The Intersection of GAAP and CAS
Understanding the differences.
March 28, 2011
Is your company currently selling or planning to sell products or services to the federal government? Government contracts are becoming increasingly widespread throughout the U.S. economy. Many businesses are now looking at the federal government as a potential customer. As a result, accountants are often required to become familiar with — if not immersed in — Cost Accounting Standards (CAS) and their relationship to U.S. Generally Accepted Accounting Principles (GAAP).
This article provides accountants with an overview and some perspective on the GAAP and CAS relationship, as well as details on where they intersect.
Cost Accounting Standards
There are 19 published Cost Accounting Standards (CAS). These standards along with their related regulations, require companies that are awarded cost-based contracts to follow precise and unique accounting rules designed to control how costs are measured, accumulated and allocated to a final cost objective. An accountant could spend countless hours researching each of these standards and still not cover all the accounting nuances and legal theories.
A Comparison of GAAP and CAS
Generally speaking, for cost accounting purposes a company should follow GAAP unless the accounting for a transaction or event specifically is covered by the FAR cost principles or CAS. GAAP and CAS are complimentary and designed for different purposes. At a macro level the differences are:
For reference purposes, see chart that compares the CAS, related FAR clause(s) and applicable GAAP, where elevant.
Key Areas of Divergence
CAS 404 and 409
These CAS deal with the step-up or step-down of asset values. GAAP recognize the economic impact of asset purchases and allow for the acquisition value to be depreciated. The government takes the position that an asset should retain its book value for the purpose of allocating costs to contracts.
CAS do not permit the adjustment (step-up/step-down) of assets when a company re-evaluates assets post-merger/acquisition; GAAP not only requires these adjustments but over the years has changed the rules affecting this reporting. With the purchase method, business-combination assets are recorded at their fair market value with any amount paid in excess of fair market value being recorded as goodwill.
This CAS becomes an issue with regard to the differing treatment of restructuring costs. GAAP requires that certain restructuring costs be expensed in the current period. CAS allows more flexibility when assigning these same costs to the current or subsequent periods.
CAS 412 and 413
GAAP does not require actual funding of pension liabilities in order to recognize the cost. The CAS do require funding. The Board, to ensure that accrued amounts were verifiable, links the period of cost assignment to the funding period.
CAS 413 addresses segment closings. GAAP requires current period recognition generally of actuarial gains and losses. The CAS require that actuarial gains and losses using an immediate-gain actuarial-cost method be amortized over 15 years. Also, the CAS provide detailed rules on the pension-related accounting for segment closings.
While this Standard allows recognition of the cost of self-insurance under certain circumstances; GAAP does not. Similar to the pension Standards, the government does not like to recognize the mere establishment of a liability as evidence of cost. This is contrary to the core accounting concept of matching revenue and expense. The matching concept is that expense recognition should take place in the same period as any related revenue.
The primary difference between GAAP and CAS is the timing of cost recognition. GAAP does not permit deferring Independent research and development (IR&D) costs to future periods. CAS permits cost assignment to future periods if specifically permitted by government regulation and is focused on the allocation of costs among cost objectives.
Current trends in federal government procurement will oblige many accountants in the private sector to become more comfortable with CAS. A first step in understanding these impacts is to be fully aware of what FAR clauses are incorporated in their contracts.
Acquiring in-depth knowledge of CAS can be a daunting task. Awareness of the basic requirements and concepts and how those concepts diverge from customary accounting, can greatly aid accountants in performing their duties.
Phillip M. Kohn, CPA, is a director in the Los Angeles office of the international forensic accounting firm, RGL Forensics. He can be reached at 213-996-0900.