ASC

ASC 912-20

Contract Costs

912 Contractors—Federal Government

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In brief

IntermediateIndustry-specificRecognitionPresentationDisclosure

ASC 912-20 governs how contractors with the federal government account for contract costs, including the requirement to follow Federal Acquisition Regulation cost principles when costs are analyzed in the procurement process. It addresses allocation of indirect costs, recording of subcontractor/vendor claims, accounting for terminations (convenience versus default), and restricts the use of program accounting. Losses from default terminations are treated as changes in accounting estimate in the current period, not as prior-period adjustments.

Key points (7)
  • Federal Acquisition Legislation and Regulation cost principles must be followed in pricing negotiated supply, service, and R&D contracts and modifications whenever cost analysis is performed (912-20-05-2), and in cost-reimbursement determinations, overhead rate negotiations, terminations, incentive contract final pricing, price redeterminations, and pricing contract modifications (912-20-05-3).
  • Indirect costs allowable or allocable under government contract regulations may be allocated to federal government contracts as indirect costs only if also allowable under GAAP (912-20-25-1).
  • Subcontractor and other vendor claims are recorded as liabilities at estimated amounts payable under Subtopic 450-20, and amounts recoverable by the prime contractor are included as part of the claim (912-20-25-3).
  • Because the parties' rights differ, default termination accounting must reflect additional liabilities such as damages, excess reprocurement costs, and progress payments to be repaid (912-20-25-4).
  • A reduction of previously recorded earnings from a default termination is included in the current-period loss on termination as a change in accounting estimate under Subtopic 250-10; prior-period adjustment is not appropriate (912-20-25-5).
  • Program accounting accumulates costs by program (estimated units in a continuing long-term production effort) rather than by unit or contract, but is not appropriate for government contracts or subcontracts except in the limited circumstances of paragraph 912-20-25-6 (912-20-25-5A, 25-8).
  • A loss on termination for default must either be reported as a separate income statement item or disclosed in the notes in conformity with Subtopic 450-20 (912-20-45-5; 912-20-50-1).

For students. Government contracting adds a regulatory overlay to GAAP: a cost must be allowable under FAR cost principles *and* under GAAP to be charged to a federal contract. A common misunderstanding is treating a default-termination loss as a prior-period adjustment—it is a current-period change in estimate under ASC 250-10.

government contract cost principlesallowable and allocable indirect coststermination for conveniencetermination for defaultsubcontractor claimsprogram accountingchange in accounting estimatecost-reimbursement contracts

Machine-generated study aid for ASC 912-20. Check the source paragraphs below.

912-20-00Status

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912-20-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
912-20-45-1SupersededAccounting Standards Update No. 2014-0905/28/2014
912-20-45-4AmendedAccounting Standards Update No. 2014-0905/28/2014

912-20-05Overview and Background

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912-20-05-1
This Subtopic provides guidance to government contractors on accounting costs related to federal government contracts.

Federal Acquisition Legislation and Regulations

912-20-05-2
All federal government contracts and contract modifications for supplies and services or experimental, developmental, or research work, negotiated on the basis of cost with commercial entities (whether on a fixed-price or cost-plus basis), must adhere to the cost principles mandated by Federal Acquisition Legislation and Regulations in pricing negotiated supply, service, experimental, developmental, and research contracts and contract modifications whenever cost analysis is to be performed in the procurement process.
912-20-05-3
In addition, compliance with Federal Acquisition Legislation and Regulation cost principles is mandatory if an entity is involved in any of the following activities:
  1. a
    Determining reimbursable costs under cost-reimbursement contracts, including any cost-reimbursement subcontracts, and the cost-reimbursement portion of time and materials contracts
  2. b
    Negotiating overhead rates
  3. c
    Proposing, negotiating, and determining costs under terminated fixed-price, cost-reimbursement contracts
  4. d
    Establishing the final price of fixed-price incentive contracts
  5. e
    Redetermining prices of prospective and retroactive price redetermination contracts
  6. f
    Pricing changes in contract modifications.

Convenience Terminations

912-20-05-4
Termination of war and defense contracts for the convenience of the government is a means of adjusting the production of materials to the varying requirements of the military services. Because terminations transfer active contracts in process of execution into claims in process of liquidation, they, like contract renegotiations and cost-plus-fixed-fee contracts, may have important effects on the financial statements of defense contractors.

912-20-15Scope and Scope Exceptions

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Overall Guidance

912-20-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 912-10-15.

912-20-25Recognition

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Costs Allocated to Contracts

912-20-25-1
Indirect costs that are allowable or allocable under pertinent government contract regulations may be allocated to federal government contracts as indirect costs if otherwise allowable under generally accepted accounting principles (GAAP) .

Convenience Terminations

912-20-25-3
Subcontractor claims and other vendor claims shall be recorded as liabilities at the estimated amounts payable in conformity with the provisions of Subtopic 450-20. To the extent such amounts are recoverable by the prime contractor, they shall be included as part of the claim.

Default Terminations

912-20-25-4
The rights of the contracting parties in a default termination of a fixed-price contract differ significantly from those in a convenience termination; consequently, the accounting must reflect these differences. Contractors shall record, in addition to normal contract liabilities, those liabilities arising from a default termination (for example, damages, excess reprocurement costs, and progress payments to be repaid).
912-20-25-5
If termination for default results in a reduction of previously recorded earnings the resulting income effect shall be included in the loss on termination of the contract in the current period as a change in an accounting estimate in conformity with Subtopic 250-10. In such circumstances, adjustments of prior-period amounts are not appropriate.

Program Accounting

912-20-25-5A
Program accounting is a method of accounting for the costs of certain products manufactured for delivery under production-type contracts. Under this method, costs are accumulated and accounted for by programs rather than by individual units or individual contracts. A program consists of the estimated number of units of a product to be produced by an entity in a continuing, long-term production effort for delivery under existing and anticipated contracts. The program is used as the accounting cost center for accumulating costs and allocating costs to cost of sales.
912-20-25-6
In practice, the program method of accounting has had very limited applications, such as in major commercial aircraft production sold to commercial (or, in some cases, commercial and government) customers. It is not often used because of all of the following:
  1. a
    The significant uncertainties associated with making reasonably dependable estimates of the total number of units to be produced and sold
  2. b
    The length of time to produce and sell them
  3. c
    The associated production costs and selling prices.
912-20-25-7
The unique aspects of the government procurement process make estimating the market and timing of deliveries extremely difficult. For example, estimating quantities and prices of future purchases by the government would be affected directly by the amount and timing of funding allocated to the program. If funding were reduced or eliminated, the effect on the program could be substantial.
912-20-25-8
In addition, the government, rather than the contractor, often retains rights to tooling and design data. This limits the potential market of the contractor and increases the risk of estimating the total market for a program by narrowing its potential customer base. Therefore, the program method of accounting is not appropriate for government contracts or subcontracts except as provided in paragraph 912-20-25-6.

912-20-45Other Presentation Matters

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Income Statement

912-20-45-4
For guidance on presentation of terminated contracts, see Section 912-220-45.
912-20-45-5
A loss on termination of a contract for default shall either be reported as a separate item in the income statement or disclosed in accordance with paragraph 912-20-50-1.

912-20-50Disclosure

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Default Terminations

912-20-50-1
A loss on termination of a contract for default that is not reported as a separate item in the income statement pursuant to paragraph 912-20-45-5 shall be disclosed in the notes to financial statements in conformity with Subtopic 450-20.

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