When IR&D & B&P costs are incurred before the entity is created, two choices exist: (1) Since no segment exists, the co-venturer/parent is justified in taking the position that IR&D costs should be allocated in the normal manner to other segments with no allocation to the new joint venture/SBU segment. CAS 420.50(e)(2) justifies this position (2) if the segment is established during the same cost accounting period, it can allocate the costs to all segments including the new one. This second alternative runs the risk of not recovering these costs if contract award is not during the same cost accounting period.

CAS 420 dictates that IR&D & B&P costs accumulated at the home office will be allocated to its segments in two steps: first, direct assigning those costs to a specific segment when the costs can be identified with it and then allocating the remaining amount to all other segments in the same way it allocates its residual home office costs. Sometimes when an entity supports only one contract or product line, it may be that ongoing IR&D or B&P costs do not benefit those limited items as much as other segments or at all. When this occurs, they will likely be required (or may be entitled) to seek a special allocation that will allow less home office IR&D/B&P costs to be allocated to the joint venture.

If a joint venture/SBU segment incurs or is assigned IR&D/B&P costs without yet receiving a contract, then it could be accumulating these costs with no vehicle for recovering them. Opportunities for recovery are limited because FAR 31.205-18 and CAS 420.40(f) as well as GAAP usually require current-year expensing. An exception is allowed for deferred IR&D recovery of current expenses but only if it developed a specific product, at its own risk, in anticipation of recovering development costs in the sale of the product and, in addition (1) the total amount of IR&D costs are identifiable (2) the proration of costs are reasonable (3) the contractor had no other government business or if it did, it chose to not allocate IR&D costs to government contracts (except for prorating specific costs) and (4) no costs of current IR&D programs are allocated to government work.

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