RGCI - Cost Accounting Standards Disclosure Statement Tips

In previous blogs, we have recommended preparing a CAS Disclosure Statement (DS) soon after emerging from small business status. We also recommended reviewing your cost accounting practices prior to preparing a Disclosure Statement to prevent having to change afterwards and ending up requiring a cost impact statement. So, by now you are probably wondering what this mythical beast is and what is the big deal about preparing it.

What is a Disclosure Statement?

Simply put, a DS is a very thorough description of a company’s cost accounting system prepared on a prescribed form. For commercial companies, this form is CASB DS-1 and is 42 pages long, before Continuations Sheets. The form itself is both good news and bad news. The good news is it asks every conceivable question, so you do not have to determine how to describe your system. The bad news is it is not user friendly. The “official” form dates from 1996 and is a PDF file that requires addition of many pages of Continuation Sheets. In addition, there are codes that must be used on multiple pages that make it almost impossible to be efficient without printing portions.

The form has general instructions that are a “must read.” There are eight Parts to the DS, in addition to a coversheet/certification page. Each part deals with a specific type of cost as shown below:

  1. General Information
  2. Direct Costs
  3. Direct vs. Indirect Costs
  4. Indirect Costs
  5. Depreciation and Capitalization Practices
  6. Other Costs and Credits
  7. Deferred Compensation and Insurance Cost
  8. Home Office Expense

I am not going to try to go over every question and part, but instead talk about some of the common problems that I have seen in reviewing Disclosure Statements that companies have prepared.

Disclosure Statement – Common Problems

First, the Certification must be signed by an authorized signatory of the reporting unit. This means, for instance, that a home office official cannot sign for a segment.

Any entity that allocates cost to a segment requiring a DS must file a Part VIII that describes how those allocated costs are determined.

According to the DS Instructions, when a home office either establishes the policies/practices for the types of costs described in Parts V, VI and VII that home office may complete these parts along with Part VIII instead of including it in the segment DS. This prevents duplication if the home office has multiple segments with Disclosure Statements. However, I have found that some DCAA offices do not agree with the CASB DS-1 Instructions. They require Parts V, VI and VII to be included in the segment DS.

Anytime you see a footnote number, look to see if it directs you to “Describe on a Continuation Sheet.” Also, if the question itself says to describe something on a continuation sheet, then you must do so, you cannot just skip the question. For example, question 2.5.0 says, “…describe on a continuation sheet the principal classes of labor rates that are, or will be applied to Manufacturing Labor, Engineering Labor, and Other Direct Labor, in order to develop direct labor costs.” This is a little confusing now because in 1996 and before when this was designed, there were broader labor categories than there are now, so it is often voluminous. It is not asking for every labor category, but the ones with the most people in them. You can combine categories that have the same name, but different skill levels, such as Programmers 1, Programmers 2, and Programmers 3 can be listed as Programmers. If you are a services company, all your employees probably fall under “Other Direct.”

Some questions may be hints that you are doing something that is not CAS compliant. For example, part of question 5.1.0 asks how you treat residual value in depreciating tangible capital assets. It gives you four choices:

  • Residual value is estimated and deducted
  • Residual value is covered by the depreciation method
  • Residual value is estimated but not deducted in accordance with the provisions of 48 CFR 9904.409
  • Other or more than one method

If you pick the third option, you are admitting you are not following CAS 409. If you pick “other” and say you do not estimate or deduct it, you are also in noncompliance. However, if you say you estimate and deduct the residual value, but that the estimate for all (or most) items is zero, you have complied with CAS.

Many companies do not realize that 401K plans to which the employer contributes is classified as a “qualified defined contribution plan” for purposes of question 7.1.0.

Be careful not to contradict yourself. For example, if question 2.2.2 describes a method of accounting for company owned inventory, then question 3.2.1(f) related to the treatment of inventory adjustments, cannot be answered as not applicable.

These are just examples of problem areas encountered in filling out a Disclosure Statement. I highly recommend that you at least have a knowledgeable person review your Disclosure Statement before submitting it. Redstone Government Consulting, Inc. can provide help from drafting your initial Disclosure Statement submission to reviewing your draft to point out weaknesses and potential noncompliance’s.

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Written by Cheryl Anderson

Cheryl Anderson Cheryl Anderson is a Director with Redstone Government Consulting, Inc. She provides Government Contract Consulting services to our government contractors primarily related to equitable adjustment claims, terminations, and DCAA audit expectations. Prior to joining Redstone Government Consulting, Cheryl served in a number of capacities with DCAA for over thirty-five years. Upon her retirement, Cheryl was a regional audit manager with DCAA. Cheryl began her DCAA career in 1977 as an auditor-trainee with the Ingalls Resident Office in Pascagoula, Mississippi. After instructing at the Defense Contract Audit Institute for four years, she returned to the Eastern Region in 1990, holding various audit positions before ultimately becoming a Regional Audit Manager in August 2005. She had overall management responsibility for audits performed by approximately 200 employees. During Cheryl’s tenure with DCAA, she was involved in conducting or managing a variety of compliance audits, to include cost proposals incurred cost submissions, systems, Cost Accounting Standards, claims, defective pricing, financial capability and agreed-upon procedures. She directly supported the government litigation team on a contract dispute and has prepared and presented various lectures and seminars to DCAA staff. In addition, she has served as an instructor for the Government Audit Training Institute for over 20 years. She currently specializes in preparing clients for more complex DCAA audits, providing advice on FAR cost principles and contracts regulatory provisions, and assisting clients in anticipating and addressing audit. Education Cheryl has a BS Degree in Accounting from Auburn University at Montgomery and a Masters of Business Administration from Wichita State University. Cheryl also completed courses at OPM’s management and executive development centers and at the Federal Executive Institute and is a Georgia Certified Public Accountant.

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: Compliant Accounting Infrastructure, Cost Accounting Standards (CAS)