Cost Accounting Standards Board Finalizes ESOP Rules for Government Contractors

On May 1, the U.S. Cost Accounting Standards Board issued final rules for reimbursable costs for government contractors that have ESOPs. Since the 1980s, there has been considerable uncertainty about how the costs of funding an ESOP would be treated. Under the final rules, the term "ESOP" includes any defined contribution plan designed to invest primarily in employer stock. Under these rules, reimbursements will be for the market value of the shares at the time a contribution is made. In a leveraged ESOP, this means the cost basis of the shares when purchased, not the accounting value under the American Institute of Certified Public Accountants' Statement of Position (SOP) 93-6, which requires a compensation charge based on the value of the shares released at the time they are released. Under the new rules, the cost will be assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs will follow Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value. The regulation does not distinguish in this regard between S and C corporations. Companies operating under an existing approved reimbursement procedure can retain that method or renegotiate under the new rules.

The rules also state that dividends used to repay a loan are allowed as a cost. However, there is some uncertainty about this as a Boston office of the Cost Accounting Standards Board recently denied reimbursement for dividends.