Conformance of Cost Accounting Standards to Generally Accepted Accounting Principles for Operating Revenue and Lease Accounting

<RULE> OFFICE OF MANAGEMENT AND BUDGET <SUBAGY>Office of Federal Procurement Policy</SUBAGY> <CFR>48 CFR Parts 9903 and 9904</CFR> <RIN>RIN 0348-AB78</RIN> <SUBJECT>Conformance of Cost Accounting Standards to Generally Accepted Accounting Principles for Operating Revenue and Lease Accounting</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Cost Accounting Standards Board, Office of Federal Procurement Policy, Office of Management and Budget. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards Board (the Board), is publishing, with additional clarification based on public comments from the notice of proposed rulemaking (NPRM), a final rule revising the Cost Accounting Standards (CAS) to conform them with changes in Generally Accepted Accounting Principles (GAAP) related to operating revenue and lease accounting. This final rule follows issuance of a NPRM, June 27, 2024; an advanced notice of proposed rulemaking (ANPRM), November, 5, 2020; and a Staff Discussion Paper (SDP), March 13, 2019. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> October 14, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> John L. McClung, Manager, Cost Accounting Standards Board (telephone: 202-881-9758; email: <E T="03">john.l.mcclung2@omb.eop.gov</E> ). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> On March 13, 2019, the Board published a Staff Discussion Paper (SDP) (84 FR 9143) to solicit views with respect to the Board's efforts to conform CAS requirements, where practicable, to GAAP as required by 41 U.S.C. 1501(c). Respondents were invited to comment on, among other things, whether and how CAS may need to be modified to conform to changes to GAAP that occurred after a related CAS was promulgated. More specifically, the SDP asked what recommended actions, if any, the Board should take regarding the changes in GAAP for operating revenue and lease accounting rules. The Board recognized that since the initial promulgation of CAS 403 (38 FR 26680, Dec. 14, 1972), numerous changes have been made to GAAP. This growth in GAAP content presents opportunities to modify or eliminate overlapping CAS requirements where GAAP standards may be applied reasonably as a substitute for CAS. Furthermore, some changes in GAAP may create inconsistencies not contemplated during the initial promulgations of CAS requiring action by the Board. Public comments received on the SDP, amongst other things, urged the Board to prioritize efforts to address changes in GAAP related to operating revenue and lease accounting. In response to these comments, the Board issued an advanced notice of proposed rulemaking (ANPRM) on November 5, 2020, (85 FR 70572) that described proposed changes to the CAS that, if adopted, would (i) align CAS with GAAP on the handling of operating revenue and (ii) clarify CAS definitions to make clear that GAAP changes on lease accounting are not recognized for CAS purposes. In regards to revenue, comments received from the ANPRM agreed with relying on GAAP for operating revenue. However, they believed the Board's desire to retain the CAS 403 criterion regarding only utilizing the “fee for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities,” was unnecessary. The commenters pointed out the additional conceptual framework GAAP includes related to the principal versus agent relationship in contracts with customers. In regards to lease accounting, comments received from the ANPRM generally agreed with the need for the definitional changes of both tangible and intangible assets to include financing leases and exclude operating leases. However, they believed the Board's proposed language was ambiguous and may not achieve the desired goal of avoiding confusion or inconsistent treatment. On June 27, 2024, the Board published the NPRM (89 FR 53575). The NRPM made further refinements to the proposed regulatory changes based on the public comments received from the ANPRM and additional research and consideration by the Board. This final rule addresses the public comments received in response to the NPRM and also reflects research accomplished by the Board. The final rule is issued by the Board in accordance with the requirements of 41 U.S.C. 1502(c). <HD SOURCE="HD1">II. Operating Revenue</HD> A. <E T="03">Overview.</E> The definitions of operating revenue in CAS and revenue in GAAP are currently different. The GAAP definition of “revenue,” found at Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606-10-20, reads as follows: <EXTRACT> <E T="03">“Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.”</E> </EXTRACT> The CAS 403-30(a)(3) definition of “operating revenue” reads as follows: <EXTRACT> <FP> <E T="03"> “. . . amounts accrued or charge[d] to customers, clients, and tenants, for the sale of products manufactured or purchased for resale, for services, and for rentals of property held primarily for leasing to others. It includes both reimbursable costs and fees under cost-type contracts and percentage-of-completion sales accruals except that it includes only the fee for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities. It excludes incidental interest, dividends, royalty, and rental income, and proceeds from the sale of assets used in the business.” </E> </FP> </EXTRACT> In the NPRM, the Board stated its belief that while the underlying definitions are worded differently, revenue as reported by contractors in accordance with GAAP if applied for CAS purposes would achieve materially the same result as applying the current definition of operating revenue in CAS, thereby, achieving uniformity and consistency. The NPRM proposed language to remove the definition of operating revenue from CAS 403 and rely on revenue reported in accordance with GAAP for CAS purposes. In addition, the Board stated its belief that changes, if any, to cost accounting practices to conform Operating Revenue to ASC 606 should be considered to be a required change defined in accordance with 48 CFR 9903.201-6(a)(2). The Board also contemplated an exemption for cost accounting practices, if any, from the cost impact process for the initial conformance efforts to align disclosed practices with ASC 606. Lastly, the Board requested specific input on whether there are any instances where an entity might not consider itself an agent, based on ASC 606-10-55-38 when performing on a Government-owned contractor-operated (GOCO) contract. B. <E T="03">Public comments.</E> The Board received five sets of public comments in response to the NPRM. Comments came from industry associations, consulting firms, and individuals. <E T="03">Comment:</E> Four sets of comments generally agreed with the proposed changes and basis described by the Board in the NPRM. <E T="03">Response:</E> Based on public comments and additional research conducted by the Board, the Board continues to believe that the definition of operating revenue in CAS and revenue in GAAP are essentially equivalent. Furthermore, the Board has not identified any material impact that would occur if revenue as reported in accordance with GAAP was used for CAS purposes. On this basis, the Board has concluded that the CAS 403 definition of operating revenue has become unnecessary to protect the Government's interests and may be deleted in its entirety to allow for reliance on revenue reported in accordance with GAAP for CAS purposes. <E T="03">Comment:</E> One commentor believes the Board should focus more on recommendations of the Section 809 Panel instead of CAS-GAAP conformance efforts. The commentor asserts that the Panel's recommendations, such as raising the thresholds for CAS applicability, full CAS compliance, and disclosure requirements would be a more impactful way of reducing CAS administrative burden and promoting competition. <E T="03">Response:</E> The Board believes CAS-GAAP harmonization, which is statutorily required, and careful consideration of the section 809 Panel's recommendations are both deserving of prioritization, as reflected in the Board's agenda, which was recently published in the <E T="04">Federal Register</E> at 90 FR 29048. <E T="03">Comment:</E> Three sets of comments responded to the Board's query in the NPRM for specific input on whether there are any instances where an entity might not consider itself an agent, based on ASC 606-10-55-38, when performing on a GOCO contract. One commentor was unaware of any circumstance where this would be the case. Another commentor asserted there could be instances where an entity might not consider itself an agent based on ASC 606-10-55-38, when performing a GOCO contract. The hypothetical provided was an entity producing a good at a GOCO facility and then placing it in its own inventory to be sold later to the government or a third party. In this and other instances where the entity is not an agent, the commentor concludes that the special allocation rules should be used to accommodate exceptions to GAAP when the use of GAAP for determining revenue does not result in an equitable allocation to GOCO segments. Finally, one commentor raised concerns that the “privity of contract” concept could be distorted by prime contractors in making a determination of Agency status for purposes of revenue reco ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 36k characters. 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