Administratively a function located within OFPP is the Cost Accounting Standards Board (CASB), an independent legislatively-established board consisting of five members, including the OFPP Administrator, who serves as chairman, and four members with experience in Government contract cost accounting, two from the Federal government, one from industry, and one from the accounting profession. The Board has the exclusive authority to make, promulgate, and amend cost accounting standards and interpretations designed to achieve uniformity and consistency in the cost accounting practices governing the measurement, assignment, and allocation of costs to contracts with the United States.
Effective June 2, 2008, the CASB has adopted Cost Accounting Standards Board; Accounting for the Costs of Employee Stock Ownership Plans (ESOPs) Sponsored by Government Contractors:
The Cost Accounting Standards Board (the Board), Office of Federal Procurement Policy, has adopted a final rule to amend 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 amendments address issues concerning the recognition of the costs of Employee Stock Ownership Plans (ESOPs) under Government cost-based contracts and subcontracts. These amendments provide criteria for measuring the costs of ESOPs and their assignment to cost accounting periods. The allocation of a contractor's assigned ESOP costs to contracts and subcontracts is addressed in other Standards. The amendments also specify that accounting for the costs of ESOPs will be covered by the provisions of CAS 415, ''Accounting for the cost of deferred compensation,'' and not by any other Standard. This rulemaking is authorized pursuant to Section 26 of the Office of Federal Procurement Policy (OFPP) Act.
The June 2, 2008 Employee Ownership Update discusses the final rule:
On May 1, after many years of uncertainty, final rules were issued by the U.S. Cost Accounting Standards Board for reimbursing ESOP companies for contributions to their plans. The final rules are very favorable to companies. An "ESOP" is defined to include any defined contribution plan designed to invest primarily in employer stock. The reimbursement is for the market value of the shares at the time a contribution is made. The cost is assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs follows Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value. Dividends are allowed as a cost. The regulation does not distinguish in this regard between S and C corporations. Companies operating under an existing approved reimbursement procedure can retain that method or renegotiate under the new rules.
The rules clarify cost recognition issues related to government contractor ESOP companies with cost-plus contracts:
Moreover, when the company is a government contractor with cost-plus contracts, certain ESOP costs are reimbursable to the extent there is room in the overhead of a contract. As a result, the costs associated with the ESOP can be reimbursed by the government to the company. The issue of which costs are reimbursable however, was both controversial and ambiguous prior to final rules adopted on May 1.
The actual amount of a dividend and/or contribution to a nonleveraged or leveraged ESOP (both principal and interest) are reimbursable costs and how "reimbursable costs for the applicable cost accounting period will only apply to the stock, cash, or combinations thereof that are awarded and allocated to employee accounts within that accounting period."
It also discusses how the final rules have eliminated the distinction between a pension ESOP and a deferred compensation ESOP for cost accounting purposes.UPDATE 8/21/08: Using Innovation and Employee Ownership to Achieve Continuous Success, Diversify Lines of Business, Retain Employees, and Address Succession Planning Objectives discusses how some uncertainty remains about dividends used to repay a loan: The rules also state that dividends used to repay a loan are allowed as a cost. However, there is some uncertainty about this as a Boston office of the Cost Accounting Standards Board recently denied reimbursement for dividends.
UPDATE 8/21/08: Cost Accounting for Government Contractor ESOPs, Dividend Concerns, Defense Contract Audit Agency (DCAA) explains how the final ruling provides more certainty by clearly defining the allowable cost as the contractor's contribution, including interest and dividends. It also discus how this differs with the fair market value definition provided under Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans, the remaining dividend concerns, and how stock valuations remain subject to audit by the Defense Contract Audit Agency (DCAA).
- 48 C.F.R. 52.230-2 Cost Accounting Standards
- Government Contractor ESOP Cost Accounting Rules Finalized
- ESOP Rules for Government Contractors Finalized