DATE: August 20, 2003

SUBJECT: Cost Accounting Standards Board; Accounting for the Costs of Employee Stock Ownership Plans Sponsored by Government Contractors

SOURCE: Federal Register, August 20, 2003, Vol. 68, No. 161, page 50111

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

ACTION: Advance Notice of Proposed Rulemaking (ANPR)

SYNOPSIS:The Cost Accounting Standards Board (CASB) is inviting comments on proposed amendments to Cost Accounting Standard (CAS) 412, Cost Accounting Standard for Composition and Measurement of Pension Cost, and CAS 415, Accounting for the Cost of Deferred Compensation. These proposed amendments address issues concerning the recognition of the costs of Employee Stock Ownership Plans (ESOPs) under government cost-based contracts and subcontracts.

EDITOR'S NOTE: The 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 on the proposed CAS amendments must be submitted on or before November 18, 2003.

ADDRESSES: Comments may be submitted by e-mail to: casb@omb.eop.gov. Put the full body of the comments in the text of the electronic message and also as an attachment readable in either MicroSoft Word or Corel WordPerfect. Those submitting comments must include their name, title, organization, postal address, telephone number, e-mail address, and "CASB Docket No. 00-03A" in the text of the message. Comments may also be submitted by fax to 202-395-5105.

FOR FURTHER INFORMATION CONTACT: Robert A. Burton, Associate Administrator, OFPP, 202-395-3302.

SUPPLEMENTAL INFORMATION: The CAS and the Federal Acquisition Regulation (FAR) have addressed issues associated with ESOPs ever since ESOPs became popular in the late 1970s as a vehicle for providing incentive compensation to employees, as well as a means for corporations to finance their capital requirements.

At first, the issues that arose were regarded as allowability matters that were to be treated in the FAR and its predecessors, the Defense Acquisition Regulation (DAR) and the Armed Services Procurement Regulation (ASPR). The views of the CASB were sought primarily on an advisory basis. However, various government commenters suggested to the CASB that accounting for the cost of ESOPs under government contracts and period assignment matters warranted placement on the CASB's agenda.

The CASB considered issuing an "Interpretation" of its existing standards, but decided that additional research was needed. Various approaches for dealing with ESOP accounting issues were considered by the CASB and other interested parties in the late 1990s. On September 15, 2000, the CASB issued a Staff Discussion Paper (SDP) on ESOPs and requested comments (see the September 15, 2000, FEDERAL CONTRACTS DISPATCH "Cost Accounting Standards Board; Accounting for the Cost of Employee Stock Ownership Plans").

The CASB reviewed and discussed the 16 sets of comments received on the SDP (from seven contractors, two government agencies, three industry associations, and four other (professional associations and individuals)). The majority of respondents agreed on several issues:

  1. Generally Accepted Accounting Principles (GAAP) do not provide adequate guidance for measuring ESOP costs.

  2. There should be no distinction between "pension" and "deferred compensation" ESOPs in the measurement of ESOP costs.

  3. The fair value of the stock should be established when title to the stock is transferred to the ESOP.

  4. ESOP costs should be measured by the cost incurred by the contractor rather than the value of compensation received by employees.

  5. The form of payment used to make distribution of ESOP benefits to employees is not relevant to the measurement of a contractor's ESOP costs.

There was no strong consensus as to whether CAS 412 or CAS 415 or both should be amended, or whether a new CAS should be adopted regarding ESOP costs.

The CASB then asked its staff to perform additional research. The staff explored three different options: (1) modify CAS 415 so the contribution to the ESOP could be treated as deferred compensation for government contract costing purposes; (2) develop a separate CAS based on the "contribution approach;" and, (3) develop a separate CAS based on Generally Accepted Accounting Principles (GAAP). The CASB has tentatively decided to proceed with option (1).

The proposed amendments make clear that all ESOP cost determinations will become subject to CAS 415. In addition, CAS 412 is proposed to be amended to exclude from its coverage those ESOP costs that meet the definition of a pension plan (paragraph (b) of 9904.412-20, Purpose, would state, "This Standard does not cover the cost of Employee Stock Ownership Plan (ESOPs) that meet the definition of a pension plan. Such plans are considered a form of deferred compensation and covered under 9904.415.").

The proposed amendments adopt the "contribution" approach for ESOP cost measurement (paragraph (f) of 9904.415-50, Techniques for Application). Using this approach, contractors' contributions to ESOPs for a cost accounting period become the basis for ESOP cost determination. That part of the contribution that is assignable to the cost accounting period would be recognized as deferred compensation cost for the period. This recognition as an assignable cost is, in turn, based on the identification of ESOP awards that have been made to employees during the period that qualify as deferred compensation in accordance with the corresponding definition incorporated in 9904.415-30, Definitions. Essentially, the ESOP costs assignable to a cost accounting period are that part of the annual contribution that is attributable to the awards made to employees during the period.

The proposed transition method (9904.415-64, Transition Method) is designed to ensure that the adoption of this proposal will not cause changes to existing arrangements that contracting parties may have developed to deal with their existing ESOP cost determinations. In particular, the intent is that contractor/government advance agreements for existing ESOPs should not be disturbed. The emphasis is on making sure the procedures incorporated in the proposal are applied only to the measurement, assignment, and allocation of costs of new ESOPs that are established after this proposal becomes effective, if ultimately adopted by the CASB.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2003 by Panoptic Enterprises. All Rights Reserved.

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