Cost Accounting Standards Board; Accounting for the Costs of Employee Stock Ownership Plans (ESOPs) Sponsored by Government Contractors, 42293-42298 [05-13951]

Agencies

• Office of Management and Budget
• Office of Federal Procurement Policy
• Federal Procurement Policy Office

[Federal Register Volume 70, Number 140 (Friday, July 22, 2005)]
[Proposed Rules]
[Pages 42293-42298]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-13951]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards Board; Accounting for the Costs of 
Employee Stock Ownership Plans (ESOPs) Sponsored by Government 
Contractors

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Cost Accounting Standards Board (CASB), Office of Federal 
Procurement Policy, invites public comments on proposed amendments to 
the Cost Accounting Standards (CAS) 412, ``Cost accounting standard for 
composition and measurement of pension cost,'' and CAS 415, 
``Accounting for the cost of deferred compensation.'' These proposed 
amendments address issues concerning the recognition of the costs of 
Employee Stock Ownership Plans (ESOPs) under Government cost-based 
contracts and subcontracts. These proposed amendments provide criteria 
for measuring the costs of ESOPs and their assignment to cost 
accounting periods. The allocation of a contractor's assigned ESOP 
costs to contracts and subcontracts is addressed in other Standards. 
The proposed amendments also specify that accounting for the costs of 
ESOPs will be covered by the provisions of CAS 415, ``Accounting for 
the cost of deferred compensation'' and not by any other Standard.

DATES: Comments must be in writing and must be received by September 
20, 2005.

ADDRESSES: Due to delays in OMB's receipt and processing of mail, 
respondents are strongly encouraged to submit comments electronically 
to ensure timely receipt. Electronic comments may be submitted to 
casb2@omb.eop.gov. Please put the full body of your comments in the 
text of the electronic message and also as an attachment readable in 
either MS Word or Corel WordPerfect. Please include your name, title, 
organization, postal address, telephone number, and e-mail address in 
the text of the message. Comments may also be submitted by fax to (202) 
395-5105. Please cite CASB Docket No. 00-03A in your comment.

For further information contact: David Capitano, Cost Accounting 
Standards Board (telephone: 703-847-7486).

[[Page 42294]]


SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The CASB's rules, regulations and Standards are codified at 48 CFR 
Chapter 99. The Office of Federal Procurement Policy Act, 41 U.S.C. 
422(g)(1), requires the Board, prior to the establishment of any new or 
revised Cost Accounting Standard, to complete a prescribed rulemaking 
process. The process generally consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of government contracts as a result of the adoption of a 
proposed Standard (e.g., promulgation of a Staff Discussion Paper.)
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    This NPRM is issued by the Board in accordance with the 
requirements of 41 U.S.C. 422(g)(1)(D), and is step three of the four-
step process.

B. Background--Prior Promulgations

    The FAR has dealt with issues associated with ESOPs since the late 
1970s. At first, the issues that arose were regarded as allowability 
matters, and the views of the CASB were sought primarily on an advisory 
basis. However, after issuance of the decision in Ralph Parsons Co. 
(ASBCA Nos. 37391, 37946, and 37947, dated December 20, 1990), various 
Government commenters suggested to the CASB that ESOP cost measurement 
and period assignment matters warranted placement on the CASB's agenda. 
These suggestions were amplified in light of the decision in Ball 
Corporation (ASBCA No. 49118, dated April 3, 2000).
    The CASB first considered issuing an interpretation of its existing 
standards, but then decided that additional research was needed. As a 
result, on September 15, 2000, the CAS Board issued a Staff Discussion 
Paper on this topic (65 FR 56008, dated September 15, 2000). The CASB 
received sixteen sets of public comments in response to the Staff 
Discussion Paper. The CASB reviewed and discussed these public 
comments. Upon completion of this review, an ANPRM was drafted and 
published in the Federal Register on August 20, 2003 (68 FR 50111).

C. Public Comments

    The Board received ten sets of public comments in response to the 
ANPRM. The Board would like to thank all the organizations and 
individuals who provided comments and information in response to the 
ANPRM. A summary of the comments and the CAS Board responses are as 
follows:

1. Exemption of Small Businesses

    Comment: One commenter requests clarification of the statement in 
the Supplementary Information section of the Federal Register Notice 
that states ``Furthermore, this proposal does not have a significant 
effect on a substantial number of small entities because small 
businesses are exempt from the application of the Cost Accounting 
Standards.'' This commenter notes that FAR 31.205-6(j)(8) includes a 
section entitled ``Employee Stock Ownership Plans.'' The commenter asks 
that the CAS Board clarify the exemption status of Small Businesses as 
mentioned in the proposed rule because it appears to conflict with the 
FAR on selected costs (ESOPs) being subject to CAS.
    CAS Board Response: There is no conflict between the Federal 
Register Notice and the FAR. The statement in the Federal Register 
Notice refers to the fact that small businesses are exempt from the 
rules, regulations, and standards promulgated by the CASB, not the 
rules and regulations promulgated under the FAR. Since small businesses 
are exempt from the requirements of the CAS, the requirements of FAR 
Part 31 are used to determine how costs are measured, assigned, and 
allocated for applicable contracts with small businesses (i.e., 
contracts that are subject to FAR Part 31). The application of FAR Part 
31 to contracts that are not covered by the CAS, including the decision 
to measure, assign, and/or allocate costs using one or more of the CAS 
standards, is under the purview of the FAR Council. This NPRM does not 
exempt any such contracts from the requirements of FAR Part 31.

2. Application to ``C'' versus ``S'' Corporations

    Comment: One commenter strongly supports the statement at CAS 
9904.415-50(f)(1) that a contractor's ESOP contribution may include 
interest and dividends. This commenter states that it reads this 
provision to apply to ``C'' corporations and ``S'' corporations. The 
commenter recommends that the preamble to any further rule state that 
application.
    CAS Board Response: The Board recognizes that the tax treatment of 
ESOP contributions may differ between ``C'' corporations and ``S'' 
corporations. However, the tax treatment of ESOP contributions does not 
impact the application of the proposed rule, i.e., the proposed rule 
does not differentiate, nor was it intended to differentiate, between 
``C'' and ``S'' corporations in the measurement of ESOP costs in 
accordance with CAS 9904.415-50(f)(1).

3. Assignment of Costs Based on Award of Shares

    Comment: Four commenters expressed concern regarding the proposed 
language at CAS 9904.415-50(f)(2), which states ``A contractor's 
contribution to an ESOP shall be assignable to the cost accounting 
period only to the extent that the number of shares, cash, or any 
combination thereof resulting from the contribution are awarded to 
individual employees in the accounting period.''
    Three of the commenters assert that many companies do not make 
final decisions about the amount of their contribution to ESOP's until 
after the end of the fiscal year. Thus, the precise number of shares 
awarded to individual employees cannot be determined until after the 
total contribution for an accounting period is known. One of these 
commenters further asserts that, for non-publicly traded companies, the 
amount of the shares to be awarded is also not known until the annual 
stock evaluation is performed. The three commenters suggest that the 
language be clarified by adopting language similar to that in CAS 
9904.412-50(d)(4), which recognizes funding of pension costs ``within a 
cost accounting period if it is accomplished by the corporate tax 
filing date for such period including any permissible extensions 
thereto.'' One of these commenters suggests the following specific 
language:

    A contractor's contribution to an ESOP shall be assignable to 
the cost accounting period only to the extent that the number of 
shares, cash, or any combination thereof resulting from the 
contribution are awarded to individual employees for the accounting 
period using funds contributed to the plan for that period by the 
tax filing date for that period, including any permissible 
extensions thereof.

    Another commenter recommends that the term ``allocated'' be 
substituted for the term ``award'' at CAS 9904.415-50(f)(2). This 
commenter states that under qualified plan rules for defined 
contribution plans, all contributions made to an ESOP must be allocated 
to the accounts of plan participants. The commenter asserts that even 
if a contractor makes an award of stock that does not use up all of a 
contribution, the remainder is still allocated to employee accounts as 
cash. The commenter further states that, since the employer's

[[Page 42295]]

contribution is irrevocable, the entire amount of the contribution 
should be assigned to the cost accounting period in which the 
contribution is made.
    CAS Board Response: While current tax laws may require that all 
contributions made to an ESOP must be allocated to the accounts of plan 
participants in the period of the contribution, the ANPRM definition of 
an ESOP is broader than the tax law definition. In addition, tax laws 
often change; thus, it is important that the Board consider the various 
possibilities in promulgating this revision.
    The Board believes the proposed rule should assure that amounts are 
not assigned to an accounting period unless the stock has been both 
awarded to employees and allocated to individual employee accounts by 
the tax filing date (or any extension thereof) for that accounting 
period. However, the Board also believes the rule should recognize that 
an ESOP contribution for work performed in a particular accounting 
period may not be made until shortly after the end of the accounting 
period, similar to the circumstances that sometimes arise for defined 
contribution pension plans. The language at CAS 9904.415-50(f)(2) has 
therefore been revised accordingly.

4. Transition Method

    Comment: One commenter states that the transition method is 
unnecessary and inequitable. This commenter asserts that ``the proposed 
transition method is inconsistent with past CASB decisions,'' and would 
be the first time that contractors would be required to follow a former 
cost accounting practice (even though it may be non-compliant with 
existing Standards) until a cost no longer exists. This commenter 
states that perhaps an advance agreement should not be disturbed, but 
application of the transition method to any other ``arrangements'' is 
vague, open-ended, unnecessary, and inequitable. A second commenter 
asserts that the transition method makes ``no good sense and would 
result in tremendous inconsistencies in the treatment of ESOPs within 
the government contracting community.''
    A third commenter believes the proposed transition method would 
place contractors without advance agreements in a difficult position. 
This commenter states that they agree completely that where the 
Government and contractor have reached an advance agreement, those 
agreements should continue to control. However, the commenter is 
concerned that many small companies will continue to have their ESOP 
costs questioned every year if existing ESOPs are not covered by the 
new language. A fourth commenter also believes the proposed transition 
method unnecessarily complicates ESOP accounting and does not achieve 
the uniformity and consistency in cost accounting that is the CASB's 
objective.
    The fourth and fifth commenters assert that the transition method 
would create three classes of ESOPs, (1) those created after the 
effective date of the provision (to which the new rules would apply); 
(2) pre-existing ESOPs with advance agreements, in which case the 
parties would have to comply with the advance agreements; and (3) pre-
existing ESOPs without advance agreements, which would remain subject 
to the Cost Accounting Standard(s) that were applicable to such plans 
prior to the applicability date of the new rule.
    The fourth commenter believes there is significant uncertainty on 
whether ESOPs are governed by CAS 412 or 415, which should not be 
perpetuated. This commenter believes ``more flexibility is required 
where ESOP costs are governed by advance agreements, and that the 
parties should be free to adopt the new ESOP accounting provisions.'' 
The commenter therefore proposes the following transition provision in 
lieu of the proposed language (this language was endorsed by a second 
commenter):

    ``(a) For contractors and subcontracts that were subject to 
Standard 9904.415 in effect prior to the effective date of the final 
rule, the requirements of this Standard, as amended, shall apply to 
the costs of pre-existing ESOPs and the costs of ESOPs that are 
established after the effective date of this Standard.
    (b) For pre-existing ESOPs, the requirements of this Standard 
shall apply as of the beginning of the contractor's next full fiscal 
year following the Standard's effective date. The parties may 
mutually agree to apply the requirements of this Standard earlier if 
they so desire.
    (c) Where ESOP costs are subject to the terms of an advance 
agreement, the parties shall comply with the provisions of such 
advance agreement, which may be modified by mutual agreement to 
incorporate the requirements of this Standard.''

    A final commenter strongly endorses the proposed transition 
provision. This commenter states that where a contractor and the 
Government have established advance agreements regarding the 
recognition of ESOP costs, contractors and the Government should comply 
with the provision of such advance agreement(s) for existing ESOPs. 
This commenter asserts that ``to do otherwise would disrupt a long-term 
accounting construct (both for the measurement and assignment of cost) 
in mid-stream, thereby causing harm to one of the contracting parties 
due to the uneven nature of contractor contributions between the early 
and later years of leveraged ESOPs.''
    CAS Board Response: The Board believes it is imperative that the 
subject revision not infringe on existing advance agreements between 
the Government and the contractor. However, the Board also believes the 
proposed rule should limit the transition to only those instances in 
which there is an existing advance agreement between the contractor and 
the Government. The Board believes this would be consistent with the 
historical application of revised or new standards. The Board therefore 
has deleted CAS 9904.415-64, and added a new paragraph (d) to CAS 
9904.415-63 that reads as follows:

    (d) For contractors and subcontractors that have established 
advance agreements prior to the effective date of this amended 
Standard regarding the recognition of the costs of existing ESOPs, 
the awarding agency and contractor shall comply with the provisions 
of such advance agreement(s) for these existing ESOPs. These advance 
agreements may be modified, by mutual agreement, to incorporate the 
requirements of this revised standard.

5. Definition of an ESOP

    Comment: One commenter is concerned that the proposed definition of 
an ESOP is overly broad and ``could sweep within its reach other types 
of defined contribution plans that should not be subject to the ESOP 
accounting rules.'' This commenter states that ``the proposed 
definition is broader than the definitions used by the Internal Revenue 
Service, ERISA, or GAAP.'' The commenter asserts that the definition 
could include ``thrift plans'' or other 401(k) defined contribution 
plans such as the plan at issue in a recent case decided by the U.S. 
Court of Federal Claims, Newport News Shipbuilding and Drydock Co. v. 
Unites States (2003 U.S. Claims LEXIS 255, dated September 10, 2003). 
This commenter recommends that the CASB align the definition with 
established definitions of the IRS, ERISA, or GAAP. Alternatively, the 
commenter recommends that the CASB explain why a broader definition is 
necessary or desirable.
    A second commenter believes the definition of an ESOP, and in 
particular the term ``designed to invest primarily in the stock of the 
contractor's corporation'' is too vague, could cause confusion, and 
could ``result in a contractor's deferred compensation plan changing 
between CAS 412 and CAS 415 in any given costing period, depending on 
the percentage of

[[Page 42296]]

investment in contractor stock.'' This commenter recommends that 
additional analysis concerning what additional requirements, such as 
those of the Internal Revenue Service Code, should be considered. In 
particular, the commenter recommends that the definition of an ESOP be 
revised to include specific requirements similar to the Internal 
Revenue Service Code 4975(e)(7) definition and the additional guidance 
provided in the Internal Revenue Service Manual. The commenter states 
that, although they are not proposing the Internal Revenue Service 
definition be used, the CASB should ``look closer at the definition as 
proposed to ensure it includes the appropriate requirements.'' This 
commenter also recommends that the definition include the requirement 
that the plan ``invests most or all of the assets in the stock of the 
contractor's corporation.''
    CAS Board Response: The definition in the ANPRM is very similar, 
but not identical, to the definition contained in AICPA Statement of 
Position (SOP) 93-6. The definition in SOP 93-6, which is the current 
GAAP for ESOP accounting, reads as follows:

    ESOP means an employee benefit plan that is described by the 
Employee Retirement Income Security Act of 1974 (ERISA) and the 
Internal Revenue Code (IRC) of 1986 as a stock bonus plan, or 
combination stock bonus and money purchase pension plan, designed to 
invest primarily in employer stock.

    There is a key difference between the GAAP definition and the 
definition in the ANPRM. The GAAP definition refers to plans described 
under ERISA and the IRC. However, the ERISA and IRC include only 
definitions of plans for purposes of tax deductibility. The Board is 
concerned that two plans with identical contribution requirements would 
have different cost accounting treatment solely because of differences 
in tax deductibility. To exclude one or the other of these two plans 
from the revised coverage would likely perpetuate the uncertain 
treatment of the excluded plan under the existing rules. Therefore, the 
Board does not believe that the definition of an ESOP, for purposes of 
applying CAS 415, should be limited to the GAAP definition. However, 
the Board recognizes that the definition in the ANPRM should be revised 
to clearly include all plans that meet the GAAP definition, as well as 
any other plans that are designed to invest primarily in the stock of 
the contractor. Therefore, the Board has revised the definition at CAS 
9904.415-30(a)(3) to read as follows:

    Employee Stock Ownership Plan (ESOP) means (i) an employee benefit 
plan that is described by the Employee Retirement Income Security Act 
of 1974 (ERISA) and the Internal Revenue Code (IRC) of 1986 as a stock 
bonus plan, or combination stock bonus and money purchase pension plan, 
designed to invest primarily in employer stock, and (ii) any other 
deferred compensation plan designed to invest primarily in the stock of 
the contractor's corporation including, but not limited to, plans 
covered by ERISA.

6. Assignment Based on ``Award''

    Comment: One commenter questions the necessity to tie the 
assignment of cost to the period in which the ESOP trust (ESOT) makes 
an ``award'' to an individual employee. This commenter asserts that the 
term ``award'' may have little relevance to the operation of ESOPs. The 
commenter states that ``IRC rules require that the entire contribution 
to an ESOP, to the extent not used to service debt, be allocated to 
employee accounts in accordance with a definite formula.'' The 
commenter further states that as a result of these requirements, there 
would be no excess to assign to future years.
    CAS Board Response: The Board believes it is important to tie the 
assignment of the cost for a period to the award of the shares to 
employees and the allocation of the shares to individual employee 
accounts. This provides consistency in the assignment of costs to the 
period and the subsequent allocation of those costs to final cost 
objectives.

7. ESOP Contributions

    Comment: One commenter states that the ANPRM will permit 
contractors that sponsor leveraged ESOPs to treat the entirety of the 
ESOP contribution as a form of employee compensation under CAS 
9904.415, thereby masking the true nature of the underlying 
transaction. This commenter states that the ANPRM will permit 
contractors to treat the entire contribution paid to the ESOT, 
including principal payments and interest expenses incurred to finance 
a leveraged ESOP, as deferred compensation. The commenter believes that 
interest expense incurred to finance leveraged ESOPs should be 
reflected as such under Government cost accounting rules. The commenter 
believes that if the CASB adopts a rule requiring the separate 
accounting for interest expense for leveraged ESOPs, current Government 
cost allowability rules (FAR 31.205-20) would probably require these 
costs to be disallowed. The commenter also believes that whether 
Congress or the Executive Branch agencies choose to allow or disallow 
interest costs associated with leveraged ESOP financing should be 
discussed and debated as a public policy matter separate and apart from 
the CASB's role in defining and measuring contract costs. This 
commenter asserts that the approach in the ANPRM seems to pretend that 
there is no interest being paid to contractors. The commenter 
recommends that, at a minimum, the CASB's proposal be amended to 
require segregation of the components of periodic ESOP expense, so that 
repayments of loan principal can be distinguished from interest 
expense. The commenter believes that the CASB's only concern should be 
one of financial transparency and full disclosure, and not whether 
interest expense on leveraged ESOPs should be an allowable cost under 
cost-based Government contracts.
    CAS Board Response: The ANPRM and the NPRM are intended to 
recognize the resources used by the contractor to fund the current 
year's award to employees, whether those shares are purchased by the 
ESOP in the year of award or made available for allocation by repayment 
of ESOP debt. In proposing this rule, the Board believes that it is 
providing for the measurement of ESOP costs in a manner that reflects 
the CAS objective of consistency in cost accounting practices. With 
this objective in mind, the Board believes the proposed rule best 
measures ESOP contributions for contract costing purposes.
    The proposal does not affect the allowability of interest or other 
cost components of an ESOP and is not intended to ``mask'' the true 
nature of ESOP financing. Whether interest or other cost components 
associated with financing a leveraged ESOP are allowable costs is 
determined under FAR Part 31. The proposed rule does not, in any 
manner, preclude the FAR Council from drafting rules that explicitly 
allow or disallow interest or any other cost component associated with 
an ESOP. Should the FAR Council decide to explicitly disallow interest 
or any other cost component associated with an ESOP, CAS 405 already 
requires that such costs be segregated in the contractor's accounting 
records. In addition, CAS 405 also requires that such costs be 
identified and excluded from any billing, claim, or proposal applicable 
to a Government contract. Therefore, the Board does not believe it is 
necessary to add a separate requirement in CAS 415.

[[Page 42297]]

8. Editorial Changes

    Comment: One commenter suggested several editorial changes for 
clarity, including minor revisions to CAS 9904.412-20(b), 9904.415-
30(a)(4), 9904.415-50(f)(1), and 9904.415-60.
    CAS Board Response: The Board agrees with the recommended editorial 
changes and has incorporated them in the NPRM.

D. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this proposal, because these amendments impose no paperwork burden on 
offerors, affected contractors and subcontractors, or members of the 
public which requires the approval of OMB under 44 U.S.C. 3501, et seq.

E. Executive Order 12866 and the Regulatory Flexibility Act

    The transition provision incorporated into this proposal ensures 
that arrangements for determining costs for existing ESOPs are not 
changed. Thus, the economic impact of these amendments, if any, on 
contractors is expected to be minor. As a result, this rule is not 
``significant'' under E.O. 12866. Furthermore, this proposal does not 
have a significant effect on a substantial number of small entities 
because small businesses are exempt from the application of the Cost 
Accounting Standards. Therefore, this rule does not require a 
regulatory flexibility analysis in accordance with the Regulatory 
Flexibility Act of 1980.

F. Additional Public Comments

    Interested persons are invited to participate by submitting data, 
views, or arguments with respect to this NPRM. All comments must be in 
writing and submitted in accordance with the instructions indicated in 
the ADDRESSES section.

List of Subjects in 48 CFR Part 9904

    Accounting, Government procurement.

David H. Safavian,
Chair, Cost Accounting Standards Board.
    Accordingly, for the reasons set forth in the preamble, it is 
proposed to amend Part 9904 as follows:

PART 9904--COST ACCOUNTING STANDARDS

    1. The authority citation for part 9904 continues to read as 
follows:

    Authority: Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. 422.

    2. Section 9904.412-20 is revised to read as follows:


9904.412-20  Purpose.

    (a) The purpose of this Standard 9904.412 is to provide guidance 
for determining and measuring the components of pension cost. The 
Standard establishes the basis on which pension costs shall be assigned 
to cost accounting periods. The provisions of this Cost Accounting 
Standard should enhance uniformity and consistency in accounting for 
pension costs and thereby increase the probability that those costs are 
properly allocated to cost objectives.
    (b) This Standard does not cover the cost of Employee Stock 
Ownership Plans (ESOPs) that meet the definition of a pension plan. 
Such plans are considered a form of deferred compensation and are 
covered under 9904.415.
    3. Section 9904.415-20 is revised to read as follows:


9904.415-20  Purpose.

    (a) The purpose of this Standard 9904.415 is to provide criteria 
for the measurement of the cost of deferred compensation and the 
assignment of such cost to cost accounting periods. The application of 
these criteria should increase the probability that the cost of 
deferred compensation is allocated to cost objectives in a uniform and 
consistent manner.
    (b) This Standard is applicable to the cost of all deferred 
compensation except the following which are covered in other Cost 
Accounting Standards:
    (1) The cost for compensated personal absence, and
    (2) The cost for pension plans that do not meet the definition of 
an Employee Stock Ownership Plan (ESOP).
    4. Section 9904.415-30 is amended by revising paragraph (a) 
introductory text, adding paragraphs (a) (2) and (3), and revising 
paragraph (b) to read as follows:


9904.415-30  Definitions.

    (a) The following are definitions of terms which are prominent in 
this Standard 9904.415. Other terms defined elsewhere in this Chapter 
99 shall have the meanings ascribed to them in those definitions unless 
paragraph (b) of this section requires otherwise.
    (1) * * *
    (2) Employee Stock Ownership Plan (ESOP) means:
    (i) An employee benefit plan that is described by the Employee 
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue 
Code (IRC) of 1986 as a stock bonus plan, or combination stock bonus 
and money purchase pension plan, designed to invest primarily in 
employer stock, and
    (ii) Any other deferred compensation plan designed to invest 
primarily in the stock of the contractor's corporation including, but 
not limited to, plans covered by ERISA.
    (3) Fair value means the amount that a seller would reasonably 
expect to receive in a current arm's length transaction between a 
willing buyer and a willing seller, other than a forced or liquidation 
sale.
    (b) The following modifications of terms defined elsewhere in this 
Chapter 99 are applicable to this Standard:
    (1) Market value means the current or prevailing price of a stock 
or other property as indicated by market quotations.
    (2) [Reserved].
    5. Section 9904.415-40 is revised to read as follows:


9904.415-40  Fundamental requirement.

    (a) The cost of deferred compensation shall be assigned to the cost 
accounting period in which the contractor incurs an obligation to 
compensate the employee. In the event no obligation is incurred prior 
to payment, the cost of deferred compensation shall be the amount paid 
and shall be assigned to the cost accounting period in which the 
payment is made.
    (b) Measurement of deferred compensation costs.
    (1) For deferred compensation other than ESOPs, the deferred 
compensation cost shall be the present value of the future benefits to 
be paid by the contractor.
    (2) For an ESOP, the deferred compensation cost shall be the amount 
contributed to the ESOP by the contractor.
    (c) The cost of each award of deferred compensation shall be 
considered separately for purposes of measurement and assignment of 
such costs to cost accounting periods. However, if the cost of deferred 
compensation for the employees covered by a deferred compensation plan 
can be measured and assigned with reasonable accuracy on a group basis, 
separate computations for each employee are not required.
    6. Section 9904.415-50 is amended by revising paragraph (d) 
introductory text and (e) introductory text and adding paragraph (f) to 
read as follows:


9904.415-50  Techniques for application.

* * * * *
    (d) The following provisions are applicable for plans, other than 
ESOPs, that meet the conditions of 9904.415-50(a) and the compensation 
is to be paid in money.
* * * * *
    (e) The following provisions are applicable for plans, other than 
ESOPs, that meet the conditions of 9904.415-

[[Page 42298]]

50(a) and the compensation is received by the employee in other than 
money. The measurements set forth in this paragraph constitute the 
present value of future benefits for awards made in other than money 
and, therefore, shall be deemed to be a reasonable measure of the 
amount of the future payment:
* * * * *
    (f)(1) For an ESOP, the contractor's cost shall be measured by the 
contractor's contribution, including interest and dividends if 
applicable, to the ESOP. The measurement of contributions made in the 
form of stock of the corporation or property, shall be based on the 
market value of the stock or property at the time the contributions are 
made. If the market value is not available, then fair value of the 
stock or property shall be used.
    (2) A contractor's contribution to an ESOP shall be assignable to a 
cost accounting period only to the extent that the stock, cash, or any 
combination thereof resulting from the contribution is awarded to 
employees and allocated to individual employee accounts by the tax 
filing date for that period, including any permissible extensions 
thereof. All stock or cash that is allocated to the individual employee 
accounts between the end of the cost accounting period and the tax 
filing date for that period must be assigned to the cost accounting 
period in which the employee is awarded the stock or cash. Any portion 
of the stock or cash resulting from a contractor's contribution that is 
not awarded to employees or allocated to individual employee accounts 
by the tax filing date for that period, including any permissible 
extensions thereof, shall be assigned to a future cost accounting 
period or periods when the remaining portion of stock or cash has been 
awarded to employees and allocated to individual employee accounts. 
This stock shall retain the value established when it was originally 
purchased by or otherwise made available to the ESOP.
    7. Section 9904.415-60 is amended by adding paragraphs (f), (g), 
(h) and (i) to read as follows:


9904.415-60  Illustrations.

* * * * *
    (f) Contractor F has a non-leveraged ESOP. Under the contractor's 
plan, employees are awarded 5,000 shares of stock for the year ended 
December 31, 2007. On February 5, 2008, when the shares have a market 
value of $10.00 each, the 5,000 shares are contributed to the ESOP and 
allocated to the individual employee accounts. The total measured and 
assigned deferred compensation cost for FY 2007 is $50,000 (5,000 x $10 
= $50,000). The market value of the contractor's stock when awarded to 
the employees, whether higher or lower than the $10.00 per share market 
value when the contractor's contribution was made to the ESOP, is 
irrelevant to the measurement of the contractor's ESOP costs.
    (g) Contractor G has a leveraged ESOP. Under the contractor's plan, 
employees are awarded 10,000 shares of stock for the year ended 
December 31, 2007. On February 15, 2008, the contractor contributes 
$780,000 in cash to the ESOP trust (ESOT) to satisfy the principal and 
interest payment on the ESOT loan for FY 2007, resulting in the bank 
releasing 9,000 shares of stock, and 1,000 shares of stock valued at 
$60,000 to the ESOT, representing the balance of the 10,000 shares. On 
February 22, 2008, the ESOP allocates 10,000 shares to the individual 
employee accounts. The total measured and assigned deferred 
compensation cost for FY 2007 is $840,000--the contractor's total 
contribution required to satisfy the deferred compensation obligation 
totaling 10,000 shares.
    (h)(1) Contractor H has a leveraged ESOP. Under the contractor's 
plan, employees are awarded 8,000 shares of stock for the year ended 
December 31, 2007. On January 31, 2008, the contractor contributes 
$500,000 in cash to the ESOT to satisfy the principal and interest 
payment on the ESOT loan for 2007, resulting in the bank releasing 
10,000 shares of stock. On February 10, 2008, 8,000 shares are 
allocated to individual employee accounts, satisfying the deferred 
compensation obligation for 2007. The total measured deferred 
compensation cost for 2007 is $500,000--the contractor's contribution 
for the cost accounting period. However, the total assignable deferred 
compensation cost for 2007 is $400,000--the portion of the contribution 
that satisfies the 2007 deferred compensation obligation of 8,000 
shares [(8,000 shares / 10,000 shares) x $500,000 = $400,000]. The 
remaining $100,000 of the contribution made in 2007 is assignable to 
future periods in which the remaining 2,000 shares of stock are awarded 
to employees and allocated to individual employee accounts.
    (2) At December 31, 2008, the employees are awarded 12,000 shares 
of stock. On January 31, 2009, Contractor H contributes $500,000 in 
cash to the ESOT to satisfy the principal and interest payment on the 
ESOT loan for 2008, resulting in the bank releasing 10,000 shares of 
stock. On February 10, 2009, 12,000 shares are allocated to individual 
employee accounts satisfying the deferred compensation obligation for 
2008. The total deferred compensation assignable to 2008 is $600,000, 
the cost of the 12,000 shares awarded to employees and allocated to 
individual employee accounts for 2008. The cost of the award is 
comprised of the contractor's contribution for the current cost 
accounting period (10,000 shares at $500,000) and the 2007 contribution 
carryover (2,000 shares at $100,000).
    (i) Contractor I has a leveraged ESOP. Under the contractor's plan, 
employees are awarded 10,000 shares for FY 2007, which ended December 
31, 2007. On February 10, 2008, Contractor I contributes $700,000 in 
cash to satisfy the principal and interest payment for the ESOP loan 
for FY 2007. This contribution results in the bank releasing 10,000 
shares of stock. On March 1, 2008, the ESOP allocates the 10,000 shares 
to individual employee accounts satisfying the 2007 obligation. The 
10,000 shares of stock must be assigned to FY 2007 (these shares cannot 
be assigned to 2008).
    8. Section 9904.415-63 is revised to read as follows:


9904.415-63  Effective date.

    (a) This Standard 9904.415 is effective as of [effective date of 
final rule].
    (b) This Standard shall be followed by each contractor on or after 
the start of its next cost accounting period beginning after the 
receipt of a contract or subcontract to which this Standard is 
applicable.
    (c) Contractors with prior CAS-covered contracts with full coverage 
shall continue to follow Standard 9904.415 in effect prior to 
[effective date of final rule] until this Standard, effective 
[effective date of final rule], becomes applicable following receipt of 
a contract or subcontract to which this revised Standard applies.
    (d) For contractors and subcontractors that have established 
advance agreements prior to [the effective date of the final rule] 
regarding the recognition of the costs of existing ESOPs, the awarding 
agency and contractor shall comply with the provisions of such advance 
agreement(s) for these existing ESOPs. These advance agreements may be 
modified, by mutual agreement, to incorporate the requirements 
effective on [the effective date of the final rule].

[FR Doc. 05-13951 Filed 7-21-05; 8:45 am]
BILLING CODE 3110-01-P