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Revenue Recognition Impact on Government Contracting

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Industry: Government Contracting
Federal government procurement of goods and services from government contractors is highly regulated, as are certain other industries such as commercial and thrift banking, securities brokerage, and insurance brokerage. A government contractor that ventures forth without an understanding of the FARs or of the governing body, the Cost Accounting Standards Board (CASB) with its Cost Accounting Standards (CASs), is following a formula for failure.

The concept underlying the FARs is fairly basic: develop a system of acquisition regulations that applies across the board to all executive agencies of the federal government. The FARs consist of 53 specific parts, as outlined in Supplement IND-II E1.

It is incumbent upon any government contractor or its advisor to recognize that the specific executive government agency it is dealing with may have issued a “supplemental” FAR. For example, the all-important DOD FAR Supplement aids in understanding the nature of restructuring costs. See www.fedbizopps.gov or www.eps.gov and www.dod.gov. Most agencies, such as NASA, DOD, DOE, USAID, and GSA, have their own website that can be found by using the agency acronym in the form www.acronym.gov.

The all-powerful Cost Accounting Standards Board (CASB) was resurrected in 1988. It re-codified previous Cost Accounting Standards (CASs) and acts as an independent agency within the legislative branch of the federal government. It sets the “trigger” threshold for a contract at $7.5 million: any government contract with a value below this trigger amount is exempt from CAS application. Also exempt are sealed bids, small business awards, regulated price awards, commercial items, firm-fixed-price contracts, and certain foreign contracts. The 19 current CASs are listed in Supplement IND-II E2.In addition to disclosure requirements to comply with the CASs, the disclosure requirement of $50 million or more in CAS-covered awards must describe the entity’s accounting practice against which costs are measured under the FAR. Even though many government contractors may be exempt from CAS application, it may be advisable to review them to understand the intent at providing guidance on federal procurement cost accounting.

Revenue Recognition
Since the FARs do not impose any method of GAAP on government contractors, it would make sense to apply the general rules of construction contractor accounting under AICPA Accounting Research Bulletin (ARB) 45, Long-Term Construction-Type Contracts, and AICPA Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

It is even with greater emphasis that ARB 45 identifies costs-plus-fixed-fee contracts as a specie of government contract and argues for the proportional performance approach to revenue recognition. It appears, therefore, that the conclusion is sound: government contractors may apply the provisions for construction contracts — the percentage of completion method (PC) — pursuant to SOP 81-1. Government contractors should review the discussion of SOP 81-1, in Chapter IND-II C, Construction Contracting, and Procedure IND-II C1, and integrate these into their understanding of revenue recognition. See also Resource FIN 1 for the AICPA and other useful websites, and the AICPA Audit and Accounting Guide, Federal Government Contractors.

Excerpted by permission. Copyright 2007, Specialty Technical Publishers.