SUPPLEMENTARY INFORMATION:

I. Background

In June of 2009, the FASB announced, in its Statement Number 168, that effective for financial statements issued for interim and annual periods ending after September 15, 2009, the FASB ASC would become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The FASB stated that this codification in the ASC supersedes existing references in U.S. GAAP. ( printed page 29306)

On February 16, 2011, DoD, GSA, and NASA issued a proposed rule under FAR Case 2010-005, published in the Federal Register at 76 FR 8989, which replaced the superseded GAAP references for three sections of the FAR, and also stated that the reference to “prior GAAP” in FAR 31.205-6(o)(2)(iii)(A)( 1) would be handled in a separate case. This proposed rule is the separate case, FAR Case 2011-019.

The superseded GAAP provisions in FAR 31.205-6(o)(2)(iii)(A)( 1) reference the description of “transition obligation” in paragraph 110 of FAS 106 and the “delayed recognition methodology” in paragraphs 112 and 113, also of FAS 106.

These references to FAS 106 in the cost principle were added in FAR Case 91-42, published in the Federal Register at 56 FR 41738 on August 22, 1991. At the time, DoD, GSA, and NASA decided not to allow contractors to claim the entire “transition obligation” associated with their initial application of FAS 106 as an allowable cost in accordance with the “immediate recognition” procedure (superseded paragraph 111) in FAS 106. (The transition obligation associated with initial application of FAS 106 is referred to hereafter as the “initial application transition obligation.”) Therefore, DoD, GSA, and NASA disallowed costs for the amortization of the initial application transition obligation in excess of the amount amortized using the delayed recognition method procedure in paragraphs 112 and 113 of FAS 106.

DoD, GSA, and NASA note that the immediate and delayed recognition procedures for the initial application transition obligation in paragraphs 111, 112, and 113, respectively, of superseded FAS 106, are obsolete because FAS 106 no longer exists in the authoritative GAAP (the ASC). When the FASB recodified FAS 106 into the ASC, paragraphs 111 through 114 were not included because public companies recognized the transition obligation in the first fiscal period beginning after December 15, 1994, or shortly thereafter if exempted from the initial effective date. While the existing provision at FAR 31.205-6(o)(2)(iii)(A)( 1) remains in force because the referenced paragraphs can be found in the historical accounting literature, the passage of time raises concerns that these paragraphs may become less readily available. DoD, GSA, and NASA conclude, therefore, that replacement criteria are needed for determining the allowability of the transition obligation, when converting from pay-as-you-go accounting for PRBs to an accrual method of accounting for the purposes of government contract cost accounting.

DoD, GSA, and NASA propose replacing the current reference to the recognition of the transition method in accordance with provisions of GAAP that no longer exist with explicit criteria that generally replicates the former GAAP methodology.

DoD, GSA, and NASA acknowledge that contractors have in the past and may continue to propose a change to their government contract cost accounting practice whereby the “pay-as-you-go” method is replaced by the “accrual” method and this may give rise to a transition obligation that is similar in its nature, but not its amount, to the initial application transition obligation that arose when (now superseded) FAS 106 first became applicable in the early 1990's for financial reporting purposes.

Consequently, DoD, GSA, and NASA are removing the obsolete references to paragraphs 110, 112, and 113 in FAR 31.205-6(o)(2)(iii)(A)( 1). The revision is intended to allow a general continuation of the obsolete GAAP delayed recognition method for contractors that move from a pay-as-you-go method of accounting to an accrual basis of accounting for PRB costs for government contract cost accounting.

II. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

III. Regulatory Flexibility Act

Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) do not expect this proposed rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the rule only removes references to specific paragraphs in an accounting standard that were deleted in the Financial Accounting Standards Board's (FASB's) Accounting Standards Codification (ASC) of Generally Accepted Accounting Principles (GAAP) and replaces these references with explicit criteria that generally replicates the former GAAP methodology. Therefore, an Initial Regulatory Flexibility Analysis has not been performed. DoD, GSA, and NASA invite comments from small business concerns and other interested parties on the expected impact of this rule on small entities.

DoD, GSA, and NASA will also consider comments from small entities concerning the existing regulations in subparts affected by this proposed rule in accordance with 5 U.S.C. 610. Interested parties must submit such comments separately and should cite 5 U.S.C. 610 (FAR Case 2011-019) in correspondence.

IV. Paperwork Reduction Act

The proposed rule does not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as set forth below: