ALLIANCE SOUTH Alliance South CFO Leasing Accounting Requirements 12/07/2010. CFO LEASING, INC. (404)

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1 ALLIANCE SOUTH 2010 YOU YOU HAVE THE CONTRACT NOW WHAT?? Kevin Bryan Grimes (404) Kevin Grimes is a Compliance Consultant with CFO Leasing, Inc. He has over 10 years of accounting experience and specializes in DCAA compliance and accounting system implementations and migrations. Over the last year, CFO Leasing has successfully supported clients in over $400M ($.4Billion) in contracts with the DOE, NASA, Department of Army, Department of Navy, NSA, Department of Veterans Affairs, USDA, and other federal agencies across the country. CFO Leasing has been featured nationally in Black Enterprise Magazine and locally in the Atlanta Business Chronicle and the Atlanta Tribune. Mr. Grimes has studied over 300 hours of DCAA Auditor training provided by the Defense Contract Audit Institute (DCAI). Mr. Grimes is a QuickBooks Certified Pro Advisor and holds multiple Microsoft Certifications. A veteran of the elite United States Navy Nuclear Submarine Force, Kevin earned a Master s Degree in Accounting and graduated Magna Cum Laude from Florida Metropolitan University. He has also pursued doctoral studies in the field of business leadership. I. Speaker Bio Major Areas of Emphasis (1) Internal Control Systems (2) Management Policies (3) Accuracy and Reasonableness of Cost Representations (4) Adequacy and Reliability of Records and Accounting Systems (5) Financial Capability (6) Contractor Compliance with Contractual Provisions (FAR Part 31) 1. Role of the DCAA 1

2 DCAA Letter Page 2 CFO Leasing, Inc s. Accounting System should be able to provide: 1. Proper segregation of direct costs from indirect costs. 2. Identification and accumulation of direct cost by contract. 3. Method for the allocation of indirect costs to intermediate and final objectives. 4. Accumulation of cost under general ledger control. 5. Timekeeping systems that identifies employees' labor by final cost objectives 6. Labor distribution systems that charges direct/indirect labor to appropriate p cost objectives. 7. Determination of costs charged to a contract through routine posting of books of accounts. 8. Identification of cost by contract line item and by units. At your earliest can you please forward me CFO Leasing, Inc. s Chart of Accounts, Organization Chart, and Accounting Policies and Procedures. Lastly, I will send you a separate letter requesting information to assist me with the Financial Capability Risk Assessment. If you have any questions please feel free to contact me. 1. Role of the DCAA Conceptual Framework of an Adequate System Generally Accepted Accounting Principles (GAAP) must be followed Data Must Be Verifiable Consistency is Applied to Accounting Processes Monthly Closings & Financials Competent Personnel 3 Major Points of Emphasis POINT 1: Proper segregation of direct costs from indirect costs. 2

3 Direct Cost (FAR Part 2.101) Any cost that is identified specifically with a particular final cost objective. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives. Direct Cost (In English) Any item, service or labor that is used for the SOLE PURPOSE of satisfying the requirements of 1 specific contract. The item cannot be used for any other contract or corporate purpose. New Term: Final Cost Objective (Simply Put: A Contract) Indirect Cost (FAR Part 2.101) Any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective. Indirect Cost (In English) Any item, service or labor that is used to support or complete the requirements of a contract, t but also benefits and/or supports other contracts t or the corporation. This item benefits multiple contracts or business units. New Term: Intermediate Cost Objective (Simply Put: Support Center/Overhead) DIRECT VS. INDIRECT Direct Costs are the items/services/labor that are required to physically build the car. (Doors, assembly workers, windshields, tires, engine, frame, etc.) Indirect Costs are items that influence and support the completion of the car, but are needed for every model or for the corporation. These items are normally present, even in the absence of a SPECIFIC contract. (Electricity, quality assurance inspector, plant supervisor) 3

4 COMMON ELEMENTS Indirect Costs Fringe Accrued Leave (Vacation/Sick/Holiday) Health & Welfare (Medical Insurance) Payroll Taxes Overhead Facilities Costs Project/Contract Management Salaries Utilities General & Administrative Costs (G&A) General Business Expenses Corporate Salaries Corporate Insurance Accumulation Of Direct Costs Accounting Systems also refer to this as: Job Cost Modules Project Cost Modules Contract Modules WBS (Work Breakdown Structure) Most Commonly Used Accounting Systems: Quickbooks (Small Businesses) DelTek (Midsize/Large Businesses) SAP (Large Businesses) In house Solutions (Large Businesses) 3 Major Points of Emphasis POINT 2: Timekeeping system that identifies labor by final cost objective. 4

5 Labor by Cost Objective DCAA: DCAA will determine whether a contractor's timekeeping system has the ability to track employees' time spent on each work activity. Simplified: DCAA will determine whether a contractor's timekeeping system has the ability to track employees' 'time spent on each work activity. it Simple Definition. but: Most common reason for failing a DCAA Audit! Definition is extremely simplistic but it is loaded with requirements DCAA is concerned with how your employees record their time DCAA is concerned with your company s overall timekeeping policy Some avoid Federal contracts Labor by Cost Objective DCAA Compliant Timekeeping System Requires (Required Practice) Time is recorded on a daily basis Time is recorded by ALL employees (salaried people & the owners) All changes MUST be initialed with an explanation for the change Every employee MUST charge their time to a project each day Record all hours worked whether paid or not (salaried people too) Employees MUST sign their own timecard at the end of each period Labor By Cost Objective DCAA Compliant Timekeeping System Requires (DCAA Floor Checks) DCAA FLOOR CHECKS Auditors periodically perform physical observations of work areas and inquiries of employees to determine if: (1) Employees are actually at work, (2) Employees are performing in their assigned job classification, and (3) Employees are charging to the appropriate job or indirect account. DCAA will perform unannounced floor checks to determine the adequacy and accuracy of the timekeeping system for reimbursement of labor costs under cost reimbursable contracts. 5

6 Labor By Cost Objective DCAA Compliant Timekeeping System Requires (Required Written Policy) Supervisor should approve and cosign all timecards Supervisor is prohibited from completing an employees timecard unless the employee is on an extended absence. Upon return, the employee should immediately submit their timecard and attach it to the one submitted by the supervisor Accuracy of information is the responsibility of the employee Every employee MUST charge their time to a project each day Individuals mischarging time to a contract may be subject to criminal action under 18 United States Code (U.S.C.) Major Points of Emphasis POINT 3: Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31. Exclusion of Costs DCAA: The FAR identifies some costs as expressly unallowable in FAR 31: bad debts; contingencies; contributions or donations; and entertainment and requires that they be excluded from proposals and billings. DCAA will determine if the accounting system identifies these expressly unallowable costs and segregates them in the books and records (or on some alternate acceptable informal basis that readily reconciles with the books and records). Simplified: There are a list of items that cannot be charged to the Government. DCAA wants to make sure you know what they are and label them in your accounting system. Common Error: Advertising, Interest, Factoring Fees, Charity 6

7 Defense Contract Audit Agency (DCAA) PART3: What Does It Mean To Be Financially Capable? (CAM Chapter 14) What Is The Purpose? The purpose of a financial capability audit is to determine if the contractor has adequate financial resources to perform on Government contracts in the near term. Why Does The Contracting Officer Care? Contractor financial difficulties may disrupt production schedules, cause inefficient use of resources, and result in contract nonperformance. These conditions may also result in monetary loss to the Government on guaranteed loans and progress payments. (Scope) Area of Emphasis The financial capability audit places emphasis on evaluating the contractor's current financial condition and trends, near term cash flows, and ability to obtain funds outside the normal course of operations. Area of Focus The audit focus is on the contractor's ability to maintain future cash flows to sustain performance on Government contracts. 7

8 (Indicators) Balance Sheet Profit & Loss (Income Statement) Current Cash Availability Cash Flow Forecast Key Ratios Key Ratios Part 1 RATIO FORMULA DESCRIPTION Current Ratio Current Assets/Current Liabilities This ratio measures a company's ability topay its short term liabilities from short termassets. Quick Ratio Liquid Assets/Current Liabilities (ROI) Return on Investment Net Income/ Total Assets Debt to Equity Ratio Capital Turnover Ratio Cash Flow to Debt Cash Flow to Sales Total Debt/ Stockholders Equity Working Capital/ Total Assets Cash Flow/ Total Debt Cash from Opera tions/sales This ratio measures a company's ability topay off its shortterm obligations from assetsreadily convertible to cash. This ratio is a measure of economic performance and is used as an indicator of management s effectiveness, a measure of a company's ability to earn a satisfactory return oninvestment, and a method of projecting earnings. This ratio assists in determining the relative size of the claims of creditors compared to theclaims of owners. High levels of debt canrestrict management and increase risk toowners. This ratio measures the net liquid assets of thecompany relative to its total capitalization.ordinarily a firm experiencing consistentoperating losses will have shrinking currentassets in relation to total assets. This ratio is an indicator of the adequacy ofavailable funds to satisfy debt obligations. This ratio shows the percentage of each salesdollar realized as cash from operations. Debt Coverage Total Debt/Cash fromoperations This ratio estimates how many years it willtake to retire all debt at the current level ofcash from operations. Key Ratios Part 2 (DCAA Sense of Humor) Financial Condition Risk Assessment Procedures (e)(3) The auditor should also ask the contractor if there are other financial ratios that should be considered when evaluating the contractor's financial condition. 8

9 (What are they really trying to determine?) Financial Flexibility Anentity s s ability to take effective actions to control amounts and timing of cash flows so it can respond to unexpected needs and opportunities. (Rulings) ACCEPTABLE: Audit discloses no financial distress (or relatively insignificant financial distress) UNFAVORABLE: Experiencing financial distress (near term) but management can, through extraordinary action (such as loans, liquidation of assets, or sale of stock), provide adequate funds to continue performing on Government contracts. ADVERSE: Experiencing financial distress and there is reasonable doubt that the contractor will be able to obtain the necessary funds to continue performance on Government contracts. Contracting Officer Determines You Are: Not Financially Responsible Certificates of Competency and Determinations of Responsibility 9

10 Certificate Of Competency Program SBA Certificate of Competency (COC) Program allows a small business to appeal a contracting officer's determination. If the business demonstrates the ability to perform, the SBA issues a COC to the contracting officer requiring the award of that specific contract to the small business. SBA is authorized by Congress to certify a small company's capability to perform a specific government contract. Defense Contract Audit Agency (DCAA) PART4: Where are the Resources for Help? Online Resources DCAA / FAR / SBA Resources DCAA (Defense Contract Audit Agency) SBA Certificate of Competence etency.html FAR Chapter 31 (Federal Acquisition Regulations) 4. Resources for Help 10

11 ALLIANCE SOUTH 2010 YOU HAVE THE CONTRACT NOW WHAT?? Kevin Bryan Grimes (404)

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