This year, The Rocky Horror Picture Show celebrates the 50th anniversary of its release. While that cult classic film has stood the test of time, another relic of the 1970s, the Cost Accounting Standards (CAS), is showing its age. When CAS was initially promulgated, Congress determined that the generally accepted accounting principles (GAAP) were not enough to satisfy the government’s requirements for evaluating contract costing and pricing. However, in the decades since, GAAP has evolved, and there are now areas of overlap that have arisen since CAS was first promulgated. Recognizing this overlap, the government has set in motion a review to determine which parts of CAS could be addressed by GAAP, which is the commercial standard regularly used by companies. If there were accounting areas where GAAP could stand in place of CAS, the government wants to reduce the overall burden in the procurement process by allowing contractors to more heavily rely on GAAP, which they are already using to report on their daily business activities.

Accordingly, on September 11, 2025, the Cost Accounting Standards Board (the Board) took two big steps forward on the path to aligning CAS requirements with GAAP by issuing a final rule addressing “operating revenue” and “lease accounting” (the Final Rule) and a notice of proposed rulemaking (NPRM) regarding the elimination of CAS 404, 408, 409, and 411 in favor of GAAP. This is a welcome double feature that promises to reduce the regulatory burden on contractors, external and government auditors, and others with oversight over contractor costs while protecting the government’s interest.  

Let’s do the “Time Warp” back to fiscal year 2017, when the Board’s efforts to conform CAS to GAAP were set in motion by the 2017 National Defense Authorization Act (NDAA). The 2017 NDAA directed the Board to “ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems.” See Section 820 of the 2017 NDAA, codified at 41 U.S.C. 1501(c). On March 13, 2019, the Board released a staff discussion paper (SDP) on the conformance of CAS to GAAP. The SDP sought input with respect to the Board’s efforts to conform CAS requirements to GAAP. Respondents were invited to comment on, among other things, whether and how CAS may need to be modified to conform to changes to GAAP that occurred after a related CAS was promulgated. Specifically, the SDP asked what recommended actions, if any, the Board should take regarding the changes in GAAP for operating revenue and lease accounting rules. The SDP also identified seven standards (404, 407, 408, 409, 411, 415, and 416) that would be the most suitable for conformance to GAAP. Since then, the contractor community has been waiting with “antici…pation” for the long-promised deregulatory action.

The Final Rule: CAS vs. GAAP on Operating Revenue and Lease Accounting (It’s Just a Jump to the Left)

The Final Rule, published at 90 Fed. Reg. 43942 (Sept. 11, 2025), dates back to an NPRM dated June 27, 2024; an advance NPRM dated November 5, 2020; and the 2019 SDP. The Final Rule addresses two concepts in CAS that overlapped with GAAP: operating revenue and lease accounting. For operating revenue, the Board explained that, while the definition in CAS 403 differed from the one used in GAAP, the two definitions had “essentially equivalent” meanings.

GAAP defines “revenue” as

[i]nflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Financial Accounting Standards Board Accounting Standards Codification (ASC) 606-10-20.

CAS 403-30(a)(3) contained the following definition of “operating revenue”:

amounts accrued or charge[d] to customers, clients, and tenants, for the sale of products manufactured or purchased for resale, for services, and for rentals of property held primarily for leasing to others. It includes both reimbursable costs and fees under cost-type contracts and percentage-of-completion sales accruals except that it includes only the fee for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities. It excludes incidental interest, dividends, royalty, and rental income, and proceeds from the sale of assets used in the business.

In light of the 2017 NDAA directive to use commercial standards to the maximum extent practicable, the Board reasoned that the CAS 403 definition had become unnecessary to protect the government’s interests. Accordingly, the Final Rule deletes the definition of “operating revenue” in its entirety and modifies CAS 403 to rely on GAAP.

Regarding lease accounting, the Final Rule notes that since the initial promulgation of CAS 414 and 417, there have been changes to GAAP related to lease accounting, which has created confusion as to which assets are included in calculations of facilities capital cost of money (FCCOM). Specifically, “right-of-use” assets, also referred to as operating leases, could be classified as assets or liabilities. To avoid confusion, the Final Rule clarifies which assets should be included in the calculations of FCCOM. 

Accordingly, the Final Rule (1) deletes the definition of “operating revenue” in its entirety from CAS 403 and makes conforming revisions to align with GAAP and (2) revises the definition of “intangible capital asset” in CAS 414 and CAS 417 and makes a conforming change in CAS 403. The Final Rule also adds language in Appendix A of CAS 414, in the Instructions for Form CASB CMF, to reflect these changes.

The Proposed Rule: Sunsetting Four CAS Standards (and Then a Step to the Right)

The NPRM, published at 90 Fed. Reg. 43994 (Sept. 11, 2025), seeks to sunset CAS 404, 408, 409, and 411. We expect these changes to be enacted so that CAS-specific compliance will be simplified. Below we summarize the four standards that are slated for elimination and how the Board proposes to do so.

Elimination of CAS 404 – Capitalization of Tangible Assets. First promulgated in 1973, CAS 404 requires contractors to establish policies for the capitalization of the acquisition costs of tangible assets. Upon comparing CAS 404 with GAAP, the Board found a significant overlap between the two except for CAS 404-50(d)(1), which protects the government from paying duplicative costs when government contractors merge or are acquired. The requirements of CAS 404-50(d)(1) will be kept by relocating them to a new paragraph within CAS 406.

Elimination of CAS 408 – Accounting for Costs of Compensated Personal Absence. Dating back to 1974, CAS 408 seeks to improve and standardize the measurement of costs of vacation, sick leave, holidays, and other compensated personal absences for a cost accounting period. The Board found that GAAP addresses these concerns and wholesale elimination of CAS 408 is acceptable. Notably, the Board recognized that conformance to GAAP and discarding CAS 408 may result in accounting practice changes in some cases because GAAP permits contractors to assign costs to earlier cost accounting periods than does CAS 408. The Board explained that it believes that these differences should be immaterial as GAAP requires estimates and adjustments for forfeitures. The proposed rule exempts any such changes from the required cost impact process, as reflected in a proposed provision at 9903.201-9(b).

Elimination of CAS 409 – Depreciation of Tangible Capital Assets. CAS 409, in existence since 1975, provides criteria for assigning the costs of tangible capital assets based on the concept that such costs should be a reasonable measure of the expiration of service potential of the tangible assets subject to depreciation. The Board found that GAAP overlaps sufficiently to protect the government’s interests except for three provisions:

• CAS 409-50(e)(5), which provides that a contractor and the government can agree on the estimated service life of individual tangible capital assets due to the equipment having a unique purpose or other agreed-upon circumstances that warrant a shorter estimated service life
• CAS 409-50(j)(1), which requires that gains and losses are assigned consistent with the costs of the associated depreciation charged
• CAS 409-50(j)(4), which protects the government against shifting of gains and losses associated with the disposition of tangible capital assets

The proposed rule retains the requirements of CAS 409-50(e)(5), CAS 409-50(j)(1), and CAS 409-50(j)(4) by relocating them to a new section within CAS 406, along with the requirement retained from CAS 404.

Elimination of CAS 411 – Accounting for Acquisition Costs of Materials. Since 1975, CAS 411 has provided criteria for the accounting for acquisition costs of materials and the use of inventory costing methods. In light of GAAP, other CAS standards, and FAR 31.205-26 (addressing material costs), the Board determined that there is no longer a need for CAS 411 and proposed to eliminate the standard.

The public comment period on the proposed rule ran until October 14, 2025, but even after comments are collected, we don’t foresee the Board changing course given the Board’s findings that GAAP adequately protects the government’s interests. Moreover, while this pair of rules is not an immediate result of the current administration’s efforts to reorient and simplify government contracting, CAS conformance to GAAP seeks similar efficiencies and synergies. Consequently, we expect the changes to be implemented. A back-of-the-envelope tally indicates that these four CAS standards currently impose 72 requirements, so the proposed rule will eliminate 68 of them, with the four remaining requirements being tucked into a new paragraph of CAS 406. While such a reduction seems drastic, contractors should not expect massive changes because the cost principles remain vital, as evidenced by the Board’s reliance on FAR 31.205-26 in proposing to eliminate CAS 411.Nevertheless, after decades of bearing the burden of complying with CAS (that really drives you insane), we expect contractors will welcome less CAS-specific compliance. However, contractors should be mindful that, despite these simplifications, overall adherence to the cost principles of the Federal Acquisition Regulation remains a bedrock component of cost compliance for contractors.