DATE: September 15, 2000

FROM: Barry McVay, CPCM

SUBJECT: Cost Accounting Standards Board; Accounting for the Cost of Employee Stock Ownership Plans

SOURCE: Federal Register, September 15, 2000, Vol. 65, No. 180, page 56008

AGENCIES: Cost Accounting Standards Board (CASB), Office of Federal Procurement Policy (OFPP), Office of Management and Budget (OMB)

ACTION: Notice

SYNOPSIS: The CASB is inviting public comments regarding a Staff Discussion Paper (SDP) on accounting for the cost of employee stock ownership plans (ESOP) under government contracts.

EDITOR'S NOTE: The Cost Accounting Standards (CAS) are 19 standards which apply to large contractors performing large contracts. They are in Chapter 99 of Title 48 of the Code of Federal Regulations, and are included as an appendix to the paper-version of the Federal Acquisition Regulation (FAR) for information purposes. The CAS are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.

DATES: Comments must be submitted no later than November 14, 2000.

ADDRESSES: Address comments to Dr. Rein Abel, Director of Research, Cost Accounting Standards Board, Office of Federal Procurement Policy, 725 17th Street, NW, Room 9013, Washington, DC 20503, Attn: CASB Docket No. 00-03. Include with the written comments a 3.5" computer diskette copy of the comments and denote the word processing format used.

FOR FURTHER INFORMATION CONTACT: Rein Abel, Director of Research, CASB, 202-395-3254.

SUPPLEMENTAL INFORMATION: A number of commenters have identified accounting for the cost of ESOPs under government contracts as an issue requiring CASB consideration, primarily because of the lack of guidance concerning this matter in government contracting regulations, and the attempt by contracting parties to apply various provisions of the CAS to accounting for the costs of ESOPs even though the CAS provisions do not even mention ESOPs, specifically CAS 9904.412, Composition and Measurement of Pension Cost, and CAS 9904.415, Accounting for the Cost of Deferred Compensation. (EDITOR'S NOTE: The SDP points out that ESOPs are mentioned in paragraph (j)(8) of Federal Acquisition Regulation (FAR) 31.205-6, Compensation for Personal Services, and in Defense Contract Audit Agency (DCAA) Contract Audit Manual Section 7-2114). This lack of clear guidance has produced a number of legal actions and other disputes between the government and contractors (the SDP references Ralph Parsons Co., ASBCA [Armed Services Board of Contract Appeals] 37931 (December 20, 1990); and Ball Corp., ASBCA 49118 (April 3, 2000)).

After a thorough discussion of the more prominent ESOP issues involved (most notably, the allowability of interest on funds borrowed to fund leveraged ESOPs), the following six questions are posed:

  1. "Does GAAP [Generally Accepted Accounting Principles] (SOP [Statement of Position] 93-6) provide sufficient guidance for accounting for the costs of ESOPs for government contract costing purposes? Please discuss the rationale of your answer to this question. If the answer is no, then the Board would like to receive comments as to whether one of the existing CAS does or could be expanded to provide adequate guidance."

  2. "Do you believe that distinguishing between "pension" and "deferred compensation" ESOP type is useful in the government contract costing environment and that this feature should be included in any future CAS Board promulgation on this topic? Please include the rationale for your answer to this question."

  3. "If you believe that a distinction between ESOP types is useful and should be included in any future CAS promulgation do you also believe that amendments, or an interpretation, to CAS 9904.412 and/or CAS 9904.415, is the appropriate action for the Board to take?"

  4. "Do you believe that the fair value of the shares released by an ESOP to individual employee accounts should be established at the date when the title to these shares is transferred to the ESOP or should it be the date when the shares are committed to be released to employee accounts? If you would like to propose a different date or a modified version of the two dates referred to above, please explain."

  5. "For contract costing purposes, should a distinction be made between measurement of the "cost to the company" or measurement of compensation "received by the employee?" Please explain. If a distinction should be made, please also comment on the method that should be used to measure this amount."

  6. "Should the form of payment of ESOP benefits to the employee make a difference in measuring the cost allocable to government contracts? If so, how should the cost be determined?"

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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