Cost Accounting Standards: Harmonization of Cost Accounting Standards 412 and 413 With the Pension Protection Act of 2006, 25982-26024 [2010-9783]

Agencies

• Office of Management and Budget
• Office of Federal Procurement Policy
• Federal Procurement Policy Office

[Federal Register Volume 75, Number 89 (Monday, May 10, 2010)]
[Proposed Rules]
[Pages 25982-26024]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-9783]



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Part III





Office of Management and Budget





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Office of Federal Procurement Policy



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48 CFR Part 9904



Cost Accounting Standards: Harmonization of Cost Accounting Standards 
412 and 413 With the Pension Protection Act of 2006; Proposed Rule

Federal Register / Vol. 75 , No. 89 / Monday, May 10, 2010 / Proposed 
Rules

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards: Harmonization of Cost Accounting 
Standards 412 and 413 With the Pension Protection Act of 2006

AGENCY: Office of Management and Budget (OMB), Office of Federal 
Procurement Policy (OFPP), Cost Accounting Standards Board (Board).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards Board (Board), invites public comments concerning 
the harmonization of Cost Accounting Standards 412 and 413 with the 
Pension Protection Act (PPA) of 2006. The PPA amended the minimum 
funding requirements for defined benefit pension plans. The PPA 
required the Board to harmonize with PPA the CAS applicable to the 
Government reimbursement of the contractor's pension costs. The Board 
has proposed several changes to harmonize CAS with PPA, including the 
recognition of a ``minimum actuarial liability'' consistent with the 
PPA minimum required contribution. The proposed CAS changes will lessen 
the difference between the amount of pension cost reimbursable to the 
contractor in accordance with CAS and the amount of pension 
contribution required to be made by the contractor as the plan sponsor 
by PPA.

DATES: Comments must be in writing and must be received by the July 9, 
2010.

ADDRESSES: All comments to this Notice of Proposed Rulemaking (NPRM) 
must be in writing. You may submit your comments via U.S mail. However, 
due to delays in the receipt and processing of mail, respondents are 
strongly encouraged to submit comments electronically to ensure timely 
receipt. Electronic comments may be submitted in any one of three ways:
     Federal eRulemaking Portal: Comments may be directly sent 
via https://www.regulations.gov--a Federal E-Government Web site that 
allows the public to find, review, and submit comments on documents 
that agencies have published in the Federal Register and that are open 
for comment. Simply type ``CAS Pension Harmonization NPRM'' (without 
quotes) in the Comment or Submission search box, click Go, and follow 
the instructions for submitting comments.
     E-mail: Comments may be included in an e-mail message sent 
to casb2@omb.eop.gov. The comments may be submitted in the text of the 
e-mail message or as an attachment;
     Facsimile: Comments may also be submitted via facsimile to 
(202) 395-5105; or
     Mail: If you must submit your responses via regular mail, 
please mail them to: Office of Federal Procurement Policy, 725 17th 
Street, NW., Room 9013, Washington, DC 20503, Attn: Raymond J. M. Wong. 
Be aware that due to the screening of U.S. mail to this office, there 
will be several weeks delay in the receipt of mail. Respondents are 
strongly encouraged to submit responses electronically to ensure timely 
receipt.
    Be sure to include your name, title, organization, postal address, 
telephone number, and e-mail address in the text of your public comment 
and reference ``CAS Pension Harmonization NPRM'' in the subject line. 
Comments received by the date specified above will be included as part 
of the official record.
    Please note that all public comments received will be available in 
their entirety at https://www.whitehouse.gov/omb/casb_index_public_comments/ and https://www.regulations.gov after the close of the comment 
period.
    For the convenience of the public, a copy of the proposed 
amendments to Cost Accounting Standards 412 and 413 shown in a ``line-
in/line-out'' format is available at: https://www.whitehouse.gov/omb/procurement_casb_index_fedreg/ and https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Eric Shipley, Project Director, Cost 
Accounting Standards Board (telephone: 410-786-6381).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    Rules, Regulations and Standards issued by the Cost Accounting 
Standards Board (Board) are codified at 48 CFR Chapter 99. The Office 
of Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the 
Board, prior to the establishment of any new or revised Cost Accounting 
Standard (CAS or Standard), complete a prescribed rulemaking process. 
The process generally consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of Government contracts as a result of the adoption of a 
proposed Standard, the Staff Discussion Paper (SDP).
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    This NPRM is step three of the four-step process.

B. Background and Summary

    The Office of Federal Procurement Policy (OFPP), Cost Accounting 
Standards Board, is today releasing a Notice of Proposed Rulemaking 
(NPRM) on the harmonization of Cost Accounting Standards (CAS) 412 and 
413 with the Pension Protection Act (PPA) of 2006 (Pub. L. 109-280, 120 
Stat. 780). The Office of Procurement Policy Act, 41 U.S.C. 422(g)(1), 
requires the Board to consult with interested persons concerning the 
advantages, disadvantages, and improvements anticipated in the pricing 
and administration of Government contracts as a result of the adoption 
of a proposed Standard prior to the promulgation of any new or revised 
CAS.
    The PPA amended the minimum funding requirements for, and the tax-
deductibility of contributions to, defined benefit pension plans under 
the Employee Retirement Income Security Act of 1974 (ERISA). Section 
106 of the PPA requires the Board to revise Standards 412 and 413 of 
the CAS to harmonize with the amended ERISA minimum required 
contribution.
    In addition to the proposed changes for harmonization, the Board 
has proposed several technical corrections to cross references and 
minor inconsistencies in the current rule. These technical corrections 
are not intended to change the meaning or provisions of CAS 412 and 413 
as currently published. The technical corrections for CAS 412 are being 
made to paragraphs 9904.412-30(a)(1) and (9), paragraphs 9904.412-
50(c)(1), (2) and (5), and paragraph 9904.412-60(c)(13). In CAS 413, 
the technical corrections are being made to paragraph 9904.413-
30(a)(1), subsection 9904.413-40(c), and paragraphs 9904.413-
50(c)(1)(i) and 9904.413-60(c)(12).

Prior Promulgations

    On July 3, 2007, the Board published a Staff Discussion Paper (SDP) 
(72 FR 36508) to solicit public views with respect to the Board's 
statutory requirement to ``harmonize'' CAS 412 and 413 with the PPA. 
Differences between CAS 412 and 413 and the PPA, as well as issues 
associated with pension harmonization, were identified in the SDP. 
Respondents were invited to

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identify and comment on any issues related to pension harmonization 
that they felt were important. The SDP reflected research accomplished 
to date by the staff of the Board, and was issued by the Board in 
accordance with the requirements of 41 U.S.C. 422(g). The SDP 
identified issues related to pension harmonization and did not 
necessarily represent the position of the Board.
    The SDP noted basic conceptual differences between the CAS and the 
PPA that affect all contracts and awards subject to CAS 412 and 413. 
The PPA utilizes a settlement or liquidation approach to value pension 
plan assets and liabilities, including the use of accrued benefit 
obligations and interest rates based on current corporate bond rates. 
On the other hand, CAS utilizes the going concern approach to plan 
asset and liability valuations, i.e., assumes the company (or in this 
case the pension plan and trust) will continue in business, and follows 
accrual accounting principles that incorporate long-term, going concern 
assumptions about future asset returns, future years of employee 
service, and future salary increases. These assumptions about future 
events are absent from the settlement approach utilized by PPA.
    On September 2, 2008, the Board published the Advance Notice of 
Proposed Rulemaking (ANPRM) (73 FR 51261) to solicit public views with 
respect to the Board's statutory requirement to ``harmonize'' CAS 412 
and 413 with the PPA. Respondents were invited to comment on the 
general approach to harmonization and the proposed amendments to CAS 
412 and 413. The ANPRM reflected public comments in response to the SDP 
and research accomplished to date by the staff of the Board, and was 
issued by the Board in accordance with the requirements of 41 U.S.C. 
422(g).
    Because of the complexity and technical nature of the proposed 
changes, many respondents asked that the Board extend the comment 
period to permit submission of additional or supplemental public 
comments. On November 26, 2008, the Board published a notice extending 
the comment period for the ANPRM (73 FR 72086).
    The ANPRM proposed nine general changes to CAS 412 and 413 that 
were intended to harmonize the CAS with the PPA minimum required 
contributions while controlling cost volatility between periods. The 
primary changes proposed by the ANPRM were the recognition of a 
``minimum actuarial liability,'' special recognition of ``mandatory 
prepayment credits,'' an accelerated gain and loss amortization, and a 
revision of the assignable cost limitation. Other proposed changes 
addressed the PPA's mandatory cessation of benefit accruals for 
severely underfunded plans, the projection of flat dollar benefits, 
recognition of accrued contribution values on a discounted basis, and 
interest on prepayments credits and prior period unfunded pension 
costs. The final category of proposed changes provided for a phased-in 
transition of the amendments to mitigate the initial increase in 
contract price.

Public Comments

    The Board received 17 public comments and 2 supplemental public 
comments to the ANPRM, including the extension period. These comments 
came from contractors, industry associations, Federal agencies, and the 
actuarial profession. The Board appreciates the efforts of all parties 
that submitted comments, and found their depth and breadth to be very 
informative. A brief summary of the comments follows in Section C--
Public Comments to the ANPRM.
    The NPRM reflects public comments in response to the ANPRM, as well 
as to research accomplished to date by the staff of the Board in the 
respective subject areas, and is issued by the Board in accordance with 
the requirements of 41 U.S.C. 422(g).

Conclusions

    The Board continues to believe that the accounting for pension 
costs for Government contract costing purposes should reflect the long-
term nature of the pension plan for a going concern. As discussed in 
the ANPRM, the Cost Accounting Standards are intended to provide cost 
data not only to determine the incurred cost for the current period, 
but also to provide consistent and reasonable cost data for the 
forward-pricing of Government contracts over the near future. Financial 
statement accounting, on the other hand, is intended to report the 
change in an entity's financial position and results of operations 
during the current period. ERISA does not prescribe a unique cost or 
expense for a period. The minimum required contribution rules of ERISA, 
as amended by the PPA, instead require that the plan achieves funding 
of its current settlement liability within a relatively short period of 
time. On the other hand, the ERISA tax-deductible maximum contribution 
is based on the plan's long-term benefit levels plus a reserve against 
adverse experience. ERISA permits a wide contribution range that allows 
the company to establish long-term financial management decisions on 
the funding of the ongoing pension plan.
    The Board recognizes that contract cost accounting for a going 
concern must address the risks to both the contractor and the 
Government that are associated with inadequate funding of a plan's 
settlement liability. The NPRM therefore proposes implementation of a 
minimum actuarial liability and minimum normal cost that is based on 
currently accrued benefits that have been valued using corporate bond 
rates. Furthermore, recognition of the minimum actuarial liability and 
normal cost that are consistent with the basis for the ERISA ``funding 
target'' and ``target normal cost,'' will alleviate the disparity 
between the CAS assigned cost and ERISA's minimum required 
contribution. Once harmonization is achieved, maintaining the going 
concern basis for contract costing allows contractors to set long-term 
funding goals that avoid undue cost or contribution volatility.
    The Board agrees with the public comments that since the general 
approach to harmonization is tied to the minimum actuarial liability, 
the recognition proposed in the ANPRM for post harmonization 
``mandatory'' prepayment credits was unnecessary and overly complex. In 
reviewing the proposed treatment of mandatory prepayments, the Board 
noted that because the normal cost and actuarial accrued liability have 
been harmonized with the minimum actuarial liability and minimum normal 
cost, providing for supplemental recognition of the mandatory 
prepayment credits would overstate the appropriate period cost. The 
NPRM does not include any special recognition of mandatory prepayment 
credits.
    The Board continues to believe that issues of benefit design, 
investment strategy, and financial management of the pension plan fall 
under the contractor's purview. The Board also believes that the Cost 
Accounting Standards must remain sufficiently robust to accommodate 
evolving changes in financial accounting theory and reporting as well 
as Congressional changes to ERISA.
    After considering the effects of accelerating the recognition of 
actuarial gains and losses and to provide more timely adjustment of 
plan experience without introducing unmanageable volatility, the NPRM 
proposes changing the amortization period for gains and losses to a 10-
year amortization period from its current 15-year period. This shorter 
amortization period more closely follows the 7-year period

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required by ERISA to fully fund the plan's settlement liability.
    The Board believes the 10-year minimum amortization period, 
including the required amortization of any change in unfunded actuarial 
liability due to switching from the actuarial accrued liability to the 
minimum actuarial liability, or from the minimum actuarial liability 
back to the actuarial accrued liability, provides sufficient smoothing 
of costs to reduce volatility. Therefore, the NPRM does not include any 
assignable cost limitation buffer. Under the NPRM, once the assignable 
cost limitation is exceeded, the assigned pension cost continues to be 
limited to zero.
    The Board proposes a specific transition method for implementing 
harmonization and moderating its cost effects. The proposed 5-year 
transition method will phase-in the recognition of any adjustment of 
the actuarial accrued liability and normal cost. This transition method 
would apply to all contractors subject to CAS 412 and 413.

Benefits

    The proposed rule of this NPRM harmonizes the disparity between the 
PPA minimum contribution requirements and Government contract costing. 
The proposed rule should provide relief for the contractors' concerns 
with indefinite delays in recovery of cash expenditures while 
mitigating the expected pension cost increases that will impact 
Government and contractor budgets. The proposed rule should also reduce 
cost volatility between periods and thereby enhance the budgeting and 
forward pricing process. This will assist in meeting the uniformity and 
consistency requirements described in the Board's Statement of 
Objectives, Policies and Concepts (57 FR 31036), July 13, 1992).
    The NPRM allows companies to use the same actuarial methods and 
valuation software for ERISA, financial statements, and Government 
contract costing purposes. Except for the interest rate, the same 
general set of actuarial assumptions can be used for all three 
purposes. This will allow Government agencies and auditors to place 
reliance on data from ERISA and financial statement valuations while 
allowing contractors to avoid unnecessary actuarial effort and expense.

Goals for Harmonization

    This proposed rule is based upon the following goals for achieving 
pension harmonization and transition that the Board established in the 
ANPRM and reaffirms in this NPRM:
(1) Harmonization Goals
    (a) Minimal changes to CAS 412 and 413.
    (b) No direct adoption of ERISA as amended by the PPA, to avoid any 
change to contract cost accounting without prior CAS Board approval 
since Congress will amend ERISA in the future.
    (c) Preserve matching of costs with causal/beneficial activities 
over the long-term.
    (d) Mitigate volatility (enhance predictably).
    (e) Make ``user-friendly'' changes (avoid complexity to the degree 
possible).
(2) Goals for Transition to Harmonization
    (a) Minimize undue immediate impact on contract prices and budgets.
    (b) Transition should work for contractors with either CAS or FAR 
covered contracts.

Summary Description of Proposed Standard

    The primary proposed harmonization provisions are self-contained 
within the ``CAS Harmonization Rule'' at 9904.412-50(b)(7). This 
structure eliminates the need to revise many long-standing provisions 
and clearly identifies the special accounting required for 
harmonization. Proposed revisions to other provisions are necessary to 
harmonization and mitigate volatility. This proposed rule makes general 
changes to CAS 412 and 413 that are intended to harmonize the CAS with 
the PPA minimum required contributions while controlling cost 
volatility between periods. These general changes are:
    (1) Recognition of a ``minimum actuarial liability.'' CAS 412 and 
413 continue to measure the actuarial accrued liability and normal cost 
based on long-term, ``best-estimate'' actuarial assumptions, projected 
benefits, and the contractor's established immediate gain actuarial 
cost method. However, in order to ensure that the measured costs 
recognize the settlement liability and normal cost as minimum values, 
the proposed rule requires that the measured pension cost must be re-
determined using the minimum actuarial liability and minimum normal 
cost if the criteria of all three (3) ``triggers'' set forth in the CAS 
Harmonization Rule are met.
    (i) If the minimum required amount exceeds the pension cost 
measured without regard to the minimum liability and minimum normal 
cost, then the contractor must determine which total period liability, 
i.e., actuarial liability plus normal cost, must be used;
    (ii) If the sum of the minimum actuarial liability plus the minimum 
normal cost measured on a settlement basis exceeds the sum of actuarial 
accrued liability plus normal cost measured on a long-term basis, then 
the contractor must re-measure the pension cost for the period using 
the minimum actuarial liability and minimum normal cost; and
    (iii) If pension cost re-measured using the minimum actuarial 
liability and minimum normal cost exceeds the pension cost originally 
measured using the actuarial accrued liability and normal cost, then 
the re-measured pension cost is used for the assignment and allocation 
of pension costs for the period. Furthermore, the minimum actuarial 
liability and minimum normal costs are used for all purposes of 
measurement, assignment, and allocation under CAS 412.
    The minimum actuarial liability definition is consistent with the 
PPA funding target and the Statement of Financial Accounting Standard 
No. 87 (FAS 87) ``accumulated benefit obligation.'' The minimum normal 
cost is similarly defined to be consistent with the FAS 87 service cost 
(without salary projection) and the PPA target normal cost.
    The proposed rule does not require a change to the contractor's 
actuarial cost method used to compute pension costs for CAS 412 and 413 
purposes. Therefore, any change in actuarial cost method, including a 
change in asset valuation method, would be a ``voluntary'' change in 
cost accounting practice and must comply with the provisions of CAS 412 
and 413.
    (2) Accelerated Gain and Loss Amortization. The proposed rule 
accelerates the assignment of actuarial gains and losses by decreasing 
the amortization period from fifteen to ten years. This accelerated 
assignment will reduce the delay in cost recognition and is consistent 
with the shortest amortization period permitted for other portions of 
the unfunded actuarial liability (or actuarial surplus).
    (3) Revision of the Assignable Cost Limitation. The proposed rule 
does not change the basic definition of the assignable cost limitation 
and continues to limit the assignable cost to zero if assets exceed the 
actuarial accrued liability and normal cost. Under the proposed rule, 
the actuarial accrued liability and normal cost used to determine the 
assignable cost limitation are adjusted for the minimum values if 
applicable.
    (4) Mandatory Cessation of Benefit Accruals. This proposed rule 
will exempt any curtailment of benefit

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accrual required by ERISA from immediate adjustment under CAS 413-
50(c)(12). Voluntary benefit curtailments will remain subject to 
immediate adjustment under CAS 413-50(c)(12). A new subparagraph has 
been added to CAS 413-50(c)(12) that addresses the accounting for the 
benefit curtailment or other segment closing adjustment in subsequent 
periods.
    (5) Projection of Flat Dollar Benefits. The proposed amendments 
will allow the projection of increases in specific dollar benefits 
granted under collective bargaining agreements. The recognition of such 
increases will place reliance on criteria issued by the Internal 
Revenue Service (IRS). As with salary projections, the rule will 
discontinue projection of these specific dollar benefit increases upon 
segment closing, which uses the accrued benefit cost method to measure 
the liability.
    (6) Asset Values and Present Value of Contributions. For 
nonqualified defined benefit plans, the proposed rule discounts 
contributions at the long-term interest assumption from the date paid, 
even if made after the end of the year. For qualified defined benefit 
plans, this proposed rule would accept the present value of accrued 
contributions and the market value (fair value) of assets recognized 
for ERISA purposes. Using the ERISA recognition of accrued 
contributions in determining the market value of assets will avoid 
unexpected anomalies between ERISA and the CAS, as well as support 
compliance and audit efforts. The market and actuarial values of assets 
should include the present value of accrued contributions.
    (7) Interest on Prepayments Credits. Funding more than the assigned 
pension cost is often a financial management decision made by the 
contractor, although funding decisions must consider the minimum 
funding requirements of ERISA. Since all monies deposited into the 
funding agency share equally in the fund's investment results, the 
prepayment is allocated a share of the investment earnings and 
administrative expenses on the same basis as separately identified 
segment assets. This recognition ensures that any investment gain or 
loss attributable to the assets accumulated by prepayments does not 
affect the gains and losses of the plan or any segments. The decision 
or requirement to deposit funds in excess of the assigned cost should 
have a neutral impact on Government contract costing.
    (8) Interest on Unfunded Pension Costs. Funding less than the 
assigned pension cost is a financial management decision made by the 
contractor. The unfunded cost cannot be reassigned to current or future 
periods and must be separately identified and tracked in accordance 
with 9904.412-50(a)(2). Because there are no assets associated with 
these unfunded accruals, the Board believes that these amounts should 
not create any investment gain or loss. The proposed rule reaffirms 
that the accumulated value of unfunded accruals is adjusted at the 
long-term interest assumption and clarifies that the settlement 
interest rate based on corporate bond yields does not apply.
    (9) Required Amortization of Change in Unfunded Actuarial Liability 
due to Recognition of Minimum Actuarial Liability Mitigates Initial 
Increase in Contract Price. The proposed rule explicitly requires that 
the actuarial gain or loss, due to any difference between the expected 
and actual unfunded actuarial liability caused by the recognition of 
the minimum actuarial liability, be amortized over a 10-year period 
along with actuarial gain or losses from all other sources. This 
amortization process will limit the immediate effect on pension costs 
when the Harmonization Rule becomes applicable and thereby mitigates 
the impact on existing contracts subject to these Standards.
    There are two other important features included in this proposed 
rule.
    (1) Transition Phase-In of Minimum Actuarial Liability and Minimum 
Normal Cost Mitigates Initial Increase in Contract Price. To allow time 
for agency budgets to manage the possible increase in Government 
contract costs and to mitigate the impact on existing contracts for 
both the Government and contractors, the changes to CAS 412 and 413 are 
phased-in over a 5-year period that approximates the typical 
contracting cycle. The proposed phase-in allows the cost impact of this 
draft proposal to be gradually recognized in the pricing of CAS-covered 
and FAR contracts alike. Any adjustment to the actuarial accrued 
liability and normal cost based on recognition of the minimum actuarial 
liability and minimum normal cost will be phased in over a 5-year 
period at 20% per year, i.e., 20% of the difference will be recognized 
the first year, 40% the next year, then 60%, 80%, and finally 100% 
beginning in the fifth year. The phase-in of the minimum actuarial 
liability also applies to segment closing adjustments.
    (2) Extended Illustrations. Many existing illustrations have been 
updated to reflect the proposed changes to CAS 412 and 413. To assist 
the contractor with understanding how this proposed rule would 
function, extensive examples have been included in a new Section 
9904.412-60.1, Illustrations--CAS Harmonization Rule. This section 
presents a series of illustrations showing the measurement, assignment 
and allocation of pension cost for a contractor with an under-funded 
segment, followed by another series of illustrations showing the 
measurement, assignment and allocation of pension cost for a contractor 
with an over-funded segment. The actuarial gain and loss recognition of 
changes between the long-term liability and the settlement liability 
bases are illustrated in 9904.412-60.1(h). This structural format 
differs from the format for 9904.412-60.
    The Board realizes that these examples are longer than the typical 
example in the Standards, but believes that providing comprehensive 
examples covering the process from measurement to assignment and then 
allocation will demonstrate how the proposed harmonization is 
integrated into the existing rule.

C. Public Comments to the Advance Notice of Proposed Rulemaking

    The full text of the public comments to the ANPRM is available at: 
https://www.whitehouse.gov/omb/casb_index_public_comments/ and https://www.regulations.gov.

Summary of Public Comments

    The public comments included a broad range of views on how to 
harmonize CAS with the PPA. At one extreme, one commenter believed that 
the Board should do nothing as the existing CAS rules are already 
harmonized with the PPA. At the other extreme, others believed that CAS 
412 and 413 should be amended to adopt the actuarial assumptions and 
measurement techniques used to determine the PPA minimum required 
contribution. In any case, there was overall consensus that any 
amendments to CAS 412 and 413 should apply to all contractors with 
Government contracts subject to CAS 412 and 413.
    Most of the public comments expressed concern that the disparity 
between CAS and the PPA has the potential to cause extreme cash flow 
problems for some Government contractors. Many commenters believed that 
the ERISA minimum required contribution must be recognized in contract 
costing on a timely basis. Industry and professional groups generally 
agreed that Section 106 of the PPA requires CAS 412 and 413 to be 
revised to harmonize with the PPA minimum required contribution. 
However, there were varying views on how to best accomplish that goal. 
Many commenters suggested that the Board

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seize the opportunity offered by harmonization to bring the CAS rules 
more in line with the evolving views of financial statement disclosure 
of pension obligations, minimum funding adequacy to protect the plan 
participants and the Pension Benefit Guarantee Corporation (PBGC), and 
financial economics regarding the appropriate use of corporate 
resources and shareholder equity. Rather than merely amend the existing 
rules, the public comments suggested that a fresh look should be taken 
by the Board to balance and reconcile the competing interests of 
stakeholders and the intent of the various statutes.
    Others argued that there is no mandate for the Board to address any 
issue beyond the PPA minimum required contribution. These commenters 
believed that any other issues should be addressed by the Board in a 
separate case. There was no consensus on how far the Board should go 
beyond the requirement to merely harmonize CAS with the PPA minimum 
required contribution, e.g., should the Board also consider the PPA's 
revisions to the maximum tax deductible limits.
    For the most part, industry comments supported adoption of the PPA 
minimum funding provisions including the provisions related to ``at-
risk'' plans. They believe that directly adopting the PPA minimum 
funding provisions will preserve the equitable principle of the CAS 
whereby neither contractors nor Government receives an unfair 
advantage. They expressed concern that if the Board does not fully 
adopt the PPA minimum funding provisions, the Government will have an 
unfair advantage because the PPA compels the contractors to incur a 
higher cost than they can allocate to Government contracts and recover 
currently, thus, creating negative corporate cash flow. They noted that 
although the prepayment provision in the current CAS is meant to 
mitigate this situation, the cost methodology under the PPA is so 
radically different that the prepayment provision in CAS 412 has 
negligible impact in providing timely relief to the contractor from 
this negative cash flow.
    The views of one Federal agency on harmonization differed from 
those of industry and opined that no revision to CAS was necessary to 
harmonize with the PPA. This commenter argued that: (i) Harmony is 
already achieved through prepayments credits; (ii) adopting the PPA 
funding rules will run counter to uniform and consistent accounting; 
(iii) adopting the PPA requirements weakens the causal/beneficial 
relationship between the cost and cost objective; and, (iv) adopting 
the PPA requirements will increase cost volatility. The commenter 
expressed its belief that the purposes of the PPA, which are to better 
secure pension benefits and promote solvency of the pension plan, are 
different than the purposes of CAS. They also believed that since CAS 
does not undermine the purposes of the PPA the two are already in 
harmony.
    This summary of the comments and responses form part of the Board's 
public record in promulgating this case and are intended to enhance the 
public's understanding of the Board's deliberations concerning Pension 
Harmonization.
Abbreviations
    Throughout the public comments there are the following commonly 
used abbreviations:

     AAL--Actuarial Accrued Liability, usually used to denote 
the liability measured using long-term assumptions;
     ACL--Assignable Cost Limitation;
     ERISA--The Employees' Retirement Security Income Act of 
1974, as amended to date;
     MAL--Minimum Actuarial Liability, usually used to denote 
the liability measured using interest based on current period 
settlement rates;
     MNC--Minimum Normal Cost, usually used to denote the 
normal cost measured using interest based on current period settlement 
rates;
     MPC--Mandatory Prepayment Credit, which was a term used in 
the ANPRM;
     MRC--Minimum Required Contribution, which is the 
contribution necessary to satisfy the minimum funding requirement of 
ERISA for continued plan qualification; and
     NC--Normal Cost, usually used to denote the normal cost 
measured using long-term assumptions.
Responses to Specific Comments
    Topic A: Proposed Approach to Harmonization. The principle elements 
for harmonization that were proposed in the ANPRM are:
    a. Continuance of the development of the CAS assigned pension cost 
on a long-term, going concern basis;
    b. Implementation of a minimum liability ``floor'' based on the 
plan's current settlement liability in the computation of the assigned 
cost for a period;
    c. Acceleration of the gain and loss amortization from 15 to 10 
years;
    d. Recognition of established patterns of increasing flat dollar 
benefits;
    e. Adjusting prepayment credits based on the rate of return on 
assets; and
    f. Exemption of mandated benefit curtailments.
    Comments: The majority of commenters found that the ANPRM presented 
a fair and reasonable approach to harmonization. The commenters 
submitted many detailed comments on improvements to specific provisions 
as well as some additional provisions they believed might be useful. 
Some commenters remarked that the extensive explanation of the 
reasoning behind the Board's approach to harmonization enhanced their 
understanding of the ANPRM.
    As one commenter wrote:

    We appreciate the effort put forth by the CAS Board and Staff to 
study the issues and publish this ANPRM. The task of harmonization 
is challenging and technically complicated. The harmonization of CAS 
needs to respect the cash contribution requirements mandated by the 
PPA, but it should be done in a way that best allows both 
contractors and the government to budget for that cost and for the 
contractors to recover that cost. The ANPRM provides an excellent 
framework for developing revisions to the CAS in order to satisfy 
the requirements for harmonization with PPA. However, we believe 
that there are several areas where changes to the ANPRM would offer 
significant improvement toward meeting the objective of 
harmonization.

    Another public comment read:

    We commend the CAS Board for addressing the complex issues 
concerning harmonizing pension costs under the CAS 412/413 
requirements with the minimum funding requirements under the Pension 
Protection Act (PPA) of 2006. We believe the ANPRM reflects an 
excellent approach for addressing these important issues.

    Commenting on the proposed approach and preamble explanation, a 
commenter remarked:

    Although the ANPRM does not establish as much commonality 
between the building blocks underlying the CAS cost and ERISA 
minimum funding requirements as we would have preferred, the 
explanation of the Board's reasoning was quite helpful. In our view, 
the ANPRM provides a reasonable framework for the necessary 
revisions to CAS 412 and 413.

    Response: The majority of commenters found that the ANPRM presented 
a fair and reasonable approach to harmonization, and therefore this 
NPRM is being proposed based upon the general concepts of the ANPRM. In 
drafting this NPRM the Board has considered many detailed suggestions 
concerning improvements to specific provisions and additional 
provisions as submitted by the commenters. Because of the technical 
nature of this proposed rule, the Board is again providing explanations 
of the reasoning for any changes from the ANPRM.
    The Board discussed the move towards fair value accounting by 
generally accepted accounting

[[Page 25987]]

principles (GAAP) and ERISA versus the CAS goal of accounting on long-
term, ``going concern'' basis. The Board reaffirmed its desire to 
retain the ``going concern'' basis and use long-term expectations to 
value pension liabilities--this recognizes the long-term relationship 
between the Government and most contractors. The long-term, ``going 
concern'' basis serves to dampen volatility and thereby enhances 
forward pricing--a function that is unique to the CAS.
    The Board also believes that the minimum liability approach is the 
highest extent of change which is academically/theoretically defensible 
and consistent with the Board's Statement of Objectives, Principles and 
Concepts.
    Topic B: Supports Comments Submitted by AIA/NDIA, Some Have 
Supplemental Comments.
    Comments: Seven (7) of the contractors submitting comments also 
stated that they support the comments submitted by industry 
associations. Several of these commenters also stated their comments 
augmented the industry associations.
    Response: The Board has given full attention to the comments 
submitted by AIA/NDIA because of their general support by other 
commenters, and because their very detailed comments and proposed 
revisions reflect thoughtfulness and appreciation for the special 
concerns of contract cost accounting.
    Topic C: General Comments on Differences between CAS, GAAP and 
ERISA (PPA). The SDP and ANPRM discussed the similarities and 
distinctions between the goals and measurement criteria of CAS, GAAP 
and ERISA. The unique purpose and goal of the CAS was determinative of 
the Board's proposed harmonization approach.
    Comments: Several Commenters noted that ERISA, as amended by the 
PPA, is intended to promote adequate funding of the currently accrued 
pension benefit and set reasonable limits on tax deductibility. These 
commenters remarked that the PPA minimum contribution is designed to 
fully fund the current settlement liability of a plan within 7 years in 
order to protect the participants' accrued benefit and to limit risk to 
the PBGC.
    As one commenter explained:

    The PPA was enacted, in part, as a response to the failure of 
companies with severely underfunded qualified defined benefit 
pension plans (``pension plans''), even though companies had 
typically contributed at least the minimum amount required under the 
Internal Revenue Service (``IRS'') rules. PPA was designed to ensure 
that corporations would fund towards liabilities measured on more of 
a settlement basis over a 7-year period, so that plans would be less 
likely to be severely underfunded.

    They remarked that GAAP has adopted fair value accounting, also 
known as ``mark-to-market'' accounting. The purpose of GAAP is to 
disclose the current period pension expense based on the current 
period's environment, including the volatility associated with a 
changing environment. Another primary concern of GAAP is disclosing the 
risk associated with the funding of the current settlement liability to 
users of financial statement.
    Two commenters reminded the Board that the purpose of CAS is (i) 
consistency between periods and (ii) uniformity between contractors. 
Unlike ERISA and GAAP, CAS is concerned with the cost data used to 
price contracts over multiple periods. The CAS continues to be 
concerned with the Government's participation in the funding of the 
long-term pension liability via a continuing relationship (going 
concern) with the contractor.
    One of these commenters felt that use of the PPA and GAAP interest 
assumption and cost method used to determine the liability and normal 
cost for CAS measurements would enhance uniformity between contractors. 
This commenter also believes that 10-year amortization of gains and 
losses and the amortization of mandatory prepayment credits would 
sufficiently mitigate any excessive volatility and therefore not harm 
consistency between periods. Finally, this commenter suggested that 
adoption of the PPA interest assumption and cost method would alleviate 
the need to have the complex mandatory prepayment reconciliation rules. 
Moreover, if the CAS values were based on fair value accounting used by 
ERISA and GAAP, the Government would be able to place reliance on 
measurements that were subject to independent review.
    As this commenter articulated these concerns:

    The proposed rule relies on the same fundamental approach for 
measuring pension liabilities that has been in effect since the CAS 
pension rules were first adopted in 1975. The CAS allows a 
contractor to choose between several actuarial cost methods and 
requires that the discount rate represent the expected long-term 
rate of return on plan assets. Although the CAS measurement basis 
was once consistent with the methods and assumptions in common use, 
this is no longer the case. In 1985, the Financial Accounting 
Standards (FAS) were modified to require that pension costs for 
financial reporting purposes be calculated using the projected unit 
credit (PUC) cost method and a discount rate that reflects the rates 
of return currently available on high-quality corporate bonds of 
appropriate duration. In 2006, the Employee Retirement Income 
Security Act (ERISA) was amended by the PPA to require the use of 
durational discount rates that are determined in a manner consistent 
with the FAS. The PPA also requires all plans to use the unit credit 
cost method (PUC without projection) to determine minimum funding, 
and the PUC method to determine the maximum tax deductible 
contribution.
    These are material conflicts with the CASB objectives. We see no 
way to resolve the conflicts except to modify the CAS to require 
pension liabilities to be determined in a manner consistent with the 
measurements used for both ERISA and financial reporting. 
Specifically, the CAS should require the use of (i) the PUC cost 
method, and (ii) a discount rate that reflects the rates of return 
currently available on high-quality corporate bonds of appropriate 
duration. These changes would also improve consistency between 
contractors, a primary objective of the CAS.

    Response: The goal of the ANPRM was to maintain predictability for 
cost measurement and period assignment while providing for 
reconciliation, i.e., recovery of required contributions within a 
reasonable timeframe. The divergence of GAAP and ERISA from CAS is 
primarily due to the adoption of ``mark-to-market'' cost measurement, 
which can be disruptive to the contract costing/pricing process.
    The Board remains cognizant of the following key distinctions 
between ERISA, GAAP and CAS regarding funding of the pension cost:
     ERISA's minimum funding is concerned with the funding of 
the current settlement liability.
     GAAP is not concerned with funding, but rather with the 
disclosure of the results of operations in the current market 
environment.
     CAS continues to be concerned with the Government's 
participation in the funding of the long-term pension liability via a 
continuing (going concern) relationship with the contractor. CAS 412 
and 413 are used to develop data for forward pricing over multiple 
years, and is not just concerned with the current environment.
    The Board wishes to retain the contractor's flexibility to choose 
the actuarial cost method it deems most appropriate for its unique 
pension plan. While the CAS permits the use of any immediate gain cost 
method, most contractors already use the projected unit cost method, 
which is required by ERISA and GAAP and compliant with CAS 9904.412-
40(b)(1). As long as the current CAS permits the use of methods 
required by the PPA there is no reason to revise the CAS to be more 
restrictive. Furthermore, the Board notes that for

[[Page 25988]]

CAS purposes a contractor may use the same actuarial cost method and 
assumptions, except for the long-term interest assumption, as used to 
value a plan under PPA that is not ``At Risk.'' (With the passage of 
the PPA, ERISA no longer computes liabilities and normal costs using 
long-term interest assumptions.)
    The Board believes that the proposed 10-year amortization of the 
gains and losses will sufficiently harmonize CAS with the PPA while 
provide acceptable smoothing of costs between most periods. The Board 
notes that the plunge in stock market values in the latter half of 2008 
demonstrates how quickly things can change between periods, but remains 
confident that the aberrant market losses for 2008 and early 2009 will 
be adequately smoothed using 10 versus 15 years.
    Topic D: Tension between Verifiability and Predictability.
    Comments: One commenter also raised the issue of verifiability, 
writing:

    In 1992, the CASB released a Statement of Objectives, Policies, 
and Concepts, which cites two primary goals for cost accounting 
standards: (i) Consistency between contractors, and (ii) consistency 
over time for an individual contractor. It also sets forth other 
important criteria to be taken into consideration. Verifiability is 
described as a key goal for any cost accounting standard, as is a 
reasonable balance between a standard's costs and benefits. We 
believe that the liability measurement basis under the proposed rule 
severely conflicts with these goals.

    This commenter was concerned that verifiability of the liability 
and cost data might be compromised or lost since the GAAP expense and 
ERISA contributions are no longer based on a long-term, ``going 
concern'' concept. This commenter also was concerned with the added 
expense of producing such numbers and the potential for disputes. This 
commenter stated:

    The pension liabilities used to develop contract costs must be 
verifiable. If the data used for contract costs are not reconcilable 
with the data used for other reporting purposes, the information 
will be open to bias and manipulation.
    Similarly, if the pension liabilities determined in accordance 
with the CAS are inconsistent with those used for other purposes, 
there will be no alternative source from which to obtain this 
information. We have encountered many situations in which a 
contractor was not aware of the requirement to compute a special 
cost for contract reimbursement or did not maintain the CAS 
information required for audit or segment closing calculation. In 
these cases, ERISA reports or financial statements were used to 
obtain the necessary liability information, and the CAS computations 
could be reconstructed. The data required under the proposed rule 
are obsolete for other reporting purposes and will not be available 
if the calculations required under the CAS are not performed, or if 
the documentation is not retained. It will be difficult or 
impossible to develop reliable estimates from existing sources of 
data.

    This commenter was also concerned that actuaries of medium-sized 
contractors may not be sufficiently familiar with the CAS rules, and 
some of the younger practitioners may not be that familiar with the 
concepts of long-term measurement methods. On occasion, the plan's 
actuary may not be aware that his client has Government contracts and 
therefore the required valuation data may not be produced.
    Conversely, another commenter was receptive to use of the fair 
market accounting liability as a minimum liability, but was concerned 
that introduction of the current liability minimum might cause the CAS 
to diverge from its long-standing goal of ``predictability.'' This 
commenter wrote:

    Because the proposed rule contains many technical and actuarial 
provisions, I am concerned that the basic purpose of CAS, which 
differs from those of other accounting standards and rules, may be 
lost in the details.

    This commenter said that the Board should not lose sight of 
predictability (consistency between periods). Focusing on uniformity 
between contractors, which is a concern of GAAP, might come at the 
expense of predictability and harm the pricing function. This commenter 
opines:

    The CAS has been, and I agree the CAS should continue to be, 
concerned with predictably (minimal volatility) across cost 
accounting periods to support the estimating, accumulating and 
reporting of costs for flexibly and fixed price contracts. Fair 
value accounting of the liability (also called ``mark-to-market'' 
accounting) may be appropriate for financial disclosure purposes 
under GAAP, but is inappropriate and disruptive of the contract 
costing function. Likewise, ERISA's mandates and limits for current 
period funding are inappropriate for cost predictability and 
stability across periods.
    I fully support the following goals for pension harmonization as 
stated in the paragraph entitled ``(1) Harmonization Goals'' of the 
Board's ANPRM:
    (b) No direct adoption of the Employee Retirement Income 
Security Act of 1974, (ERISA) as amended by the Pension Protection 
Act (PPA), to avoid any change to contract cost accounting without 
prior CAS Board approval since it is quite likely that Congress will 
amend ERISA in the future.
    (c) Preserve matching of costs with causal/beneficial activities 
over the long-term.
    (e) Mitigate volatility (enhance predictably).

    This commenter also remarked that balancing the tension between 
ERISA and the CAS has long been a concern of the Board, writing as 
follows:

    Harmonization is not a new subject to the CAS Board. Even in the 
early 1990s the matching of ERISA funding and contract cost accruals 
was of concern to the staff. The SDP continues:
    The costing and pricing of Government contracts also requires a 
systematic scheme for accruing pension cost that precludes the 
arbitrary assignment of costs to one fiscal period rather than 
another to gain a pricing advantage. The Government also has 
sensitivity to the inclusion of unfunded pension costs in contract 
prices. Conversely, the staff's research revealed one instance of a 
contractor who, due to the shortened amortization periods now 
contained in the Tax Code, faced minimum ERISA funding requirements 
in excess of the CAS 412 pension cost and, thus could not be 
reimbursed. That particular contractor felt, understandably, that 
allowability ought to be tied to funding under the Tax Code. 
Obviously, given the current tax law climate regarding full funding, 
complete realization of all of these goals is not achievable. In the 
staff's opinion, the goals of predictable and systematic accrual 
outrank that of funding. However, funding still remains an important 
consideration.

    Response: The Board recognizes that there is a tension between the 
benefits of verifiability, i.e., reliance on outside audited data, and 
predictability, i.e., stability or at least minimized volatility. Most 
of the commenters expressed positive opinions concerning the general 
approach of the ANPRM and do not seem overly concerned with the 
verifiability issue. Verifiability is always an audit issue and will 
remain a consideration as the Board proceeds.
    Contractors are required to provide adequate documentation to 
support all cost submissions, including pension costs. Furthermore, the 
American Academy of Actuaries' ``Qualification Standards for Actuaries 
Issuing Statements of Actuarial Opinion in the United States'' 
expressly requires actuaries to be professionally qualified and adhere 
to CAS 412 and 413--Actuarial communications and opinions regarding CAS 
412 and 413 are recognized as ``Statements of Actuarial Opinion.'' 
Paragraph 3.3.3 of Actuarial Standards of Practice No. 41 requires 
actuaries to provide information that is sufficient for another 
actuary, qualified in the same practice area, to make an objective 
appraisal of the reasonableness of the actuary's work as presented in 
the actuary's report.
    As discussed above, since a contractor may use for CAS the same 
actuarial cost method and assumptions, except for the long-term 
interest assumption, as used for valuing a plan under PPA that is not 
``At Risk,'' there is a commonality to the values measured for CAS and 
PPA. There will some additional effort expended since the contractor 
and its

[[Page 25989]]

actuary will have to reconcile the liability and normal cost measured 
under different interest rates. However demonstrating the difference 
caused by the change of a single variable should not impose an undue 
burden or expense.
    Topic E: CAS 412.40(b)(3)(ii) Harmonization Rule's Minimum 
Actuarial Liability Interest Rate Assumption.
    Comments: Most commenters asked that the rule clearly identify the 
allowable basis for the interest rate used to measure the MAL. Some 
asked that a particular basis for the rate be stated or permitted, 
i.e., PPA or FAS 87as a ``safe harbor''. PPA allows some leeway and 
therefore one commenter said that it was not clear as to the date the 
current bond rate would be measured. Others believed that the MAL 
should be based on a long-term assumed rate for corporate bonds, 
instead of the current PPA rate, in order to reduce volatility and 
enhance forward pricing.
    One commenter asked that the rule permit the use of a single 
interest rate for the plan rather than separate rates by PPA segment or 
full yield curve. Another commenter asked that the Board provide 
examples illustrating selection and use of the interest rate.
    The following captures the theme of many comments submitted:

    * * * First, our comments regard the Interest Rate used for the 
Minimum Actuarial Liability (MAL) and Minimum Normal Cost (MNC). We 
believe the flexibility provided by using ``the contractors' best 
estimate'' for selecting the source of the interest rate used in the 
calculation of the MAL and MNC is desirable to achieve a meaningful 
measure of the resulting pension cost for each contractor. However, 
we have concerns that the criteria for the acceptable rates as 
written are sufficiently unclear as to create a significant exposure 
for interpretive disagreements. For example, we believe that the 
ANPRM criteria as written allows for the use of a very short term 
rate or a very long term rate, since either may reflect the rate at 
which pension benefits could be effectively settled at a current or 
future period, respectively. We encourage the CAS Board to adopt the 
industry recommendation of inserting two new sentences after the 
first sentence in CAS 412-40(b)(3)(ii) to read, ``Acceptable 
interest rates selected by the contractor are those used for the PPA 
funding target, FASB 87 discount rate, long term bond rate, or 
another such reasonable measure. A contractor shall select and 
consistently follow a policy for the source of the interest rate 
used for the calculation of the minimum actuarial liability and 
minimum normal cost.''

    There was some concern expressed about the volatility between 
periods caused the use of current corporate bond rates. As commenter 
noted:

    History shows that the FAS discount rate leads to volatile 
pension expense as the discount rate changes from one measurement 
date to the next. Exhibit A provides a monthly history of the 
Citigroup Pension Liability Index from January 31, 1985 through 
September 30, 2008. The Citigroup Pension Liability Index is a good 
proxy for the FAS discount rate. To illustrate how dramatically the 
index can change over a 12-month period, note that between May 31, 
2002 and May 31, 2003, the Index dropped by 172 basis points. Using 
general actuarial rules of thumb, this drop would translate to a 22% 
increase in liability and a 41% increase in normal cost.
    The interest assumption used for liabilities for determining 
minimum funding requirements under the PPA is based on high-quality 
corporate bonds, but PPA allows the plan sponsor the option to use a 
24-month average of rates vs. a one month average.

    Another commenter discussed the advantage of using an average bond 
rate, writing:

    This result is not consistent with the fundamental desire to 
strive for predictability of cost in the government contracting 
arena. The impact that unforeseen changes in cost can have on fixed 
price contracts is obvious, but even unexpected cost increases on 
flexibly priced business can place a strain on government budgets. 
It is important to try to mitigate the potential pitfalls that might 
create inequitable financial results for either the government or 
the contractors.
    The ANPRM maintains the concept of the actuarial accrued 
liability (AAL) that is calculated using an interest rate that 
represents the average long-term expected return on the pension 
trust fund. This reflects the CAS Board's view of pension funding as 
a long-term proposition. The ANPRM states that CAS 412 and 413 are 
concerned with long-term pension funding and minimizing volatility 
to enhance predictability. Since the new MAL is based on spot bond 
rates it will experience more volatility from year to year than the 
AAL. We believe that the addition of the MAL to the CAS calculations 
is an important change that is very much needed. However instead of 
measuring the MAL using spot bond rates each year, we feel very 
strongly that it is important to allow contractors to have an option 
to calculate the MAL using an expected long-term average bond rate. 
This would allow contractors to use an interest assumption that 
would not need to be changed each year, and would very significantly 
reduce the volatility of the MAL and greatly improve predictability 
of the pension cost. The MAL interest assumption would only need to 
be changed if it was determined that average future bond yields over 
a long-term horizon were expected to be materially different from 
the current MAL assumption. For example, if long-term bond rates 
were expected to fluctuate between 5.5% and 6.5% in the future, then 
a valid assumption for the expected average future rate might be 
6.0%. So this concept would hold some similarities to the interest 
rate used for calculating the AAL. The main difference is that the 
AAL interest rate represents the average expected long-term future 
return on the investment portfolio, whereas the MAL interest rate 
would represent the average expected future long-term yield on high-
quality corporate bonds. There should obviously be some correlation 
between the MAL interest rate and the AAL interest rate, so the two 
different rates should be determined on a consistent basis.

    Several commenters suggested that the rule expressly permit use of 
a long-term rate to improve predictability & reduce volatility. The 
following is typical of this suggestion:

    * * * However, because of the extreme volatility which could 
result from changes in market interest rates, [we] believes the CAS 
Board should explicitly take the position either in the standard or 
the preamble to the final publication, that contractors are 
permitted to calculate the minimum actuarial liability using a long-
term expectation of high-quality bond yields, moving averages of 
reasonable durations beyond 24 months (a period described elsewhere 
in the proposed rule) or other techniques which enhance 
predictability.

    Response: The ANPRM sets forth a conceptual description of the 
settlement rate which would include the corporate bond yield rate 
required by the PPA. Furthermore, the PPA permits several elections 
concerning the yield rate, i.e., full or segmented yield curve, current 
or average yield curve, yield curve as of the valuation date or any of 
the 4 prior months. The Board agrees that a ``safe harbor'' should be 
included for clarity and to avoid disputes. The Board also believes 
that the election of the specific basis for the settlement interest 
rate is part of the contractor's cost accounting practice. Accordingly, 
the proposed rule at 9904.412-50(b)(7)(iv)(B) provides:

    The contractor may elect to use the same rate or set of rates, 
for investment grade corporate bonds of similar duration to the 
pension benefits, as published or defined by the Government for 
ERISA purposes. The contractor's cost accounting practice includes 
any election to use a specific table or set of such rates and must 
be consistently followed.

    The Board reaffirms its belief that the recognition of the more 
conservative assumptions required for plans whose funding ratio falls 
below a specific threshold, such as plans deemed ``at risk'' under the 
PPA, is inappropriate for the purposes of contract costing. The 
proposed rule requires that all other actuarial assumptions continue to 
be based on the contractor's long-term, best-estimate assumptions. 
(9904.412-50(b)(7)(iii)(B)) (Note that the DS-1, Part VII asks for the 
basis for selection of assumptions rather than the current numeric 
value.)
    Topic F: Recognition of Minimum Actuarial Liability and Minimum 
Normal Cost.
    Comments: One commenter was concerned with the added complexity

[[Page 25990]]

from introduction of the minimum actuarial liability and minimum normal 
cost into the development of the assignable pension cost as follows:

    While the ability to have contractors determine their CAS 
assignable costs based on liabilities reflecting the yields on high-
quality corporate bonds is a significant relief for the negative 
cash flow issue faced by government contractors, the process for 
introducing the MAL into the development of the CAS Assignable Costs 
will result in additional complexity in the calculations.

    Several commenters were concerned that the assigned cost would 
occasionally be larger than necessary under the ANPRM. They believed 
that the assigned cost based on the adjusted liability would be 
excessive if the unadjusted assigned cost already exceeded the PPA 
minimum contribution. Some commenters recommended that the assigned 
pension cost be adjusted based upon a revised assigned pension cost 
only if the PPA minimum required contribution, without reduction for 
any credit balances, exceeds the assigned cost as measured on a long-
term basis. As one commenter explained:

    There can be situations where the CAS assignable cost developed 
without regard to the MAL would be larger than the PPA funding 
requirement. Regardless of this situation, under the ANPRM, if the 
MAL is higher than the regular AAL, the liabilities and normal costs 
will be adjusted to reflect the MAL and the MNC. This adjustment 
will result in even higher CAS assignable costs

    This commenter suggested an alternative approach as follows:

    Instead of applying minimums to the liabilities and normal costs 
used in the calculation of the CAS assignable cost, we present the 
following alternative (which we shall refer to as the ``Minimum CAS 
Cost'' alternative) for consideration and further study. We believe 
this alternative addresses the Board's goals of minimizing changes 
to CAS 412 and 413 and avoiding complexity as much as possible, 
while addressing the difference between CAS assignable costs and PPA 
minimum required contributions.
    We believe this alternative will lead to less volatile CAS 
assignable costs compared to the ANPRM. In Attachment II, we compare 
results under this approach and under the ANPRM for a hypothetical 
sample. We recommend further study of this approach.
    Under this alternative, the CAS assignable cost will be the 
greater of (a) and (b) below:
    (a) The Regu