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ICS for Non-Profit


Corduroy Frog

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A non-profit records committed purchases as expenditures prior to receiving goods and title.  Even though the purchases account shows the expense, the cost hasn't really been incurred in the sense that we normally consider.

Does their incurred cost submission need to remove such expenditures in the calculation of incurred cost?

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Contractors have discretion regarding the timing of recording material costs, so long as they are consistent. Options include:

1. When orders are placed

2. When both the material and invoice are received

3. When the material is issued or released from inventory

4. When invoices are paid

 

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46 minutes ago, Corduroy Frog said:

the cost hasn't really been incurred in the sense that we normally consider.

Doesn't this statement answer your own question?  Generally, for government cost accounting purposes, a cost is incurred when the contractor has paid the cost or has a legal obligation to pay the cost.  There are a few exceptions to this rule when imputed costs, such as cost of money, can be considered an incurred cost.  These principles apply when determining what costs are included as incurred costs when establishing final indirect cost rates.  See, FAR 52.216-7(d)(2)(ii) which states "The proposed rates shall be based on the Contractor’s actual cost experience for that period. "

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Retread, thanks for your usual help.

My question is really "when" is the cost incurred.  The contractor has a legal obligation to pay when a purchase order is entered, and this is recorded as an expenditure for non-profit entities.  However, the obligation to pay is a future obligation and is subject to availability, quality, and delivery of goods.  The quote you present from the FAR is not in question, but the definition of "actual cost experience" is subject to interpretation and thus my question.

My general feeling, and somewhat supported by your response, is that the incurred cost needs to be more solidified than the simple issuance of a purchase order.

 

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This quandary is why the terms "recorded" and "incurred" are not synonyms. The question speaks to the timing of when the contractor records the expense, not when the cost is incurred in the sense that cash has been credited. Accruals are perfectly acceptable -- and, indeed, often required -- means of recording costs prior to actual payment.

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1 hour ago, Corduroy Frog said:

The contractor has a legal obligation to pay when a purchase order is entered,

That is not necessarily a true statement.  Unless there is something in the contract to the contrary, the contractor only has a legal obligation to pay when the supplies or services called for by the PO are delivered or performed.  Until then, the obligation is contingent upon performance.

I agree that accruals are an acceptable way of accounting for some costs such as sick or annual leave.  However, for incurred cost purposes on government contracts, the accrual needs to be tied to some obligation to actually pay the cost.  In the case of a PO for supplies or services, there is no obligation to pay until delivery or performance has occurred.

Edited by Retreadfed
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11 hours ago, Retreadfed said:

However, for incurred cost purposes on government contracts, the accrual needs to be tied to some obligation to actually pay the cost.  In the case of a PO for supplies or services, there is no obligation to pay until delivery or performance has occurred.

That pretty much answers the question, and I agree.

Thanks to all...

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