In government contracting, three critical sets of guidelines govern the recognition of expenses for financial reporting and cost accounting practices: Generally Accepted Accounting Principles (GAAP) govern financial reporting, and Federal contracts require Federal Acquisition Regulations (FAR) part 31 and Cost Accounting Standards (CAS). While both frameworks are focused on assigning expenses to the appropriate accounting period, they have distinct roles and implications for government contractors. This article explores the key differences between CAS and GAAP, focusing on their significance and application in government contracting.
Federal Acquisition Regulations (FAR) part 31, Contract Cost Principles and Procedures
FAR part 31 requires most contractors and subcontractors doing business with the Federal Government to have an accounting system that can assign costs (i.e., expenses) to each and every contract and subcontract. This is a significant step beyond the GAAP financial reporting requirements placed on most public companies.
Understanding Cost Accounting Standards (CAS) for Government Contractors
Cost Accounting Standards (CAS) are specific guidelines established by the Cost Accounting Standards Board (CASB) under the U.S. Office of Management and Budget (OMB). Most of the requirements set forth in CAS are incorporated into the cost accounting requirements in FAR part 31. CAS is primarily applicable to Government contractors and subcontractors engaged in federal contracts that exceed certain thresholds.
CAS aims to ensure consistency and comparability in cost accounting practices across government contracts. It provides detailed requirements and methods for cost measurement, accumulation, and allocation. Compliance with CAS is vital for government contractors as it facilitates transparency and accurate cost information reporting to Government agencies.
Additionally, CAS requires the Government to be notified in advance of any changes to the contractor’s accounting practices. CAS also provides that should the contractor not follow its accounting practices consistently or be found to be in non-compliance with a CAS requirement, the contractor will have to pay the Government for the impact on the Government contracts and subcontracts plus interest.
Exploring the Role of Generally Accepted Accounting Principles (GAAP) for Government Contractors
Generally Accepted Accounting Principles (GAAP) is a broader framework of accounting standards encompassing various accounting principles, conventions, and rules. While GAAP is not specifically designed for government contractors, it still has implications for their financial reporting and decision-making processes. FAR part 31 also provides that should CAS not address the accounting for an expense (i.e., cost), GAAP must be applied.
Government contractors, particularly those operating as public companies, are typically required to adhere to GAAP. GAAP ensures consistency, comparability, and transparency in financial reporting, providing reliable information to stakeholders such as investors, lenders, and regulatory agencies.
Key Differences between CAS and GAAP for Government Contractors
CAS primarily centers around cost accounting practices, emphasizing cost measurement, accumulation, and allocation. It ensures uniformity in these areas across Government contracts. GAAP, while not specifically tailored to government contracting, covers broader aspects of financial reporting, including revenue recognition, asset and liability measurement, and financial statement presentation.
Compliance with CAS is mandatory for government contractors and subcontractors involved in qualifying federal contracts. Failure to comply with CAS may lead to penalties or contract termination. On the other hand, compliance with GAAP typically provides Government contractors with a greater level of subjectivity, except for publicly traded companies that must follow GAAP to maintain credibility and access to capital markets.
CAS is governed by the CASB, chaired by the Director of the Office of Federal Procurement Policy, which is responsible for establishing, amending, and interpreting CAS. GAAP, however, is developed and maintained by the Financial Accounting Standards Board (FASB), an independent private-sector body.
For Government contractors, understanding the distinctions between Cost Accounting Standards (CAS) and Generally Accepted Accounting Principles (GAAP) is vital for accurate contract costing, financial reporting, and compliance. CAS provides specific guidance on cost accounting practices, ensuring consistency across Government contracts. GAAP, while not tailored to government contracting, offers a broader framework for financial reporting, which government contractors often adopt to meet stakeholders’ expectations. By comprehending the roles and implications of CAS and GAAP, Government contractors can effectively navigate the complexities of contract costing and financial reporting, fulfilling their obligations to Government agencies and other stakeholders.
Redstone GCI is available to assist contractors in assessing their current cost accounting practices and being well-positioned to handle any future or current CAS requirements. Our team assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in CAS compliance and compliant accounting systems.