CAS Board Finalizes Standard 415 ESOPs Rules

The Cost Accounting Standards Board, Office of Federal Procurement Policy, has issued a final rule amending Cost Accounting Standard 412, "Cost Accounting Standard for composition and measurement of pension cost," and CAS 415, "Accounting for the cost of deferred compensation." These changes to the CAS direct that costs of all Employee Stock Ownership Plans, regardless of type, be accounted for in accordance with CAS 415, and provide criteria in CAS 415 for measuring ESOP costs and assigning those costs to cost accounting periods. The amendments specify that the provisions of CAS 415, and not any other Standard, govern accounting for ESOPs costs. The allocation of a contractor's assigned ESOP costs to contracts and subcontracts is addressed in other Standards. While the purpose of CAS 412 is to provide guidance for determining and measuring the components of pension costs, the Standard does not apply to ESOPs that meet the definition of a pension plan (CASB 9904.412-20). Such plans are considered deferred compensation and covered exclusively by CAS 415. Pursuant to CASB 9904.415-20, CAS 415 applies to the cost of all deferred compensation except the cost for compensated personal absence, and the cost for pension plans that do not fit the description of an ESOP, as defined in CASB 9904.415-30. The final rule also revises CASB 9904.415-40 to specify the requirements for measurement and assignment of ESOP costs. Revised CASB 9904.415-50 provides techniques for application, and CASB 9904.415-60 presents illustrations.

The CAS and Federal Acquisition Regulation have dealt with issues associated with ESOPs since these plans 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. The views of the CAS Board were sought primarily on an advisory basis. However, after the Armed Services Board of Contract Appeals issued its decision in the "Parsons case" (91-1 BCA ¶23,648), various government commentators suggested the Board place ESOP cost measurement and period assignment matters on its agenda. Both the Department of Defense and contractors reiterated this position following the ASBCA's decision in Ball Corp. (00-1 BCA ¶30,864). The Board decided to research the issue and subsequently released a staff discussion paper (¶70,061.01), and in response to public comments followed up with an advance notice of rulemaking (¶70,058.03). The final rule adopts the proposed rule (¶70,058.04) with minor changes to the transition provision, CASB 9904.415-63, which states revised CAS 415 is effective June 2, 2008, and generally requires contractor compliance at the start of the next accounting period beginning after the receipt of a contract to which the Standard applies. For the text of the final rule, see ¶70,055.20.

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