A common question I am asked recently involves deferred compensation under government contracts. Often small businesses and especially small R&D business find the need to defer the payment of compensation to owners and employees. The answer to the question is yes you can charge or accrue deferred compensation under government contracts. However, as one might expect there are rules that must be followed. I would only move forward with caution on deferred compensation plans as the rules are very specific and auditors will consider it an item of interest. It will be very important to follow the rules carefully. These rules include:
Must have a policy on this subject. The actual terms of the awards are normally in the form of an agreement.
Must make an award before the service is provided. After the fact awards in periods subsequent to when the service was provided are unallowable.
Must comply with the CAS 415, Accounting for the Costs of Deferred Compensation. The requirements include.
There is a requirement to make the future payment(s) which the contractor cannot unilaterally avoid.
The deferred compensation award is to be satisfied by a future payment of money, other assets, or shares of stock of the contractor.
The amount of the future payment can be measured with reasonable accuracy.
The recipient of the award is known.
If the terms of the award require that certain events must occur before an employee is entitled to receive the benefits, there is a reasonable probability that such events will occur.
For stock options, there must be a reasonable probability that the options ultimately will be exercised.
For plans other than ESOP’s, amounts must be discounted to the present value of the future payments to be made. Under ESOP plans the amount assignable is the amount contributed and incurred in the year contributed.
Of course there are special provisions for payment arrangements including principle and interest, forfeitures, nonmonetary
compensation, etc. In these special rule cases 48 CFR 9904.415-50 should be consulted.
If any of these conditions are not met then the cost will be assigned to the cost accounting period that cost is actually paid.