ASC 606, Revenue from Contracts with Customers, had an impact on the way many contractors recognized revenue related to contracts with the Federal Government. Redstone has covered this topic a couple of times (January 26, 2021 Government Contractor Challenges in 2021 Webinar and May 6, 2021 MossAdam/Redstone Webinar Compliance Changes for Government Contractors). ASC 606 also impacts the recognition of sales commissions. The overarching GAAP matching principle requires that the expense of sales be matched to the recognition of the related revenue.
So, What Was the Overall Impact of ASC 606?
Not that much when it comes to dealing with Cost Plus Fixed Fee (CPFF) and Time & Material (T&M) contracts. Incentive type contracts (both cost and fixed) required an estimate of the incentive (or award) fee over the life of the contract. The total impact of any anticipated losses must be recorded when the loss is determined. The biggest impact of ASC 606 is on fixed priced contracts, which now requires an in-depth analysis as to when to recognize revenue.
Recognition of Sales Commissions
While sales commissions are not an overwhelming cost for most contractors, many do incur selling expenses in the form of distributor fees, sales agent fees, and of course, the Government mandated GSA Industrial Funding Fee (IFF). (We pontificate a little about the IFF below.) Many selling arrangements require the contractor to pay the sales commission when the related contract is awarded, not when the revenue is recognized. In this instance, ASC 606 requires the contractor to record a deferred expense, which should be recognized as the revenue is recognized. This deferred expense is shown on the balance sheet as an asset or a contra liability until the expense (and related revenue) is fully recognized.
GSA Industrial Funding Fee
We often get the question from contractors regarding the proper government contract accounting treatment for GSA IFF. While some others in the GOVCON community have bowed down to the DCAA pressure to consider IFF to be a contra-revenue or even an unallowable expense, we continue to believe the GSA IFF expenses needs to be appropriately treated as an allowable selling expense, for more information click here. The quarterly payment to GSA for the IFF represents an allowable selling expense under an established agreement with a selling agency (i.e., GSA) maintained by the contractor for the purpose of securing business. Unless we are mistaken as to what GSA (a Government Agency) does, the payment of IFF does not include any advertising or corporate image enhancement which would be unallowable under FAR 31.205-1. It is clear to us that a similar fee paid to a non-federal agency (e.g., authorized distributor) would be an allowable selling expense. Therefore, the fact that the payment is made to GSA should have no impact on the categorization of the expense whatsoever. We recognize that many contractors would rather treat this as contra-revenue or unallowable, just to avoid conflict with a DCAA auditor, as the amount is often immaterial, however, technically, there is no regulatory basis for DCAA’s insistence on IFF being treated as such. OK, we will get off our soap box now.
Redstone GCI assists contractors, throughout the U.S. and internationally, with understanding cost accounting and regulations in the GOVCON environment.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant