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Government Contracting: Changing Accounting Standards Will Have an Impact

With federal officials discussing trillion-dollar infrastructure plans, more and more contractors are looking at government projects as a source of new business.

Regardless of whether you are new to government contracting or already have extensive experience with it, recent changes to U.S. accounting standards mean you should take a fresh look at what’s required to successfully work in this arena.

Federal Acquisition Regulation
All federal government contracts are subject to the Federal Acquisition Regulation (FAR), which spells out specific processes and procedures you must follow. FAR requirements are becoming increasingly common on state and local government projects as well.

Most federal contracts also contain a provision that allows the government to audit your billings, underlying costs, fees and rates. In particular, FAR Part 31 contains detailed guidance on overhead costs that are reimbursable by the government.

The overhead cost requirements apply to time-and-materials and cost-plus contracts, of course, but even fixed-price contracts are subject to audit under the FAR.

New Revenue Recognition Standard
In addition to verifying compliance with Part 31 overhead allowances, FAR audits also verify that your job costing systems comply with generally accepted accounting principles (GAAP). But GAAP standards are undergoing some major changes — and the effects of these changes on government contracts are not yet entirely clear.

The Financial Accounting Standards Board’s new revenue recognition standard (ASU 2014-09) supersedes the previous rules that were used to properly recognize and report revenue on long-term government contracts. The new standard went into effect in calendar year 2018 for many publicly traded companies. Most private companies will need to comply by calendar year 2019.

The previous GAAP standard spelled out detailed rules that were specific to each industry, but the new standard focuses more on broad principles. As a result, there is greater reliance on management judgment regarding key contract terms and classifications.

These changes make it more important than ever that you fully understand your rights and responsibilities under FAR regulations and are clear about the contract’s specific language, scope and performance obligations.