Given ABC existed as an independent entity until 2/17/xx, what is the appropriate transitional period for CAS 406: (1) 2/18/xx through 12/31/xx (date of acquisition by DEF through DEF's FYE) OR is it acceptable for ABC to continue its FY through 3/31/xx and the transitional period is 4/1/xx through 12/31/xx?
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Two sources discuss accounting treatment of financial accounting periods, Generally Accepted Accounting Principles (GAAP) and Cost Accounting Standards (CAS). GAAP does not require a subsidiary (even wholly owned) to maintain the same fiscal year as the parent company. GAAP, as found in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810, even provides guidance on financial reporting in situations where a parent and subsidiary maintain different Fiscal Year Ends (FYE). While there is understandable benefit to both organizations to have the same FYE, since it is not required by GAAP, accounting practices would not appear to mandate for a particular start date for a change in FYE.
Further, even if CAS applied to the subsidiary (which it may not as the question stated it was not a business unit with full or modified CAS covered contracts), neither does CAS 406 specifically call out a particular start date for the change in FYE for acquisition of subsidiaries. However, as general practice CAS 406-40(a)(3) does state that “A transitional cost accounting period other than a year shall be used whenever a change of fiscal year occurs.” Further, CAS 406-50(f) allows, “When a transitional cost accounting period is required under the provisions of 9904.406-40(a)(3), the contractor may select any one of the following:
(1) The period, less than a year in length, extending from the end of his previous cost accounting period to the beginning of his next regular cost accounting period.
(2) A period in excess of a year, but not longer than 15 months, obtained by combining the period described in paragraph (f)(1) of this subsection with the previous cost accounting period, or
(3) A period in excess of a year, but not longer than 15 months, obtained by combining the period described in paragraph (f)(1) of this subsection with the next regular cost accounting period."
Thus, in the techniques for application, CAS would indicate the appropriate timing to use as the start date for the transitional period to a new FYE would be the end of the prior FYE. With the information provided in the case of ABC, the start date for the transitional period of 4/1/xx appears to be acceptable.