[Federal Register Volume 70, Number 140 (Friday, July 22, 2005)]
[Proposed Rules]
[Pages 42293-42298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13951]
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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: 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) 412, ``Cost accounting standard for
composition and measurement of pension cost,'' and CAS 415,
``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 specify that accounting for the costs of
ESOPs will be covered by the provisions of CAS 415, ``Accounting for
the cost of deferred compensation'' and not by any other Standard.
DATES: Comments must be in writing and must be received by September
20, 2005.
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
[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 by fax to (202)
395-5105. Please cite CASB Docket No. 00-03A in your comment.
For further information contact: David Capitano, Cost Accounting
Standards Board (telephone: 703-847-7486).
[[Page 42294]]
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The CASB'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 NPRM is issued by the Board in accordance with the
requirements of 41 U.S.C. 422(g)(1)(D), and is step three of the four-
step process.
B. Background--Prior Promulgations
The FAR has dealt with issues associated with ESOPs since the late
1970s. At first, the issues that arose were regarded as allowability
matters, and the views of the CASB were sought primarily on an advisory
basis. However, after issuance of the decision in Ralph Parsons Co.
(ASBCA Nos. 37391, 37946, and 37947, dated December 20, 1990), 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 in Ball
Corporation (ASBCA No. 49118, dated April 3, 2000).
The CASB first considered issuing an interpretation of its existing
standards, but then decided that additional research was needed. As a
result, on September 15, 2000, the CAS Board issued a Staff Discussion
Paper on this topic (65 FR 56008, dated September 15, 2000). The CASB
received sixteen sets of public comments in response to the Staff
Discussion Paper. The CASB reviewed and discussed these public
comments. Upon completion of this review, an ANPRM was drafted and
published in the Federal Register on August 20, 2003 (68 FR 50111).
C. Public Comments
The Board received ten sets of public comments in response to the
ANPRM. The Board would like to thank all the organizations and
individuals who provided comments and information in response to the
ANPRM. A summary of the comments and the CAS Board responses are as
follows:
1. Exemption of Small Businesses
Comment: One commenter requests clarification of the statement in
the Supplementary Information section of the Federal Register Notice
that states ``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.'' This commenter notes that FAR 31.205-6(j)(8) includes a
section entitled ``Employee Stock Ownership Plans.'' The commenter asks
that the CAS Board clarify the exemption status of Small Businesses as
mentioned in the proposed rule because it appears to conflict with the
FAR on selected costs (ESOPs) being subject to CAS.
CAS Board Response: There is no conflict between the Federal
Register Notice and the FAR. The statement in the Federal Register
Notice refers to the fact that small businesses are exempt from the
rules, regulations, and standards promulgated by the CASB, not the
rules and regulations promulgated under the FAR. Since small businesses
are exempt from the requirements of the CAS, the requirements of FAR
Part 31 are used to determine how costs are measured, assigned, and
allocated for applicable contracts with small businesses (i.e.,
contracts that are subject to FAR Part 31). The application of FAR Part
31 to contracts that are not covered by the CAS, including the decision
to measure, assign, and/or allocate costs using one or more of the CAS
standards, is under the purview of the FAR Council. This NPRM does not
exempt any such contracts from the requirements of FAR Part 31.
2. Application to ``C'' versus ``S'' Corporations
Comment: One commenter strongly supports the statement at CAS
9904.415-50(f)(1) that a contractor's ESOP contribution may include
interest and dividends. This commenter states that it reads this
provision to apply to ``C'' corporations and ``S'' corporations. The
commenter recommends that the preamble to any further rule state that
application.
CAS Board Response: The Board recognizes that the tax treatment of
ESOP contributions may differ between ``C'' corporations and ``S''
corporations. However, the tax treatment of ESOP contributions does not
impact the application of the proposed rule, i.e., the proposed rule
does not differentiate, nor was it intended to differentiate, between
``C'' and ``S'' corporations in the measurement of ESOP costs in
accordance with CAS 9904.415-50(f)(1).
3. Assignment of Costs Based on Award of Shares
Comment: Four commenters expressed concern regarding the proposed
language at CAS 9904.415-50(f)(2), which states ``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.''
Three of the commenters assert that many companies do not make
final decisions about the amount of their contribution to ESOP's until
after the end of the fiscal year. Thus, the precise number of shares
awarded to individual employees cannot be determined until after the
total contribution for an accounting period is known. One of these
commenters further asserts that, for non-publicly traded companies, the
amount of the shares to be awarded is also not known until the annual
stock evaluation is performed. The three commenters suggest that the
language be clarified by adopting language similar to that in CAS
9904.412-50(d)(4), which recognizes funding of pension costs ``within a
cost accounting period if it is accomplished by the corporate tax
filing date for such period including any permissible extensions
thereto.'' One of these commenters suggests the following specific
language:
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 for the accounting
period using funds contributed to the plan for that period by the
tax filing date for that period, including any permissible
extensions thereof.
Another commenter recommends that the term ``allocated'' be
substituted for the term ``award'' at CAS 9904.415-50(f)(2). This
commenter states that under qualified plan rules for defined
contribution plans, all contributions made to an ESOP must be allocated
to the accounts of plan participants. The commenter asserts that even
if a contractor makes an award of stock that does not use up all of a
contribution, the remainder is still allocated to employee accounts as
cash. The commenter further states that, since the employer's
[[Page 42295]]
contribution is irrevocable, the entire amount of the contribution
should be assigned to the cost accounting period in which the
contribution is made.
CAS Board Response: While current tax laws may require that all
contributions made to an ESOP must be allocated to the accounts of plan
participants in the period of the contribution, the ANPRM definition of
an ESOP is broader than the tax law definition. In addition, tax laws
often change; thus, it is important that the Board consider the various
possibilities in promulgating this revision.
The Board believes the proposed rule should assure that amounts are
not assigned to an accounting period unless the stock has been both
awarded to employees and allocated to individual employee accounts by
the tax filing date (or any extension thereof) for that accounting
period. However, the Board also believes the rule should recognize that
an ESOP contribution for work performed in a particular accounting
period may not be made until shortly after the end of the accounting
period, similar to the circumstances that sometimes arise for defined
contribution pension plans. The language at CAS 9904.415-50(f)(2) has
therefore been revised accordingly.
4. Transition Method
Comment: One commenter states that the transition method is
unnecessary and inequitable. This commenter asserts that ``the proposed
transition method is inconsistent with past CASB decisions,'' and would
be the first time that contractors would be required to follow a former
cost accounting practice (even though it may be non-compliant with
existing Standards) until a cost no longer exists. This commenter
states that perhaps an advance agreement should not be disturbed, but
application of the transition method to any other ``arrangements'' is
vague, open-ended, unnecessary, and inequitable. A second commenter
asserts that the transition method makes ``no good sense and would
result in tremendous inconsistencies in the treatment of ESOPs within
the government contracting community.''
A third commenter believes the proposed transition method would
place contractors without advance agreements in a difficult position.
This commenter states that they agree completely that where the
Government and contractor have reached an advance agreement, those
agreements should continue to control. However, the commenter is
concerned that many small companies will continue to have their ESOP
costs questioned every year if existing ESOPs are not covered by the
new language. A fourth commenter also believes the proposed transition
method unnecessarily complicates ESOP accounting and does not achieve
the uniformity and consistency in cost accounting that is the CASB's
objective.
The fourth and fifth commenters assert that the transition method
would create three classes of ESOPs, (1) those created after the
effective date of the provision (to which the new rules would apply);
(2) pre-existing ESOPs with advance agreements, in which case the
parties would have to comply with the advance agreements; and (3) pre-
existing ESOPs without advance agreements, which would remain subject
to the Cost Accounting Standard(s) that were applicable to such plans
prior to the applicability date of the new rule.
The fourth commenter believes there is significant uncertainty on
whether ESOPs are governed by CAS 412 or 415, which should not be
perpetuated. This commenter believes ``more flexibility is required
where ESOP costs are governed by advance agreements, and that the
parties should be free to adopt the new ESOP accounting provisions.''
The commenter therefore proposes the following transition provision in
lieu of the proposed language (this language was endorsed by a second
commenter):
``(a) For contractors and subcontracts that were subject to
Standard 9904.415 in effect prior to the effective date of the final
rule, the requirements of this Standard, as amended, shall apply to
the costs of pre-existing ESOPs and the costs of ESOPs that are
established after the effective date of this Standard.
(b) For pre-existing ESOPs, the requirements of this Standard
shall apply as of the beginning of the contractor's next full fiscal
year following the Standard's effective date. The parties may
mutually agree to apply the requirements of this Standard earlier if
they so desire.
(c) Where ESOP costs are subject to the terms of an advance
agreement, the parties shall comply with the provisions of such
advance agreement, which may be modified by mutual agreement to
incorporate the requirements of this Standard.''
A final commenter strongly endorses the proposed transition
provision. This commenter states that where a contractor and the
Government have established advance agreements regarding the
recognition of ESOP costs, contractors and the Government should comply
with the provision of such advance agreement(s) for existing ESOPs.
This commenter asserts that ``to do otherwise would disrupt a long-term
accounting construct (both for the measurement and assignment of cost)
in mid-stream, thereby causing harm to one of the contracting parties
due to the uneven nature of contractor contributions between the early
and later years of leveraged ESOPs.''
CAS Board Response: The Board believes it is imperative that the
subject revision not infringe on existing advance agreements between
the Government and the contractor. However, the Board also believes the
proposed rule should limit the transition to only those instances in
which there is an existing advance agreement between the contractor and
the Government. The Board believes this would be consistent with the
historical application of revised or new standards. The Board therefore
has deleted CAS 9904.415-64, and added a new paragraph (d) to CAS
9904.415-63 that reads as follows:
(d) For contractors and subcontractors that have established
advance agreements prior to the effective date of this amended
Standard regarding the recognition of the costs of existing ESOPs,
the awarding agency and contractor shall comply with the provisions
of such advance agreement(s) for these existing ESOPs. These advance
agreements may be modified, by mutual agreement, to incorporate the
requirements of this revised standard.
5. Definition of an ESOP
Comment: One commenter is concerned that the proposed definition of
an ESOP is overly broad and ``could sweep within its reach other types
of defined contribution plans that should not be subject to the ESOP
accounting rules.'' This commenter states that ``the proposed
definition is broader than the definitions used by the Internal Revenue
Service, ERISA, or GAAP.'' The commenter asserts that the definition
could include ``thrift plans'' or other 401(k) defined contribution
plans such as the plan at issue in a recent case decided by the U.S.
Court of Federal Claims, Newport News Shipbuilding and Drydock Co. v.
Unites States (2003 U.S. Claims LEXIS 255, dated September 10, 2003).
This commenter recommends that the CASB align the definition with
established definitions of the IRS, ERISA, or GAAP. Alternatively, the
commenter recommends that the CASB explain why a broader definition is
necessary or desirable.
A second commenter believes the definition of an ESOP, and in
particular the term ``designed to invest primarily in the stock of the
contractor's corporation'' is too vague, could cause confusion, and
could ``result in a contractor's deferred compensation plan changing
between CAS 412 and CAS 415 in any given costing period, depending on
the percentage of
[[Page 42296]]
investment in contractor stock.'' This commenter recommends that
additional analysis concerning what additional requirements, such as
those of the Internal Revenue Service Code, should be considered. In
particular, the commenter recommends that the definition of an ESOP be
revised to include specific requirements similar to the Internal
Revenue Service Code 4975(e)(7) definition and the additional guidance
provided in the Internal Revenue Service Manual. The commenter states
that, although they are not proposing the Internal Revenue Service
definition be used, the CASB should ``look closer at the definition as
proposed to ensure it includes the appropriate requirements.'' This
commenter also recommends that the definition include the requirement
that the plan ``invests most or all of the assets in the stock of the
contractor's corporation.''
CAS Board Response: The definition in the ANPRM is very similar,
but not identical, to the definition contained in AICPA Statement of
Position (SOP) 93-6. The definition in SOP 93-6, which is the current
GAAP for ESOP accounting, reads as follows:
ESOP means an employee benefit plan that is described by the
Employee Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Code (IRC) of 1986 as a stock bonus plan, or
combination stock bonus and money purchase pension plan, designed to
invest primarily in employer stock.
There is a key difference between the GAAP definition and the
definition in the ANPRM. The GAAP definition refers to plans described
under ERISA and the IRC. However, the ERISA and IRC include only
definitions of plans for purposes of tax deductibility. The Board is
concerned that two plans with identical contribution requirements would
have different cost accounting treatment solely because of differences
in tax deductibility. To exclude one or the other of these two plans
from the revised coverage would likely perpetuate the uncertain
treatment of the excluded plan under the existing rules. Therefore, the
Board does not believe that the definition of an ESOP, for purposes of
applying CAS 415, should be limited to the GAAP definition. However,
the Board recognizes that the definition in the ANPRM should be revised
to clearly include all plans that meet the GAAP definition, as well as
any other plans that are designed to invest primarily in the stock of
the contractor. Therefore, the Board has revised the definition at CAS
9904.415-30(a)(3) to read as follows:
Employee Stock Ownership Plan (ESOP) means (i) an employee benefit
plan that is described by the Employee Retirement Income Security Act
of 1974 (ERISA) and the Internal Revenue Code (IRC) of 1986 as a stock
bonus plan, or combination stock bonus and money purchase pension plan,
designed to invest primarily in employer stock, and (ii) any other
deferred compensation plan designed to invest primarily in the stock of
the contractor's corporation including, but not limited to, plans
covered by ERISA.
6. Assignment Based on ``Award''
Comment: One commenter questions the necessity to tie the
assignment of cost to the period in which the ESOP trust (ESOT) makes
an ``award'' to an individual employee. This commenter asserts that the
term ``award'' may have little relevance to the operation of ESOPs. The
commenter states that ``IRC rules require that the entire contribution
to an ESOP, to the extent not used to service debt, be allocated to
employee accounts in accordance with a definite formula.'' The
commenter further states that as a result of these requirements, there
would be no excess to assign to future years.
CAS Board Response: The Board believes it is important to tie the
assignment of the cost for a period to the award of the shares to
employees and the allocation of the shares to individual employee
accounts. This provides consistency in the assignment of costs to the
period and the subsequent allocation of those costs to final cost
objectives.
7. ESOP Contributions
Comment: One commenter states that the ANPRM will permit
contractors that sponsor leveraged ESOPs to treat the entirety of the
ESOP contribution as a form of employee compensation under CAS
9904.415, thereby masking the true nature of the underlying
transaction. This commenter states that the ANPRM will permit
contractors to treat the entire contribution paid to the ESOT,
including principal payments and interest expenses incurred to finance
a leveraged ESOP, as deferred compensation. The commenter believes that
interest expense incurred to finance leveraged ESOPs should be
reflected as such under Government cost accounting rules. The commenter
believes that if the CASB adopts a rule requiring the separate
accounting for interest expense for leveraged ESOPs, current Government
cost allowability rules (FAR 31.205-20) would probably require these
costs to be disallowed. The commenter also believes that whether
Congress or the Executive Branch agencies choose to allow or disallow
interest costs associated with leveraged ESOP financing should be
discussed and debated as a public policy matter separate and apart from
the CASB's role in defining and measuring contract costs. This
commenter asserts that the approach in the ANPRM seems to pretend that
there is no interest being paid to contractors. The commenter
recommends that, at a minimum, the CASB's proposal be amended to
require segregation of the components of periodic ESOP expense, so that
repayments of loan principal can be distinguished from interest
expense. The commenter believes that the CASB's only concern should be
one of financial transparency and full disclosure, and not whether
interest expense on leveraged ESOPs should be an allowable cost under
cost-based Government contracts.
CAS Board Response: The ANPRM and the NPRM are intended to
recognize the resources used by the contractor to fund the current
year's award to employees, whether those shares are purchased by the
ESOP in the year of award or made available for allocation by repayment
of ESOP debt. In proposing this rule, the Board believes that it is
providing for the measurement of ESOP costs in a manner that reflects
the CAS objective of consistency in cost accounting practices. With
this objective in mind, the Board believes the proposed rule best
measures ESOP contributions for contract costing purposes.
The proposal does not affect the allowability of interest or other
cost components of an ESOP and is not intended to ``mask'' the true
nature of ESOP financing. Whether interest or other cost components
associated with financing a leveraged ESOP are allowable costs is
determined under FAR Part 31. The proposed rule does not, in any
manner, preclude the FAR Council from drafting rules that explicitly
allow or disallow interest or any other cost component associated with
an ESOP. Should the FAR Council decide to explicitly disallow interest
or any other cost component associated with an ESOP, CAS 405 already
requires that such costs be segregated in the contractor's accounting
records. In addition, CAS 405 also requires that such costs be
identified and excluded from any billing, claim, or proposal applicable
to a Government contract. Therefore, the Board does not believe it is
necessary to add a separate requirement in CAS 415.
[[Page 42297]]
8. Editorial Changes
Comment: One commenter suggested several editorial changes for
clarity, including minor revisions to CAS 9904.412-20(b), 9904.415-
30(a)(4), 9904.415-50(f)(1), and 9904.415-60.
CAS Board Response: The Board agrees with the recommended editorial
changes and has incorporated them in the NPRM.
D. 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.
E. Executive Order 12866 and the Regulatory Flexibility Act
The transition provision incorporated into this proposal ensures
that arrangements for determining costs for existing ESOPs are not
changed. Thus, the economic impact of these amendments, if any, on
contractors is expected to be minor. As a result, this rule is not
``significant'' under E.O. 12866. 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.
F. Additional Public Comments
Interested persons are invited to participate by submitting data,
views, or arguments with respect to this NPRM. All comments must be in
writing and submitted in accordance with the instructions indicated in
the ADDRESSES section.
List of Subjects in 48 CFR Part 9904
Accounting, Government procurement.
David H. Safavian,
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: Pub. L. 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 Plans (ESOPs) that meet the definition of a pension plan.
Such plans are considered a form of deferred compensation and are
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 amended by revising paragraph (a)
introductory text, adding paragraphs (a) (2) and (3), and revising
paragraph (b) to read as follows:
9904.415-30 Definitions.
(a) The following are definitions of terms which are prominent in
this 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 section requires otherwise.
(1) * * *
(2) Employee Stock Ownership Plan (ESOP) means:
(i) An employee benefit plan that is described by the Employee
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue
Code (IRC) of 1986 as a stock bonus plan, or combination stock bonus
and money purchase pension plan, designed to invest primarily in
employer stock, and
(ii) Any other deferred compensation plan designed to invest
primarily in the stock of the contractor's corporation including, but
not limited to, plans covered by ERISA.
(3) Fair value means the amount that a seller would reasonably
expect to receive in a current arm's length transaction between a
willing buyer and a willing seller, 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 amended by revising paragraph (d)
introductory text and (e) introductory text and adding paragraph (f) to
read as follows:
9904.415-50 Techniques for application.
* * * * *
(d) The following provisions are applicable for plans, other than
ESOPs, that meet the conditions of 9904.415-50(a) and the compensation
is to be paid in money.
* * * * *
(e) The following provisions are applicable for plans, other than
ESOPs, that meet the conditions of 9904.415-
[[Page 42298]]
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:
* * * * *
(f)(1) For an ESOP, the contractor's cost shall be measured by the
contractor's contribution, including interest and dividends if
applicable, to the ESOP. The measurement of contributions made in the
form of 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 a
cost accounting period only to the extent that the stock, cash, or any
combination thereof resulting from the contribution is awarded to
employees and allocated to individual employee accounts by the tax
filing date for that period, including any permissible extensions
thereof. All stock or cash that is allocated to the individual employee
accounts between the end of the cost accounting period and the tax
filing date for that period must be assigned to the cost accounting
period in which the employee is awarded the stock or cash. Any portion
of the stock or cash resulting from a contractor's contribution that is
not awarded to employees or allocated to individual employee accounts
by the tax filing date for that period, including any permissible
extensions thereof, shall be assigned to a future cost accounting
period or periods when the remaining portion of stock or cash has been
awarded to employees and allocated to individual employee accounts.
This stock shall retain the value established when it was originally
purchased by or otherwise made available to the ESOP.
7. Section 9904.415-60 is amended by adding paragraphs (f), (g),
(h) and (i) to read as follows:
9904.415-60 Illustrations.
* * * * *
(f) Contractor F has a non-leveraged ESOP. Under the contractor's
plan, employees are awarded 5,000 shares of stock for the year ended
December 31, 2007. On February 5, 2008, when the shares have a market
value of $10.00 each, the 5,000 shares are contributed to the ESOP and
allocated to the individual employee accounts. The total measured and
assigned deferred compensation cost for FY 2007 is $50,000 (5,000 x $10
= $50,000). The market value of the contractor's stock when awarded to
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 are awarded 10,000 shares of stock for the year ended
December 31, 2007. On February 15, 2008, 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 2007, resulting in the bank
releasing 9,000 shares of stock, and 1,000 shares of stock valued at
$60,000 to the ESOT, representing the balance of the 10,000 shares. On
February 22, 2008, the ESOP allocates 10,000 shares to the individual
employee accounts. The total measured and assigned deferred
compensation cost for FY 2007 is $840,000--the contractor's total
contribution required to satisfy the deferred compensation obligation
totaling 10,000 shares.
(h)(1) Contractor H has a leveraged ESOP. Under the contractor's
plan, employees are awarded 8,000 shares of stock for the year ended
December 31, 2007. On January 31, 2008, the contractor contributes
$500,000 in cash to the ESOT to satisfy the principal and interest
payment on the ESOT loan for 2007, resulting in the bank releasing
10,000 shares of stock. On February 10, 2008, 8,000 shares are
allocated to individual employee accounts, satisfying the deferred
compensation obligation for 2007. The total measured deferred
compensation cost for 2007 is $500,000--the contractor's contribution
for the cost accounting period. However, the total assignable deferred
compensation cost for 2007 is $400,000--the portion of the contribution
that satisfies the 2007 deferred compensation obligation of 8,000
shares [(8,000 shares / 10,000 shares) x $500,000 = $400,000]. The
remaining $100,000 of the contribution made in 2007 is assignable to
future periods in which the remaining 2,000 shares of stock are awarded
to employees and allocated to individual employee accounts.
(2) At December 31, 2008, the employees are awarded 12,000 shares
of stock. On January 31, 2009, Contractor H contributes $500,000 in
cash to the ESOT to satisfy the principal and interest payment on the
ESOT loan for 2008, resulting in the bank releasing 10,000 shares of
stock. On February 10, 2009, 12,000 shares are allocated to individual
employee accounts satisfying the deferred compensation obligation for
2008. The total deferred compensation assignable to 2008 is $600,000,
the cost of the 12,000 shares awarded to employees and allocated to
individual employee accounts for 2008. 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 2007 contribution
carryover (2,000 shares at $100,000).
(i) Contractor I has a leveraged ESOP. Under the contractor's plan,
employees are awarded 10,000 shares for FY 2007, which ended December
31, 2007. On February 10, 2008, Contractor I contributes $700,000 in
cash to satisfy the principal and interest payment for the ESOP loan
for FY 2007. This contribution results in the bank releasing 10,000
shares of stock. On March 1, 2008, the ESOP allocates the 10,000 shares
to individual employee accounts satisfying the 2007 obligation. The
10,000 shares of stock must be assigned to FY 2007 (these shares cannot
be assigned to 2008).
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 of final rule] until this Standard, effective
[effective date of final rule], becomes applicable following receipt of
a contract or subcontract to which this revised Standard applies.
(d) For contractors and subcontractors that have established
advance agreements prior to [the effective date of the final rule]
regarding the recognition of the costs of existing ESOPs, the awarding
agency and contractor shall comply with the provisions of such advance
agreement(s) for these existing ESOPs. These advance agreements may be
modified, by mutual agreement, to incorporate the requirements
effective on [the effective date of the final rule].
[FR Doc. 05-13951 Filed 7-21-05; 8:45 am]
BILLING CODE 3110-01-P