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:
- General Information
- Direct Costs
- Direct vs. Indirect Costs
- Indirect Costs
- Depreciation and Capitalization Practices
- Other Costs and Credits
- Deferred Compensation and Insurance Cost
- 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.