Transfer of Work/Closure of Segment/Merger
Transfer of Work/Closure of Segment
If you transfer one contract from one segment to another, there is clearly no change in accounting practice in either segment. The contract may be accounted for differently in the new segment, but the guidance clearly says that is not a “change in cost accounting practice.” The guidance issued by Dee Lee has been followed pretty consistently when a single contract or a group of contracts are transferred to a different business unit. In a situation where you completely close one segment and transfer all contracts, there is no change in practice in that segment – the segment just ceases to exist. In the second segment, there is also no change in practice.
File:January 2002 - Navy Memo, Changes in Cost Accounting Practice.pdf
C. Transfer of Contract Work[1]
The transfer of work on a contract from one existing segment to another existing segment is not a change in cost accounting practice or a CAS 401 noncompliance, provided cost accounting practices at the segments remain unchanged. For example, when a contractor transfers contract work from Segment A to Segment B, there is no change in cost accounting practice or CAS 401 noncompliance provided the cost accounting practices of Segments A and B have not changed.
When work is transferred from one segment to another, the contract often will not incur the costs as originally estimated. Instead, the contract will incur costs in accordance with the disclosed or established cost accounting practices of the segment to which the work was transferred. The contract may incur the cost of the transferred work under a different indirect cost pool (e.g., Segment B's overhead pool instead of Segment A's overhead pool) or a different cost element (e.g., intra-company transfers). However, this is a business decision concerning how the work will be performed during contract performance (similar to a make or buy decision), rather than a change in the cost accounting practices of either segment. If the cost accounting practices of the segments remain the same, this is not a change in cost accounting practice or a CAS 401 noncompliance. The established cost accounting practices of the two contractor segments were consistently used to estimate and accumulate each segment's costs.
Merger Between Segments
There is language in Section 9903-302-3(c)(3) that describes in an illustration a “merger” between Segments A and B where the accounting practice of Segment B are adopted for the merged segment – that illustration says that there is a change in accounting practice for the contracts of Segment A. Under that approach, if there is a merger of two business units, the contracts of one or both of the merged businesses could experience accounting changes, depending on what practices are adopted in the merged organization.
Illustrations of changes which meet the definition of "change to a cost accounting practice[2]
| Description | Accounting Treatment |
|---|---|
| (3) The contractor merges operating segment A and B which use different cost accounting practices in accounting for manufacturing overhead costs[3] | (3)(i) Before change: In segment, A, the costs of the manufacturing overhead pool have been allocated to final cost objectives using a direct labor hours base; in segment B, the costs of the manufacturing overhead pool have been allocated to final cost objectives using a direct labor dollars base.
(ii) After change: As a result of the merger of operations, the combined segment decides to allocate the cost of the manufacturing overhead pool to all final cost objectives, using a direct labor dollars base. Thus, for those final cost objectives referred to in segment A, the cost of the manufacturing overhead pool will be allocated to the final cost objectives of segment A using a direct labor dollars base instead of a direct labor hours base. |
Conclusion
There is at least arguably a difference in outcome if there has been a “merger” of two segments rather than the closure of a segment and the transfer of specifically identified contracts to a different business unit. DCAA may raise that merger issue at some point, but it is reasonable for contractors to rely on the Dee Lee guidance and argue that there is no change in practice for “transferred” contracts. DCAA could argue that there was really a merger, rather than a transfer of contracts, so what it was called and exactly what happened could be an issue, but it would be perfectly reasonable to make a good faith argument that there was no change in practice where there was no “merger.”