[Federal Register Volume 68, Number 161 (Wednesday, August 20, 2003)]
[Proposed Rules]
[Pages 50111-50120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21074]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9904
Cost Accounting Standards Board; Accounting for the Costs of
Employee Stock Ownership Plans (ESOPs) Sponsored by Government
Contractors
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, OMB.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Cost Accounting Standards Board (CASB), Office of Federal
Procurement Policy, invites public comments on proposed amendments to
the Cost Accounting Standards (CAS), ``Cost accounting standard for
composition and measurement of pension cost'', and ``Accounting for the
cost of deferred compensation''. These proposed amendments address
issues concerning the recognition of the costs of Employee Stock
Ownership Plans (ESOPs) under Government cost-based contracts and
subcontracts. These proposed amendments provide criteria for measuring
the costs of ESOPs and their assignment to cost accounting periods. The
allocation of a contractor's assigned ESOP costs to contracts and
subcontracts is addressed in other Standards. The proposed amendments
also clarify that accounting for the costs of ESOPs will be covered by
the provisions of ``Accounting for the cost of deferred compensation''
and not by any other Standard.
DATES: Comments must be in writing and must be received by November 18,
2003.
ADDRESSES: Due to delays in OMB's receipt and processing of mail,
respondents are strongly encouraged to submit comments electronically
to ensure timely receipt. Electronic comments may be submitted to:
[[Page 50112]]
[email protected]. Please put the full body of your comments in the text
of the electronic message and also as an attachment readable in either
MS Word or Corel WordPerfect. Please include your name, title,
organization, postal address, telephone number, and e-mail address in
the text of the message. Comments may also be submitted via facsimile
to (202) 395-5105. Please cite CASB Docket No. 00-03A in your comment.
FOR FURTHER INFORMATION CONTACT: Robert A. Burton, Associate
Administrator, Office of Federal Procurement Policy (telephone: (202)
395-3302).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The Cost Accounting Standards Board's rules, regulations and
Standards are codified at 48 CFR chapter 99. The Office of Federal
Procurement Policy Act, 41 U.S.C. 422(g)(1), requires the Board, prior
to the establishment of any new or revised Cost Accounting Standard, to
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 (e.g., promulgation of a Staff Discussion Paper.)
2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
3. Promulgate a Notice of Proposed Rulemaking (NPRM).
4. Promulgate a Final Rule.
This ANPRM is issued by the Board in accordance with the
requirements of 41 U.S.C. 422(g)(1)(B) and (C), and, is step two of the
four-step process.
B. Background and Summary
Prior Promulgations
The CAS and Federal Acquisition Regulation (FAR) have dealt with
issues associated with ESOPs ever since ESOPs became popular in the
late 1970s as a vehicle for providing incentive compensation to
employees, as well as a means for corporations to finance their capital
requirements. The popularity of ESOPs was greatly enhanced by their
inclusion in the Employee Retirement Income Security Act of 1974
(ERISA) and by several beneficial changes to the Federal Income Tax
Code in that same time period.
At first, the issues that arose were regarded as allowability
matters that were to be treated in the FAR (or one of its predecessors,
the Defense Acquisition Regulations or Armed Services Procurement
Regulations). The views of the CASB were sought primarily on an
advisory basis. However, after issuance of the decision of the Armed
Services Board of Contract Appeals (ASBCA) in the ``Parsons case,''
Ralph Parsons Co., ASBCA Nos. 37391, 37946, and 37947, December 20,
1990, 91-1 BCA 23648, reconsideration denied 91-2 BCA 23751, various
government commenters suggested to the CASB that ESOP cost measurement
and period assignment matters warranted placement on the CASB's agenda.
These suggestions were amplified in light of the decision of the ASBCA
in Ball Corp., ASBCA No. 49118, April 3, 2000, 00-1 BCA 30864. This
position has been reiterated both by the Department of Defense and by
some contractors.
The Board first considered issuing an Interpretation of its
existing Standards, but then decided that additional research was
needed. Various approaches for dealing with ESOP accounting issues were
considered by the CASB and other interested parties in the late 1990s.
On September 15, 2000, the Board issued a Staff Discussion Paper (SDP)
on this topic (65 FR 56008, Sept. 15, 2000).
After the Board reviewed and discussed the public comments received
in response to the Staff Discussion Paper, the staff was asked to
perform additional research. The staff explored three different
options: (a) Modify CAS 9904.415 so that the contribution to the ESOP
could be treated as deferred compensation for government contract
costing purposes; (b) Develop a separate Standard based on the
``contribution approach;'' and, (c) Develop a separate Standard based
on Generally Accepted Accounting Principles (GAAP). The Board has
tentatively decided to proceed with option (a).
Public Comments
The Board received sixteen (16) sets of public comments in response
to the Staff Discussion Paper.
These comments came from contractors, government agencies,
professional associations, industry associations, and individuals.
The majority of respondents agreed on several issues related to
ESOPs for government contract costing purposes:
1. Generally Accepted Accounting Principles (GAAP), in particular
SOP 93-6, do not provide adequate guidance for measuring ESOP costs.
2. There should be no distinction between ``pension'' and
``deferred compensation'' ESOPs in the measurement of ESOP costs.
3. The fair value of the stock should be established when title to
the stock is transferred to the ESOP.
4. ESOP costs should be measured by the cost incurred by the
contractor rather than the value of compensation received by employees.
5. The form of payment used to make distribution of ESOP benefits
to employees is not relevant to the measurement of a contractor's ESOP
costs.
There was, however, no strong consensus as to whether CAS 9904.412
or 9904.415 (or both) should be amended, or whether a new Standard
should be adopted regarding ESOP costs.
This proposal is based upon continuing research performed by the
staff of the Cost Accounting Standards Board, public comments received
in response to the SDP, and deliberations of the Board. The various
comments and proposals are discussed in greater detail under Section E,
Public Comments. The Board would like to thank all the organizations
and individuals who provided comments and information in response to
the Staff Discussion Paper.
Conclusions
While there have been distinctions drawn in the past between
``pension'' and ``deferred compensation'' ESOPs, the Board has
concluded that all ESOP costs should be treated consistently as
deferred compensation.
Based on the comments received in response to the Staff Discussion
Paper, the Board has also determined that specific guidance is required
regarding the measurement of ESOP contributions and the assignment of
ESOP costs to cost accounting periods. Specifically, the Board believes
that the contractor's ESOP cost should be measured by the contribution
made to the ESOP, not by the value of compensation received by the
employee. In addition, the Board believes that these costs should be
systematically assigned to the cost accounting periods in which ESOP
awards are made to employees.
Benefits
CAS has never explicitly dealt with the cost of ESOPs. These costs
can be significant. However, there have been numerous efforts by
contracting parties to apply the provisions of existing CAS,
principally CAS 9904.412 and 9904.415, to the ESOP cost determination
process. These efforts have resulted in a distinction between ``pension
ESOPs'' and ``deferred compensation ESOPs'' in Government contract cost
accounting.
[[Page 50113]]
This distinction is not recognized in other fields of accounting.
Historically, many controversies regarding accounting for ESOP
costs have been resolved at the local level by entering into an advance
agreement between the contracting parties. Nevertheless, this is a cost
accounting issue that has not been adequately dealt with within the
framework of existing CAS. The Board recognizes that the diversity of
current practices is not conducive to uniformity and consistency in
cost measurement, assignment, or allocation of costs--the stated
objectives of CAS.
The Board believes that these amendments will lead to a significant
increase in uniformity and consistency in this important area of
contract cost measurement. The Board also believes that the benefits of
such improvements in contractor cost accounting practices should be
substantial, and should greatly outweigh any added costs.
Summary Description of Proposed Amendments
The proposed amendments make clear that all ESOP cost
determinations will become subject to CAS 9904.415. In addition, CAS
9904.412 is proposed to be amended to exclude the coverage of the costs
of ESOPs that meet the definition of a pension plan.
The proposed amendments adopt the ``contribution'' approach for
ESOP cost measurement. Using this approach, contractors' contributions
to ESOPs for a cost accounting period become the basis for ESOP cost
determination. That part of the contribution that is assignable to the
cost accounting period would be recognized as deferred compensation
cost for the period. This recognition as an assignable cost is, in
turn, based on the identification of ESOP awards that have been made to
employees during the period that qualify as deferred compensation in
accordance with the corresponding definition incorporated in the
Standard. In essence, the ESOP costs assignable to a cost accounting
period are that part of the annual contribution that is attributable to
the awards made to employees during the period.
The proposed transition method is designed to ensure that the
adoption of this proposal will not cause changes to existing
arrangements that contracting parties may have developed to deal with
their existing ESOP cost determinations. In particular, the intent is
that contractor/government advance agreements for existing ESOPs should
not be disturbed. The emphasis is on making sure the procedures
incorporated in this proposal are applied only to the measurement,
assignment and allocation of costs of new ESOPs that are established
after this proposal becomes effective, if ultimately adopted by the
CASB.
C. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this proposal, because these amendments impose no paperwork burden on
offerors, affected contractors and subcontractors, or members of the
public which requires the approval of OMB under 44 U.S.C. 3501, et seq.
The records required by this proposed rule are normally maintained by
contractors that claim reimbursement of ESOP costs under government
contracts.
D. Executive Order 12866 and the Regulatory Flexibility Act
Because the transition provision incorporated into this proposal
ensures that arrangements for determining costs for existing ESOPs are
not changed, the economic impact of these amendments, if any, on
contractors is expected to be minor.
As a result, the Board has determined that this rule will not
result in the promulgation of a ``major rule'' under the provisions of
Executive Order 12866, and that a regulatory impact analysis will not
be required. Furthermore, this proposal does not have a significant
effect on a substantial number of small entities because small
businesses are exempt from the application of the Cost Accounting
Standards. Therefore, this rule does not require a regulatory
flexibility analysis in accordance with the Regulatory Flexibility Act
of 1980.
E. Public Comments
This proposal is based upon responses to the CASB SDP entitled
``Accounting for the Cost of Employee Stock Ownership Plans'' that was
published in the Federal Register on September 15, 2000 (65 FR 56008).
Altogether, 16 responses were received, classified as follows:
Industry......................................................... 7
Professional associations and others............................. 4
Industry associations............................................ 3
Government Agencies.............................................. 2
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Total:....................................................... 16
The SDP asked six specific questions and the responses to these
questions are discussed below. In addition to these responses, several
commenters submitted additional comments on topics not covered directly
by the six questions; others summarized in general terms the more
significant features of their detailed responses. The comments received
and the Board's actions are summarized below.
Question 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.
Comments: Thirteen commenters acknowledged that SOP 93-6 does not
provide adequate guidance for accounting for ESOPs for Government
contracting purposes. Most of these commenters recognized that GAAP is
not intended to address Government contracting issues.
Nevertheless, three of these commenters, the National Defense
Industrial Association (NDIA), Boeing and Darrell J. Oyer & Co.,
recognized that GAAP contains some useful guidance. One of these
commenters, Darrell J. Oyer & Company, explains this as follows:
GAAP is not intended to address government contracting issues
and does not do so in SOP 93-6. GAAP does provide some useful
concepts concerning ESOPs; however, SOP 93-6 cannot blindly be
applied to government contracting. Each aspect of SOP 93-6 must be
considered on a case-by-case basis consistent with the principles of
government contract costing.* * *
Two commenters, McDermott, Will & Emery and the Project on
Government Oversight (POGO), thought that GAAP may provide adequate
guidance for Government contract costing purposes. McDermott, Will &
Emery commented favorably on the comprehensive treatment of the topic
in SOP 93-6 and then stated that if ``* * * the cost accounting
standards for government contracts purposes were to differ materially
from the requirements of SOP 93-6, contractors could be placed in an
extremely awkward, illogical, and perhaps untenable position.'' This
commenter also pointed out that any deviation from GAAP would require
companies to keep two sets of books.
POGO expressed concerns about differing treatments for pension and
deferred compensation ESOPs, valuation of shares acquired by ESOPs, and
interest expense incurred by leveraged ESOPs as areas of potential
abuse. POGO was principally concerned with the apparent current
practice in Government contract cost accounting where ``* * * interest
expense may be passed on to contractors (and ultimately taxpayers) as a
form of ``employee compensation.'' POGO contrasted this practice with
SOP 93-6 requirements that stipulate that ``* * * interest expense
incurred in financing leveraged
[[Page 50114]]
ESOPs is clearly reflected on financial statements as such.''
However, POGO characterized its opinion that contractors should be
required to account for ESOP costs using SOP 93-6, as ``tentative.''
POGO stated:
POGO is pleased to see that the Board is addressing an important
Government contract accounting topic. This may be an area where the
use of GAAP is appropriate; something we understand that some
Government contractors have urged upon the Board for some time
(although apparently not with respect to ESOPs). We would strongly
recommend that the CAS Board, whatever its ultimate decision,
consider the need to promote greater uniformity among Government
contractors in this area, and to place greater importance on the
financial implications for taxpayers, rather than those of
contractors.
Response: The CAS Board recognizes that there are instances when
GAAP is not appropriate for measuring costs on Government contracts.
This is due, in part, to significant differences between the objectives
of CAS and those of GAAP. CAS seeks to promote consistency and
uniformity in the measurement, assignment and allocation of costs on
Government contracts, while the broad objectives of GAAP relate to the
fair presentation of income, cash flows, assets, liabilities and
stockholders' equity in financial statements. GAAP does not embrace the
CAS concern for appropriate accumulation and estimating of costs to
specific cost objectives. The CAS Board believes that ESOPs are an
instance where GAAP would be inappropriate for determining costs on
Government contracts for the following reasons:
1. For contract costing purposes, the Government recognizes and
reimburses a contractor's actual costs, as defined at 48 CFR 9904.401-
30(a)(2). As stated in the May 1992 CASB ``Restatement of Objectives,
Policies and Concepts'' (57 FR 31036), the Standards are intended to
``provide criteria for the allocation to cost objectives of the costs
of resources used.'' In the case of ESOPs, the costs of resources used
are the amount of the company's contribution to the ESOP. The
contribution represents the contractor's actual total costs to acquire
shares that are awarded to employees; that is, the amount of contractor
resources used to provide the deferred compensation to the employee.
The value of the stock at distribution to employee accounts generally
does not reflect a contractor's actual costs.
2. The cost for a leveraged ESOP measured using GAAP changes from
period to period based on fluctuations in stock prices. The Government
should not share in fluctuations of stock prices, whether up or down,
that occur during the period between the time when an ESOP trust
originally acquires shares and when those shares are distributed to
employee accounts. The policy that the Government should not
participate in the fluctuation of stock prices is already embodied in
CAS 9904.415 related to stock options. The Preamble to CAS 9904.415,
states:
If the market price of the stock on the date of distribution is
used, the Government, in effect, would be sharing in financial risk
taking with the contractor. Subsequent fluctuations of the price of
the stock should not influence the measurement of the award.
3. Congressional intent is to encourage the use of ESOPs. However,
if the measurement date prescribed by GAAP were used for Government
contracting purposes, it would significantly limit the use of leveraged
ESOPs by Government contractors, particularly contractors whose stock
is not widely traded. Government contractors could still use ESOPs, but
would potentially suffer from financial disadvantages if leveraging
caused a material effect on a company's debt to equity ratio. Often the
establishment of a leveraged ESOP adversely affects a company's debt to
equity ratio since the value of the company's stock may drop
significantly after the leveraged ESOP is established due to the ESOP
debt recognized on a contractor's books. Over a period of time, as the
debt is paid off, the value of the stock can be expected to return to
pre-ESOP levels. In the commercial marketplace, where the price a
company receives for its product is not totally based on actual costs
incurred, the company does not necessarily have to reduce the price of
its products to reflect smaller deferred compensation awards resulting
from the drop in stock value. This is not the case with Government
cost-based contracting, since the contractor is only reimbursed for its
actual costs incurred.
If GAAP were to be adopted for measuring the cost of a leveraged
ESOP, the fair value of stock would become the basis for reimbursement
of ESOP costs under Government contracts. Since the fair value of stock
of Government contractors, whose stock is not widely traded, is lower
after the initiation of a leveraged ESOP, the use of GAAP measurement
requirements would impair those Government contractors' ability to
recover sufficient monies to cover the debt payment of the leveraged
ESOP.
The CAS Board notes there was consensus among the respondents to
its SDP that the cost of ESOPs should be measured as the amount of the
contractor's total contribution.
Question 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 promulgation on this topic? Please include the
rationale for your answer to this question.
Comments: With one exception (the DOD Inspector General), all
commenters agreed that the distinction between ``pension'' and
``deferred compensation'' ESOPs serves no useful purpose. They
described such distinction as either irrelevant, confusing,
meaningless, artificial, specious or not useful. McDermott, Will &
Emery described the relevance of the distinction as follows:
ESOP companies are currently able to pick and choose whether
they are better off being pension ESOPs or deferred compensation
ESOPs by merely including or not including a meaningless provision
in their plan documents offering participants distribution in the
form of a life annuity. In practice, virtually no participants ever
want a distribution in this form; and if they do, they are better
off taking a lump sum distribution and purchasing their own annuity
to fit their own needs than accepting the ``one size fits all''
annuity that the plan would provide. Whether this distribution form
is present in the plan document has no logical connection whatsoever
with the determination of the amount and timing of costs for
government contracts purposes.
The Section of Public Contract Law of the American Bar Association
(ABA) and Abt Associates Inc. attributed the concept of different types
of ESOPs to a Government attempt to disallow interest costs related to
ESOP financing. This view was expressed by the Public Contract Law
Section of the ABA:
Disputes have arisen over whether an ESOP is more appropriately
accounted for under CAS 412 or under CAS 415. The primary driver in
these disputes is the so-called ``interest component'' of the
employer's contribution. In other words, should a portion of the
employer's contribution be disallowed because the trust uses it to
repay interest on borrowings? Under CAS 412, pension cost is
measured by the entirety of an employer's contribution to the
pension trust, even though the trustee may use it to repay
borrowings. Under CAS 415, governing the costs of deferred
compensation, the Government can argue that the portion of the
employer's contribution that the trust uses to pay interest should
not be included in measuring the employer's cost.
The DOD Inspector General (DOD IG) provided the following comments
in
[[Page 50115]]
support of its argument that there should be a distinction in the
treatment of ``pension'' and ``deferred compensation'' ESOPs for
Government contract costing purposes:
ESOPs that meet the requirements of a qualified pension plan are
subject to laws and regulations governing pension costs that should
be considered in the cost accounting standards. ESOPs that do not
meet the requirements of a qualified retirement plan should be
addressed in CAS 9904.415 as deferred compensation subject to the
individual contracts between the employer and the employee.
The Board notes that Boeing recognized that a uniform approach is
needed for all ESOPs for cost measurement purposes, but was not
specific as to the section of CAS that should be amended for that
purpose. Although, the DOD IG stated that a distinction should be made
between ``pension'' and ``deferred compensation'' ESOPs for Government
contract costing purposes, several other commenters, including DynCorp
and AIA, indicated that the ``status quo'' is acceptable and no further
action by the Board is needed. Since the current practice recognizes,
in effect, a distinction between these two types of ESOPs, then
acceptance of the ``status quo'' would also imply that these commenters
believe that distinguishing between the two types of ESOPs would be
useful in the government contract costing environment. Therefore, the
notion that there are two different types of ESOPs, ``pension'' and
``deferred compensation'' ESOPs, may have more support than indicated
by the sole affirmative response received to this question.
Response: It is widely recognized that the two different types of
ESOPs, ``pension'' and ``deferred compensation'' ESOPs, are recognized
only in the Government contract costing environment. The Government was
compelled to make this distinction as the result of the ASBCA's
decision in Ralph Parsons Co., supra. The ASBCA held that since FAR
31.205-6(j)(8) (ESOPs) is included in the pension section of the cost
principle, it does not apply to ESOPs that do not meet the definition
of a pension. Therefore, those ESOPs that do not meet the definition of
a pension are considered to be deferred compensation covered by FAR
31.205-6(k), which incorporates CAS 9904.415 in its entirety.
The DOD IG's comments about qualified pensions refer to ERISA, not
to CAS. The only distinction between pensions and deferred compensation
in the CAS is the requirement that pension benefits be payable for
life. This distinction is not found in ERISA. The Board does not agree
that ERISA qualification for pension plans should be the sole
determining factor for which CAS should be applied in the measurement
and assignment of ESOP costs for Government contracting purposes.
The Board agrees with the majority of commenters that no
distinction should be made between ``pension'' and ``deferred
compensation'' ESOPs in measurement and assignment of cost. Therefore,
the proposed amendments would eliminate this distinction in the
measurement and assignment of ESOP costs. As a consequence, a
significant step will be taken to improve uniformity and consistency in
the cost accounting practices among Government contractors in like
circumstances--a primary objective of the Board. Furthermore, the
current differences in the recognition and measurement of the interest
element in the ESOP cost calculations among the two different types of
ESOPs will be eliminated.
In summary, the Board proposes that CAS 9904.412 be amended to
ensure that no ESOP is subject to the provisions of that Standard. At
the same time, it is proposed that CAS 9904.415 be amended so that all
the ESOPs become subject to that Standard.
Question 3
If you believe that a distinction between ESOP types is useful and
should be included in any future CAS promulgations, 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?
Comments: Since in response to Question 2, only one commenter
indicated that a distinction between ESOP types is useful, it might
have been expected that a single response would be obtained to this
question. However, a total of nine commenters provided their opinion as
to which Standard should be changed. Of the remaining seven commenters,
five responded that no amendments or clarifications to either CAS
9904.412 or 9904.415 are required, and the other two (ESOP Association
and Abt Associates Inc.) provided no specific response to this
question.
Of the nine commenters who recommended that changes are required,
three stated that CAS 9904.415 should be amended (DOD, ABA and POGO);
two believe that CAS 9904.412 should be amended (Parsons, Brinkerhoff
and United Technologies), three expressed no preference as to which
standard should be amended (NDIA, Darrell J. Oyer & Co., and McDermott,
Will & Emery); and one (the DOD IG) recommended that both CAS 9904.412
and 9904.415 be amended.
In addition, two commenters (United Technologies and DynCorp), who
consider ESOPs defined contribution plans, believe that, given the Ball
decision, CAS 9904.412 and 9904.415 would produce the same results.
The Boeing response reflects the view of the five commenters who
thought that no amendments to existing Standards are required (Boeing,
Lockheed Martin, AIA, ALCOA, DynCorp):
We believe the current provisions of CAS 9904.412 and 9904.415 are
adequate if properly interpreted. If clarification is desired to avoid
interpretive disputes, amendments or interpretations to existing
standards could be useful * * *.
Response: The purpose of this question was to solicit opinions as
to what format any Board action in this area should take. However, the
responses that were obtained varied greatly and did not clearly point
to any specific course of action.
Regarding the main thrust of the question, whether it would be more
appropriate to deal with ESOPs under CAS 9904.412 or 9904.415, the
Board believes that ESOPs have more in common with deferred
compensation plans than with pension plans. Therefore, the Board
proposes amendments to CAS 9904.415 to provide for the measurement and
assignment of ESOP costs, and to CAS 9904.412 to clearly state that it
is not applicable to ESOPs, including those plans which provide
benefits that are ``payable for life.''
Question 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.
Comments: The majority of commenters (13 of 16) indicated that for
shares transferred to an ESOP trust, the fair value should be
established at the date when the title to these shares is transferred
to the trust. Several commenters expanded on this basic response. It
was frequently stressed that the contribution to the trust could be in
the form of cash as well as shares, and thus, the critical date should
be the date when an irrevocable transfer is made to
[[Page 50116]]
the trust either in cash or in stock. These commenters, including two
Government agencies, probably would agree with the following, rather
general, statement made by Parsons Brinkerhoff:
If the company's contribution is made in stock, we believe the
fair value of shares should be as of the date the shares are
transferred, or committed to be transferred, to the ESOP. The fair
value of shares at any later time, e.g., at the time committed to be
released to employee accounts, would not be relevant in determining
allocability as a contract cost. If the company's contribution is
made in cash, excluding payments made to the Trust to re-purchase
shares from the Trust, then the entire amount of the payment,
regardless of how characterized, e.g., contribution, loan principal,
interest, or dividends on a qualified security, is allocable to the
government.
McDermott, Will & Emery, however, does not agree with this type of
response and indicated that the CAS Board should strive for conformance
with GAAP and, in particular, with SOP 93-6. McDermott, Will & Emery
believes that the proper valuation date should be the date when the
shares are committed to be released to employee accounts. McDermott,
Will & Emery stated:
The fair value of shares should be established in accordance
with the GAAP rule of SOP 93-6, i.e., at the time the shares are
committed to be released to employee accounts.
Establishing it at any other time would put the CAS out of synch
with GAAP, creating a highly undesirable and unnecessary ``two sets
of books'' environment for government contractors.
Response: The Board agrees with the majority of commenters and is
proposing to adopt the ``contribution'' approach to ESOP cost
accounting as the best measure of a contractor's cost to provide the
ESOP benefit awarded to employees. Therefore, the value of shares
transferred to an ESOP should be established as of the date when the
title to the shares is transferred to the trust.
The Board also notes that in adopting this approach, risks
associated with changes in the market value of stock or property
subsequent to the date the title to such stock or property is
transferred to the ESOP, either up or down, are borne by the ESOP
trust. From this perspective, the government does not bear any risk or
perceived conflict of interest associated with share price fluctuations
after the contribution has been made as pointed out by Lockheed Martin.
This is consistent with the current CAS 9904.415 provision regarding
stock options.
The Board believes that any other measurement date, such as that
suggested by McDermott, Will & Emery, would not reflect the
contractor's cost in providing the ESOP benefit and would, therefore,
be inappropriate for the measurement of costs for government
contracting purposes. McDermott, Will & Emery's rationale is based on
its desire to avoid differences between financial accounting and
contract cost accounting. As discussed in the Board's response to
Question 1, GAAP are not appropriate for determining ESOP costs on
Government contracts.
Question 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.
Comments: All the commenters who responded to this question either
stated directly or implied that a distinction should be made between
measurement of ``cost to the company'' and the measurement of
``compensation received by the employee.'' With one exception
(McDermott, Will & Emery), they also all stated that the proper
measurement should be the ``cost to the company.'' The line of thought
of this majority is exemplified by the following two quotes. First,
NDIA stated:
We firmly believe that the only relevant date is the measurement
date of the cost to the company. ESOPs are essentially a defined
contribution plan. Thus when the company incurs the cost that is the
measurement date. The measurement date based on ``received by the
employee'' is irrelevant.
As a basic principle, no further contract cost or costing
consideration exists after the date for the cost to the company.
This approach accurately measures the cost to the company. Any
attempt to impact contract costs after these events is
inappropriate.
The same point of view, in different words, was also expressed by
the Public Contract Law section of the ABA:
The purpose of the proposal is to measure the contractor's cost,
not the amount of compensation received by the employee. In a
leveraged ESOP, these two will hardly ever be the same. If the
contractor contributes $100, and by the time the shares are released
the stock has doubled in value, should the contractor's ``cost'' be
$200? We think not.
McDermott, Will & Emery disagreed with the majority response
stating that GAAP should prevail for the purpose of Government contract
cost accounting in order to maintain consistency between financial and
Government contract reporting and to increase contractors'
profitability. At the same time, their comments cited a potential
weakness in the GAAP methodology for financial reporting purposes. The
commenter's justification for this position is stated as follows:
* * * the GAAP rule, which measures compensation ``received by
the employee,'' should govern, so that there is no inconsistency
between the GAAP reporting and the government contract cost
reporting that is required of these companies. Arguably, the GAAP
rule should be reformed, as users of corporate financial statements
probably have more interest in what the corporation spent than in
what the employees received.
However, so long as government contractors must use the GAAP
rule in their audited statements and SEC reports, it is unfair and
problematic to require them to use a completely different rule for
contract costing purposes which could negatively impact their
profitability and their access to working capital.
The scenario that could prove to be detrimental to a contractor
under such circumstances is further described by the commenter in
response to another question:
For example, in a leveraged ESOP where the price of a company's
stock has increased since the time the shares were acquired, if the
ESOP company reflects the cost of the shares at the time they were
originally acquired in their indirect rates, then that company will
have lower revenue from cost based government contracts, but higher
pension expense under GAAP. This will both distort and negatively
impact the company's profitability and, especially for a smaller
business, its ability to obtain funding to support its business with
the government.
Response: The Board agrees with the majority of commenters that a
distinction exists between measurement of the ``cost to the company''
and the measurement of ``compensation received by the employee.'' The
Board has determined that the relevant concept in the measurement of
ESOP costs for Government contracts is the ``cost to the company.''
Therefore, the Board proposes adoption of the ``contribution''pproach
to ESOP cost measurement.
Regarding the comments of McDermott, Wills & Emery, the Board notes
that the use of the ``compensation received by the employee'' as the
measurement of ESOP costs could result in the reimbursements to
contractors in excess of their actual costs as defined at CAS 9904.401-
30(a)(2). The commenter would have the Board believe that failure to
adopt GAAP will unfairly penalize contractors by reducing their
revenues. However, under cost-type Government contracts it is intended
that the contractor be reimbursed actual costs and, in addition, be
paid a negotiated profit. In the commenter's example, the costs
submitted by the
[[Page 50117]]
contractor for reimbursement would not constitute actual costs
incurred, but could include amounts in excess of actual costs. Such
inflated amounts would represent additional profit to the contractor,
not reimbursement of a contractor's costs. In the subject example,
total profit would be enlarged beyond that contemplated in contract
negotiations. This enlargement would be contrary to the intent of the
contracting parties and would result in increased costs to the
Government in the form of a ``windfall'' profit to the contractor.
Conversely, if McDermott, Will & Emery's example is changed to reflect
a decrease in the price of a company's stock since the shares were
acquired by the ESOP, in accordance with GAAP, the company would be
reimbursed only for the decreased value of the shares under Government
contracts and would likely not recover its actual costs incurred. In
such a situation the contractor would be unfairly penalized by reduced
profitability and decreased working capital.
Question 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?
Comments: All of the fourteen commenters who responded to this
question were unanimous in their conclusion that the form of payment of
ESOP benefits should make no difference in measuring the cost allocable
to Government contracts. This response from DOD is fairly typical:
The form of payment of ESOP benefits to the employee should not
make a difference in measuring the cost allocable to Government
contracts. The measured cost should be the same whether the benefit
is paid in cash, other assets or stock. It should also be the same
whether the benefit is paid as a lump sum or over an employee's
life. The cost allocable to Government contracts should be based on
the cost to the contractor and not on the compensation received by
the employee.
Response: The Board agrees with the commenters that the form of
payment to employees should not make any difference to the ESOP cost
measurement process for government contract costing purposes. The Board
notes that neither the value nor form of distribution of ESOP awards to
employees determines the contractor's cost of providing the ESOP
benefit.
Additional Comments
1. Public Policy Issues
Comments: Several commenters stressed the public policy aspect of
ESOPs and, in particular, Congressional support for these plans. These
commenters seem to suggest that any Standard on this topic should not
interfere with the original Congressional intent of encouraging
employee ownership through ESOPs.
Response: The Board believes that the proposed amendments to CAS
9904.415 would not interfere with the intent of Congress.
2. Applicability of the Ball Corporation Decision
Comments: Another theme included in the comments was that whatever
problems there might have been a few years ago with ESOP cost
measurement, these issues have been, in effect, clarified and resolved
by the ASBCA in its decision in Ball Corporation, supra.
Lockheed Martin Corporation summarized this point of view as
follows:
Court actions resulted in decisions such as the Ball Corporation
ASBCA case which affirmed that the broad conceptual guidance found
in CAS Standards were adequate for the measurement and allocation of
ESOP costs. The controversies are basically settled and the courts
have established that there is adequate guidance on how to account
for ESOP costs.
Response: The Board believes that clarification of the measurement
and assignment of ESOP costs is needed to promote uniformity and
consistency in accounting for ESOP costs, despite the decision in Ball
Corporation, supra. That decision did not address the contribution
method of measuring ESOP costs incorporated into these proposed
amendments. The ASBCA's decision in that case was limited to a
determination that the fundamental requirements of the measurement
criteria in CAS 9904.415-40(b) had been met by the contractor, that
neither CAS 9904.415-50(d) or (e) was applicable in that instance, and
that the Government had not demonstrated that the contractor's ESOP
contributions failed to represent the present value of the future
benefits.
F. Additional Public Comments
Interested persons are invited to participate by submitting data,
views, or arguments with respect to this ANPRM. All comments must be in
writing and submitted in accordance with the instructions indicated in
the ADDRESSES section.
List of Subjects in 48 CFR 9904
Government procurement, Cost Accounting Standards.
Angela B. Styles,
Chair, Cost Accounting Standards Board.
Accordingly, for the reasons set forth in the preamble, it is
proposed to amend part 9904 as follows:
PART 9904--COST ACCOUNTING STANDARDS
1. The authority citation for part 9904 continues to read as
follows:
Authority: Public Law 100-679, 102 Stat 4056, 41 U.S.C. 422
2. Section 9904.412-20 is revised to read as follows:
9904.412-20 Purpose.
(a) The purpose of this Standard 9904.412 is to provide guidance
for determining and measuring the components of pension cost. The
Standard establishes the basis on which pension costs shall be assigned
to cost accounting periods. The provisions of this Cost Accounting
Standard should enhance uniformity and consistency in accounting for
pension costs and thereby increase the probability that those costs are
properly allocated to cost objectives.
(b) This Standard does not cover the cost of Employee Stock
Ownership Plan (ESOPs). that meet the definition of a pension plan.
Such plans are considered a form of deferred compensation and covered
under 9904.415.
3. Section 9904.415-20 is revised to read as follows:
9904.415-20 Purpose.
(a) The purpose of this Standard 9904.415 is to provide criteria
for the measurement of the cost of deferred compensation and the
assignment of such cost to cost accounting periods. The application of
these criteria should increase the probability that the cost of
deferred compensation is allocated to cost objectives in a uniform and
consistent manner.
(b) This Standard is applicable to the cost of all deferred
compensation except the following which are covered in other Cost
Accounting Standards:
(1) The cost for compensated personal absence, and
(2) The cost for pension plans that do not meet the definition of
an Employee Stock Ownership Plan (ESOP).
4. Section 9904.415-30 is revised to read as follows:
9904.415-30 Definitions.
(a) The following are definitions of terms which are prominent in
this
[[Page 50118]]
Standard 9904.415. Other terms defined elsewhere in this Chapter 99
shall have the meanings ascribed to them in those definitions unless
paragraph (b) of this subsection, requires otherwise.
(1) Contribution means the amount paid by a contractor to satisfy
the contractor's obligation under a deferred compensation plan. The
contribution may be made in cash, stock, or other property, or any
combination thereof. Contribution does not include the sale of stock or
property by a contractor to a trust.
(2) Deferred compensation means an award made by a contractor to
compensate an employee in a future cost accounting period or periods
for services rendered in one or more cost accounting periods prior to
the date of the receipt of compensation by the employee. This
definition shall not include the amount of year end accruals for
salaries, wages, or bonuses that are to be paid within a reasonable
period of time after the end of a cost accounting period.
(3) Employee Stock Ownership Plan (ESOP) means any deferred
compensation plan designed to invest primarily in the stock of the
contractor's corporation including, but not limited to, plans covered
by the Employee Retirement Income Security Act (ERISA).
(4) Fair value means the amount that a seller would reasonably
expect to receive in a current sale between a willing buyer and a
willing seller, that is, other than a forced or liquidation sale.
(b) The following modifications of terms defined elsewhere in this
Chapter 99 are applicable to this Standard:
(1) Market value means the current or prevailing price of a stock
or other property as indicated by market quotations.
(2) [Reserved].
5. Section 9904.415-40 is revised to read as follows:
9904.415-40 Fundamental requirement.
(a) The cost of deferred compensation shall be assigned to the cost
accounting period in which the contractor incurs an obligation to
compensate the employee. In the event no obligation is incurred prior
to payment, the cost of deferred compensation shall be the amount paid
and shall be assigned to the cost accounting period in which the
payment is made.
(b) Measurement of deferred compensation costs.
(1) For deferred compensation other than ESOPs, the deferred
compensation cost shall be the present value of the future benefits to
be paid by the contractor.
(2) For an ESOP, the deferred compensation cost shall be the amount
contributed to the ESOP by the contractor.
(c) The cost of each award of deferred compensation shall be
considered separately for purposes of measurement and assignment of
such costs to cost accounting periods. However, if the cost of deferred
compensation for the employees covered by a deferred compensation plan
can be measured and assigned with reasonable accuracy on a group basis,
separate computations for each employee are not required.
6. Section 9904.415-50 is revised to read as follows:
9904.415-50 Techniques for application.
(a) The contractor shall be deemed to have incurred an obligation
for the cost of deferred compensation when all of the following
conditions have been met. However, for awards which require that the
employee perform future service in order to receive the benefits, the
obligation is deemed to have been incurred as the future service is
performed for that part of the award attributable to such future
service:
(1) There is a requirement to make the future payment(s) which the
contractor cannot unilaterally avoid.
(2) The deferred compensation award is to be satisfied by a future
payment of money, other assets, or shares of stock of the contractor.
(3) The amount of the future payment can be measured with
reasonable accuracy.
(4) The recipient of the award is known.
(5) If the terms of the award require that certain events must
occur before an employee is entitled to receive the benefits, there is
a reasonable probability that such events will occur.
(6) For stock options, there must be a reasonable probability that
the options ultimately will be exercised.
(b) If any of the conditions in 9904.415-50(a) is not met, the cost
of deferred compensation shall be assignable only to the cost
accounting period or periods in which the compensation is paid to the
employee.
(c) If the cost of deferred compensation can be estimated with
reasonable accuracy on a group basis, including consideration of
probable forfeitures, such estimate may be used as the basis for
measuring and assigning the present value of future benefits.
(d) The following provisions are applicable for plans that meet the
conditions of 9904.415-50(a) and the compensation is to be paid in
money.
(1) If the deferred compensation award provides that the amount to
be paid shall include the principal of the award plus interest at a
rate fixed at the date of award, such interest shall be included in the
computation of the amount of the future benefit. If no interest is
included in the award, the amount of the future benefit is the amount
of the award.
(2) If the deferred compensation award provides for payment of
principal plus interest at a rate not fixed at the time of award but
based on a specified index which is determinable in each applicable
cost accounting period; e.g., a published corporate bond rate, such
interest shall be included in the computation of the amount of future
benefit. The interest rate to be used shall be the rate in effect at
the close of the period in which the cost of deferred compensation is
assignable. Since that interest rate is likely to vary from the actual
rates in future periods, adjustments shall be made in any such future
period in which the variation in rates materially affects the cost of
deferred compensation.
(3) If the deferred compensation award provides for payment of
principal plus interest at a rate not based on a specified index, or
not determinable in each applicable year, the
(i) Cost of deferred compensation for the principal of the award
shall be measured by the present value of the future benefits of the
principal, and shall be assigned to the cost accounting period in which
the employer incurs an obligation to compensate the employee; and
(ii) Interest on such awards shall be assigned to the cost
accounting period(s) in which the payment of the deferred compensation
is made.
(4) If the terms of the award require that the employee perform
future service in order to receive benefits, the cost of the deferred
compensation shall be appropriately assigned to the periods of current
and future service based on the facts and circumstances of the award.
The cost of deferred compensation for each cost accounting period shall
be the present value of the future benefits of the deferred
compensation calculated as of the end of each such period to which such
cost is assigned.
(5) In computing the present value of the future benefits, the
discount rate shall be equal to the interest rate as determined by the
Secretary of the Treasury pursuant to Public Law 92-41, 85 Stat. 97, at
the time the cost is assignable.
(6) If the award is made under a plan which requires irrevocable
funding for
[[Page 50119]]
payment to the employee in a future cost accounting period together
with all interest earned thereon, the amount assignable to the period
of award shall be the amount irrevocably funded.
(7) In computing the assignable cost for a cost accounting period,
any forfeitures which reduce the employer's obligation for payment of
deferred compensation shall be a reduction of contract costs in the
period in which the forfeiture occurred. The amount of the reduction
for a forfeiture shall be the amount of the award that was assigned to
a prior period, plus interest compounded annually, using the same
Treasury rate that was used as the discount rate at the time the cost
was assigned. For irrevocably funded plans, pursuant to 9904.415-
50(d)(6), the amount of the reduction for a forfeiture shall be the
amount initially funded plus or minus a pro-rata share of the gains and
losses of the fund.
(8) If the cost of deferred compensation for group plans measured
in accordance with 9904.415-50(c) is determined to be greater than the
amounts initially assigned because the forfeiture was overestimated,
the additional cost shall be assignable to the cost accounting period
in which such cost is ascertainable.
(e) The following provisions are applicable for plans that meet the
conditions of 9904.415-50(a) and the compensation is received by the
employee in other than money. The measurements set forth in this
paragraph constitute the present value of future benefits for awards
made in other than money and, therefore, shall be deemed to be a
reasonable measure of the amount of the future payment:
(1) If the award is made in the stock of the contractor, the cost
of deferred compensation for such awards shall be based on the market
value of the stock on the measurement date; i.e., the first date the
number of shares awarded is known. If such values are unavailable or
not appropriate (thin market, volatile price movements, etc.) an
acceptable alternative is the fair value of the stock.
(2) If an award is made in the form of options to employees to
purchase stock of the contractor, the cost of deferred compensation of
such award shall be the amount by which the market value of the stock
exceeds the option price multiplied by the number of shares awarded on
the measurement date; i.e., the first date on which both the option
price and the number of shares is known. If the option price on the
measurement date is equal to or greater than the market value of the
stock, no cost shall be deemed to have been incurred for contract
costing purposes.
(3) If the terms of an award of stock or stock option require that
the employee perform future service in order to receive the stock or to
exercise the option, the cost of the deferred compensation shall be
appropriately assigned to the periods of current and future service
based on the facts and circumstances of the award. The cost to be
assigned shall be the value of the stock or stock option at the
measurement date as prescribed in 9904.415-50(e)(1) or (e)(2).
(4) If an award is made in the form of an asset other than cash,
the cost of deferred compensation for such award shall be based on the
market value of the asset at the time the award is made. If a market
value is not available, the fair value of the asset shall be used.
(5) If the terms of an award, made in the form of an asset other
than cash, require that the employee perform future service in order to
receive the asset, the cost of the deferred compensation shall be
appropriately assigned to the periods of current and future service
based on the facts and circumstances of the award. The cost to be
assigned shall be the value of the asset at the time of award as
prescribed in 9904.415-50(e)(4).
(6) In computing the assignable cost for a cost accounting period,
any forfeitures which reduce the employer's obligation for payment of
deferred compensation shall be a reduction of contract costs in the
period in which the forfeiture occurred. The amount of the reduction
shall be equal to the amount of the award that was assigned to a prior
period, plus interest compounded annually, using the Treasury rate (see
9904.415-50(d)(5)) that was in effect at the time the cost was
assigned. If the recipient of the award of stock options voluntarily
fails to exercise such options, such failure shall not constitute a
forfeiture under provisions of this Standard.
(7) Stock option awards or any other form of stock purchase plans
containing all of the following characteristics shall be considered
noncompensatory and not covered by this Standard 9904.415:
(i) Substantially all full-time employees meeting limited
employment qualifications may participate.
(ii) Stock is offered equally to eligible employees or based on a
uniform percentage of salary or wages.
(iii) An option or a purchase right must be exercisable within a
reasonable period.
(iv) The discount from the market price of the stock is no greater
than would be reasonable in an offer of stock to stockholders or
others.
(f)(1) The provisions of 9904.415(d) and (e) shall not apply to
ESOPs. The contractor's cost for an ESOP shall be measured by the
contractor's contribution, including interest and dividends if
applicable, to the ESOP. The measurement of contributions made in stock
of the corporation or property, shall be based on the market value of
the stock or property at the time the contributions are made. If the
market value is not available, then fair value of the stock or property
shall be used.
(2) A contractor's contribution to an ESOP shall be assignable to
the cost accounting period only to the extent that the number of
shares, cash, or any combination thereof resulting from the
contribution are awarded to individual employees in the accounting
period. Any portion of the shares or cash resulting from the
contractor's contribution that is not awarded to individual employees
during the cost accounting period when the contribution is made to the
ESOP shall be assigned to a future cost accounting period or periods
when the remaining portion of stock or cash is awarded to individual
employees. This stock shall retain the value established in the year of
the contribution which resulted in its purchase or availability to the
ESOP.
7. Section 9904.415-60 is amended by adding paragraphs (f), (g),
and (h) to read as follows:
9904.415-60 Illustrations.
* * * * *
(f) Contractor F has a non-leveraged ESOP. Under the contractor's
plan, employees were awarded 5,000 shares of stock for the year ended
December 31, 2004. On the date the 5,000 shares were contributed to the
ESOP, the shares had a market value of $10.00 each. The total measured
and assigned deferred compensation cost for FY 2004 is $50,000 (5,000 x
$10 = $50,000). The market value of the contractor's stock when earned
by the employees, whether higher or lower than the $10.00 per share
market value when the contractor's contribution was made to the ESOP,
is irrelevant to the measurement of the contractor's ESOP costs.
(g) Contractor G has a leveraged ESOP. Under the contractor's plan,
employees were awarded 10,000 shares of stock for the year ended
December 31, 2004. The contractor contributes $780,000 in cash to the
ESOP trust (ESOT) to satisfy the principal and interest payment on the
ESOT loan for FY 2004, resulting in the bank releasing 9,000 shares of
stock. The contractor contributes 1,000 shares of stock valued at
$60,000 to the ESOT, representing the
[[Page 50120]]
balance of the 10,000 shares. The total measured and assigned deferred
compensation cost for FY 2004 is $840,000--the contractor's total
contribution to satisfy the deferred compensation obligation totaling
10,000 shares.
(h)(1) Contractor H has a leveraged ESOP. Under the contractor's
plan, employees were awarded 8,000 shares of stock for the year ended
December 31, 2004. The contractor contributes $500,000 in cash to the
ESOT to satisfy the principal and interest payment on the ESOT loan for
2004, resulting in the bank releasing 10,000 shares of stock. The total
measured deferred compensation cost for 2004 is $500,000--the
contractor's contribution for the cost accounting period. The total
assignable deferred compensation cost for 2004 is $400,000--the portion
of the contribution that satisfies the 8,000 shares of deferred
compensation awarded to the employees in the year [(8,000 shares /
10,000 shares) x $500,000 = $400,000]. The remaining $100,000 of the
contribution made in 2004 is assignable to future periods in which the
remaining 2,000 shares of stock are awarded to the employees.
(2) At December 31, 2005, the employees were awarded 12,000 shares
of stock. The contractor again contributed $500,000 in cash to the ESOT
to satisfy the principal and interest payment on the ESOT loan for
2005, resulting in the bank releasing 10,000 shares of stock. However,
the total deferred compensation assignable to 2005 is $600,000, the
cost of the 12,000 shares awarded to employees. The cost of the award
is comprised of the contractor's contribution for the current cost
accounting period (10,000 shares at $500,000) and the 2004 contribution
carryover (2,000 shares at $100,000).
8. Section 9904.415-63 is revised to read as follows:
9904.415-63 Effective date.
(a) This Standard 9904.415 is effective as of [effective date of
final rule].
(b) This Standard shall be followed by each contractor on or after
the start of its next cost accounting period beginning after the
receipt of a contract or subcontract to which this Standard is
applicable.
(c) Contractors with prior CAS-covered contracts with full coverage
shall continue to follow Standard 9904.415 in effect prior to
[effective date] until this Standard, effective [effective date],
becomes applicable following receipt of a contract or subcontract to
which this revised Standard applies.
9. Section 9904.415-64 is added to read as follows:
9904.415-64 Transition method.
(a) For contractors and subcontractors that were subject to
Standard 9904.415 in effect prior to [effective date of final rule],
the requirements of this Standard, as amended, shall apply to the cost
of new ESOPs that are established after this Standard, as amended,
becomes applicable to the contractor or subcontractor. Any ESOP in
existence prior to the applicability date of this amended Standard,
shall remain subject to the Cost Accounting Standard(s) that were
applicable to such plans prior to the applicability date of this
amended Standard.
(b) For contractors and subcontractors that have established
advance agreements regarding the recognition of the costs of ESOPs that
were established prior to the applicability date of this amended
Standard, the awarding agency and contractor shall comply with the
provisions of such advance agreement(s) for existing ESOPs. All ESOPs
established on or after [effective date] shall be subject to the
requirements of this Standard.
[FR Doc. 03-21074 Filed 8-19-03; 8:45 am]
BILLING CODE 3110-01-P