{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/912/","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","number":"912","title":"Contractors—Federal Government","area":"Industry","group":"91X Contractors","subtopics":[{"number":"912-10","topic":"912","title":"Overall","area":"Industry","paragraphs":10,"summary":"ASC 912-10 is the Overall subtopic of the Contractors—Federal Government Topic, which layers incremental industry guidance on top of otherwise applicable GAAP for entities doing business with the U.S. federal government. It explains that the federal customer is a sovereign that procures under statutes and regulations governing contractor selection, monitoring, and payment, creating risks not present in commercial dealings. Its scope covers all entities with federal government contracts, specifically cost-plus-fixed-fee contracts and fixed-price war and defense supply contracts terminated for the convenience of the government.","concepts":["government contractor","cost-plus-fixed-fee contract","termination for convenience","prime contractor and subcontractor","cost accounting regulations","incremental industry guidance","procurement statutes and regulations","unilateral government rights"],"categories":["Industry-specific","Recognition","Contingencies and guarantees","Revenue"],"level":"intermediate","topic_title":"Contractors—Federal Government","sections":[{"number":"00","label":"00 Status","anchor":"00-status","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"912-10-00-1","para":"00-1","html":"The following table identifies the changes made to this Subtopic.
The Contractors—Federal Government Topic provides incremental guidance for government contractors. See also Subtopic
910-20.
This Topic includes the following Subtopics:
- a
Overall
- b
Contract Costs
- c
- d
Income Statement
- e
- f
Changing Prices
- g
Risks and Uncertainties
- h
Receivables
- i
Inventory
- j
Liabilities
- k
Contingencies
- l
- m
Cost of Sales and Services
- n
Compensation—Retirement Benefits
- o
Research and Development
- p
Interest.
Entities electing to do business with the federal government will find a customer who behaves, in some significant ways, very differently from commercial customers. This unique behavior results from the customer being a sovereign power that conducts its procurement activities under specific laws and implementing regulations. These procurement statutes and regulations govern the process the federal government must follow in its business dealings with private industry. They cover such critical matters as how the federal government selects, monitors, and pays its contractors.
While most industries include entities that are government contractors, certain industries are more heavily involved in providing goods and services to the government. These industries include manufacturing, architect-engineering, professional services, construction, aerospace, shipbuilding, and technology.
Entities engaged in government contracting are subject to the risks associated with their respective industries, as well as additional risks that generally are not encountered by other business entities in the commercial sector. These additional risks are caused principally by the highly regulated environment in which government contractors operate. Such risks include, but are not necessarily limited to, all of the following: - a
Contractors are subject to extensive and complex cost accounting and other regulations, and in some circumstances, significant penalties even for violations of relatively immaterial dollar amounts (such as penalties under the False Claims Act).
- b
Business and accounting practices are subject to frequent scrutiny by the government.
- c
The government has unilateral rights not found in commercial relationships.
- d
If contracts or contract changes are negotiated based on cost, cost accounting considerations play a vital role in pricing and administering government contracts and, consequently, determining the contractor's reported financial position and results of operations.
The Subtopics within the Contractors—Federal Government Topic only provide incremental industry-specific guidance for the entities defined in this Scope Section, or as further defined in the Scope Sections of the individual Subtopics. Entities within the scope of this Topic shall also comply with the applicable standards not included in this Topic. Except where the text clearly indicates otherwise, the term contractor is used to denote either a prime contractor or a subcontractor, and the term contract to denote either a prime contract or a subcontract.
The guidance in this Topic applies to all entities that engage in federal government contracts.
The guidance in this Topic applies to all of the following transactions and activities:
- a
- b
- c
Fixed-price war and defense supply contracts terminated, in whole or in part, for the convenience of the government.
The guidance in this Topic with respect to fixed-price war and defense supply contracts terminated, in whole or in part, for the convenience of the government does not specifically apply to terminated cost-plus-fixed-fee contracts nor to contracts for facilities or services. However, the conclusions reached herein may serve as guides for the accounting applicable to such contracts.
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance to government contractors on accounting costs related to federal government contracts.
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.
In addition, compliance with Federal Acquisition Legislation and Regulation cost principles is mandatory if an entity is involved in any of the following activities: - a
Determining reimbursable costs under cost-reimbursement contracts, including any cost-reimbursement subcontracts, and the cost-reimbursement portion of time and materials contracts
- b
Negotiating overhead rates
- c
Proposing, negotiating, and determining costs under terminated fixed-price, cost-reimbursement contracts
- d
Establishing the final price of fixed-price incentive contracts
- e
Redetermining prices of prospective and retroactive price redetermination contracts
- f
Pricing changes in contract modifications.
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.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
912-10-15.
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) .
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. 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).
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 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.
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: - a
The significant uncertainties associated with making reasonably dependable estimates of the total number of units to be produced and sold
- b
The length of time to produce and sell them
- c
The associated production costs and selling prices.
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.
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. For guidance on presentation of terminated contracts, see Section
912-220-45.
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. 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.