B-205401 L/M, JAN 18, 1982, OFFICE OF GENERAL COUNSEL

B-205401 L/M: Jan 18, 1982

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SHOULD PROVIDE THAT ACTUAL INTEREST COST IN LIEU OF THE CALCULATED IMPUTED COST OF MONEY FOR CAPITAL ASSETS UNDER CONSTRUCTION IS ALLOWABLE. 2. FABRICATION OR DEVELOPMENT IS UNALLOWABLE. THIS IS CONTRARY TO SUBSECTION 50(A)(3) OF CAS 417. THIS SUBSECTION OF CAS 417 WAS INCLUDED TO PROVIDE A CRITERION WHICH COULD BE USED TO LESSEN ADMINISTRATIVE BURDENS TO CONTRACTORS. THE STANDARD WAS INTENDED TO PERMIT USE OF ACTUAL INTEREST CAPITALIZED IN ACCORDANCE WITH FINANCIAL ACCOUNTING STANDARD 34. THE EFFECT OF THE PROPOSED REVISION WILL BE AN INCREASED BURDEN OF ADMINISTERING CAS 417 BECAUSE IN EVERY INSTANCE TWO SEPARATE DEPRECIATION SCHEDULES WILL HAVE TO BE MAINTAINED FOR THESE ASSETS - ONE FOR FINANCIAL ACCOUNTING AND THE OTHER FOR GOVERNMENT CONTRACT COSTING PURPOSES.

B-205401 L/M, JAN 18, 1982, OFFICE OF GENERAL COUNSEL

DIGEST: 1. GAO BELIEVES THAT PROPOSED AMENDMENT TO DAR SEC. 15-205.50(B)(3) IMPLEMENTING COST ACCOUNTING STANDARD 417, COST OF MONEY AS AN ELEMENT OF THE COST OF CAPITAL ASSETS UNDER CONSTRUCTION, SHOULD PROVIDE THAT ACTUAL INTEREST COST IN LIEU OF THE CALCULATED IMPUTED COST OF MONEY FOR CAPITAL ASSETS UNDER CONSTRUCTION IS ALLOWABLE. 2. GAO BELIEVES THE PROVISIONS OF REVISION TO DAR SEC. 15-205.5(B)(2) DELAYING APPLICATION OF CAS 417 TO CONTRACTS OTHER THAN FULL CAS COVERED CONTRACTS SHOULD BE DELETED.

MR. JAMES T. BRANNAN, DEFENSE ACQUISITION REGULATORY SYSTEM:

BY LETTER DATED OCTOBER 30, 1981, YOU REQUESTED OUR COMMENTS ON A PROPOSED AMENDMENT TO DEFENSE ACQUISITION REGULATION SEC. 15-205.50 INCORPORATING COST ACCOUNTING STANDARD (CAS) 417, COST OF MONEY AS AN ELEMENT OF THE COST OF CAPITAL ASSETS UNDER CONSTRUCTION.

THE PROPOSED SECTION 15-205.50(B)(3) PROVIDES THAT ACTUAL INTEREST COST IN LIEU OF THE CALCULATED IMPUTED COST OF MONEY FOR CAPITAL ASSETS UNDER CONSTRUCTION, FABRICATION OR DEVELOPMENT IS UNALLOWABLE. AS RECOGNIZED IN YOUR LETTER, THIS IS CONTRARY TO SUBSECTION 50(A)(3) OF CAS 417. THIS SUBSECTION OF CAS 417 WAS INCLUDED TO PROVIDE A CRITERION WHICH COULD BE USED TO LESSEN ADMINISTRATIVE BURDENS TO CONTRACTORS. THE STANDARD WAS INTENDED TO PERMIT USE OF ACTUAL INTEREST CAPITALIZED IN ACCORDANCE WITH FINANCIAL ACCOUNTING STANDARD 34, PROVIDED THE RESULTING AMOUNT DOES NOT DIFFER MATERIALLY FROM THAT CALCULATED AS IMPUTED COST. THE EFFECT OF THE PROPOSED REVISION WILL BE AN INCREASED BURDEN OF ADMINISTERING CAS 417 BECAUSE IN EVERY INSTANCE TWO SEPARATE DEPRECIATION SCHEDULES WILL HAVE TO BE MAINTAINED FOR THESE ASSETS - ONE FOR FINANCIAL ACCOUNTING AND THE OTHER FOR GOVERNMENT CONTRACT COSTING PURPOSES. WE BELIEVE ACTUAL INTEREST COST SHOULD BE ALLOWABLE.

THE PROPOSED SECTION 15-205.50(B)(2) STATES THAT THE COST OF MONEY CAPITALIZED PURSUANT TO THIS PROPOSAL SHALL BE ALLOWABLE ON FULL CAS COVERED CONTRACTS AT THE TIME CAS 417 BECOMES APPLICABLE. SECTION 15 205.50(B)(2) FURTHER PROVIDES, HOWEVER, THAT FOR OTHER CONTRACTS, CAS 417 SHALL BECOME APPLICABLE TO AWARDS MADE ON OR AFTER THE DATE THIS AMENDMENT BECOMES EFFECTIVE.

WE SUGGEST THAT THE PROVISIONS DELAYING APPLICATION OF CAS 417 TO CONTRACTS OTHER THAN FULL CAS COVERED CONTRACTS BE DELETED. IF THE PROVISIONS OF CAS 417 REPRESENT SOUND COST ACCOUNTING, AND IF THESE PROVISIONS HELP ENCOURAGE CONTRACTORS TO MAKE CAPITAL ACQUISITIONS, WE FAIL TO UNDERSTAND THE RELUCTANCE TO ADOPT THE PROVISIONS OF CAS 417 ACROSS THE BOARD.

WE HAVE NO FURTHER COMMENTS TO OFFER.

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