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Cost Accounting Standards Board
ATTN: Mr. John L. McClung
Office of Federal Procurement Policy, Office of Management and Budget
Subject: Financial Executives International (FEI) Comments on CASB Case No. 2021-01, Conformance of Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP) for Operating Revenue and Lease Accounting
Reference: FEI Letter Dated January 4, 2021, on CASB Advance Notice of Proposed Rulemaking (ANPRM) on the Conformance of the CAS to GAAP for Operating Revenue and Lease Accounting
Dear Mr. McClung,
FEI is a leading international organization comprised of members who hold positions as Chief Financial Officers, Chief Accounting Officers, Controllers, Treasurers, and Tax Executives at companies in every major industry. This letter is submitted by FEI’s Committee on Government Business (CGB) which formulates policy opinions on government contracting issues and represents the views of CGB and not necessarily the views of FEI or its members individually.
The purpose of this letter is to offer comments pursuant to 41 U.S.C 1502(c) related to CAS Board Case No. 2021-01 published in the Federal Register on June 27, 2024, as a Notice of Proposed Rulemaking (NPRM) on the Conformance of the Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP) for Operating Revenue and Lease Accounting.
FEI-CGB previously responded to the referenced ANPRM prepared in response to Section 820 of Public Law 114–328 that required the Board to review CAS and conform them, to the extent practicable, to GAAP. Our letter agreed that leveraging existing GAAP regulations has the potential to eliminate time and expense for the US Government and contractor community. We continue to support this initiative and provide the following comments on the NPRM.
I. Operating Revenue
FEI-CGB supports using the GAAP definition of revenue in place of the CAS definition of operating revenue. We further agree with the elimination of the definition of “operating revenue” within 9904.403-30(a)(3) and the removal of the word “operating” in relation to revenue elsewhere in CAS 403.
FEI-CGB is not aware of any instances where an entity might not consider itself an agent, based on Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606-10-55-38, when performing on a Government Owned Contractor Operated (GOCO) contract, and therefore provides no additional input on this point.
FEI-CGB views the proposed change (i.e., the elimination of the definition of “operating revenue” and reliance on the “revenue” definition in GAAP ASC 606) as a required change as defined under 48 CFR 9903.201-6(a)(2) and described at 48 CFR 9903.201-4(a)(i), since it effectively modifies CAS. However, since the CAS definition of “operating revenue” and the GAAP definition of “revenue” are essentially the same, the expectation is that there would be no cost impact to the Government or contractors as a result of the change. In fact, FEI-CGB envisions that any changes to a contractor’s Disclosure Statement as a result of this change would most likely be an administrative wording change and not a change in cost accounting practice. Consequently, FEI-CGB agrees that it is appropriate to exempt any necessary disclosed changes related to this conformance effort from the contract price and cost adjustment requirements of part 9903 by creating an exemption similar to that used for external restructuring activities in 48 CFR 9903.201.8
II. Lease Accounting
FEI-CGB supports the CAS Board’s intent to clarify which assets should be included in the calculations of Facilities Capital Cost of Money (FCCOM). However, there still appears to be some confusion in terminology since the proposed changes attempt to apply the financial accounting rules governing tangible capital assets to right-of-use (ROU) assets acquired under finance leases. By definition, a ROU asset is an intangible asset acquired in a lease. It is the right, obtained under a lease, to use the underlying asset. While a finance lease generally includes a transfer of ownership of the underlying asset, it is still considered an intangible asset until that transfer occurs. Therefore, no change is required to the existing definition of tangible capital asset as it appears in 48 CFR 9904.403-30(a)(5), 9904.404-30(a)(4), 9904.409-30(a)(3), 9904.414-30(a)(5), and 9904.417-30(a)(2) which states:
Tangible capital asset means 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 services it yields.
FEI-CGB recommends limiting the definition of ROU assets to intangible assets in 48 CFR 9904.414-30(a)(4) and 9904.417-30(a)(1). For purposes of the intangible asset definition, there is no need to distinguish ROU assets acquired in finance leases from ROU assets acquired under operating leases. Consequently, the desired clarity is accomplished by adding the statement shown in italics to the end of the existing definition:
Intangible capital asset means 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 accounting period for the benefits it yields. It includes right-of-use assets acquired under leases.
If the CAS Board follows our recommended approach of revising only the definition of intangible capital asset to address ROU assets, a change is also required to 48 CFR 9904.403-50(c)(1)(iii) to add the value of ROU assets acquired in finance leases to the three factor formula. Specifically, 403-50(c)(1)(iii) could be revised as shown in italics below:
The percentage of the average net book value of the sum of the segment’s tangible capital assets, plus right-of-use assets acquired in finance leases, plus inventories 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 average of the net book value at the beginning of the organization’s fiscal year and the net book value at the end of the year.
Since the Appendix A to 9904.414—Instructions for Form CASB CMF already address the capitalized value of leased property, only a minor revision is needed to clarify that the ROU assets acquired in a finance lease should be included in the facilities capital items reported on the form, as presented italics below:
Recorded, Leased Property, Corporate
The net book value of facilities capital items in this column shall represent the average balances outstanding during the cost accounting 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 is adequate to ascertain the net book value of these assets at the beginning and end of each cost accounting period, and to compute an average of the beginning and ending values. “Recorded” facilities are the 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, including right-of-use assets acquired in a finance lease, but excluding right-of-use assets acquired in an operating lease. Corporate or group facilities are the business unit's allocable share of corporate-owned and leased facilities. 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 office expense allocation.
FEI appreciates the CAS Board’s consideration of our input. If you wish to engage with the FEI-CGB on this matter or have any questions, please contact Ms. Christina Coulter, Manager, Technical Committee Operations, at (973) 765-1047 or email at [email protected]. You may also contact me directly at (508) 309-8118 or [email protected].
Sincerely,
David K. Ferrari
Chair, Financial Executives International – Committee on Government Business
Distribution: Christina Coulter, Manager, Technical Committee Operations
FEI-CGB Members