1974, as amended at
40 FR 14737, Apr. 2, 1975; 40 FR 15865, Apr.
8, 1975]
PREMBLES: Preamble A of the supplement
to Part 401 of this chapter explains how ef-
fective dates are determined.
183.
Supp. No. 5
Cost Accounting Standards Board
SUPPLEMENT-PREAMBLES
A. Preamble to Original Publication, 9-19-74
The following is the preamble to the origi-
nal publication of Part 408, on Sept. 19, 1974,
at 39 FR 33681.
The Cost Accounting Standard on
Accounting for Costs of Compensated
Personal Absence is one of a series
being promulgated by the Cost Ac-
counting Standards Board pursuant to
section 719 of the Defense Produc-
tion Act of 1950, as amended, Pub. L.
91-379, 50 U.S.C. App. 2168, which
provides for the development of Cost
Accounting Standards to be used in
connection with negotiated national
defense contracts. This Standard deals
primarily with the amount and time of
recognition of costs of compensated per-
sonal absence.
Work preliminary to the development
of this Cost Accounting Standard was
initiated as a part of the study of the
larger subject of accounting for labor
costs. The costs of compenstated personal
absence are an important element of
labor costs, but under existing procure-
ment regulations there is no assurance
that the costs of compensated personal
absence are assigned to the cost account-
ing period in which the related labor
is performed and in which the related
wage or salary costs are recognized. Be-
cause the volume and mix of contracts
of a particular contractor may vary sig-
nificantly from period to period, the
assignment of costs to the proper cost
accounting periods is important.
Early research on this Cost Accounting
Standard included a study of available
literature and relevant decisions of
boards of contract appeals and courts.
Initial meetings were held with major
procurement agencies and with a number
of contractors, and certain issues were
tentatively identified. The relationship of
Government procurement regulations to
Federal Income Tax laws which govern
the accounting for costs of compensated
personal absence was explored. It was
noted that the exact nature of the em-
ployer's liability to employees under a
specific plan was an important consider-
ation in determining the income tax
treatment which might be permitted. A
review of Disclosure Statements on file
indicated a disparity in existing account-
ing practices.
A questionnaire and a statement of is-
sues were then sent to 117 companies, 40
Government agencies, and 53 others, in-
cluding industry and professional asso-
ciations, to obtain detailed information,
particularly in regard to benefit plans
and the reasons for selecting a specific
accounting method. Data on benefit
plans and accounting practices were re-
ceived from 68 companies and comments
on the issues were received from 37 re-
spondents. Analysis of the data and com-
ments indicated that the issues could be
classified broadly into two groups—those
relating to the amount and timing of
recognition of costs of compensated per-
sonal absence and those relating to
methods of allocation of these costs to
cost objectives. Some problems were
noted in connection with the charging of
costs of compensated personal absence
directly to final cost objectives at the
time of payment; these have been ad-
dressed in the Standard. Detailed criteria
for the allocation of costs of compen-
sated personal absence are not included
in this Standard. Additional study of
other labor-related costs is being under-
taken and when it has been completed
such criteria may be provided.
Based on analysis of the responses to
the questionnaire and issues paper and
on further discussions, a preliminary
draft Standard was developed and
widely distributed for comment. Com-
ments and suggestions were received
from 87 respondents; these comments
were considered in developing a revised
Standard which was published in the
FEDERAL REGISTER of March 4, 1974, with
an invitation to interested parties to sub-
mit written views and comments to the
Board. The Board also supplemented the
invitation in the FEDERAL REGISTER by
sending copies of that issue to several
hundred organizations and individuals
who had provided the Board with com-
ments on the earlier proposal or who had
otherwise expressed interest in the pro-
posal.
Following the FEDERAL REGISTER publi-
cation, the Board received 86 sets of writ-
ten comments from companies, Govern-
ment agencies, professional associations,
industry associations, public accounting
firms, universities, and others. All com-
ments have been carefully considered by
the Board and those addressing areas of
significance are discussed below, to-
gether with explanations of the changes
made in the Cost Accounting Standard
being promulgated from the proposal
published in the FEDERAL REGISTER of
March 4, 1974.
184
Cost Accounting Standards Board
PART 409 COST ACCOUNTING STAND-
ARD-DEPRECIATION OF TANGIBLE
CAPITAL ASSETS
Sec.
409.10 General applicability.
409.20 Purpose.
409.30
409.40
409.50
409.60
409.70
Definitions.
Fundamental requirement.
Techniques for application.
Illustrations.
Exemption.
409.80 Effective date.
Supplement-Preambles
AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C.
App. 2168).
SOURCE: 40 FR 4264, Jan. 29, 1975, unless
otherwise noted.
NOTE: A supplement, consisting of the pre-
ambles to these regulations as they appeared
in the FEDERAL REGISTER, follows the text of
this part. These preambles, which are in-
tended to explain the regulations in non-
technical language, are printed in chrono-
logical order to provide an administrative
history of the cost accounting standards.
The preamble to the original publication
of this part (40 FR 4259, January 29, 1975) is
set forth in preamble A of the supplement.
For preambles to amendments and revi-
sions which affect only certain sections, see
the references following those sections.
OFR is interested in receiving comments
from readers on this new format. Comments
should be sent to: Office of the Federal Reg-
ister, National Archives and Records Service,
General Services Administration, Washing-
ton, D.C. 20408.
§ 409.10
General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (§ 331.30 of this
chapter).
[Amended at 43 FR 24819, June 8, 1978; for
preamble, see preamble D in supplement to Part
401]
§ 409.20
Purpose.
The purpose of this Standard is to pro-
vide criteria and guidance for assigning
costs of tangible capital assets to cost
accounting periods and for allocating
such costs to cost objectives within such
periods in an objective and consistent
manner. The Standard is based on the
concept that depreciation costs identified
with cost accounting periods and benefit-
ing cost objectives within periods should
be a reasonable measure of the expira-
tion of service potential of the tangible
assets subject to depreciation. Adherence
to this Standard should provide a sys-
tematic and rational flow of the costs of
tangible capital assets to benefited cost
objectives over the expected service lives
of the assets. This Standard does not
cover nonwasting assets or natural re-
sources which are subject to depletion.
§ 409.30 Definitions.
(a) The following definitions of terms
which are prominent in this Standard are
reprinted from Part 400 of this chapter
for convenience. Other terms which are
used in this Standard and are defined in
Part 400 of this chapter have the mean-
ings ascribed to them in that part unless
the text demands a different definition or
the definition is modified in paragraph
(b) of this section:
(1) Residual value. The proceeds (less
removal and disposal costs, if any) real-
ized upon disposition of a tangible capi-
tal asset. It usually is measured by the
net proceeds from the sale or other dis-
position of the asset, or its fair value if
the asset is traded in on another asset.
The estimated residual value is a current
forecast of the residual value.
(2) Service life. The period of useful-
ness of a tangible capital asset (or group
of assets) to its current owner. The pe-
riod may be expressed in units of time
or output. The estimated service life of
a tangible capital asset (or group of
assets) is a current forecast of its service
life and is the period over which depre-
ciation cost is to be assigned.
(3) Tangible capital asset. An asset
that has physical substance, more than
minimal value, and is expected to be held
by an enterprise for continued use or pos-
session beyond the current accounting
period for the services it yields.
(b) The following modifications of
definitions set forth in Part 400 of this
chapter are applicable to this Standard:
None.
§ 409.40
Fundamental requirement.
(a) The depreciable cost of a tangible
capital asset (or group of assets) shall be
assigned to cost accounting periods in
accordance with the following criteria:
(1) The depreciable cost of a tangible
capital asset shall be its capitalized cost
less its estimated residual value.
189
Supp. No. 5
Cost Accounting Standards Board
(2) The estimated service life of a
tangible capital asset (or group of assets)
shall be used to determine the cost ac-
counting periods to which the depreciable
cost will be assigned.
(3) The method of depreciation se-
lected for assigning the depreciable cost
of a tangible capital asset (or group of
assets) to the cost accounting periods
representing its estimated service life
shall reflect the pattern of consumption
of services over the life of the asset.
(4) The gain or loss which is recog-
nized upon disposition of a tangible capi-
tal asset shall be assigned to the cost
accounting period in which the disposi-
tion occurs.
(b) The annual depreciation cost of
a tangible capital asset (or group of as-
sets) shall be allocated to cost objectives
for which it provides service in accord-
ance with the following criteria:
(1) Depreciation cost may be charged
directly to cost objectives only if such
charges are made on the basis of usage
and only if depreciation costs of all like
assets used for similar purposes are
charged in the same manner.
(2) Where tangible capital assets are
part of, or function as, an organizational
unit whose costs are charged to other cost
objectives based on measurement of the
services provided by the organizational
unit, the depreciation cost of such assets
shall be included as part of the cost of
the organizational unit.
(3) Depreciation costs which are not
allocated in accordance with (b) (1) or
(2) above shall be included in appropri-
ate indirect cost pools.
(4) The gain or loss which is recog-
nized upon disposition of a tangible
capital asset, where material in amount,
shall be allocated in the same manner as
the depreciation cost of the asset has
been or would have been allocated for
the cost accounting period in which the
disposition occurs. Where such gain or
loss is not material, the amount may be
included in an appropriate indirect cost
pool.
§ 409.50 Techniques for application.
(a) Determination of the appropriate
depreciation charges involves estimates
both of service life and of the likely pat-
tern of consumption of services in the
cost accounting periods included in such
life. In selecting service life estimates
and in selecting depreciation methods
many of the same physical and economic
factors should be considered. The follow-
ing are among the factors which may be
taken into account: quantity and quality
of expected output, and the timing there-
of; costs of repair and maintenance, and
the timing thereof; standby or incidental
use and the timing thereof; and tech-
nical or economic obsolescence of the
asset (or group of assets), or of the prod-
uct or service it is involved in producing.
(b) Depreciation of a tangible capital
asset shall begin when the asset and any
others on which its effective use depends
are ready for use in a normal or accept-
able fashion. However, where partial
utilization of a tangible capital asset is
identified with a specific operation, de-
preciation shall commence on any por-
tion of the asset which is substantially
completed and used for that operation.
Depreciable spare parts which are re-
quired for the operation of such tangible
capital assets shall be accounted for
over the service life of the assets.
(c) A consistent policy shall be fol-
lowed in determining the depreciable
cost to be assigned to the beginning and
ending cost accounting periods of asset
use. The policy may provide for any
reasonable starting and ending dates in
computing the first and last year de-
preciable cost.
(d) Tangible capital assets may be ac-
counted for by treating each individual
asset as an accounting unit, or by com-
bining two or more assets as a single ac-
counting unit, provided such treatment
is consistently applied over the service
life of the asset or group of assets.
(e) Estimated service lives initially
established for tangible capital assets (or
groups of assets) shall be reasonable ap-
proximations of their expected actual
periods of usefulness, considering the
factors mentioned in paragraph (a) of
this section. The estimate of the expected
actual periods of usefulness need not in-
clude the additional period tangible
capital assets are retained for standby
or incidental use where adequate records
are maintained which reflect the with-
drawal from active use.
(1) The expected actual periods of
usefulness shall be those periods which
are supported by records of either past
retirement or, where available, with-
drawal from active use (and retention
for standby or incidental use) for like
assets (or groups of assets) used in
similar circumstances appropriately
modified for specifically identified fac-
tors expected to influence future lives.
190
Cost Accounting Standards Board
(3) Business Unit D manufactures a
variety of testing devices. During a cost
accounting period, Business Unit D ac-
quires and uses a small building, con-
structs a small production facility using
its own resources, and keeps for its own
use one unit of a testing device that it
manufactures and sells to its customers.
The acquisition cost of the building is
not part of the total cost input base;
however, the depreciation taken on the
building would be part of the total cost
input base. The costs of construction of
the small production facility are not
part of the total cost input base. The
requirements of Cost Accounting Stand-
ard 404 provide that those G&A expenses
which are identifiable with the construc-
ted asset and are material in amount
shall be capitalized as part of the cost
of the production facility. If there are
G&A expenses material in amount and
identified with the constructed asset,
these G&A expenses would be removed
from the G&A expense pool prior to the
allocation of this pool to final cost ob-
jectives. The cost of the testing device
shall be part of the total cost input base
per the requirements of Cost Account-
ing Standard 404 which provides that
the costs of constructed assets identical
with the contractor's regular product
shall include a full share of indirect cost.
(e) (1) Business Unit E produces Item
Z for stock or product inventory. The
business unit does not include G&A ex-
pense as part of the inventory cost of
these items for costing or financial re-
porting purposes. A production run of
these items occurred during Cost Ac-
counting Period 1. A number of the units
produced were not issued during Period
1 and are issued in Period 2. However,
those units produced in Period 1 shall
be included in the cost input of that
period for calculating the G&A expense
allocation base and shall not be included
in the cost input of Period 2.
(2) Business Unit E should apply the
G&A expense rate of Period 1 to those
units of Item Z issued during Period 1
and may apply the rate of Period 2 to
the units issued in Period 2.
(3) If the practice of Business Unit E
is to include G&A expense as part of
the cost of stock or product inventory,
the inventory cost of all units of Item Z
209
produced in Period 1 and remaining in
inventory at the end of Period 1, should
include G&A expense using the G&A
rate of Period 1.
(f) (1) Business Unit F produced Item
X for stock or product inventory. The
business unit does not include G&A ex-
pense as part of the inventory cost of
these items. A production run of these
items was started, finished, and placed
into inventory in a single cost accounting
period. These items are issued during
the next cost accounting period.
(2) The cost of items produced for
stock or product inventory should be in-
cluded in the G&A base in the same year
they are produced. The cost of such items
is not to be included in the G&A base on
the basis of when they are issued to final
cost objectives. Therefore, the time of is-
suance of these items from inventory to a
final cost objective is irrelevant in com-
puting the G&A base.
(g) The normal productive activity of
Business Unit G includes the construc-
tion of base operating facilities for oth-
ers. G uses a total cost input base to al-
locate G&A expense to final cost objec-
tives. As part of a contract to construct
an operating facility, G agrees to acquire
a large group of trucks and other mobile
equipment to equip the base operating
facility. G does not usually supply such
equipment. The cost of the equipment
constitutes a significant part of the con-
tract cost. A special G&A allocation to
this contract shall be agreed to by the
parties if they agree that in the circum-
stances the contract as a whole receives
substantially less benefit from the G&A
expense pool than that which would be
represented by a cost allocation based on
inclusion of the contract cost in the total
cost input base.
(h) (1) The home office of Segment H
separately allocates to benefiting or
causing segments significant home office
expenses of (i) staff management func-
tions relative to manufacturing, (ii) staff
management functions relative to engi-
neering, (iii) central payment of health
insurance costs and (iv) residual ex-
penses. H receives these expenses as
separate allocations. H maintains three
indirect cost pools: (i) G&A expense,
(ii) manufacturing overhead and (iii)
engineering overhead; all home office ex-
penses allocated to H are included in
Cost Accounting Standards Board
H's G&A expense pool.
(2) This accounting practice of H
does not comply with section 410.50(g)
(2). Home office residual expenses should
be in the G&A expense pool, and the ex-
penses of the staff management func-
tions relative to manufacturing and en-
gineering should be included in the man-
ufacturing overhead and engineering
overhead pools, respectively. The health
insurance costs should be allocated in
proportion to the beneficial and causal
relationship between these costs and
H's cost objectives.
§ 410.70
Exemptions.
This standard shall not apply to con-
tractors who are subject to the provi-
sions of Federal Management Circular
74-4 (Principles for Determining Costs
Applicable to Grants and Contracts
with State and Local Governments).
[Amended 43 FR 24819, June 8, 1978; for pre-
amble, see preamble K in supplement K to Part
331]
§ 410.80 Effective date.
(a) The effective date of this Standard
is October 1, 1976.
(b) This Standard shall be followed
by each contractor after the start of his
next fiscal year beginning after Jan-
uary 1, 1977.
APPENDIX A
TRANSITION FROM A COST OF SALES OR
SALES BASE TO A COST INPUT BASE
A business unit may use the method de-
scribed below for transition from the use of
a cost of sales or sales base to a cost input
base.
(1) Calculate the cost of sales or sales base
in accordance with the cost accounting prac-
tice disclosed or established prior to the
date established by Section 410.80 (b) of
this Cost Accounting Standard.
(2) Calculate the G&A expense allocation
rate using the base determined in paragraph
(1) above and use that rate to allocate from
the G&A expense pool to the final cost ob-
jectives which were in existence prior to the
date on which the business unit must first
allocate costs in accordance with the require-
ments of this Cost Accounting Standard.
(3) Calculate a cost input base in com-
pliance with § 410.50 (d) above.
(4) Calculate the G&A expense rate us-
ing the base determined in paragraph (3)
above and use that rate to allocate from the
G&A expense pool to those final cost ob-
jectives which arise under contracts entered
into on or after the date on which the busi-
ness unit must first allocate costs in accord-
ance with the requirements of this Cost Ac-
counting Standard.
(5) The calculations set forth in para-
graphs (1)-(4) above shall be performed
for each cost accounting period during
which final cost objectives described in (2)
are being performed.
(6) The business unit shall establish an
inventory suspense account. The amount of
the inventory suspense account shall be equal to
the beginning inventory of contracts subject to
the CAS clause of the cost accounting pe-
riod in which the business unit must first
allocate costs in accordance with the re-
quirements of this Cost Accounting Stand-
ard.
(7) In any cost accounting period, after
the cost accounting periods described in
(5) above, if the ending inventory of con-
tracts subject to the CAS clause is less than
the balance of the inventory suspense ac-
count, the business unit shall calculate two
G&A expense allocation rates, one to allocate
G&A expenses to contracts subject to the
CAS clause and one applicable to other
work.
(a) The G&A expense pool shall be divided
in the proportion which the cost input of
the G&A expense allocation base of the
contracts subject to the CAS clause bears
to the total of the cost input allocation
base, selected in accordance with § 410.50 (d),
for the cost accounting period.
(b) The G&A expenses applicable to con-
tracts subject to the CAS clause shall be
reduced by an amount determined by multi-
plying the difference between the balance
of the inventory suspense account and the
ending inventory of contracts subject to the
CAS clause by the cost of sales rate, as
determined under (1) above, of the cost ac-
counting period in which a business unit
must first allocate costs in accordance with
the requirements of this Cost Accounting
Standard.
8) In any cost accounting period in which
such a reduction is made, the balance of the
inventory suspense account shall be reduced
to be equal to the ending inventory of con-
tracts subject to the CAS clause of that cost
accounting period.
The following illustrates how a business
unit would use this transition method.
1. Business Unit R has been using a cost
of sales base to allocate its G&A expense pool
to final cost objectives. Business Unit R uses
a calendar year as its cost accounting period.
On October 1, 1976 (assumed for purposes
of this illustration) Cost Accounting Stand-
ard 410 becomes effective. On October 2, 1976,
Business Unit R receives a three-year con-
tract containing the Cost Accounting Stand-
ards clause. As a result, Business Unit R must
comply with the requirements of the Stand-
ard in the cost accounting period beginning
in January, 1978.
As of January 3, 1978, Business Unit R has
the following contracts:
(1) Contract I-A four-year contract
210
Supp. No. 5
Cost Accounting Standards Board
contractual provisions applicable to such
prior awards. The provisions of this
Standard are applicable only to new
awards of deferred compensation made
on or after the date that the Standard
becomes applicable to each contractor.
The Board recognizes that there will be
a minor budgetary increase required by
the Government agencies until the prior
deferred compensation awards are paid.
However, for the majority of deferred
compensation plans, the awards previ-
ously made will be paid out over a rela-
tively short period of time, e.g., five years.
Consequently, the Board believes that a
transition provision is not necessary for
the Standard being promulgated today.
OTHER CHANGES
The first illustration (§ 415.60 (a))
was changed to reflect the change in the
provision regarding interest rates that
are not fixed at the date of award.
Other changes of a minor nature were
made to various sections of the Standard
for clarification.
COSTS AND BENEFITS
Section 719(g) of the Defense Produc-
tion Act of 1950, as amended, provides
"In promulgating such standards and
major rules and regulations for the im-
plementation of such standards, the
Board shall take into account, and shall
report to the Congress in the transmittal
required by section 719 (h) (3) hereof,
the probable costs of implementation, in-
cluding inflationary effects, if any, com-
pared to the probable benefits, including
advantages and improvements in the
pricing, administration and settlement
of contracts."
Comments received in response to the
FEDERAL REGISTER publication, as well as
information obtained from contractors
prior thereto, indicated that there would
be minimal administrative costs entailed
in complying with the Standard. One
Government agency stated that addi-
tional administrative burden would be
placed on the Government as a result of
the conversion from a cash basis to the
accrual method of accounting. The Board
believes that any such additional ad-
ministrative costs due to this conversion
will be minimal. The Governmental
agencies have always had the respon-
sibility for reviewing the reasonableness
of deferred compensation plans and
evaluating the payments to assure that
such payments coincide with the prin-
cipal and interest provisions of the plan.
The Board believes the main additional
administrative cost involved is in review-
ing the present value calculation and
determining if the contractor has incur-
red a valid obligation at the time the
award is made.
Among the benefits which the Board
believes will be derived from the use of
this Standard is the assignment of the
costs of deferred compensation to proper
periods. Under the present regulations,
the assignment of much of these costs
is essentially on a cash basis. As a con-
sequence, deferred compensation costs
may have been incurred in much earlier
periods than the periods in which they
were recognized as incurred costs; in
many cases, several years after the serv-
ice has been rendered by the employee.
Giving full consideration to all the rele-
vant factors discussed herein, the Board
believes the benefits to be derived from
this Standard clearly outweigh any costs
of implementation.
As required by section 719(g), the
Board has evaluated the potential in-
flationary effect of this Standard. The
Standard requires the use of present
value techniques for the assignment of
cost and incorporates a forfeiture pro-
vision with interest. The use of these
techniques recognizes the time cost of
money. In the long run, the cost to the
Government should be essentially the
same as that which would be incurred
under a cash basis of accounting. For a
majority of deferred compensation plans,
moreover, the awards previously made
will be paid out over a relatively short
period of time, e.g., five years. The Board
has concluded that there will be only a
minor budgetary increase on the Govern-
ment agencies until the prior deferred
compensation awards are paid. Overall,
however, anv inflationary effect of this
Standard will be minimal.
The Board expects that this Standard
will become effective January 1, 1977.
There is also being published today
an Amendment to Part 400, Definitions,
to incorporate in that part terms defined
in § 415.30 of this Cost Accounting
Standard.
275
Supp. No. 2
Cost Accounting Standards Board
Sec.
PART 416-ACCOUNTING FOR
INSURANCE COSTS
416.10 General applicability.
416.20 Purpose.
416.30
Definitions.
416.40 Fundamental requirement.
416.50 Techniques for application.
416.60
416.70
416.80
Illustrations.
Exemptions.
Effective date.
AUTHORITY: 84 Stat. 796, Sec. 103, 50
U.S.C. App. 2168.
§ 416.10 General applicability.
General applicability of this cost ac-
counting standard is established by
§ 331.30 of the Board's regulations on
applicability, exemption, and waiver of
the requirement to include the cost ac-
counting standards contract clause in
negotiated defense prime contracts
and subcontracts (4 CFR 331.30).
§ 416.20 Purpose.
The purpose of this standard is to
provide criteria for the measurement
of insurance costs, the assignment of
such costs to cost accounting periods,
and their allocation to cost objectives.
The application of these criteria
of these criteria
should increase the probability that
insurance costs are allocated to cost
objectives in a uniform and consistent
manner.
§ 416.30 Definitions.
(a) The following definitions of
terms which are prominent in this
standard are reprinted from part 400
of this chapter for convenience. Other
terms which are used in this standard
and are defined in part 400 of this
chapter have the meanings ascribed to
them in that part unless the text de-
mands a different definition or the
definition is modified in paragraph (b)
of this section.
Actual cash value. The cost of re-
placing damaged property with other
property of like kind and quality in
the physical condition of the property
immediately prior to the damage.
Insurance administration expenses.
The contractor's costs of administer-
ing an insurance program, e.g., the
costs of operating an insurance or risk-
management department, processing
276
claims, actuarial fees, and service fees
paid to insurance companies, trustees,
or technical consultants.
Projected average loss. The estimat-
ed long-term average loss per period
for periods of comparable exposure to
risk of loss.
Self-insurance. The assumption or
retention of the risk of loss by the
contractor, whether voluntarily or in-
voluntarily. Self-insurance includes
the deductible portion of purchased
insurance.
Self-insurance charge. A cost which
represents the projected average loss
under a self-insurance plan.
(b) The following modifications of
definitions set forth in part 400 of this
chapter are applicable to this stand-
ard: None.
§ 416.40 Fundamental requirement.
(a) The amount of insurance cost to
be assigned to a cost accounting period
is the projected average loss for that
period plus insurance administration
expenses in that period.
(b) The allocation of insurance costs
to cost objectives shall be based on the
beneficial or causal relationship be-
tween the insurance costs and the
benefiting or causing cost objectives.
§ 416.50 Techniques for application.
(a) Measurement of projected aver-
age loss.
(1) For exposure to risk of loss
which is covered by the purchase of
insurance or by payments to a trus-
teed fund, the premium or payment,
adjusted in accordance with the fol-
lowing criteria, shall represent the
projected average loss:
(ii)
(i) The premium cost applicable to a
given policy term shall be assigned pro
rata among the cost accounting peri-
ods covered by the policy term, except
as provided in subparagraphs
through (vi) of this paragraph. A
refund, dividend or additional assess-
ment shall become an adjustment to
the pro rata premium costs for the
earliest cost accounting period in
which the refund or dividend is actual-
ly or constructively received or in
which the additional assessment is
payable.
Supp. No. 5
Cost Accounting Standards Board
(ii) Where insurance is purchased
specifically for, and directly allocated
to, a single final cost objective, the
premium need not be prorated among
cost accounting periods.
(iii) Any part of a premium or pay-
ment to an insurer or trustee, or any
part of a dividend or premium refund
retained by an insurer or trustee
which would be includable as a deposit
in published financial statements pre-
pared in accordance with generally ac-
cepted accounting principles shall be
accounted for as a deposit for the pur-
pose of determining insurance costs.
(iv) Any part of a premium or pay-
ment to an insurer or to a trustee, or
any part of a dividend or premium
refund retained by an insurer, for in-
clusion in a reserve or fund estab-
lished and maintained on behalf of the
insured or the policyholder or trustor,
shall be accounted for as a deposit
unless the following conditions are
met: (A) The objectives of the reserve
or fund are clearly stated in writing;
(B) Measurement of the amount re-
quired for the reserve or fund is actu-
arially determined and is consistent
with the objectives of the reserve or
fund;
(C) Payments and additions to the
reserve or fund are made in a system-
atic and consistent manner; and
(D) If payments to accomplish the
stated objectives of the reserve or
fund are made from a source other
than the reserve or fund, the pay-
ments into the reserve or fund are re-
duced accordingly.
(v) If an objective of an insurance
program is to prefund insurance cover-
age on retired persons, then, in addi-
tion to the requirements imposed by
subparagraph (iv) of this paragraph:
(A) Payments must be made to an
insurer or trustee to establish and
maintain a fund or reserve for that
purpose;
(B) The policyholder or trustor must
have no right of recapture of the re-
serve or fund so long as any active or
retired participant in the program re-
mains alive unless the interests of
such remaining participants are satis-
fied through adequate reinsurance or
otherwise; and
277
(C) The amount added to the reserve
or fund in any cost accounting period
must not be greater than an amount
which would be required to apportion
the cost of the insurance coverage
fairly over the working lives of the
active employees in the plan. If a con-
tractor establishes a terminal-funded
plan for retired persons or converts
from a pay-as-you-go plan to a termi-
nal-funded plan, the actuarial present
value of benefits applicable to employ-
ees already retired shall be amortized
over a period of 15 years.
(vi) The contractor may adopt and
consistently follow a practice of deter-
mining insurance costs based on the
estimated premium and assessments
net of estimated refunds and divi-
dends. If this practice is adopted, then
any difference between an estimated
and actual refund, dividend, or assess-
ment shall become an adjustment to
the pro rata net premium costs for the
earliest cost accounting period in
which the refund or dividend is actual-
ly or constructively received or in
which the additional assessment is
payable.
(2) For exposure to risk of loss
which is not covered by the purchase
of insurance or by payments to a trus-
teed fund, the contractor shall follow
a program of self-insurance accounting
according to the following criteria:
(i) Except as provided in paragraph
(a)(2) (ii) and (iii) of this section
actual losses shall not become a part
of insurance costs. Instead, the con-
tractor shall make a self-insurance
charge for each period for each type
of self-insured risk which shall repre-
sent the projected average loss for
that period. If insurance could be pur-
chased against the self-insured risk,
the cost of such insurance may be
used as an estimate of the projected
average loss; if this method is used,
the self-insurance charge plus insur-
ance administration expenses may be
equal to, but shall not exceed, the cost
of comparable purchased insurance
plus the associated insurance adminis-
tration expenses. However, the con-
tractor's actual loss experience shall
be evaluated regularly, and self-insur-
ance charges for subsequent periods
Supp. No. 5
Cost Accounting Standards Board
shall reflect such experience in the
same manner as would purchased in-
surance. If insurance could not be pur-
chased against the self-insured risk,
the amount of the self-insurance
charge for each period shall be based
on the contractor's experience, rele-
vant industry experience, and antici-
pated conditions in accordance with
accepted actuarial principles.
(ii) Where it is probable that the
actual amount of losses which will
occur in a cost accounting period will
not differ significantly from the pro-
jected average loss for that period, the
actual amount of losses in that period
may be considered to represent the
projected average loss for that period
in lieu of a self-insurance charge.
(iii) Under self-insurance programs
for retired persons, only actual losses
shall be considered to represent the
projected average loss unless a reserve
or fund is established in accordance
with § 416.50(a)(1)(v).
(iv) The self-insurance charge shall
be determined in a manner which will
give appropriate recognition to any in-
demnification agreement which exists
between the contracting parties.
(3) In measuring actual losses under
paragraph (a)(2) of this section:
(i) The amount of a loss shall be
measured by (A) The actual cash value
of property destroyed; (B) amounts
paid or accrued to repair damage; (C)
amounts paid or accrued to estates
and beneficiaries; and (D) amounts
paid or accrued to compensate claim-
ants, including subrogation. Where
the amount of a loss which is repre-
sented by a liability to a third party is
uncertain, the estimate of the loss
shall be the amount which would be
includable as an accrued liability in fi-
nancial statements prepared in accord-
ance with generally accepted account-
ing principles.
(ii) If a loss has been incurred and
the amount of the liability to a claim-
ant is fixed or reasonably certain, but
actual payment of the liability will not
take place for more than 1 year after
the loss is incurred, the amount of the
loss to be recognized currently shall
not exceed the present value of the
future payments, determined by using
278
a discount rate equal to that pre-
scribed for settling such claims by the
State having jurisdiction over the
claim. If no such rate is prescribed by
the State, then the rate shall be equal
to the interest rate as determined by
the Secretary of the Treasury pursu-
ant to Pub. L. 92-41, 85 Stat. 97, in
effect at the time the loss is recog-
nized. Alternatively, where settlement
will consist of a series of payments
over an indefinite time period, as in
worker's compensation, the contractor
may follow a consistent policy of rec-
ognizing only the actual amounts paid
in the period of payment.
(4) The contractor may elect to rec-
ognize immaterial amounts of self-in-
sured losses or insurance administra-
tion expenses as part of other expense
categories rather than as "insurance
costs."
(b) Allocation of insurance costs:
(1) Where actual losses are recog-
nized as an estimate of the projected
average loss, in accordance with
§ 416.50(a)(2), or where actual loss ex-
perience is determined for the purpose
of developing self-insurance charges
by segment, a loss which is incurred in
a given segment shall be identified
with that segment. However, if the
contractor's home office is, in effect, a
reinsurer of its segments against cata-
strophic losses, a portion of such cata-
strophic losses shall be allocated to, or
identified with, the home office.
(2) Insurance costs shall be allocated
on the basis of the factors used to de-
termine the premium,
the premium, assessment,
refund, dividend, or self-insurance
charge, except that insurance costs in-
curred by a segment or allocated to a
segment from a home office may be
combined with costs of other indirect
cost pools if the resultant allocation to
each final cost objective is substantial-
ly the same as it would have been if
separately allocated under this provi-
sion.
(3) Insurance administration ex-
penses which are material in relation
to total insurance costs shall be allo-
cated on the same basis as the related
premium costs or self-insurance
charge.
(c) Records. The contractor shall
Supp. No. 5
Cost Accounting Standards Board
maintain such records as may be nec-
essary to substantiate the amounts of
premiums, refunds, dividends, losses,
and self-insurance charges, paid or ac-
crued, and the measurement and allo-
cation of insurance costs. Memoran-
dum records may be used to reflect
any material differences between in-
surance costs as determined in accord-
ance with this standard and as includ-
able in financial statements prepared
in accordance with generally accepted
accounting principles.
§ 416.60 Illustrations.
(a) Contractor A pays a company-
wide property and casualty insurance
premium for the policy term July 1,
1980, to July 1, 1983, and includes the
entire amount as cost in its cost ac-
counting period which ended Decem-
ber 31, 1980. This is a violation of
§ 416.50(a)(1)(i) in that only one-sixth
of the policy term fell within the cost
accounting period which ended De-
cember 31, 1980, and therefore only
one-sixth of the premium should have
been included in cost in that cost ac-
counting period.
(b) Contractor B has a retrospective-
ly rated worker's compensation insur-
ance program. The policy term corre-
sponds with the contractor's cost ac-
counting period. Premium refunds are
normally received and applied in the
following cost accounting period. The
contractor's practice is to include the
entire gross premium in insurance cost
in the cost accounting period in which
it is paid and to credit the refund
against insurance cost in the cost ac-
counting period in which it is received.
This practice conforms
§ 416.50(a)(1)(i). The contractor could
also, under the provisions of
§ 416.50(a)(1)(vi), have followed a con-
sistent practice of estimating such re-
funds in advance and including the es-
timated net premium in insurance
cost.
with
(c) Contractor C establishes a self-in-
sured program of life insurance for
active and retired persons. The con-
tractor pays death benefits directly to
the beneficiaries of deceased employ-
ees and includes such payments in in-
surance costs at the time of payment.
279
This
practice complies with
§ 416.50(a)(2)(iii) which requires that
only the actual losses be recognized
unless a trusteed reserve or fund is es-
tablished in accordance with
§ 416.50(a)(1)(v).
(d) Instead of paying death benefits
directly, contractor D purchases
annual group term life insurance on
active and retired persons and charges
the premiums to insurance costs (with
proper recognition for refunds and
dividends). Contractor D's retired per-
sons wish to be protected against pos-
sible discontinuance of the program.
Contractor D, therefore, establishes a
trusteed fund. As each employee re-
tires, contractor D deposits in the
fund an amount which is equal to the
premium on a paid-up policy for that
employee, and he advises the trustee
that the fund is to be used to continue
to pay premiums on retired persons in
the event the program is discontinued.
The contractor also continues to pur-
chase group term insurance on both
active employees and retired persons
and charges both the premiums and
the deposits to insurance costs. This
practice does not comply with
which requires
§ 416.50(a)(1)(iv)(D)
that if payments to accomplish the
stated objectives of the reserve
funds are made from a source other
than the reserve or fund, the pay-
ments into the fund shall be reduced
accordingly.
or
NOTE. In this instance the contractor
could comply with the standard by paying
from the fund that portion of the group
term premium which represented the re-
tired persons or by reducing the deposits to
the fund by an equivalent amount in accord-
ance with § 416.50(a)(1)(iv)(D). This practice
would also comply with the requirement of
§ 416.50(a)(1)(v)(C) that the amount added
to the fund not be greater than an amount
which would be required to fairly allocate
the cost over the working lives of the active
employees in the plan.
(e) Contractor E wishes to provide
assurance of his life insurance pro-
gram continuance to both active and
retired employees. He establishes a
trusteed fund in accordance with
§ 416.50(a)(1) (iv) and (v) and thereaf-
ter pays into the fund each year for
each active employee an actuarially
Supp. No. 5
Cost Accounting Standards Board
determined amount which will accu-
mulate to the equivalent of the premi-
um on a paid-up life insurance policy
at retirement. He charges the annual
payments to insurance costs. Benefits
are paid directly from the fund (or the
fund is used to pay the annual premi-
ums on group term life insurance for
all employees). This practice also com-
plies with the requirement of
§ 416.50(a)(1)(v)(C) that the amount
added to the fund not be greater than
an amount which would be required to
fairly allocate the cost over the work-
ing lives of the active employees in the
plan.
loss.
(f) Contractor F has a fire insurance
policy which provides that the first
$50,000 of any fire loss will be borne
by the contractor. Because the risk of
loss is dispersed among many physical
units of property and the average po-
tential loss per unit is relatively low,
the actual losses in any period may be
expected not to differ significantly
from the projected average
Therefore, the contractor intends to
let the actual losses represent the pro-
jected average loss for this exposure to
risk. Property with an actual cash
value of $80,000 is destroyed in a fire.
The contractor charges the $50,000 of
the loss not covered by the policy to
insurance costs for contract costing
purposes. The practice complies with
the requirement of § 416.50(a)(2). How-
ever, had the contractor's plan been to
make a self-insurance charge for such
losses, then any difference between
the self-insurance charge and actual
losses in that cost accounting period
would not have been allocable as an
insurance cost.
(g) Contractor G is preparing to
enter into a Government contract to
produce explosive devices. The con-
tractor is unable to purchase adequate
insurance protection and must act as a
self-insurer. There is a significant pos-
sibility of a major loss, against which
the Government will not undertake to
idemnify the contractor. The contrac-
tor, therefore, intends to make a self-
insurance charge for this exposure to
risk. The contractor may, in accord-
ance with § 416.50(a)(2)(i), use data ob-
tained from other contractors or any
other reasonable method of estimating
the projected average loss in order to
determine the self-insurance charge.
(h) Contractor H purchases liability
insurance for all of its motor vehicles
in a single, company-wide policy which
contains a $50,000 deductible provi-
sion. However, the company's manage`
ment policy provides that when a loss
is incurred in a segment, only the first
$5,000 of the loss will be charged to
the segment; the balance of the loss
will be absorbed at the home-office
level and reallocated among all seg-
ments. Because the risk of loss is dis-
persed among many physical units and
the maximum potential loss per occur-
rence is limited, the actual losses in
any cost accounting period may be ex-
pected not to differ significantly from
the projected average loss. Therefore,
the contractor intends to let the
actual losses represent the projected
average loss for this exposure to risk.
An analysis of the loss experience
shows that many past losses exceeded
$5,000. Contractor H's practice of allo-
cating the loss in excess of $5,000 to
the home office is a violation of
§ 416.50(b)(1)(ii). The limit of $5,000
cannot realistically be considered a
measure of a "catastrophic" loss when
losses frequently exceed this amount,
and the use of a limit this low would
obscure segment loss experience.
§ 416.70 Exemptions.
None for this standard.
§ 416.80 Effective date.
(a) The effective date of this stand-
ard is July 10, 1979.
(b) This standard shall be followed
by each contractor on or after the
start of his next cost accounting
period beginning after the receipt of a
contract to which this cost accounting
standard is applicable.
ARTHUR SCHOENHAUT,
Executive Secretary.
[FR Doc. 78-26410 Filed 9-19-78; 8:45 am]
280
Supp. No. 5
Cost Accounting Standards Board
Supplement-Preambles A. Original
publication 9-20-78 the following is
the preamble to the original publica-
tion of part 416, 43 FR42239, Sept.
20, 1978.
(1) BACKGROUND
Work on a potential standard on ac-
counting for insurance costs was initi-
ated for a number of reasons; these in-
cluded (1) differences between armed
services procurement regulation
(ASPR) provisions governing self-in-
surance and Financial Accounting
Standards Board (FASB) statement
No. 5, (2) Armed Services Board of
Contract Appeals (ASBCA) cases or
other disputes related to insurance ac-
counting, and (3) knowledge of unre-
solved problems obtained by discus-
sions with contractors and audit agen-
cies.
A statement of issues related to ac-
counting for insurance and a prelimi-
nary draft standard were developed by
the staff and circulated to contractors,
agencies, and others. Responses to
these staff papers and to the FEDERAL
REGISTER publications of October 5,
1977, and May 15, 1978, and informa-
tion obtained in subsequent meetings
with respondents and other interested
persons were considered in developing
the standard which is being promul-
gated today. Twenty-nine comments
were received in response to the most
recent FEDERAL REGISTER publication.
All comments have been considered by
the Board and those addressing areas
of significance are discussed below, to-
gether with explanations of the
changes made in the cost accounting
standard being promulgated today
from the proposal published in the
FEDERAL REGISTER of May 15, 1978.
Ten respondents said that the pro-
posed standard was acceptable as writ-
ten, or they suggested only minor
word changes.
The Board wishes to take this oppor-
tunity to express its appreciation for
the helpful suggestions and construc-
tive criticisms it has received, and for
the time devoted to assisting the
Board in this endeavor by the many
organizations and individuals involved.
(2) Coverage of StandARD
One respondent said that the stand-
ard should be limited in its application
to significant problem areas rather
281
than treating all insurance and insur-
ance-related costs in a general fashion.
As stated in the prefatory remarks
which accompanied the May 15, 1978,
FEDERAL REGISTER publication, in its
research, the Board did not find that
accounting practices depended upon
the type of risk or insurance. There-
fore this standard, applicable to the
major problems, is also appropriate for
all other insurance.
One respondent suggested that the
standard deal with the subject of pre-
miums paid to "captive" insurers. The
Board reiterates its belief, which it
stated in the May 15, 1978, FEDERAL
REGISTER publication, that the tech-
nique for accounting for premium
costs should not be influenced by
questions of the reasonableness of the
amounts paid. Consequently,
change in this regard has been made
in the May 15, 1978, proposal.
(3) SELF-INSURANCE AS A COST
no
Three respondents suggested that
the proposed standard failed to prop-
erly distinguish between self-insurance
and the absence of insurance. The
Board recognizes that there may
indeed be differences in the amount of
planning involved, but there is no dif-
ference in the principle applicable to
cost measurement. "Absence of insur-
ance" is in fact one kind of self-insur-
ance. The respondents said that a con-
tractor who does not purchase insur-
ance or set up a funded reserve to
cover possible losses does not incur a
cost and that, in such situations,
actual losses are a part of entrepre-
neurial risk taking and should come
directly from profit. For the reasons
set forth below the Board does not
agree.
A contractor who acquires assets is
exposed to two types of risks-static
risks and dynamic risks. Static risks
are the risks which are inherent in the
ownership of the assets; dynamic risks
result from the decision to utilize the
assets for the production of specific
goods or services. Static risks are the
same for all owners of similar assets in
similar circumstances; e.g., the risk
that property of a given type in a
given location will be destroyed or
damaged. Consequently, they are nor-
mally predictable by mathematical
Supp. No. 5
Cost Accounting Standards Board
methods and can be insured against.
Dynamic risks are a function of man-
agerial judgment, e.g., whether a pro-
posed product can be produced for a
profit. Dynamic risks are not normally
predictable or insurable; they generate
a profit or loss, depending on manage-
ment's ability to forecast costs and
markets; they are the true entrepre-
neurial risks. Static risks, because they
can be measured, predicted, and quan-
tified, are properly subject to treat-
ment as costs rather than as entrepre-
neurial risks.
From a cost accounting standpoint,
the decision to purchase insurance or
self-insure is not one of cost versus no-
cost. Rather, it is one of certainty
versus uncertainty. A contractor who
self-insures will be subject to cost vari-
ations in any short time period as com-
pared to one who purchases insurance,
but in the long run their costs should
be substantially the same, and their
product or service must be priced to
cover the same long-term cost.
Whether a contractor should be re-
quired to make deposits in a fund to
provide for replacement of assets in
the event of loss is not a consideration
in determining the costs of self-insur-
ance.
(4) ACCOUNTING FOR SELF-INSURANCE
When the business entity purchases
insurance coverage from an underwrit-
er, the cost to the business-for the
static risk—is the premium. When the
business entity does not purchase in-
surance, the best method of assign-
ment of cost to current activities is a
matter of possible disagreement.
A contractor who self-insures can
recognize the cost of self-insurance for
product pricing purposes in either of
two ways: (1) By recognizing actual
losses as they occur and allocating
them to the products of some time
period, usually the cost accounting
period in which the loss occurred; or
(2) by estimating the long-term aver-
age loss per time period and allocating
it to the products of each time period.
The second method is conceptually
preferable in that it allocates the costs
of all losses to the products of all time
periods without regard to the particu-
282
lar chance distribution of actual losses
among time periods.
The proposals which were published
in the October 5, 1977, and May 15,
1978, FEDERAL REGISTER included crite-
ria for selecting between the two ap-
proaches to recognizing the costs of
self-insurance. A charge which would
represent the projected average loss
was required except in those situations
where the actual losses in a cost ac-
counting period could be expected to
serve as a good representative of the
long-term average loss for that period.
The recognition of actual losses,
rather than the use of a predetermin-
ated charge, would be expected where
many units are exposed to loss and the
maximum loss related to any one unit
would be relatively small. Examples
are the losses falling within the de-
ductible portion of the automobile col-
lision coverage for a fleet of vehicles,
the deductible portions of property
and casualty coverage where the size
of the deductible is nominal in rela-
tion to the total exposure to risk for
that coverage, and the worker's com-
pensation claims of a large work force.
There would be little point in calculat-
ing a special self-insurance charge in
such circumstances.
The Board has decided to retain the
requirement for the use of a self-insur-
ance charge, as contained in the FED-
ERAL REGISTER proposals. A reasonable
assignment of cost should be made to
products of each period in which there
is exposure to the risk. The cost of
each loss should be allocated to all
work accomplished in the facility
where it occurred (and successor facili-
ties over the life of the enterprise, not
just to the work of the day, month, or
year in which the loss happened to
occur. this can be accomplished by
charging each period with a self-insur-
ance charge which is equal to the pro-
jected average loss.
The standard also retains the provi-
sion of the FEDERAL REGISTER propos-
als which permitted the recognition of
actual losses in those limited circum-
stances, as described above, in which
the actual losses in any cost account-
ing period may be expected not to
differ significantly from the projected
average loss for that period.
Supp. No. 5
Cost Accounting Standards Board
Several respondents were concerned
as to the possible consequences if a
self-insurance charge were to be made,
and, subsequently, actual losses dif-
fered substantially from the projected
average loss. The self-insurance charge
is, of necessity, an estimate. If the esti-
mate is made in a reasonable and sup-
portable manner, then the fact that
actual losses depart significantly in
either direction from the projected
average loss is not a basis for adjusting
the costs of that cost accounting
period. However, the standard pro-
vides that contractor's actual loss ex-
perience shall be reviewed regularly
and that self-insurance charges for
subsequent periods shall reflect expe-
rience, as would premiums for pur-
chased insurance. Similarly, if the sit-
uation were one in which it had been
determined that actual losses were to
be used because they were not expect-
ed to differ significantly from the pro-
jected average loss, and actual losses
did, in fact, differ significantly, the
actual losses would be nonetheless the
measure of the cost.
(5) LIMITATION ON SELF-INSURANCE
CHARGE
The proposals which were published
in the FEDERAL REGISTER provided that
the self-insurance charge plus insur-
ance administration expenses could be
equal to, but could not exceed, the
cost of comparable purchased insur-
ance plus the associated administra-
tion expenses. Several respondents
saw this as a question of allowability.
It is, however, not a limit on allowabi-
lity; it permits the cost of comparable
purchased insurance to be used as one
means of estimating the projected
average loss. The provision is intended
to avoid the necessity of employing ac-
tuaries to perform computations
which other actuaries have already
performed for the insurance company
in setting the premium. the standard
has been modified to express this in-
tention more clearly.
Other respondents were concerned
that a company which calculated a
self-insurance charge based on, say, a
5-year moving average of its own loss
experience would encounter problems
283
if it were to incur a large loss; this
would raise its average above the cost
of comparable purchased insurance
and thereby preclude the recovery of
the excess over time. Again, the Board
intended the limitation to apply only
where the cost of comparable pur-
chased insurance is used as a conve-
nient method of estimating the pro-
jected average loss. The standard spe-
cifically requires that the contractor's
own loss experience be reviewed regu-
larly and that self-insurance charges
for future periods reflect such experi-
ence in the same manner as would
purchased insurance. It should be
noted that the cost of future insur-
ance premiums would also be expected
to reflect, to some degree, the unfavor-
able loss experience of the contractor.
Several respondents were concerned
that the standard would require them
to obtain quotations for insurance pre-
miums for comparison with proposed
self-insrance charges, and they ques-
tioned the feasibility of obtaining such
quotations. The standard only re-
quires such a quotation if the self-in-
surance charge is to be estimated
thereby; it would not be required if,
for example, the charge were to be
based only on a projection of the con-
tractor's own experience.
(6) TERMINOLOGY
Several respondents suggested that,
in the definition of "actual cash
value," the phrase "replacement cost
less depreciation” could lead to confu-
sion because the type of depreciation
intended thereby was not clear. The
phrase was intended to imply replace-
ment of the destroyed asset with one
in the same physical condition. The
definition has been modified to make
this intention clearer.
One respondent suggested that the
provisions of § 416.50(a)(1)(v) relative
to "insurance coverage on retired
lives" should be applicable to all types
of insurance, rather than being limited
to life insurance. the Board intended
that this phrase provide for all types
of insurance for retired persons. The
term "retired lives" has accordingly
been replaced by the term "retired
persons."
Supp. No. 5
Cost Accounting Standards Board
Two respondents asked that the
standard define or prescribe criteria
for determining when a loss is consid-
ered to be "catastrophic" for purposes
of home-office reinsurance agree-
ments; they were concerned about
after-the-fact disagreement as to
whether a particular loss was "cata-
strophic" and thereby to be allocated
in part to the home office, or "nonca-
tastrophic" and to be absorbed entire-
ly by the segment. the Board believes
that what constitutes "catastrophic
loss" depends on the individual cir-
cumstances of each contractor. The
determination should be made at the
time the internal loss-sharing policy is
established and should be revised, as
necessary, for changes in future cir-
cumstances. Obviously, a catastrophic
loss would be one which would be very
large in relation to the average loss
per occurrence for that exposure, and
losses of that magnitude would be ex-
pected to occur infrequently.
(7) PREMIUMS AND REFUNDS
The proposed standard provided
that a premium refund or dividend
would become an adjustment to the
pro rata premium cost for the earliest
cost accounting period in which the
refund or dividend is actually or con-
tructively received. However, the
standard permitted the contractor the
option of using estimated net premi-
ums instead. One respondent suggest-
ed that the standard permit the shift-
ing of adjustments to prior years for
purposes of overhead analysis. This
proposed change would not assure con-
sistent measurement of cost; it has
therefore not been adopted.
(8) DIRECT CHARGING OF PREMIUMS
Paragraph 416.50(a)(1)(ii) provides
that where insurance is purchased spe-
cifically for, and directly allocated to,
a single final cost objective, the premi-
ums need not be prorated. One respon-
dent was concerned that if the final
cost objective included requirements
for two or more customers and the in-
surance premium were not prorated
over the policy period, the cost might
be charged only to the earliest units of
production. They suggested that the
284
provision be qualified by limiting it to
only those final cost objectives which
include requirements for a single cus-
tomer. If the need for the insurance
were to be occasioned by only one cus-
tomer's requirements, the cost should
be allocated to only that customer's
units regardless of the production se-
quence. If the requirement is common
to all customers' units, it should be al-
located to all units.
The accounting principle here is the
same as the one for specialized materi-
als, which are charged directly to a
final cost objective at the time of ac-
quisition. If costs within a final cost
objective, either for materials or for
purchased insurance, were to be inap-
propriately related among the custom-
ers whose work is accumulated in the
same cost objective, the problem
would not be one of allocating costs to
that cost objective. Rather it would be
a problem of the method of analyzing
costs within that final cost objective, a
subject not being dealt with here.
(9) DEPOSITS AND RESERVES
Insurance agreements frequently
provide for substantial amounts to be
held by the insurer for various contin-
gencies. Such amounts may be negoti-
ated in advance or may represent the
unrefunded excess of premiums over
losses; in either event they are not ar-
rived at by actuarial computations of
known risks. The contractor typically
retains a significant amount of inter-
est in, and control over, such funds.
FASB statement No. 5 provides that
amounts which do not represent trans-
fers of risk from the insured to the in-
surer are deposits and should be ac-
counted for as such. The proposed
standard required that anything
which would be a deposit under that
statement be treated as a deposit for
contract costing purposes. In addition,
the standard required that "reserves"
held by the insurer for the account of
the contractor would be regarded as
deposits unless they met stated crite-
ria.
These special criteria included a pro-
hibition against recapture of the re-
serve or fund so long as any benefici-
ary remained alive. Two commentators
Supp. No. 5
Cost Accounting Standards Board
urged that this test be modified. The
Board intended to assure that the cost
had indeed been incurred, but there
was no intention to tie up excess re-
serves for long periods. The provision
has been modified accordingly.
One respondent pointed out that
group insurance carriers in recent
years have required that premium sta-
bilization reserves be established on
medium-size experience-rated pro-
grams to smooth the experience so it
will be similar to a large group. He
said that the contractor has no more
right to these reserves than the
monthly premium he pays on the
policy. He therefore suggested that
the reserves required by the insurance
carrier should not be required to be
treated as deposits unless these re-
serves are treated as deposits for fi-
nancial statement purposes. The
Board does not agree; such reserves
are negotiated amounts and the con-
tractor does in fact have some influ-
ence over them. Cost measurement is
improved if these amounts are treated
as deposits until settled.
Some respondents previously point-
ed out that where a contractor
changes from a pay-as-you-go program
for retired persons to a pre-funded
program, or initially establishes a pre-
funded program, a liability arises to
those employees who have already re-
tired. The respondents suggested that
the standard provide a transition
mechanism to deal with the newly rec-
ognized liability. Therefore, the stand-
ard which was proposed in the May 15,
1978, FEDERAL REGISTER provided, and
the standard being promulgated today
provides that, for a transition from a
pay-as-you-go plan to a terminal-
funded plan, or on the initial estab-
lishment of a terminal funded plan,
the actuarial present value of benefits
applicable to employees already re-
tired shall be amortized over a period
of 15 years.
Two respondents inquired as to the
Board's reason for not providing a sim-
ilar provision for transitions to fully
prefunded level-premium or entry-age-
normal plans. The actuarial premium
computations for such plans implicitly
allow for appropriate amortization of
285
the liability for past service; therefore,
an explicit provision for this purpose
is unnecessary.
Two respondents asked for some lib-
eralization of the 15-year amortization
requirement; one suggested that the
period be negotiable depending upon
the circumstances which occasioned
the change, as for example, when a
segment is abolished and many em-
ployees take immediate retirement.
The 15-year period was chosen to be
comparable to the amortization period
for actuarial gains and losses con-
tained in CAS 413. To permit the am-
ortization period to be negotiated on a
case-by-case basis would reduce uni-
formity. It might also create an incen-
tive to make such changes at times
when one of the parties could be ex-
pected to benefit. The Board does not
accept the suggestion.
(10) RELATIONSHIP TO OTHER
STANDARDS
One respondent was concerned
about the realtionship of this standard
to two other cost accounting stand-
ards, CAS NO. 412, composition and
measurement of pension cost, and
CAS No. 415, accounting for costs of
deferred compensation. The respon-
dent was concerned especially about
health insurance carried for retired
employees of a contractor; he felt that
there might be confusion as to wheth-
er such insurance should be consid-
ered a form of deferred compensation,
a part of a pension plan, or a part of
an insurance program.
The Board believes that these stand-
ards provide ample criteria for deter-
mining which standard is applicable to
any given cost. In particular, the ques-
tion of whether a benefit, such as in-
surance provided to retired persons, is
an integral part of a pension plan and
thereby governed by CAS No. 412 or is
a part of an insurance program and
thereby governed by CAS No. 416 is a
question of fact in each given instance.
Moreover, application of either stand-
ard to this element would result in
substantially the same amounts of al-
locable cost.
Supp. No. 5
Cost Accounting Standards Board
(11) AMOUNT OF A LOSS
The proposal which was published in
the October 5, 1977, FEDERAL REGISTER
provided, in part, that "the amount of
an incurred loss shall be measured by
the net book value of property de-
stroyed . . ." A number of respondents
disagreed with this provision and sug-
gested that the proper measure of the
loss was "fair value," "replacement
cost," "replacement cost, net of depre-
ciation," and "replacement cost if re-
placed and net book value if not re-
placed." After considering these com-
ments, the Board concluded that the
measure of the loss should be the eco-
nomic value of the asset destroyed,
and that this value was best described
as “actual cash value"; consequently,
the May 15, 1978, FEDERAL REGISTER
proposal incorporated "actual cash
value."
Three respondents have again asked
that the standard recognize replace-
ment cost as the measure of the loss,
on the grounds that the asset would
probably be replaced with a new asset
and that the cost of insurance premi-
ums which would provide for replace-
ment cost coverage would be allowa-
ble. The Board believes that the meas-
ure of the loss is the economic value of
the asset destroyed, and this may bear
little relationship to the economic
value of the asset which is acquired to
replace it. In this connection it should
also be noted that CAS No. 409 re-
quires the treatment of a gain on in-
voluntary conversion of an asset as a
recovery of past depreciation or, alter-
natively, treatment as a reduction in
the cost, basis of the replacement
asset. The Board has, accordingly, re-
tained the use of "actual cash value"
as one of the major measures of loss.
Contract audit agencies have report-
ed that contractors sometimes charge
the maximum potential loss for con-
tract costing purposes but report a
lesser amount for published financial
statements; therefore, the proposed
standard provided that where the
amount of the loss is uncertain, the es-
timate of the loss shall be the amount
includible in published financial state-
ments. Three respondents suggested
that this requirement be deleted be-
286
cause the amount reported for finan-
cial statement purposes might be too
conservative. The Board continues to
believe that the guidance contained in
FASB statement No 5 and interpreta-
tion No. 14 thereto permits an objec-
tive measure of the loss. The Board,
therefore, retains the requirement.
One respondent was concrned about
whether use of the term "incurred
loss" in § 416.50(a)(3) was intended to
mean something other than an actual
loss. The Board did not so intend; the
term "incurred loss" has been elimi-
nated.
Two respondents asked the Board to
clarify the references to "published fi-
nancial statements" contained in the
previously proposed standards. One of
these respondents pointed out that
not all published financial statements
are necessarily prepared in accordance
with generally accepted accounting
principles; the other pointed out that
a loss may be required to be reported
in a published financial statement
under conditions where it is not ac-
cruable therein as a liability. In order
to clarify its intent, the Board has re-
placed the phrase "published financial
statements," whenever it appeared in
the proposed standard, with the
phrase "statements prepared in ac-
cordance with generally accepted ac-
counting principles" and the standard
now refers to the amount which would
be "includible as an accrued liability"
in such statements.
(12) PRESENT VALUE OF FUTURE Losses
On respondent objected to the re-
quirement for discounting amounts of
losses to be paid in the future at a rate
different from that contained in exist-
ing procurement regulations. As it
stated in the prefatory remarks which
accompanied the May 15, 1978, FEDER-
al Register publication, the Board be-
lieves that the additional computa-
tional effort involved in using a rate
for contract costing different from
that required by the various States is
not warranted. Where no rate is pre-
scribed by a State, the use of the rate
determined by the Secretary of the
Treasury pursuant to Pub. L. 92-41, 85
Stat 97, as required by the standard, is
Supp. No. 5
Cost Accounting Standards Board
consistent with the Board's require-
ment in CAS 415 to use that rate in
discounting deferred compensation
awards.
(13) ALLOCATION OF INSURANCE COSTS
FROM A HOME OFFICE to SegmentS
The October 5, 1977, proposal con-
tained criteria for the allocation of in-
surance costs from a home office to
segments. Various respondents ques-
tioned the need for such additional
guidance on the grounds that the pro-
visions of CAS 403 are adequate for
this purpose. The Board concurred in
this belief and omitted the related
provisions from the May 15, 1978, pro-
posal. Two respondents to that propos-
al suggested that the provisions of
CAS 403 are too general and further
guidance is needed to insure that such
allocations will reflect significant dif-
ferences in segment loss experience.
CAS 403 requires that home office
expenses shall be allocated on the
basis of the beneficial or casual rela-
tionship between supporting and re-
ceiving activities. Specifically, with re-
spect to central payments or accruals
made by a home office on behalf of its
segments, CAS 403 requires that these
shall be allocated directly to segments
to the extent that they can be identi-
fied. CAS 403 provides further that
payments or accruals which cannot be
identified with individual segments are
to be allocated by means of an alloca-
tion base representative of the factors
on which the total payment is based.
If there are significant differences in
segment loss experience, then these
differences would be identifiable and
would be required by CAS 403 to be re-
flected in the allocation of the related
home office premium cost or refund.
The Board therefore continues to be-
lieve that additional guidance for such
allocations in this standard is not nec-
essary.
(14) MATERIALITY OF LOSSES AND
INSURANCE ADMINISTRATION EXPENSES
The standard permits a contractor
to recognize immaterial amounts of
self-insured losses and insurance ad-
ministration expenses as part of other
expense categories rather than as "in-
287
surance expense." Two respondents
were concerned that what is a "materi-
al" cost will be the subject of contro-
versy.
The Board recognizes that some con-
tractors may elect to purchase all of
their insurance services from an insur-
ance company or outside agencies;
such services as claims processing or
payment, risk analysis, loss prevention
activities, etc. may be billed separately
or included in the premium. Other
contractors may elect to provide some
or all of these services themselves. The
standard recognizes this diversity of
practice by stating, in § 416.40, that
the amount of the insurance cost is
the sum of the projected average loss
plus the insurance administration ex-
penses.
Where a contractor purchases sub-
stantially all of its insurance services
and the cost is included in the premi-
um, the allocation of the costs of such
services automatically follows the allo-
cation of the premium. In such situa-
tions, if immaterial amounts of in-
house costs, such as portions of var-
ious individuals' salaries or allocable
space costs, are not explicitly recog-
nized as insurance administration ex-
penses, the accuracy of cost allocation
is not significantly impaired. On the
other hand, if a contractor establishes
a claim processing department to proc-
ess group insurance claims for a large
work force, and the costs of such a
group are material, then the Board be-
lieves that uniformity will be better
served by requiring that such costs be
allocated in the same manner as the
costs of the related insurance. The
Board believes that its previous pro-
nouncements on the subject of materi-
ality will provide sufficient guidance.
(15) RENEGOTIATION
One respondent was concerned that
contractors will have difficulty in fol-
lowing the standard while reporting to
the Renegotiation Board, which is
bound by law to allow items in accord-
ance with chapter 1 of the Internal
Revenue Code. This concern applies
both to the election to account for re-
funds, dividends, and additional assess-
ments on the basis of estimated net
Supp. No. 5
Cost Accounting Standards Board
premiums,
authorized
in
§ 416.50(a)(1)(vi), and the use of a self-
insurance charge in lieu of the recog-
nition of actual losses. In both in-
stances the standard could result in
the recognition, as contract cost, of
amounts which would not be recog-
nized for tax purposes.
Other cost accounting standards
have required the selection of specific
cost measurement techniques from
among the many which might have
been available under the Internal Rev-
enue Code. The respondent suggested
that the proposal on insurance is dif-
ferent in that it can result in the use
of a method of contract cost account-
ing which is not permitted for tax ac-
counting purposes.
The Board recognizes that the Re-
negotiation Board is indeed bound by
law to recognize those elements of cost
which are identified in the Internal
revenue Code. Measurement of the
amounts of such costs to be recognized
in any particular period, however,
should be done in accordance with the
best available accounting techniques.
Where this standard recognizes a self-
insurance charge in lieu of actual
losses, the Renegotiation Board will
also obtain a better measure of con-
tractual profits by following the stand-
ard than by following the tax mea-
surement. The Renegotiation Board,
as a relevant Federal agency, can ar-
range for the application of this stand-
ard as it has for various others which
have required reconciliations between
tax reporting and contract costing. No
exemption is, therefore, being made
for renegotiation.
(16) RECORDS
A contractor who elects to make a
self-insurance charge should be ex-
pected to provide sufficient documen-
tation to support the amount of the
charge. In addition, the standard re-
quires that the contractor's own loss
experience be evaluated regularly. Fi-
nally, the standard requires the identi-
fication of losses to the segment in
which they occur. While the cost of
losses is already reflected in the con-
tractor's formal accounting records,
the data on loss frequency, amount,
and location which may be necessary
288
to comply with the proposed standard
may not be a normal part of such ac-
counting records. The "records" provi-
sion of the standard recognizes both
the need for such data and the prob-
able memorandum nature of the rec-
ords. The requirement to maintain
such records was contained in the Oc-
tober 5, 1977, proposal but was inad-
vertently omitted from the May 15,
1978, FEDERAL REGISTER proposal. It
has been reinstated in the standard
now being promulgated.
(17) ILLUSTRATIONS
One respondent suggested that the
dollar amounts used in illustrations
were unrealistic and would serve as
guidelines for unrealistic rulings in
practice. As the Board has stated on
previous occasions, the use of dollar
amounts in illustrations is intended to
improve the understandability of the
illustration. Such dollar amounts are
not intended to establish criteria for
use in actual situations.
(18) Costs AND BENEFITS
The Board's objective, with respect
to uniformity, is to achieve compara-
bility among entities operating under
like circumstances. As applied to the
measurement of insurance costs, there
should be similar reported costs where
there are similar exposures to risk.
The Board has recognized the need to
provide guidance on the determination
of contract charges under self-insur-
ance programs, especially under cir-
cumstances where the likelihood is
that actual losses in a given period will
differ materially from the long-term
projected average. This standard will
provide for increased uniformity in
this field.
Consistency pertains to the use, by
any one entity, of cost accounting
practices which permit comparability
of contract results under similar cir-
cumstances over periods of time. The
decision whether to purchase insur-
ance or to self insure is comparable to
a make or buy decision. A change in
the method of providing for the risks
(which risks continue unchanged) is
not a change in circumstances of the
sort which should destroy comparabil-
ity over time. This standard provides
Supp. No. 5
Cost Accounting Standards Board
the basis for consistency in measuring
insurance costs even when there are
shifts between purchased insurance
and self-insurance.
Only three respondents suggested
that the implementation costs of the
standard would be excessive or would
exceed the benefits. One of these fore-
saw increased administrative costs but
did not offer any specifics. The con-
cerns of the others appeared to lie pri-
marily in two areas-the lack of a defi-
nition of "materiality" in relation to
insurance costs and the lack of specific
procedural guidance in estimating a
self-insurance charge. They therefore
anticipated increased disagreements.
The Board has provided remarks
about materiality in various public
pronouncements. The Board believes
that these comments are sufficient
and that the concerns in this regard
are unwarranted.
A self-insurance charge is an esti-
mate, and the Board has consistently
refrained from dictating detailed esti-
mating procedures. A contractor must,
of necessity, estimate many costs, and
the degree of sophistication and com-
plexity of the estimating process is a
matter for discussion between the con-
tractor and procurement and audit
personnel.
The standard provides for several
methods of recognizing the costs of
self-insurance. First, the contractor
may recognize actual losses in those
situations in which the distribution of
actual losses may be expected to not
differ significantly from the projected
average loss. This is a matter which
should be readily determinable from
the nature of the exposure to risk; this
will normally be expected where there
are many units exposed to loss and the
potential loss per unit is low in rela-
tion to the total exposure, as, for ex-
ample, with worker's compensation,
group insurance, and deductible por-
tion of property and casualty insur-
ance which is nominal in relation to
the total exposure. In most such cases,
contractors already charge actual
losses, so no change will be necessary.
Second, the contractor may use the
premium cost of purchased insurance
for comparable coverage as the basis
289
for the self-insurance charge. This
method would be appropriate when,
for example, the contractor proposed
to substantially increase a deductible
provision for property and casualty in-
surance; he might propose to make a
self-insurance charge equal to the pre-
mium reduction for the decreased cov-
erage. Only in the event that neither
of these two methods is appropriate
would the contractor have to resort to
the third method, that of actuarial
review of his own or industry experi-
ence to develop a self-insurance
charge. Under these circumstances,
the Board believes that the majority
of contractors will already be in com-
pliance with the proposed standard
and the costs of compliance for the re-
mainder should not be significant.
Therefore, the standard should have
no significant inflationary impact.
Four respondents suggested that, if
the majority of contractors would not
have to change in order to comply
with the standard, then the problems
were not sufficient to justify the
standard. The Board recognizes that,
although the insurance problems re-
solved by this standard are likely to be
encountered only by a minority of con-
tractors, when they are encountered
they are of substantial importance and
their resolution in a uniform and con-
sistent manner will be beneficial in
contract costing.
In summary, the Board finds that
this standard will increase the uni-
formity and consistency of measure-
ment of the cost of insurance related
to negotiated defense contracts. The
standard will eliminate, or materially
reduce, the problems listed in the
Board's prefatory remarks with the
May 15, 1978 publication. The Board
finds that the costs of implementation
will be slight and that there will be no
inflationary impact.
There is also being published today
an amendment to part 400, definitions,
to incorporate in that part terms de-
fined in § 416.30(a) of this cost ac-
counting standard.
Supp. No. 5
Cost Accounting Standards Board
(This page left blank intentionally)
290
*U.S. GOVERNMENT PRINTING OFFICE : 1979 O 284-702/6640
X.
!