Cost Accounting Standards Board; Allocation of Contractor Restructuring Costs

OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904

Cost Accounting Standards Board; Allocation of Contractor

Restructuring Costs

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement

Policy, OMB.

ACTION: Final rule; interpretation.

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SUMMARY: The Cost Accounting Standards (CAS) Board is issuing an

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.

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 a contractor or subcontractor that decides to avail itself

of incurring 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 interpretation is designed to

address these questions, as well as the cost of restructuring

activities, in general.

This interpretation is based upon the interim interpretation (with

request for comment) issued by the CAS Board on March 8, 1995, 60 FR

12711. Ten sets of public comments were received in response to the

interim interpretation. None of the commenters identified any

substantive issues, although several requested more specificity with

respect to the relationship of the interim interpretation to the

provisions of CAS 9904.406--Cost Accounting Period. Accordingly, the

interim interpretation is being revised to clarify that it serves

principally as an interpretation of the provisions of CAS 9904.406 as

related to restructuring costs.

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.

List of Subjects in 48 CFR part 9904

Accounting, Government procurement.

Accordingly, 48 CFR part 9904 is amended as follows:

Part 9904--COST ACCOUNTING STANDARDS

Subpart 9904.406--Cost Accounting Standard--Cost Accounting Period

1. The authority citation for part 9904 of chapter 99 of title 48

continues to read as follows:

Authority: Pub. L. 100-679, 102 Stat. 4056, 41 U.S.C. 422.

2. Section 9904.406-61 is amended by adding text to read as

follows:

Sec. 9904.406-61 Interpretation.

(a) Questions have arisen as to the allocation and period cost

assignment of certain contract costs (primarily under defense contracts

and subcontracts). This section deals primarily with the assignment of

restructuring costs to cost accounting periods. In essence, it

clarifies whether restructuring costs are to be treated as an expense

of the current period or as a deferred charge that is subsequently

amortized over future periods.

(b) ``Restructuring costs'' as used in this Interpretation means

costs that 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 operations, functions or

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 a

decision is made to execute a significant restructuring event not

related to a business combination. Typical categories of costs that

have been included in the past and may be considered in the future as

restructuring charges include severance pay, early retirement

incentives, 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

to other significant nonrecurring restructuring decisions.

(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 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) 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.

(e) Contractor restructuring costs defined pursuant to this section

may be accumulated as deferred cost, and subsequently amortized, over a

period during which the benefits of restructuring are expected to

accrue. However, a contractor proposal to expense restructuring costs

for a specific event in a current period is also 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 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 (see 9903.201-6).

Changes in cost accounting practices for restructuring costs shall be

subject to disclosure statement revision requirements (see 9903.202-3),

if applicable.

(g) Business changes giving rise to restructuring costs may result

in changes in cost accounting practice (see 9903.302). If a contract

price or cost allowance is affected by such changes in cost accounting

practice, adjustments shall be made in accordance with subparagraph

(a)(4) of the CAS clause

[[Page 31309]]

(see 9903.201-4(a)(2), 9903.201-4(c)(2) and 9903.201-4(e)(2)).

(h) 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.

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

the computation to determine facilities capital cost of money (see

9904.414). Specifically, deferred charges are not tangible or

intangible capital assets and therefore are excluded from the

facilities capital values for the 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 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 9904.403. Restructuring costs incurred at the

segment level that benefit only that segment shall be treated in

accordance with the provisions of 9904.418. If one or more indirect

cost pools do not comply with the homogeneity requirements of 9904.418

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.

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

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

[FR Doc. 97-14773 Filed 6-5-97; 8:45 am]

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