The ASBCA Issues Two CAS Decisions
By: John Ford, Senior Consultant, Government Contractor Services Group
Recently, the Armed Services Board of Contract Appeals (“ASBCA” or “the Board”) issued two decisions relating to the Cost Accounting Standards (“CAS”) that should be of interest to contractors.
In the first decision, Raytheon Company, Space and Airborne Systems, ASBCA No. 58608 (August 19, 2016), the Board decided that the contracting officer had abused her discretion by failing to consider all the factors listed in Federal Acquisition Regulation (“FAR”) 9903.305 in determining whether increased costs to the government resulting from an accounting practice change were material. As a large contractor doing billions of dollars of business with the government, Raytheon holds several contracts that are subject to full CAS coverage. As a consequence, Raytheon is required to submit and have approved a Disclosure Statement. Further, if Raytheon wishes to make a voluntary accounting practice change, it must seek approval from the responsible Administrative Contracting Officer (“ACO”) to do so. However, under the terms of FAR 52.230-2, the ACO cannot agree to a change that will result in increased costs to the government. The Board noted that 52.230-2 does not contain a materiality provision. The Board observed that this is consistent with the language of the CAS statute, 41 U.S.C. §1502, which requires the CAS Board to issue regulations that require contractors to “agree to a contract price adjustment, with interest, for any increased costs paid to the contractor by the Federal Government because of a change in the contractor’s cost accounting practices.” Following this direction, the CAS Board issued FAR 9903-201-4(a)(2), which contains a contract clause upon which FAR 52.230-2 is based. This clause also contains a provision stating that the government cannot agree to an accounting practice change that results in increased costs to the government. It should be noted that similar to FAR 52.230-2, neither the CAS statute nor model contract clause contains a materiality provision.
However, FAR 30.602 states that if a contractor proposes to make a unilateral accounting practice change, the contracting officer will follow certain procedures in FAR Part 30 if the change has a material impact on what the government will pay under CAS-covered contracts. In determining whether the impact is material, contracting officers are to follow FAR 9903.305, which lists several factors to consider in determining materiality, one of which is the absolute dollar amount involved.
In Raytheon, Raytheon made a unilateral accounting practice change and informed the government of the change and amended its Disclosure Statement. However, Raytheon did not provide a statement concerning the magnitude of the change until over two years later. Even more time elapsed until the government could evaluate the cost impact the change had on government contracts. Ultimately, the government determined that Raytheon had been overpaid by a material amount on CAS covered contracts as a result of the change and demanded a refund of the overpayments.
Raytheon contended that the cost increase to the government was immaterial, but the ACO determined the increase to be material because of the dollar amount of the overpayment. The Board determined that the ACO abused her discretion in determining the increase was material because she did not consider all the factors listed in 9903.305; at least two of which appeared applicable in this case in addition to the dollar magnitude of the cost impact. As a consequence, the Board held that the government could not demand a refund from Raytheon. On a side note, the Board observed that the dollar impact per contract was only approximately $34 a year.
The significance of the Raytheon decision is not its final outcome, but the Board’s analysis of the interplay between what it called the “four headed monster” of the CAS statute, the CAS Board rules, FAR contract clauses and FAR Part 30. In doing so, the Board pointed out the consistency between the first three not containing a materiality requirement when evaluating whether a unilateral accounting practice change is permissible. On the other hand, FAR 30.602 does contain a materiality provision. However, because the parties did not argue the validity of 30.602, the Board did not opine on that issue. Nevertheless, it seems clear that the Board is inviting such an argument in future cases. It is unlikely that a contractor would argue against 30.602, but it is quite conceivable that the government would so that it could only consider whether a unilateral accounting practice change results in increased costs to the government, and if it does, refuse to permit such a change.
The other decision of note is Excelis, Inc., ASBCA No. 60131 (August 29, 2016). In Excelis, the dispute centered on whether the lease of a building should be treated as a capital lease or an operating lease. Excelis argued that the lease was an operating lease, but the government determined that the lease was a capital lease. As a consequence, the government asserted that Excelis was in non-compliance with CAS 404, Capitalization of Tangible Assets. In resolving this matter, the Board stated that it interprets contract terms, including incorporated CAS, in accordance with their plain terms. Here, CAS 404 deals with tangible assets. Thus, the fundamental question to be resolved was whether a tangible asset was involved in the lease transaction. In this regard, the Board held that the asset here was the lease, which is an intangible asset, not the building. Therefore, because the asset in question was an intangible asset, CAS 404 did not apply. Consequently, the government could not recover any amounts from Excelis for CAS non-compliance in this circumstance.
It should be noted that FAR 31.205-11 was also at issue in Excelis. Significantly, 31.205-11 is based in substantial part on CAS 404, and even refers to it. However, because the present decision only dealt with a procedural issue, the Board did not rule on whether the government was entitled to any recovery under that cost principle. Thus, unless the case is settled by the parties, we will have to wait to see how that issue is resolved.
Finally, as an aside, it should be noted that in February of this year, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-02 updating guidance on reporting lease transactions on the balance sheets of lessees. Under the ASU, lessees will be required to recognize the assets and liabilities arising from operating leases on the company balance sheet. However, no change was made to the definition of what constitutes capital or operating leases. This new guidance takes effect in 2019, and is to be fully implemented by 2020.