Cost Accounting Standards Board; Interim Interpretation 95-01, Allocation of Contractor Restructuring Costs Under Defense Contracts

OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Chapter 99

Cost Accounting Standards Board; Interim Interpretation 95-01,

Allocation of Contractor Restructuring Costs Under Defense Contracts

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement

Policy, OMB.

ACTION: Interpretation.

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SUMMARY: The Cost Accounting Standards Board is issuing an interim

interpretation designed to address period cost assignment and

allocability criteria for restructuring costs incurred under certain

national defense contracts.

DATES: Effective Date: August 15, 1994. Comments on this interim

interpretation must be in writing and must be received by May 8, 1995.

ADDRESSES: Comments upon this interim interpretation should be

[[Page 12712]] addressed to Richard C. Loeb, Executive Secretary, Cost

Accounting Standards Board, Office of Federal Procurement Policy, 725

17th Street, NW., Room 9001, Washington, DC 20503. ATTN: CASB

Interpretation 95-01.

FOR FURTHER INFORMATION CONTACT:

Richard C. Loeb, Executive Secretary, Cost Accounting Standards Board

(telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Background

Section 818 of the National Defense Authorization Act for Fiscal

Year 1995, Pub. L. 103-337, restricts the Department of Defense from

reimbursing contractor restructuring costs associated with a business

combination unless certain ``net savings'' provisions are met.

Questions have arisen as to the methods to be used in measuring,

assigning and allocating such restructuring costs. This interim

interpretation is designed to address these questions. The Board would

appreciate receiving comments concerning this interpretation.

B. Authority to Issue an Interpretation

Authority for issuance of this interpretation is provided by 41

U.S.C. 422(f)(1) and 48 CFR 9901.302(b).

Richard C. Loeb,

Executive Secretary, Cost Accounting Standards Board.

Cost Accounting Standards Board Interim Interpretation 95-01,

``Allocation of Contractor Restructuring Costs Under Defense

Contracts''

(a) Questions have arisen as to the appropriate methodologies to be

used for the allocation and period cost assignment of contract costs

categorized or classified as ``restructuring costs'' under certain

defense contracts. This Interpretation applies to the provisions of

several Cost Accounting Standards, including, but not limited to CAS

9904.403, 9904.404, 9904.406, 9904.409 and 9904.418, as they relate to

``restructuring costs'' associated with CAS-covered contracts.

(b) ``Restructuring costs'' are incurred after an entity decides to

make a significant nonrecurring change in its business operations or

structure in order to reduce overall cost levels in future periods

through work force reductions, the elimination of selected activities,

and/or the combination of ongoing operations, including plant

relocations. Restructuring activities do not include ongoing routine

changes an entity makes in its business operations or organizational

structure. Restructuring costs are comprised both of direct and

indirect costs associated with contractor restructuring activities

taken after a business combination is effected or after an internal

corporate restructuring decision is made. Typical categories of costs

that have been included as restructuring charges include severance pay,

early retirement incentive, retraining, employee relocation, lease

cancellation, asset disposition and write-offs, and relocation and

rearrangement of plant and equipment. Restructuring costs do not

include the cost of such activities when they do not relate either to

business combinations or significant nonrecurring internal corporate

restructuring decisions. Generally, activities giving rise to

restructuring charges should normally be completed within one year.

(c) The costs of betterments or improvements of capital assets that

result from restructuring activities shall be capitalized and

depreciated in accordance with the provisions of CAS 9904.404 and

9904.409.

(d) When a procuring agency imposes a net savings requirement for

the payment of restructuring costs, the contractor shall submit data

specifying (1) restructuring costs by period, (2) restructuring savings

by period (if applicable), and (3) the methods by which such costs

shall be allocated.

(e) Under normal circumstances, most categories of costs that

qualify as restructuring costs are recognized as current period cost in

the period in which the cost is incurred. However, for contractor

restructuring costs defined pursuant to this Interpretation, such costs

may be deferred, and subsequently amortized, over a period during which

the benefits are expected to accrue. A proposal to expense

restructuring costs in the current period is acceptable when the

Contracting Officer agrees that such treatment will result in a more

equitable assignment of costs in the circumstances.

(f) 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 (see 9903.302-2(a)). If a

contractor incurs restructuring costs but has 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 (see 9903.201-6). Changes in cost

accounting practices for restructuring costs shall be subject to

disclosure statement revision requirements (see CAS 9903.202-3), if

applicable.

(g) Measurement of cost impact on existing CAS-covered contracts,

shall be the difference between an estimate to complete before giving

effect to the restructuring, and, an estimate to complete considering

restructuring. The estimates to complete shall be based on the

contractor's compliant cost accounting practices for the affected cost

accounting periods, from the applicability date of the restructuring

plan through the end of the period designated as the benefiting period.

(h) The amortization period for deferred restructuring costs shall

not exceed five years. Straight line amortization should normally be

used, unless another method results in a more appropriate matching of

cost to expected benefits.

(i) Restructuring costs that are deferred shall not be included in

the allocation based for cost of money purposes (see CAS 9904.414).

Deferred charges are not tangible or intangible capital assets and

therefore are excluded from the base for computation of facilities

capital cost of money.

(j) Restructuring costs incurred at a home office level shall be

treated in accordance with the provisions of CAS 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 pursuant to CAS 9904.403. Restructuring costs

incurred at the segment level that benefit only that segment shall be

treated in accordance with the provisions of CAS 9904.418.

Restructuring costs that are not considered to meet the homogeneity

requirements of CAS 9904.418 shall be grouped in indirect cost pools

that are distinct from the contractor's current indirect cost pools.

(k) This Interpretation is applicable to contractor ``restructuring

costs'' paid or approved on or after August 15, 1994.

[FR Doc. 95-5607 Filed 3-7-95; 8:45 am]

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