Cost Accounting Standard (CAS) 406 – Cost Accounting Period

Comparison to FAR

Like CAS 401, CAS 402, and CAS 405, CAS 406 is part of modified CAS coverage and is one of the first CAS standards a company encounters. It likely will not call for any changes to the company’s cost accounting system if you are compliant with FAR 31.203(g)(2) (Indirect costs). FAR states that for contracts not subject to CAS:

“...the base period for allocating indirect costs shall be the contractor’s fiscal year used for financial reporting purposes in accordance with generally accepted accounting principles. The fiscal year will normally be 12 months, but a different period may be appropriate (e.g., when a change in fiscal year occurs due to business combination of other circumstances.)”

CAS also states that the contractor shall use the fiscal year as the cost accounting period, with some exceptions.

CAS Specific

CAS 406 provides a definition for fiscal year which means the accounting period for which annual financial statements are regularly prepared, generally a period of 12 months, 52 weeks, or 53 weeks. The same cost accounting period shall be used for accumulating costs in an indirect cost pool as well as for establishing its allocation base, if agreed to by contracting parties.

The exceptions in CAS to use of the fiscal year are:

1. Costs of an indirect function which exists for only a part of a cost accounting period may be allocated based on data for that part of the cost accounting period if the cost is:
   • Material
   • Accumulated in a separate indirect cost pool
   • Allocated on the basis of an appropriate direct measure of the activity or output of the function during that part of the period.
2. An annual period other than the fiscal year may be used as the cost accounting period if its use is an established practice of the contractor and includes appropriate practices for deferrals, accruals, and other adjustments.
3. When a change of fiscal year occurs, a transitional cost accounting period other than a year shall be used. The contractor may select one of the following:
   • The period, less than a year in length, extending from the end of the previous cost accounting period to the beginning of the next regular cost accounting period,
   • A period in excess of a year, but not longer than 15 months, obtained by combining the period described in prior paragraph with the previous cost accounting period, or
   • A period in excess of a year, but not longer than 15 months, obtained by combining the period described in the prior paragraph with the next regular cost accounting period.
4. If the contractor’s cost accounting period does not equal the reporting period used for Federal income taxes, a contractor may use the federal income tax fiscal year for the reported cost accounting period.

Note: A change in the contractor's cost accounting period is a change in accounting practices for which an adjustment in the contract price may be required.

The real emphasis of CAS 406. The company must use their fiscal year as their cost accounting period, with limited exceptions.

Restructuring Cost

Another question related to CAS 406 is how restructuring costs are to be treated: is it an expense of the current period or is it a deferred charge that is subsequently amortized over future periods? Restructuring costs are not related to ongoing, routine changes an entity makes in its business operations or organizational structure. Instead, these costs represent a significant, nonrecurring change in its business operations or structure to reduce overall cost levels in future periods through work force reductions, the elimination of selected operations, functions or activities, and/or the combination of ongoing operations, including plant relocations. If you experience such a restructuring expense, the amortization period for deferred restructuring costs shall not exceed five years. The straight-line method of amortization should normally be used, unless another method results in a more appropriate matching of cost to expected benefits.

When a procuring agency imposes a net savings requirement for the payment of restructuring costs, the contractor shall submit data specifying:

(1) The estimated restructuring costs by period,

(2) The estimated restructuring savings by period (if applicable), and

(3) The cost accounting practices by which such costs shall be allocated to cost objectives.

If a contractor incurs restructuring costs but does not have an established or disclosed cost accounting practice covering such costs, the deferral of such restructuring costs may be treated as the initial adoption of a cost accounting practice. If a contractor incurs restructuring costs but does have an existing established or disclosed cost accounting practice that does not provide for deferring such costs, any resulting change in cost accounting practice to defer such costs may be presumed to be desirable and not detrimental to the interests of the Government. Changes in cost accounting practices for restructuring costs shall be subject to disclosure statement revision requirements.

Restructuring costs incurred at a home office level shall be treated in accordance with the provisions of 9904.403. Restructuring costs incurred at the segment level that benefit more than one segment should be allocated to the home office and treated as home office expense. Restructuring costs incurred at the segment level that benefit only that segment shall be treated in accordance with the provisions of CAS 418. If one or more indirect cost pools do not comply with the homogeneity requirements of CAS 418 due to the inclusion of the costs of restructuring activities, then the restructuring costs shall be accumulated in indirect cost pools that are distinct from the contractor's ongoing indirect cost pools.

Redstone GCI is available to assist contractor’s in assessing their current cost accounting practices and being well position to handle any future or current CAS requirements. Be sure to contact us if you have a change in fiscal year because it will be considered a change in accounting practices, and you will likely require help in calculating the needed adjustment in the contract price. Also contact us if you have been involved in a restructuring.

Watch for our next blog when we start review of the unique CAS standards that comes into effect with full CAS coverage, starting with CAS 418, Allocation of Direct and Indirect Costs.