In February 2020, the Government Accountability Office (GAO) released a report on the Cost Accounting Standards (CAS) Board's progress on modernizing the CAS—including conforming them to the Generally Accepted Accounting Principles (GAAP)—where appropriate. GAO found that the CAS Board is well underway in its assigned mission; but that the CAS are likely to persist in some form and will not be completely absorbed into a unified GAAP-like system.
Congress created the CAS Board in 1970 to promulgate standards for accounting practices used by federal contractors. Although GAAP's predecessor had existed since the 1930s, the federal government faced a distinct accounting challenge that commercial enterprises did not. The government required a reliable process by which to allocate costs to individual contracts, whereas GAAP's primary focus is accurate reporting of high-level financial performance. Between 1972 and 1980, the CAS Board issued 19 CAS covering topics ranging from deferred compensation, to consistency in estimating, to depreciation.
After promulgating the CAS, the CAS Board only met intermittently to address interpretation issues. Many federal contractors have successfully applied the standards; however, innumerable companies that offer valuable solutions have elected not to do business with the federal government to avoid developing a government-unique cost accounting system and disclosures. Moreover, CAS compliance involves significant expense; often companies separate their commercial and government work to manage increased demands on the latter.
Recognizing the need to protect the federal government's interests, while minimizing the burden on existing and potential contractors, Congress required the CAS Board to work on conforming the CAS with GAAP where practicable, review related disputes, and report annually to Congress.1
GAO released a report in February 2020 analyzing the CAS Board's progress, and the CAS Board received good marks.2 The Board has met regularly and started reviewing each standard for potential revision or conformance to the GAAP. To achieve this task, the Board has set out a four-step process commencing with studying potential impacts of the CAS, publishing a report based upon that study, developing proposed actions (to include seeking public comments) and developing a final action via rulemaking procedures.
In its report, GAO found that the Board's most notable achievement has been the release in March 2019 of a staff discussion paper identifying guiding principles for the CAS revisions, prioritization of which standards to review and revise first, and a CAS/GAAP comparison. The Board has announced its intention to focus on the seven standards regarding cost measurement and assignment to accounting periods first, as those standards have the most potential overlap with the GAAP. Next up on the Board's list are those standards addressing cost allocation, followed by those that are foundational or unique to government contracting.
According to GAO, public information released thus far indicates that the CAS Board is unsurprisingly skeptical of completely conforming the CAS to GAAP, in part out of the concern that led to the creation of the CAS in the first place: that government contracting presents complicated and unique challenges necessitating unique accounting standards. Only time will tell whether those standards need be as complicated as they have historically been, but contractors should be encouraged that mire of government accounting is at long last receiving the attention it deserves. That said, given that the CAS Board is already two years into the process, that the CAS Board faces a four-step regulatory promulgation process, and the membership is due to turn over yet again, modernization and conformance may likely take a decade as it did to promulgate the original standards.
1 National Defense Authorization Act for Fiscal Year 2017, Pub. L. No. 114-328, § 820, 130 Stat. 2000, 2273-76.
2 U.S. Gov't Accountability Office, GAO-20-266, Cost Accounting Standards, Board Has Taken Initial Steps to Meet Recent Legislative Requirements (2020).
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