ASC 912
Active
ASC 912 – Contractors–Federal Government
Addresses allowable versus unallowable costs, CAS disclosure, and claim recognition for federal government contractors.
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Conceptual Framework Linkage
Accounting shaped by a specific federal regulatory regime
Contractors performing work for the US FEDERAL GOVERNMENT operate under a distinctive regulatory overlay – the FEDERAL ACQUISITION REGULATION (FAR) and, for larger contractors, the COST ACCOUNTING STANDARDS (CAS) – that governs which COSTS may be BILLED to (and reimbursed by) the government. ASC 912 addresses how this REGULATORY cost-allowability framework interacts with GENERAL GAAP cost recognition, particularly for cost-reimbursement-type contracts where the CONTRACT PRICE itself is substantially determined by allowable costs incurred.
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Scope
Contractors performing under federal government contracts
ASC 912 applies to entities performing contracts directly with (or as subcontractors under contracts with) agencies of the US FEDERAL GOVERNMENT, subject to FAR and, where applicable, CAS.
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Allowable vs Unallowable Costs (FAR Part 31 Cost Principles)
A regulatory allowability overlay on top of GAAP cost recognition
FAR Part 31 designates certain categories of cost as EXPRESSLY UNALLOWABLE for government contract billing purposes – even though those SAME costs may be entirely legitimate, ordinary business expenses recognised NORMALLY under GAAP. Common UNALLOWABLE cost categories include certain ENTERTAINMENT costs, ALCOHOLIC BEVERAGES, certain LOBBYING and public relations costs, BAD DEBTS, and certain EXECUTIVE COMPENSATION amounts exceeding specified caps. A cost being GAAP-recognisable does NOT mean it is RECOVERABLE from the government under a cost-reimbursement contract – these are genuinely separate questions, and ASC 912 requires contractors to track and account for this distinction.
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Cost Accounting Standards (CAS) – Consistency and Disclosure
A separate regulatory cost-measurement regime for larger contractors
Larger federal contractors are subject to the COST ACCOUNTING STANDARDS (CAS) – a set of 19 specific standards governing how costs must be MEASURED, ASSIGNED, and ALLOCATED to government contracts, requiring CONSISTENCY in cost accounting practices across contracts, and mandating a formal CAS DISCLOSURE STATEMENT describing the contractor's cost accounting practices. CAS compliance is a genuinely SEPARATE regulatory regime layered alongside – not a substitute for – general GAAP cost recognition.
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Contract Types – Cost-Reimbursement, Fixed-Price, Time-and-Materials
Different risk allocation, different revenue recognition considerations
Contract typeDescription
Cost-reimbursementThe government reimburses the contractor's ALLOWABLE costs, plus a fee – the contractor bears less cost-overrun risk, but is exposed to potential cost DISALLOWANCE
Fixed-priceThe contractor is paid a FIXED amount regardless of actual costs incurred – the contractor bears the FULL risk of cost overruns, similar to ordinary ASC 606 fixed-price contract accounting
Time-and-materialsThe government pays specified HOURLY rates for labor plus the cost of materials – a hybrid risk allocation
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Claims and Requests for Equitable Adjustment (REAs)
Recognised only where recovery is probable and reasonably estimable
Federal contractors frequently pursue CLAIMS or REQUESTS FOR EQUITABLE ADJUSTMENT (REAs) – seeking additional compensation from the government for events such as GOVERNMENT-CAUSED delays, changes in scope, or differing site conditions. Consistent with the general contract accounting principles in ASC 910/606, additional consideration from a claim/REA is recognised only when recovery is PROBABLE and the amount is REASONABLY ESTIMABLE – a genuinely CONSERVATIVE recognition threshold given the inherent uncertainty of government contract dispute resolution processes.
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Cost Allocation – Direct Costs and Indirect Cost (Overhead) Pools
Consistent, auditable allocation bases required
Costs DIRECTLY traceable to a specific contract (direct labor, direct materials) are charged DIRECTLY to that contract. Costs benefiting MULTIPLE contracts (facilities costs, general management) are accumulated in INDIRECT COST (overhead) POOLS and ALLOCATED to individual contracts using a consistent, auditable ALLOCATION BASE (e.g. direct labor hours or dollars) – subject to potential government AUDIT of the contractor's cost accounting practices and allocation methodology.
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Worked Example – Allowable vs Unallowable Cost Classification
A GAAP expense that isn't billable to the government
Example: A contractor's client entertainment expenses
A federal contractor incurs $50,000 of client entertainment expenses (dinners, event tickets) during the year, alongside $2,000,000 of ordinary direct labor and materials costs on a cost-reimbursement contract.
Under GENERAL GAAP, the $50,000 entertainment cost is a legitimate business EXPENSE, recognised normally in the income statement. However, under FAR Part 31, entertainment costs are EXPRESSLY UNALLOWABLE – the contractor CANNOT bill this $50,000 to the government for reimbursement under the cost-reimbursement contract, even though it remains a properly recognised GAAP expense. The $2,000,000 of ordinary direct costs, by contrast, IS allowable and reimbursable.
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Worked Example – Claim Recognition
Applying the probable-and-estimable threshold
Example: A delay claim against the government
A contractor incurs $800,000 of additional costs due to a government-caused delay in providing required site access, and submits a formal claim for $800,000 in additional compensation. Based on precedent and legal counsel's assessment, recovery is deemed PROBABLE, and the amount is reasonably estimable at $650,000 (after anticipated negotiation).
The contractor recognises additional contract consideration of $650,000 – the amount deemed probable AND reasonably estimable – rather than the full $800,000 claimed, reflecting the conservative recognition threshold applied to government contract claims.
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Disclosure Requirements
What ASC 912 requires
Description of significant accounting policies related to government contract cost allowability and allocationNature and status of significant claims or REAs pending against the government
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Classifying costs as allowable or unallowable under FAR Part 31Assessing whether recovery of a claim or REA is probable
SIGNIFICANT ESTIMATES
Amount reasonably estimable for a pending claim or REAAllocation of indirect costs to individual contracts using an appropriate base
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No Direct IFRS Equivalent – Discussion
A regulatory framework tied specifically to US federal procurement law
IFRS has NO dedicated standard paralleling ASC 912 – the FAR and CAS regulatory regimes are SPECIFIC to US FEDERAL government procurement law, without a directly analogous structure in most other jurisdictions' public procurement frameworks. An IFRS reporter with government contracts would apply GENERAL IFRS 15 revenue recognition principles, without a dedicated allowable-cost overlay comparable to FAR Part 31. This makes ASC 912 one of the narrower, genuinely US-specific Topics in this library with NO direct IFRS counterpart, similar to ASC 808 (Collaborative Arrangements) and ASC 852 (Reorganizations).
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Statement Mapping
Where every ASC 912 event lands
EventStatement(s) affectedNotes
Unallowable costsISStill recognised as GAAP expenses, simply not billable/reimbursable
Claim/REA recognitionBS ISRecognised only when probable and reasonably estimable
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Related Topics
Cross-reference map
TopicConnection
ASC 910Contractors–Construction – supplies the broader over-time revenue recognition and loss provision framework this Topic builds on
ASC 606Supplies the general variable consideration framework applied to claims and REAs
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Quick-Reference Glossary
Allowable cost
A cost permitted to be billed to and reimbursed by the federal government under FAR Part 31 cost principles.
Cost Accounting Standards (CAS)
A set of federal regulatory standards governing cost measurement, assignment, and allocation practices for larger government contractors.
Request for equitable adjustment (REA)
A contractor's formal request for additional compensation from the government, typically for government-caused delays or scope changes.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows