[Federal Register Volume 65, Number 180 (Friday, September 15, 2000)]
[Notices]
[Pages 56008-56010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23717]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
Cost Accounting Standards Board; Accounting for the Cost of
Employee Stock Ownership Plans
ACTION: Notice.
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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting
Standards Board, invites public comments concerning a Staff Discussion
Paper on accounting for the cost of employee stock ownership plans
(ESOP) under government contracts.
DATES: Comments must be in writing and must be received by November 14,
2000.
ADDRESSES: All comments should be addressed to Dr. Rein Abel, Director
of Research, Cost Accounting Standards Board, Office of Federal
Procurement Policy, 725 17th Street, NW, Room 9013, Washington, D.C.
20503. Attn: CASB Docket No. 00-03. The submission of public comments
in writing, via letter, is requested, as receipt of a readable data
file via Internet e-mail cannot be assured. To facilitate the CAS
Board's review of submitted comments, you may include with your written
comments a three point five inch (3.5'') computer diskette copy of your
comments and denote the word processing format used.
FOR FURTHER INFORMATION CONTACT: Rein Abel, Director of Research, Cost
Accounting Standards Board (telephone: 202-395-3254).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The Cost Accounting Standards Board's rules, regulations and
Standards are codified at 48 CFR Chapter 99. Section 26(g)(1) of the
Office of Federal Procurement Policy Act, 41 U.S.C. 422(g), requires
that the Board, prior to the establishment of any new or revised Cost
Accounting Standard, complete a prescribed rulemaking process. The
process generally consists of the following four steps:
1. Consult with interested persons concerning the advantages,
disadvantages and improvements anticipated in the pricing and
administration of Government contracts as a result of the adoption of a
proposed Standard.
2. Promulgate an Advance Notice of Proposed Rulemaking.
3. Promulgate a Notice of Proposed Rulemaking.
4. Promulgate a Final Rule.
This proposal is step one of the four-step process.
B. Background and Summary
In response to the Cost Accounting Standards (CAS) Board's
continuing research, a number of commenters have identified accounting
for the cost of employee stock ownership plans under government
contracts as an issue requiring Board consideration. The primary
concern raised is the lack of guidance concerning this matter in
applicable government contracting regulations, and the attempt by the
contracting parties, in certain cases, to apply various provisions of
the CAS to accounting for the costs of ESOPs, when such CAS provisions
do not explicitly address or even mention ESOPs. More specifically,
issues have arisen in which the accounting for the cost of ESOPs have
caused substantial controversies.
This Staff Discussion Paper represents the results of research
performed by the staff of the Cost Accounting Standards Board, and is
issued by the Board in accordance with the requirements of 41 U.S.C.
422(g)(1)(A). The statements contained herein do not necessarily
represent the position of the Cost Accounting Standards Board.
C. Public Comments
Interested persons are invited to participate by submitting data,
views or arguments with respect to this Staff Discussion Paper. All
comments must be in writing and submitted to the address indicated in
the ADDRESSES section.
Nelson F. Gibbs,
Executive Director, Cost Accounting Standards Board.
Cost Accounting Standards Board Staff Discussion Paper--Issues
Relating to Employee Stock Ownership Plans (ESOPs)
The Cost Accounting Standards (CAS) Board is examining the
accounting issues related to the measurement, assignment and allocation
of costs associated with Employee Stock Ownership Plans (ESOPs) to
government contracts. This Staff Discussion Paper (SDP) is part of the
Board's deliberative process that may lead to a pronouncement by the
Board on this topic. The purpose of this SDP is to solicit comments on
the relevant issues.
Background
The initial purpose of ESOPs was to encourage employee stock
ownership of American industry. Such encouragement was contained in the
Employee Retirement Income Security Act of 1974 (ERISA) and
corresponding changes to the Internal Revenue Code. Congress has also
commented on ESOP
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regulations dealing with the allowability of such costs for Government
contract costing purposes. Specifically, the National Defense
Authorization Act for fiscal year 1998 (Pub. L. 105-85, 844, Nov. 18,
1997) included a section expressing the ``Sense of Congress'' on
certain aspects of ESOP cost allowability.
More recently, ESOPs have also been used for additional purposes.
According to the Statement of Position (SOP) 93-6, issued by the
American Institute of Certified Public Accountants (AICPA), these other
purposes include the following:
To fund a matching program for a sponsor's 401(k) saving
plan, formula-based profit-sharing plan, and other employee benefits;
To raise new capital or to create a marketplace for
existing stock;
To replace lost benefits from the termination of other
retirement plans or provide benefits under postretirement benefit
plans, particularly medical benefits;
To be part of the financing package in leveraged buy-outs;
To provide a tax-advantaged means for owners to terminate
their ownership;
To be part of a long-term program to restructure the
equity section of a plan sponsor's balance sheet; and
To defend the company against hostile takeovers.
Although costs of ESOP sponsorship are not explicitly covered by
CAS, guidance is included in Federal Acquisition Regulation (FAR),
31.205-6(j)(8), and referred to in the Defense Contract Audit Agency
(DCAA) Contract Audit Manual (Sec. 7-2114). These references either
state or imply that a distinction exists between so-called ``pension''
and ``nonpension'' ESOPs.
In general, the lack of a clear regulatory framework in this area
has contributed to an environment in which a number of legal actions
and other disputes have occurred between the Government and
contractors. See, e.g., Ralph Parsons Co., ASBCA 37931, 91-1 BCA 23648,
reconsideration denied 91-2 BCA 23751; Ball Corp., ASBCA 49118 (Apr. 3,
2000).
The CAS Board first considered the issue of accounting for ESOP
costs at its May 1995 meeting, wherein it was decided to establish a
case on this topic. At the Board's December 1995 meeting, the matter
was further discussed and consideration was given to issuing an
``interpretation'' on the topic. A draft interpretation was submitted
by the staff to the Board at the Board's February 1996 meeting. In the
ensuing Board discussion, the applicability of either CAS 9904.412 or
CAS 9904.415 was identified as one of the major issues. Other issues
discussed were the characterization of interest in leveraged ESOPs, and
the valuation of shares that are released from the ESOP's suspense
account and allocated to individual employee accounts. The Board
determined that these issues were matters appropriate for the Board's
consideration. The staff was instructed to continue with its research
on this topic.
As part of its research, the staff has consulted with various
Government offices and other interested parties who have had experience
with ESOPs. At the December 1998 open CAS Board meeting, the Director
of Defense Procurement again urged the CAS Board to address the issue
of accounting for the costs of ESOPs.
Discussion
A discussion of the more prominent ESOP issues follows with
questions on each subject. Commenters who believe that the questions
contained herein do not adequately cover all pertinent aspects of the
topic are encouraged to submit comments dealing with any additional
issues.
There are two forms of ESOPs--nonleveraged and leveraged.
Contributions to a nonleveraged ESOP are generally allocated to
individual participant accounts before the end of the sponsor's fiscal
year. A leveraged ESOP uses borrowed funds to acquire shares in the
sponsoring company which are then held by the ESOP in a suspense
account for potentially extended periods, prior to their release to
individual employee accounts. In a leveraged ESOP, some maintain that
the employer's periodic contribution to the ESOP contains two
elements--the cost of employee compensation and the cost of interest on
borrowed funds.
Even though CAS do not deal explicitly with the costs associated
with ESOPs, the parties to some government contracts have applied the
provisions in existing Standards to support their position with respect
to ESOP treatment.
While the arguments have varied, at least one assertion has been
that if an ESOP can be regarded as a ``pension'' ESOP, then it falls
under the provisions of CAS 9904.412, Composition and Measurement of
Pension Cost. This makes it easier, so some believe, to assert that the
total of a contractor's payment to the ESOP, including any interest
element, should be regarded as employee compensation. Others have
asserted that if an ESOP is classified as a ``deferred compensation''
ESOP then the appropriate Standard for application is CAS 9904.415,
Accounting for the Cost of Deferred Compensation. In this case, some
have asserted that the cost measurement should not include interest
while others have asserted that it should include interest. Thus,
different interpretations of the various provisions of CAS by the
contracting parties have become an element in recent disputes
concerning accounting for ESOP contributions.
The question as to whether interest costs attributable to leveraged
ESOPs should be reimbursed by the Government is a procurement policy
issue with broad ramifications. However, this issue is not within the
purview of the CAS Board. As stated in the CAS Board's Statement of
Objectives, Policies and Concepts (May 1992):
``While the Board has exclusive authority for establishing
Standards governing the measurement, assignment and allocation of
costs, it does not determine the allowability of categories or
individual items of cost. Allowability is a procurement concept
affecting contract price and in most cases is established in
regulatory or contractual provisions.''
Although accounting for the costs of ESOPs is addressed in the FAR
and in other guidance applicable to cost allowability issues in
Government contracting, the topic has not been dealt with explicitly in
any of the existing CAS Board Standards. Private sector accounting
standard setters have addressed the topic for financial reporting
purposes. The current Statement of Position (SOP) on the topic was
issued by the AICPA in November 1993 as SOP 93-6. This SOP was issued
after an extensive promulgation process that included the publication
of an exposure draft which attracted a significant number of comments.
The SOP provides guidance on both periodic compensation cost
measurement and applicable disclosure. It states that compensation
costs and interest on borrowed funds should be reported as separate
items in financial statements.
SOP 93-6 further states that the fair value prevailing at the time
when the shares are ``committed to be released for allocation to
participant accounts'' should be used for charging employee
compensation costs when that was the purpose for which the shares were
released. The SOP similarly provides that the cost of shares acquired
or transferred to ESOPs should be valued on the date they were acquired
or transferred. Any difference in value between the acquisition date
and the date when the shares are released to the employee accounts is
recognized as an
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equity adjustment in the financial statements.
At this point it may be useful to restate the CAS Board's position
on pronouncements issued by other authoritative bodies established to
issue guidance affecting accounting for financial and tax purposes. In
its Statement of Objectives, Policies and Concepts (May 1992) the Board
stated:
``The Board will continue taking those other pronouncements into
account to the extent it can do so in accomplishing its objectives.
However, the Board recognizes that the purposes of these
pronouncements are not intended to meet the objectives of contract
costing. Therefore the Board will retain and exercise full
responsibility for meeting the objectives of contract costing.''
In the light of this statement the first question may be stated as
follows:
1. Does GAAP (SOP 93-6) provide sufficient guidance for accounting
for the costs of ESOPs for Government contract costing purposes? Please
discuss the rationale of your answer to this question.
If the answer to question 1, above, is no, then the Board would
like to receive comments as to whether one of the existing CAS does or
could be expanded to provide adequate guidance.
As noted earlier, CAS have been applied to these issues by the
various parties to the Government contracting process. As there has not
been any direct reference to ESOPs in any of the Standards, a party
applying CAS to ESOP accounting must first identify a Standard that
would be applicable in a particular instance. In general, the choice
has been between CAS 9904.412 and CAS 9904.415.
To develop criteria for distinguishing the circumstances in which
either of these two Standards may be applicable, two different types of
ESOPs have been identified. The first type embraces the so-called
``pension ESOPs'' which are distinguished principally by the
characteristic that they offer their participants, benefits for life.
All other ESOPs are referred to as ``nonpension'' or ``deferred
compensation ESOPs.'' In practice, it appears that the provisions of
CAS 9904.412 have been applied to the first group of ESOPs, while the
provisions of CAS 9904.415 have been applied to the second group. This
attempt to distinguish between pension and deferred compensation ESOPs
seems to be a categorization that is currently found only in the field
of Government contract cost accounting. In the broader context, when
accounting for ESOPs is discussed, this particular categorization is
not used. Therefore, the question arises as to whether this distinction
between pension and deferred compensation ESOPs is an approach that
should be included in any future CAS Board promulgation on this topic.
2. Do you believe that distinguishing between ``pension'' and
``deferred compensation'' ESOP type is useful in the Government
contract costing environment and that this feature should be included
in any future CAS Board promulgation on this topic? Please include the
rationale for your answer to this question.
3. If you believe that a distinction between ESOP types is useful
and should be included in any future CAS promulgation do you also
believe that amendments, or an interpretation, to CAS 9904.412 and/or
CAS 9904.415, is the appropriate action for the Board to take?
Another area where differing opinions exist, concerns the
measurement date for determining the fair value of shares released to
employee accounts. Some ESOPs hold shares of the sponsor company in a
suspense account for the purpose of subsequent distribution to
employees. It is likely that the fair value of these shares will change
while the shares are held in the suspense account prior to being
transferred to individual employee accounts. Accordingly, two different
dates have been suggested as measurement dates for the purpose of
determining the fair value of the shares released to individual
employee accounts.
The FAR, at section 31.205-6(j)(8), stipulates that ``* * * the
value of the stock contribution shall be limited to the fair market
value of the stock on the date that the title is effectively
transferred to the trust.'' The FAR provisions do not, however, address
what valuation applies on the date when shares are actually released to
employees for determining individual employee compensation costs. In
other words, the FAR implies that the cost of the shares at the time of
their acquisition by the ESOP should also be used as their fair value
at the time of their release to individual employee accounts.
4. Do you believe that the fair value of the shares released by an
ESOP to individual employee accounts should be established at the date
when the title to these shares is transferred to the ESOP or should it
be the date when the shares are committed to be released to employee
accounts? If you would like to propose a different date or a modified
version of the two dates referred to above, please explain.
The cost allocated to contracts may also be different depending on
what is to be measured--the cost to the company or the amount of
compensation received by the employee. The compensation received by the
employee is the fair value of the shares or other consideration
received by the employee. The cost to the company may be measured
differently depending on whether the cost is measured as (1) the fair
value of the shares on the date the sponsor transfers the shares to the
ESOP; (2) the fair value of the shares on the date the ESOP purchases
the shares; (3) the amount of the sponsor's cash contribution to the
ESOP; or (4) a combination of the above.
5. For contract costing purposes, should a distinction be made
between measurement of the ``cost to the company'' or measurement of
compensation ``received by the employee?'' Please explain. If a
distinction should be made, please also comment on the method that
should be used to measure this amount.
In certain circumstances when CAS 9904.415 has been applied to
accounting for ESOPs, further disputes may occur. CAS 9904.415
identifies two different methods for determining the present value of
future benefits depending upon the method of settling the deferred
compensation obligation.
CAS 9904.415-50(d) provides guidance for the calculation when the
settlement ``is to be paid in money,'' while CAS 9904.415-50(e)
provides guidance when ``the compensation is received by the employee
in other than money.'' These two approaches, CAS 9904.415-50(d) and
(e), generally produce different present values of the future benefit
and hence, different cost for contract costing purposes.
6. Should the form of payment of ESOP benefits to the employee make
a difference in measuring the cost allocable to Government contracts?
If so, how should the cost be determined?
[FR Doc. 00-23717 Filed 9-14-00; 8:45 am]
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