[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Rules and Regulations]
[Pages 12711-12712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5607]



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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Chapter 99


Cost Accounting Standards Board; Interim Interpretation 95-01, 
Allocation of Contractor Restructuring Costs Under Defense Contracts

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Interpretation.

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SUMMARY: The Cost Accounting Standards Board is issuing an interim 
interpretation designed to address period cost assignment and 
allocability criteria for restructuring costs incurred under certain 
national defense contracts.

DATES: Effective Date: August 15, 1994. Comments on this interim 
interpretation must be in writing and must be received by May 8, 1995.

ADDRESSES: Comments upon this interim interpretation should be 
[[Page 12712]] addressed to Richard C. Loeb, Executive Secretary, Cost 
Accounting Standards Board, Office of Federal Procurement Policy, 725 
17th Street, NW., Room 9001, Washington, DC 20503. ATTN: CASB 
Interpretation 95-01.

FOR FURTHER INFORMATION CONTACT:
Richard C. Loeb, Executive Secretary, Cost Accounting Standards Board 
(telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Background

    Section 818 of the National Defense Authorization Act for Fiscal 
Year 1995, Pub. L. 103-337, restricts the Department of Defense from 
reimbursing contractor restructuring costs associated with a business 
combination unless certain ``net savings'' provisions are met. 
Questions have arisen as to the methods to be used in measuring, 
assigning and allocating such restructuring costs. This interim 
interpretation is designed to address these questions. The Board would 
appreciate receiving comments concerning this interpretation.

B. Authority to Issue an Interpretation

    Authority for issuance of this interpretation is provided by 41 
U.S.C. 422(f)(1) and 48 CFR 9901.302(b).
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.

Cost Accounting Standards Board Interim Interpretation 95-01, 
``Allocation of Contractor Restructuring Costs Under Defense 
Contracts''

    (a) Questions have arisen as to the appropriate methodologies to be 
used for the allocation and period cost assignment of contract costs 
categorized or classified as ``restructuring costs'' under certain 
defense contracts. This Interpretation applies to the provisions of 
several Cost Accounting Standards, including, but not limited to CAS 
9904.403, 9904.404, 9904.406, 9904.409 and 9904.418, as they relate to 
``restructuring costs'' associated with CAS-covered contracts.
    (b) ``Restructuring costs'' are incurred after an entity decides to 
make a significant nonrecurring change in its business operations or 
structure in order to reduce overall cost levels in future periods 
through work force reductions, the elimination of selected activities, 
and/or the combination of ongoing operations, including plant 
relocations. Restructuring activities do not include ongoing routine 
changes an entity makes in its business operations or organizational 
structure. Restructuring costs are comprised both of direct and 
indirect costs associated with contractor restructuring activities 
taken after a business combination is effected or after an internal 
corporate restructuring decision is made. Typical categories of costs 
that have been included as restructuring charges include severance pay, 
early retirement incentive, retraining, employee relocation, lease 
cancellation, asset disposition and write-offs, and relocation and 
rearrangement of plant and equipment. Restructuring costs do not 
include the cost of such activities when they do not relate either to 
business combinations or significant nonrecurring internal corporate 
restructuring decisions. Generally, activities giving rise to 
restructuring charges should normally be completed within one year.
    (c) The costs of betterments or improvements of capital assets that 
result from restructuring activities shall be capitalized and 
depreciated in accordance with the provisions of CAS 9904.404 and 
9904.409.
    (d) When a procuring agency imposes a net savings requirement for 
the payment of restructuring costs, the contractor shall submit data 
specifying (1) restructuring costs by period, (2) restructuring savings 
by period (if applicable), and (3) the methods by which such costs 
shall be allocated.
    (e) Under normal circumstances, most categories of costs that 
qualify as restructuring costs are recognized as current period cost in 
the period in which the cost is incurred. However, for contractor 
restructuring costs defined pursuant to this Interpretation, such costs 
may be deferred, and subsequently amortized, over a period during which 
the benefits are expected to accrue. A proposal to expense 
restructuring costs in the current period is acceptable when the 
Contracting Officer agrees that such treatment will result in a more 
equitable assignment of costs in the circumstances.
    (f) If a contractor incurs restructuring costs but does not have an 
established or disclosed cost accounting practice covering such costs, 
the deferral of such restructuring costs may be treated as the initial 
adoption of a cost accounting practice (see 9903.302-2(a)). If a 
contractor incurs restructuring costs but has an existing established 
or disclosed cost accounting practice that does not provide for 
deferring such costs, any resulting change in cost accounting practice 
to defer such costs may be presumed to be desirable and not detrimental 
to the interests of the Government (see 9903.201-6). Changes in cost 
accounting practices for restructuring costs shall be subject to 
disclosure statement revision requirements (see CAS 9903.202-3), if 
applicable.
    (g) Measurement of cost impact on existing CAS-covered contracts, 
shall be the difference between an estimate to complete before giving 
effect to the restructuring, and, an estimate to complete considering 
restructuring. The estimates to complete shall be based on the 
contractor's compliant cost accounting practices for the affected cost 
accounting periods, from the applicability date of the restructuring 
plan through the end of the period designated as the benefiting period.
    (h) The amortization period for deferred restructuring costs shall 
not exceed five years. Straight line amortization should normally be 
used, unless another method results in a more appropriate matching of 
cost to expected benefits.
    (i) Restructuring costs that are deferred shall not be included in 
the allocation based for cost of money purposes (see CAS 9904.414). 
Deferred charges are not tangible or intangible capital assets and 
therefore are excluded from the base for computation of facilities 
capital cost of money.
    (j) Restructuring costs incurred at a home office level shall be 
treated in accordance with the provisions of CAS 9904.403. 
Restructuring costs incurred at the segment level that benefit more 
than one segment should be allocated to the home office and treated as 
home office expense pursuant to CAS 9904.403. Restructuring costs 
incurred at the segment level that benefit only that segment shall be 
treated in accordance with the provisions of CAS 9904.418. 
Restructuring costs that are not considered to meet the homogeneity 
requirements of CAS 9904.418 shall be grouped in indirect cost pools 
that are distinct from the contractor's current indirect cost pools.
    (k) This Interpretation is applicable to contractor ``restructuring 
costs'' paid or approved on or after August 15, 1994.

[FR Doc. 95-5607 Filed 3-7-95; 8:45 am]
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