CFR 9903.302-2(a) states the initial adoption of a cost accounting practice is the first time a cost is incurred or a function is created. (Editor’s Note. We have often been successful in asserting a change in treatment of a cost that was immaterial in the past and then becomes material is tantamount to adopting a new incurred cost and hence is not an accounting change.) Alluding to the controversy over whether an organization change represents an accounting change, when a function is transferred between segments, between home offices or between a segment and home office this does not constitute the creation or elimination of a function for either the segments or home offices. Similarly, the merger of two or more segments does not constitute the creation or elimination of a function.

For example, if a contractor establishes a new security function then this would be a creation of a new function. However, if the security function was transferred from one segment to another this would not be creation of a new function for the one segment nor the elimination of the function from the other segment.

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