The Department of Defense is moving toward greater reliance on Generally Accepted Accounting Standards (“GAAP”), but contractors must distinguish between changes that are already effective and reforms that remain under development.
Over the past two months, the Federal government has taken several significant steps toward reducing the government-unique accounting requirements associated with defense contracting.
In a September 14, 2026 memorandum (“Fostering One Strong Industrial Base”), Deputy Defense Secretary Stephen Feinberg directed the DoD to rely on U.S. GAAP “to the maximum extent the law permits” and continue pursuing alignment between GAAP and Cost Accounting Standards (CAS). The policy is intended to increase acquisition speed, attract more commercial companies, and strengthen competition across the U.S. defense industrial base.
Here are some of the actions called out in the memo:
- Immediately implement higher CAS thresholds. The memo directs departments to apply the increased thresholds from Section 1806 of the FY2026 NDAA.
- Drive to set CAS exemption as the default. The memo commits the Department to submit proposals to the Cost Accounting Standards Board (“CASB”) within 60 days "to make CAS exemption the default, confine remaining CAS coverage to sole-source, cost-based development or incentive-fee procurement, and ensure CAS applies only to relevant contracts and not companies as a whole."
- Use U.S. GAAP as baseline accounting method going forward. The memo directs the Department to formally propose to the CASB "completion of the CAS-to-GAAP conformance begun with the July 8, 2026 final rule so that GAAP is the baseline and government-unique requirements survive only where cost-based pricing specifically demands them."
- Risk-based audits built on GAAP financials. Rather than duplicating audit work, the memo directs the Department to "consider a contractor's commercially audited GAAP financial statements and internal-control attestations before performing additional work," and bars reopening previously audited years absent evidence of fraud. In addition the memo says that the DoD should reserve government-unique oversight for high-risk work where the Department has no alternative.
What’s Changed?
A CASB final rule published on September 1 became effective October 1, 2026. The rule:
- Exempts negotiated contracts and subcontracts valued at $35 million or less from CAS, subject to the applicable rules and other exemptions.
- Eliminates the previous $2.5 million threshold and separate $7.5 million trigger-contract mechanism.
- Increases the threshold for full CAS coverage and the Disclosure Statement from $50 million to $100 million.
Full CAS coverage may also apply when a business unit had more than $100 million in net CAS-covered awards during the preceding cost-accounting period.
In addition, a CASB rule effective August 7, 2026 rescinded CAS 408 and CAS 411 and removed most provisions of CAS 404 and CAS 409, reflecting a growing reliance on commercial accounting standards.
The Broader Transition Is Not Yet Complete
The higher thresholds and changes to the four individual standards are final. The broader transition outlined by the DoD remains a policy initiative.
Proposals to make CAS exemption the default, further narrow the procurements subject to CAS and rely more broadly on commercially audited GAAP financial statements will require additional action.
Contractors should also understand that the revised thresholds do not automatically change the treatment of prior awards. Existing contracts may continue to carry their current CAS clauses and coverage.
Potential Impact on Middle-Market Companies
The revised basic threshold could make defense contracting more accessible to manufacturers, technology companies and other non-traditional commercial suppliers that previously viewed CAS compliance as a barrier.
The CASB estimates that the threshold changes will reduce the number of CAS-covered business segments by approximately 60% while retaining more than 90% of the dollars currently covered. It also estimates that the higher full-coverage threshold will reduce the number of entities subject to full CAS coverage and Disclosure Statement reporting by nearly 30%, with less than a 1% reduction in the associated contract dollars.
Five Things to Act on Now:
1. Review your contract portfolio. Separate existing contracts from new solicitations and awards and identify the CAS clauses incorporated into each agreement.
2. Evaluate new awards under the revised thresholds. Future contracts at or below $35 million may now be exempt, while awards between $35 million and $100 million may receive modified coverage.
3. Do not confuse CAS with pricing-data requirements. CAS thresholds and certified cost or pricing data requirements operate under different rules.
4. Strengthen GAAP reporting and internal controls. Reliable financial statements, consistent accounting practices and documented controls may become increasingly important as the government relies more heavily on commercial financial information.
5. Monitor additional regulatory action. Contractors should follow future CAS Board rulemaking and Department of Defense implementation guidance.
How UHY Can Help
UHY’s Aerospace and Defense professionals provide audit, tax, consulting, internal audit, financial reporting, accounting automation, technology and other services designed to address complex industry needs.
UHY can help companies evaluate how the changing environment affects:
- GAAP reporting and internal controls
- Accounting systems and financial processes
- CAS applicability and compliance
- Operational and cost optimization
- Supply chain performance
- Cybersecurity and compliance readiness
Companies that understand both the opportunities and the remaining obligations will be better positioned to compete as the DoD expands its use of commercial business practices.
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