Cost Accounting Standards: Cost Accounting Standards 412 and 413-Cost Accounting Standards Pension Harmonization Rule, 81296-81325 [2011-32745]

Agencies

• Management and Budget Office
• Office of Federal Procurement Policy

[Federal Register Volume 76, Number 248 (Tuesday, December 27, 2011)]
[Rules and Regulations]
[Pages 81296-81325]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32745]



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Vol. 76

Tuesday,

No. 248

December 27, 2011

Part VII





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: Cost Accounting Standards 412 and 413--Cost 
Accounting Standards Pension Harmonization Rule; Final Rule

Federal Register / Vol. 76 , No. 248 / Tuesday, December 27, 2011 / 
Rules and Regulations

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards: Cost Accounting Standards 412 and 
413--Cost Accounting Standards Pension Harmonization Rule

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

ACTION: Final rule.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards Board (Board), is publishing this final rule to 
revise Cost Accounting Standard (CAS) 412, ``Composition and 
Measurement of Pension Cost,'' and CAS 413, ``Adjustment and Allocation 
of Pension Cost.'' This revision will harmonize the measurement and 
period assignment of the pension cost allocable to Government 
contracts, and the minimum required contribution under the Employee 
Retirement Income Security Act of 1974 (ERISA), as amended, as required 
by the Pension Protection Act (PPA) of 2006. The PPA amended the 
minimum funding requirements for qualified defined benefit pension 
plans. The Board issues this final rule to revise CAS 412 and CAS 413 
to include the recognition of a ``minimum actuarial liability'' and 
``minimum normal cost,'' which are measured on a basis consistent with 
the liability measurement used to determine the PPA minimum required 
contribution, and accelerate the recognition of actuarial gains and 
losses. These and other revisions will better align both the 
measurement and period assignment of pension cost allocable to a 
contractor's Government contracts and other final cost objectives in 
accordance with CAS, and the measurement and period assignment 
requirements for determining the contractor's minimum pension 
contribution under the PPA.

DATES: Effective Date: February 27, 2012.

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

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The Rules, Regulations and Standards issued by the Board are 
codified at 48 CFR chapter 99. The Office of Federal Procurement Policy 
Act, 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 422(g)], requires that the 
Board, prior to the establishment of any new or revised Cost Accounting 
Standard, complete a prescribed rulemaking process. The process 
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, and prepare and publish a report on the issues 
reviewed, which is normally accomplished by publication of a 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 final rule completes the four-step process.

B. Background and Summary

    The Board is releasing a final rule on the revisions to 48 CFR 
9904.412 and 9904.413 (respectively, CAS 412 and 413, or 9904.412 and 
9904.413) to implement paragraph (d) of section 106 of the Pension 
Protection Act (PPA) of 2006 (Pub. L. 109-280, 120 Stat. 780).
    The PPA amended the minimum funding requirements for, and the tax-
deductibility of contributions to, qualified defined benefit pension 
plans under ERISA. Paragraph (d) of section 106 of the PPA requires the 
Board to revise CAS 412 and 413 to harmonize the ERISA minimum required 
contribution and the reimbursable pension cost.
    In addition to the revisions to implement harmonization, the Board 
is making 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. 
The technical corrections for CAS 412 are being made to paragraphs 
9904.412-30(a)(1), (8) and (9); paragraph 9904.412-50(a)(6); 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), paragraph 9904.413-
50(c)(1)(i), and paragraphs 9904.413-60(c)(12) and (18).

Different Roles and Responsibilities

    The Board recognizes that heightened interest in pension-related 
matters may attract attention to this regulatory action by members of 
the public who are not familiar with CAS and the Board. The Board has a 
limited role, albeit an indirect one, with respect to pension funding, 
through its rulemaking regarding reimbursement of Government contractor 
pension costs. Under ERISA, the authority to implement the statute and 
promulgate rules and regulations regarding the minimum funding 
requirements for pension plans, tax deductibility of contributions, and 
protection of participant's rights has been granted to the Department 
of Treasury, Department of Labor (DOL) and the Pension Benefit Guaranty 
Corporation (PBGC). By contrast, the OFPP Act gave the CAS Board the 
exclusive authority to ``make, promulgate, amend, and rescind cost 
accounting standards and interpretations thereof designed to achieve 
uniformity and consistency in the cost accounting standards governing 
measurement, assignment, and allocation of costs to contracts with the 
United States.''
    In this preamble, references to ERISA serve to identify and 
distinguish the federal system of funding requirements and restrictions 
for qualified pension plans from financial disclosure and reporting 
guidance, which is also known as generally accepted accounting 
principles (GAAP), and the CAS. References to ERISA may include: ERISA 
as amended to date; relevant sections of the Internal Revenue Code 
(IRC) at Title 26 of the U.S.C.; regulations and other pertinent 
guidance issued by Treasury, DOL and PBGC; and pertinent case law. The 
Board acknowledges that the tax deductibility of pension contributions 
is governed by the IRC at Title 26 of the U.S.C. and refers to the IRC 
when addressing issues related to tax deductibility. The Board 
acknowledges the pension funding responsibilities of ERISA as being 
distinct from the Board's responsibilities under the OFPP Act, which 
are to establish contract cost accounting standards governing the 
reimbursement of contract costs, including pension costs. Government 
contractors must continue to comply with ERISA and its implementing 
regulations that govern the funding of pension plans. This includes the 
new minimum funding requirements imposed by the PPA as implemented by 
Treasury. The Board's rules do not change the minimum funding 
requirements imposed by ERISA or Treasury's implementing regulations. 
To the contrary, the Board has changed its regulations to harmonize 
with the PPA and Treasury's implementing regulations by revising the 
CAS measurement basis for determining the amount of pension cost 
allocable to

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Government contracts, which is reimbursable through contract pricing.

Prior Promulgations

    On July 3, 2007, the Board published a SDP (72 FR 36508) to solicit 
public views with respect to section 106 of the PPA that required the 
Board to review and revise CAS 412 and 413. Differences between CAS 412 
and 413, and the PPA, as well as potential issues associated with 
addressing those differences, were identified in the SDP.
    The ANPRM (73 FR 51261, September 2, 2008) proposed changes to CAS 
412 and 413. These proposed changes included the recognition of a 
``minimum actuarial liability,'' a ``minimum normal cost,'' special 
recognition of ``mandatory prepayment credits,'' accelerated gain and 
loss amortization, and revision of the assignable cost limitation. 
Other proposed changes addressed the PPA's mandatory cessation of 
benefit accruals for severely underfunded plans, projection of flat 
dollar benefits, recognition of accrued contribution values on a 
discounted basis, interest on prepayment credits, and prior period 
unfunded pension costs. The Board also proposed a transition period to 
phase in certain provisions to promote fairness and equity to the 
contracting parties, as has been done by the Board in other rulemaking. 
The public was invited to offer comments on these proposed changes and 
any other related matters. In response to many respondents who asked 
for additional time for the submission of additional or supplemental 
public comments, on November 26, 2008, the Board published a notice (73 
FR 72086) extending the comment period for the ANPRM.
    After considering the comments received on the ANPRM, as well as 
the results of further analysis and deliberations conducted by the 
Board, the Board published a NPRM (75 FR 25982) on May 10, 2010, to 
solicit public views with respect to the proposed revisions to CAS 412 
and 413. The NPRM reflected public comments in response to the SDP and 
ANPRM, as well as research accomplished by the staff for consideration 
by the Board.
    The NPRM proposed changes to CAS 412 and 413 that were considered 
necessary to harmonize the minimum required contributions under ERISA 
for Government contractor pension plans and the Government's 
reimbursable pension plan costs. The primary proposed changes were the 
recognition of a ``minimum actuarial liability,'' ``minimum normal 
cost,'' and an accelerated amortization of actuarial gains and losses. 
The minimum actuarial liability and minimum normal cost are measured on 
a settlement basis using the expected payout of currently accrued 
benefits that have been discounted using yield rates on investment 
grade corporate bonds with matching durations to forecasted pension 
benefit payments, and that are in the top three quality levels 
available, e.g., Moody's grade A and above. 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, 
interest on prepayments credits, and prior period unfunded pension 
costs. The Board continued to propose a transition period to phase in 
certain provisions to promote fairness and equity to the contracting 
parties, as has been done by the Board in other rulemaking. The public 
was invited to offer comments on these proposed changes and any other 
related matters.
    A major feature of the NPRM was the proposal that the minimum 
actuarial liability and minimum normal cost would only be recognized if 
three threshold criteria were met. Otherwise, the actuarial accrued 
liability and normal cost are measured on a going concern basis using 
the expected payout of projected benefits that have been discounted 
using an interest assumption equal to the expected future rate of 
return on investments which reflect long-term trends so as to avoid 
distortions caused by short-term market fluctuations. (Note that the 
SDP, ANPRM and NPRM referred to this as the ``long-term'' interest 
assumption.) These threshold criteria, which have been referred to as 
``triggers,'' required that:
    (i) The ERISA minimum required contribution exceeds the contract 
pension costs measured on a going concern basis, referred to as 
``trigger 1;''
    (ii) The sum of the minimum actuarial liability and minimum normal 
cost exceeds the sum of the going concern actuarial accrued liability 
and normal cost, referred to as ``trigger 2;'' and
    (iii) The contract pension cost measured using the sum of the 
minimum actuarial liability and minimum normal cost exceeds the 
contract pension cost measured using the sum of the actuarial accrued 
liability and normal cost, referred to as ``trigger 3.''
    The Board provided illustrations of these proposed revisions in a 
new section 9904.412-60.1, Illustrations--CAS Pension Harmonization 
Rule. The illustrations showed the measurement, assignment and 
allocation of pension cost under the proposed rule for a contractor 
that separately accounted for pension costs for one segment and an 
aggregation of the remaining segments.
    The NPRM also added language to clarify that any difference between 
the expected and actual unfunded actuarial liability caused by a change 
between recognition of the going concern actuarial accrued liability 
and the minimum actuarial liability would be treated as part of the 
actuarial gain or loss for the period. The actuarial gain and loss 
recognition arising from the change in the liability basis (between 
using the actuarial accrued liability and the minimum actuarial 
liability) for computing pension costs was illustrated in the NPRM at 
9904.412-60.1(h). The proposed structural format differed from the 
format for 9904.412-60.
    The final rule considered the comments and other concerns expressed 
by the public in response to the NPRM. The Board's responses to the 
public comments are discussed in Section C--Public Comments to the 
NPRM.

Basis for Conclusions

    Paragraph (d) of section 106 of the PPA instructs the Board to 
revise CAS 412 and 413, as follows:

    COST ACCOUNTING STANDARDS PENSION HARMONIZATION RULE--The Cost 
Accounting Standards Board shall review and revise sections 412 and 
413 of the Cost Accounting Standards (48 CFR 9904.412 and 9904.413) 
to harmonize the minimum required contribution under the Employee 
Retirement Income Security Act of 1974 of eligible government 
contractor plans and government reimbursable pension plan costs not 
later than January 1, 2010. Any final rule adopted by the Cost 
Accounting Standards Board shall be deemed the Cost Accounting 
Standards Pension Harmonization Rule.

    In deliberating and deciding upon a final rule, the Board adopted 
the following criteria for harmonizing the minimum required 
contribution under ERISA:
     Accounting rules must satisfy the Board's Statement of 
Objectives, Policies and Concepts (57 FR 31036 published July 13, 
1992);
     Accounting rules must promote fairness and equity to both 
contracting parties;
     Measurement of pension costs must be objectively 
verifiable;
     Accounting rules must keep volatility to a minimum in the 
pricing of Government contracts; and
     Accounting rules must be understandable, particularly 
given the complexity of CAS 412.
    Throughout the comment process afforded by the SDP, ANPRM, and 
NPRM, many respondents commented

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that ``harmonize'' under PPA section 106(d) meant that it was 
Congress's intent that the Board adopt ERISA's minimum required 
contribution for measuring, assigning, and allocating pension costs to 
CAS-covered contracts. Further, these commenters stated that the plain 
meaning of ``harmonize,'' as defined in various dictionaries, would 
lead to an identical conclusion. The Board's review of the PPA, as well 
as its legislative history, did not reveal evidence of any such 
Congressional intent.
    The Board has historically recognized that financial accounting 
policies and procedure, i.e., GAAP, and tax accounting rules have 
inherently different goals from Government contract cost accounting 
that preclude their use for the appropriate measurement, assignment and 
allocation of pension costs for CAS. In the Board's view, PPA section 
106 did not seek to change that historical recognition. Based on the 
Board's analysis, entirely adopting either financial accounting or tax 
accounting rules for CAS 412 and 413 would have resulted in inequities 
and unfairness to both contracting parties. The Board noted that the 
public commenters most directly affected by the CAS Pension 
Harmonization Rule tended to agree with the NPRM provisions, except for 
a few matters which are discussed later in this preamble.
    The Board continues to believe that CAS 412 and 413 should reflect 
the continuing nature of the pension plan sponsored by a going concern, 
as well as the multi-year nature of the contractual relationship 
between the Government and contractors in the acquisition process. The 
CAS are intended to provide consistent and accurate cost data to 
determine the incurred cost for the current period and for the forward 
pricing of Government contracts over future years for multi-year 
contracts. With regard to pension accounting, both financial accounting 
and ERISA have taken a market-based approach toward pension 
liabilities, which are often referred to as ``mark-to-market'' 
liabilities. This approach is less predictable for purposes of 
projecting future costs than the going concern basis of CAS and, 
therefore, is less useful than CAS for forward pricing purposes for 
multi-year contracts.
    The Board recognizes that contract cost accounting must address the 
risks to both the contractor and the Government associated with 
inadequate funding of a plan's current period settlement liability 
measured on a ``mark-to-market'' basis. This final rule addresses this 
risk by recognizing a minimum actuarial liability and minimum normal 
cost that is based on currently accrued benefits valued using the top 
three quality levels of investment grade corporate bond rates 
consistent with the PPA criteria as cited in the IRC at 26 U.S.C. 
430(h)(2)(D)(i).
    ERISA's ``funding target'' and ``target normal cost'' were 
introduced by the PPA and are mark-to-market values consistent with the 
measurement basis for the minimum actuarial liability and minimum 
normal cost. The CAS recognition of the minimum actuarial liability and 
minimum normal cost ensures that the annual pension cost as measured 
and assigned under CAS is at least sufficient to liquidate ERISA's 
target normal cost currently and the unfunded target liability on an 
amortized basis. Therefore, recognizing the minimum actuarial liability 
and minimum normal cost will reduce differences between the CAS 
assigned cost and the ERISA minimum required contribution, although the 
CAS assigned cost may sometimes exceed the ERISA minimum required 
contribution. Maintaining the going concern basis for Government 
contract costing will allow contractors to set multi-year funding goals 
that avoid undue volatility in cash flow requirements.
    The Board was persuaded by public comments that the proposed 
threshold criteria (``triggers'') for recognition of the minimum 
actuarial liability and minimum normal cost were overly complex and 
might create inequities. The final rule only retains the criterion that 
assesses whether the sum of the minimum actuarial liability and minimum 
normal cost exceeds the sum of the actuarial accrued liability and 
normal cost. If the contractor computes pension costs on a composite 
basis for the plan as a whole, then the criterion should be examined at 
the plan level. However, if 9904.413-50(c)(2) or (3) require the 
contractor to separately compute pension costs for a segment, or if the 
contractor so elects, the criterion should be separately examined at 
the segment level. This may mean that some segments might use an 
actuarial accrued liability and normal cost to compute pension costs, 
and other segments might use the minimum actuarial liability and 
minimum normal cost. This ensures that variance in demographics or 
funding levels between different segments is recognized.
    ERISA imposes minimum funding requirements on qualified defined 
benefit plans based on a conservative measurement of the plan's 
liability and normal cost. It should be noted that the measurement 
mandated for ERISA minimum funding approximates the value of a bond 
portfolio required to liquidate the stream of expected payments for 
accrued benefits if purchased in the current market. While the purchase 
of such a bond portfolio would not transfer all asset and demographic 
risks to a third party, this measurement emulates the costs of self-
insuring the pension fund against the liability for accrued benefits 
and represents the mark-to-market (settlement) value without the 
premium charge for transfer of risk. The final rule requires that 
contract cost accounting for pension costs must recognize a mark-to-
market (settlement) based liability and normal cost as minimum values 
for CAS. By doing so, the Board believes that any ERISA minimum 
required contribution in excess of the allocable contract pension cost 
amount will be reconciled and reflected in contract pricing in the near 
term because, by definition, the CAS liability and normal cost would be 
equal to or greater than the minimum values determined under the 
settlement liability. Furthermore, by recognizing the settlement 
liability and normal cost as minimum values, this final rule will 
benefit the procuring agencies, as well as taxpayers, by minimizing the 
Government's exposure to the financial risk of unfunded actuarial 
liabilities as funding progresses.
    In order to promote equity and fairness in achieving an orderly 
change in the contract cost accounting for pension costs, this final 
rule retains the transition period consisting of five cost accounting 
periods, the Pension Harmonization Rule Transition Period, that will 
phase in recognition of any adjustment of the actuarial accrued 
liability and normal cost. This transition method will apply to all 
contractors with contracts subject to CAS 412 and 413.
    Because modern actuarial software programs can value the same data 
set multiple times using different assumptions, the final rule is 
designed to allow 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 externally verified data from ERISA and financial statement 
valuations while allowing contractors to avoid unnecessary additional 
actuarial effort and expense.

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Summary of Final Rule

    The primary harmonization provisions are consolidated within the 
``CAS Pension Harmonization Rule'' at 9904.412-50(b)(7). This 
consolidation eliminates the need to revise many long-standing 
provisions of CAS 412 and clearly identifies the special accounting 
practices required for harmonization. Some revisions to other 
provisions of CAS 412 and 413 are also necessary to achieve the full 
result. These basic changes to CAS 412 and 413 are as follows:
    (1) Recognition of a ``minimum actuarial liability'' and ``minimum 
normal cost.'' CAS 412 and 413 continue to measure the actuarial 
accrued liability and normal cost based on a going concern basis using 
``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 mark-to-market 
liability as a minimum value, the final rule requires that the measured 
pension cost must be determined using the minimum actuarial liability 
and minimum normal cost if a specific threshold criterion is met. That 
is, if the sum of the minimum actuarial liability and the minimum 
normal cost (as measured using current yield rates on the top three 
quality levels of investment-grade corporate bonds) exceeds the sum of 
actuarial accrued liability and normal cost (as measured using the 
expected rate of return on investments), the contractor must measure 
the pension cost for the period using the minimum actuarial liability 
and minimum normal cost. Furthermore, if the criterion is met, the 
minimum actuarial liability and minimum normal costs are used for all 
purposes of measurement, period assignment, and allocation under CAS 
412. However, the minimum actuarial liability is not recognized for the 
purposes of 9904.413-50(c)(8), (9) and (12).
    The minimum actuarial liability and minimum normal cost are 
measured under the accrued benefit cost method based on the current 
yield rate on the top three quality levels of investment-grade 
corporate bonds. Measuring the minimum actuarial liability and minimum 
normal cost on a current mark-to-market basis better aligns the CAS 
measurement with current accounting and economic theory. In addition, 
the minimum actuarial liability definition is consistent with the 
ERISA's funding target and the GAAP's ``accumulated benefit 
obligation.'' The minimum normal cost is similarly defined to be 
consistent with the ERISA's ``target normal cost'' and the GAAP's 
``service cost'' (without salary projection).
    (2) Accelerated Gain and Loss Amortization. The final rule 
accelerates the assignment of actuarial gains and losses to accounting 
periods by decreasing the amortization period from a fifteen-year to 
ten-year period. This accelerated assignment will reduce the period of 
deferral in cost recognition and is consistent with the shortest 
amortization period permitted for other portions of the unfunded 
actuarial liability (or actuarial surplus). Paragraph 9904.412-64-
1(b)(5) of the transition provisions clarify that the ten-year 
amortization of gains and losses begins with the first cost accounting 
period this final rule is applicable to the contractor.
    (3) Mandatory Cessation of Benefit Accruals. This final rule 
exempts any curtailment of benefit accrual required by ERISA from 
immediate adjustment under 9904.413-50(c)(12). Voluntary benefit 
curtailments will remain subject to immediate adjustment under 
9904.413-50(c)(12).
    (4) Projection of Flat Dollar Benefits. The final rule allows the 
projection of increases in specific dollar benefits granted under 
collective bargaining agreements. The recognition of such increases is 
limited to the average increase in such benefits over the preceding six 
years, limited to benefits governed by collective bargaining 
agreements. As with salary projections, the final rule will discontinue 
projection of these specific dollar benefit increases upon a segment 
closing, which uses the accrued benefit cost method to measure the 
actuarial accrued liability.
    (5) Present Value of Contributions Receivable. For both qualified 
and nonqualified defined benefit plans, the final rule discounts 
contributions attributable to the prior accounting period but made 
after the asset valuation date, i.e., the contribution receivable, at 
the expected rate of return on investments assumption that reflects 
long-term trends (assumed interest rate) from the date actually paid 
back to the valuation date. In considering the public comments on 
interest crediting on application of prepayment credits and the FAR 
31.205-6(j)(2)(iii) quarterly funding requirement, the Board also 
reviewed the provisions on interest adjustments on pension costs, 
contributions receivable, prepayment credits, and unfunded pension 
costs. The assumed interest rate is used to adjust amounts not yet 
funded, such as receivable contributions, quarterly pension costs, and 
unfunded pension costs. This is consistent with the general provision 
of 9904.412-40(b)(2) that the assumed interest rate must be based on 
expected rates of return on investments, except for the interest rate 
used to measure the minimum actuarial liability and minimum normal 
cost. However, interest adjustments on invested monies, such as the 
prepayment credits, are adjusted at the actual rate of return on the 
assets.
    (6) Interest on Prepayments Credits. Generally, the funding of 
pension plans is a financial management decision made by the 
contractor, and must satisfy the minimum funding requirements of ERISA. 
Thus, funding more than the pension cost measured and assigned under 
CAS is entirely possible. Funding in excess of the CAS assigned costs 
results in a prepayment for the purposes of CAS. Since all monies 
deposited into the funding agency are fungible and 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 
all other invested monies. This recognition ensures that any investment 
gain or loss attributable to the assets accumulated by prepayments does 
not inequitably affect the gains and losses of the plan or any 
segments. A decision to fund in excess of the CAS assigned cost should 
have a neutral impact on Government contract costing, although it might 
have a transitory negative impact on the contractor's cash flow.
    (7) Transition Period to Phase In Minimum Actuarial Liability and 
Minimum Normal Cost Mitigates Initial Impact of the Potential Increase. 
The changes to CAS 412 and 413 are phased in over a transition period 
consisting of five cost accounting periods, the Pension Harmonization 
Rule Transition Period. The phase in allows the cost impact of this 
final rule to be gradually recognized in the pricing and costing of 
CAS-covered and FAR-covered contracts alike. It also moderates the 
difference in the pension cost allocable to FAR-covered fixed price 
contracts entered into prior to the effective date of the CAS Pension 
Harmonization Rule that are not subject to equitable adjustment. The 
final rule was revised so that the transition period in the proposed 
rule is now a fixed schedule for the first five cost accounting 
periods, the Pension Harmonization Rule Transition Period, following 
the ``Implementation Date'' so that the transition does not extend 
unduly beyond the time needed for the contract pricing and budgetary 
systems to migrate from the existing rule to the CAS Pension 
Harmonization Rule. Also, the Board has modified the transition

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schedule slightly to lessen the impact on contract prices and agency 
budgets in the near-term. To accomplish this, the difference between 
the minimum actuarial liability and the going concern actuarial accrued 
liability, and the difference between the minimum normal cost and the 
going concern normal cost, are recognized on a scheduled basis during 
the Pension Harmonization Rule Transition Period, the first five cost 
accounting periods that this rule is applicable. Under the revised 
schedule, 0% of the difference will be recognized in the First Cost 
Accounting Period, 25% in the Second Cost Accounting Period, 50% in the 
Third Cost Accounting Period, 75% in the Fourth Cost Accounting Period, 
and finally, 100% in the Fifth Cost Accounting Period. After the 
completion of the Pension Harmonization Rule Transition Period, 100% of 
the minimum actuarial liability and minimum normal cost are recognized, 
if applicable. While 0% of the difference is recognized in the First 
Cost Accounting Period, there will be other incremental differences, 
e.g., the change to ten-year amortization of gains and losses.
    (8) Extended Illustrations. Many illustrations in 9904.412-60 have 
been updated to reflect the proposed changes to CAS 412 and 413. To 
assist users with understanding how this final rule will function, 
examples have been added in a new section, ``9904.412-60.1 
Illustrations--CAS Pension Harmonization Rule.'' This section presents 
illustrations showing the measurement and assignment of pension cost 
for a contractor's pension plan that meets the criterion of the 
9904.412-50(b)(7) CAS Pension Harmonization Rule. The actuarial gain 
and loss recognition arising from the change in the liability basis 
(between using the actuarial accrued liability and the minimum 
actuarial liability) for computing pension cost is illustrated in 
9904.412-60.1(d). This structural format differs from the format of 
9904.412-60, Illustrations.

C. Public Comments to the Notice of Proposed Rulemaking

    The Board received 20 public comments to the NPRM. These comments 
came from Federal agencies, contractors, professional and trade 
associations, actuaries, and individuals. As with the ANPRM and SDP, 
the Board found the public comments to be focused, well developed, and 
informative. The Board appreciates the efforts of all parties who 
submitted comments. The public comments to the NPRM may be viewed at: 
https://www.whitehouse.gov/omb/casb_index_public_comments/, or https://www.regulations.gov.

Summary of Public Comments

    Many of the public commenters believed that, while the NPRM 
represented progress towards harmonizing the minimum required 
contribution under ERISA and reimbursable pension plan costs, the 
proposed three threshold criteria (``triggers'') for recognition of the 
minimum actuarial liability were an obstacle to adequate recognition of 
the contribution requirements of ERISA.
    Some of the commenters continued to recommend that the Board accept 
the PPA's mark-to-market based accounting as the only basis for 
contract cost accounting. Several commenters believed that full 
harmonization could only be achieved by the direct recognition of 
mandatory prepayment credits. The public comments also included many 
detailed recommendations regarding how the proposed rule might be 
corrected or clarified.
    Most of the public comments reiterated concerns that the 
differences between CAS and the PPA have the potential to cause cash 
flow problems for some Government contractors. Although there were 
diverse views on how to best achieve that goal, timely recognition of 
the ERISA minimum required contribution in contract costing was often 
recommended. Some commenters believed that section 106 of the PPA 
requires CAS 412 and 413 to be identical to PPA's minimum required 
contribution.
    Many commenters believed that the Board should remove the proposed 
first threshold criterion, which some commenters referred to as 
``trigger 1,'' that compared the pension cost measured on a going 
concern basis to the ERISA minimum required contribution. They noted 
that this criterion not only added complexity to the proposed rule, but 
also unnecessarily delayed the recovery of previously accumulated 
prepayment credits. Some of these comments also suggested that the 
Board remove the second threshold criterion (``trigger 2''), which 
compared the total liability for the period measured on a going concern 
basis (i.e., the actuarial accrued liability and normal cost) to the 
total liability for the period measured on a mark-to-market basis 
(i.e., the minimum actuarial liability and minimum normal cost). These 
commenters believe that the only necessary limitation on use of the 
minimum actuarial liability would occur when the pension cost measured 
on a going concern basis already exceeded the pension cost on a mark-
to-market basis.
    Many public comments objected to the segment closing and benefit 
curtailment provisions that excluded the recognition of the minimum 
actuarial liability. These commenters expressed their belief that such 
an exception could reverse the cost recovery and be non-compliant with 
the mandate of section 106 of the PPA.
    Some public comments expressed a concern that the proposed 
transition rules would delay full recovery and believed that the Board 
should address contract cost accounting and not budgetary impacts. On 
the other hand, several commenters believed that the delay caused by 
the transitional phase in rule was a reasonable compromise that allowed 
the Government and contractors to gradually implement the effect of the 
magnitude of the cost increase on the forward pricing process.
    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 the CAS 
Pension Harmonization Rule.

Responses to Specific Public Comments

Topic 1: Harmonization.
    Comments: Some commenters focused on the meaning of the 
Congressional mandate under section 106 of the PPA, the proposed 
continued recognition of pension liabilities on a going concern basis, 
and the relationship between the pension cost for contract costing and 
the ERISA minimum required contribution. One commenter stated that ``By 
allowing the recognition of the MAL and MNC [minimum actuarial 
liability and minimum normal cost] (sic) in determining the CAS cost, 
without precondition, eventually the CAS assignable cost should catch 
up with the ERISA funding requirements and full harmonization should be 
reached.''
    One public comment suggested that compliance with PPA section 106 
required adoption of the measurement and period assignment provisions 
of the PPA. This commenter believes that the NPRM as proposed did not 
fully implement the mandate of section 106 because the Board did not 
adopt the measurement and amortization rules of the PPA. The commenter 
stated that Webster's II New College Dictionary (3d ed. 2005) defines 
``harmonize'' and ``harmony'' to mean ``agreement.''
    Two commenters argued that ``the best approach to harmonization 
would

[[Page 81301]]

be to revamp CAS 412 and 413 to follow PPA, with modifications as 
necessary to meet the unique requirements of government contracts.'' 
One of these commenters quoted the Merriam-Webster's Online Dictionary 
which defines ``harmonize'' as ``to bring into consonance or accord.''
    On the other hand, one commenter believed that harmonization is a 
more generalized goal meaning to achieve ``equity between the 
parties.'' And, another public commenter asked the Board to consider 
the language of section 106, which tells the Board to ``harmonize the 
[ERISA minimum required contribution] (sic) and government reimbursable 
pension plan costs, not harmonize CAS with the PPA.'' [Emphasis Added]
    Three public commenters reminded the Board that the primary concern 
that prompted section 106 was the difference between the pension 
funding requirements imposed by ERISA and the delayed reimbursement of 
pension cost under contracts subject to CAS 412 and 413. Some 
commenters identified areas of concern that they believed were 
preventing the proposed rule from providing timely recovery of pension 
contributions.
    Another public commenter reminded the Board that improving the 
timeliness of pension cost recovery was a goal of the NPRM writing that 
``While pension funding rules have changed with the enactment of the 
PPA, this principle of equity--where the government does not excuse 
itself from requirements it is imposing on all plan sponsors--
remains.'' This commenter believed that the CAS Pension Harmonization 
Rule, as proposed, failed to satisfy that objective and provided 
specific suggestions for improvement.
    In contrast to the comments that the Board should fully adopt or 
more closely follow the measurement and amortization rules of the PPA, 
one commenter was concerned that ``the CAS Board is straying from the 
intent and historical precepts of contract cost accounting and veering 
toward tax-driven cash accounting.'' This commenter examined the goals 
of the Cost Accounting Standards vis-[agrave]-vis the goals of the PPA:

    As the Board's response notes, ``strictly tying pension 
accounting to settlement liabilities and current fair market values 
will cause volatility that will be counterproductive to 
predictability and disrupt the contract forward pricing process. 
Contract price predictability must remain a critical concern for the 
Board. ''

    The commenter's letter continues:

    The long standing concept of accounting is that pension plans 
are presumed to continue absent evidence to the contrary. We 
understand that actuaries include assumptions concerning settlement 
payment (lump sum) elections by terminating and retiring employees--
thus the likely risk of paying the extra settlement cost is already 
anticipated in actuarial measurements. Furthermore, the expected 
return on investment should reflect a contractor's investment policy 
for the plan, rather than theories of financial economics that are 
in vogue.

    Several public commenters suggested that success in achieving 
harmonization should be measured by reduction in ``mandatory'' 
prepayment credits, where mandatory prepayments refers to minimum 
funding requirements in excess of the allocable pension costs measured 
and assigned in accordance with CAS 412 and 413. These commenters were 
not only concerned with the prospective harmonization of the contract 
cost with the ERISA minimum contribution once the CAS Pension 
Harmonization Rule was applicable, but also with a reduction in the 
substantive mandatory prepayment credits that had been accumulated 
since the passage of the PPA and the recent dramatic decline in asset 
values.
    One public commenter stated this concern directly: ``Under the 
NPRM, there is no mechanism present to ensure that contractors will be 
able to assign mandatory prepayment credits.'' This commenter later 
continued: ``To eliminate these situations in which recovery of 
accumulated mandatory prepayment credits are indefinitely delayed, we 
ask the Board to reintroduce the mandatory prepayment credit mechanism 
that was contained in the ANPRM.''
    Another commenter expressed the belief that: ``Without such 
amortization, [mandatory prepayment credits] (sic) are not recovered in 
a reasonable time period, and situations may arise where the balances 
are inaccessible.'' This commenter cautioned the Board that: ``Without 
these suggested changes, we respectfully submit that the Board will not 
have met its mandate under section 106 of the PPA.''
    Response: As previously stated, the Board's review of the PPA, as 
well as its legislative history, did not reveal any expression of 
Congressional intent that ``harmonize'' under PPA section 106(d) 
requires the Board to adopt ERISA's minimum required contribution for 
measuring, assigning, and allocating pension costs to Government 
contracts. The Board's historical recognition that financial accounting 
and tax accounting rules have inherently different goals, that preclude 
them from being used for Government contract cost accounting, is well 
established. In the Board's view, PPA section 106 did not seek to 
change that historical recognition. Based on the Board's analysis, 
adopting either financial accounting or tax accounting rules for 
contract cost accounting purposes would have resulted in inequities to 
both contracting parties. The Board noted that the contracting parties 
most directly affected by the CAS Pension Harmonization Rule tended to 
agree with the general concepts articulated in the NPRM, except for a 
few matters which are dealt with later in this final rule.
    The Board does not believe adopting tax accounting rules, which 
establish a funding range rather than an accrual for the period, is 
appropriate for contract cost accounting purposes. Recognition of the 
minimum actuarial liability is a reflection of the potential risk of 
inadequate funding imposed by the ``mark-to-market,'' i.e., settlement 
liability, in the event that there is an immediate liquidation of the 
pension plan. To accomplish this, the minimum actuarial liability and 
minimum normal cost are treated as minimum values to the actuarial 
accrued liability and normal cost measurements. Apart from these 
minimum values, the measurement and period assignment rules continue to 
be based on the going concern concept wherein actuarial assumptions 
reflect long-term trends and avoid distortions caused by short-term 
fluctuations, which the Board has determined appropriate for contract 
cost accounting purposes. Furthermore, recognition of no less than the 
minimum actuarial liability and minimum normal cost for contract 
costing purposes ensures that over time the assignable pension cost is 
at least equal to the ERISA minimum required contribution computed 
using the funding target liability and target normal cost, which are 
mark-to-market values.
    By ensuring that the pension cost measurement recognizes the 
minimum actuarial liability and minimum normal cost in a manner similar 
to the basis for the PPA's funding target and target normal cost, the 
Board believes that the final rule will over time accumulate contract 
pension costs that are at least equal to the accumulated value of the 
PPA minimum required contributions.
    The Board agrees that timely recovery of the accumulated 
prepayments is essential to the degree practicable, but notes that 
there are some situations where recovery opportunities are limited, 
i.e., overfunded plans with benefits that have been frozen. Section 106 
of the PPA did not require direct reduction of accumulated prepayment

[[Page 81302]]

credits when CAS is harmonized. However, the Board acknowledges the 
importance of such a reduction, and the final rule will improve 
recovery of accumulated prepayment credits through recognition of the 
higher of either the settlement or going concern liability.
Topic 2: Proposed Threshold Criteria
    Comments: Several public commenters believed that the proposed rule 
was too complex because it combines going concern and settlement 
measurements. One public commenter expressed the belief that ``the 
Board's goal--to create a version of CAS that harmonizes with both the 
minimum funding requirements of PPA and the historical versions of CAS 
412 and 413--is not viable.'' Another commenter believed that 
continuing to compute an actuarial accrued liability and normal cost 
measured using an expected rate of return on investments as the 
interest assumption, solely for Government cost accounting purposes, 
would add a layer of complexity and expense that is not warranted, and 
which could not be directly verified. And one public commenter remarked 
that the description of the ``minimum required amount'' needed 
clarification.
    The industry associations were generally supportive of the proposed 
rule and believed that ``use of the new liability measure, the minimum 
actuarial liability (MAL), in conjunction with the existing actuarial 
accrued liability (AAL) provides for a balanced liability measurement 
despite varying economic circumstances and is a reasonable balance 
between long- and short-term approaches.'' Another commenter also gave 
general support for the rule as proposed, writing:

    We understand that given the urgency of the mandate to harmonize 
CAS, the CASB has chosen an approach to make modifications to the 
existing CAS rules rather than undertake a complete overhaul of the 
rules. We understand and support this approach. In addition, we 
continue to support the CAS modifications to adopt the PPA-like 
minimum actuarial liability (MAL) and shorter ten-year amortization 
period for actuarial gains/losses in order to achieve harmonization.

    In addition to the concern with complexity from using two different 
liability measures, a commenter found that imposition of a series of 
three threshold criteria as a prerequisite for recognizing the minimum 
actuarial liability and minimum normal cost values created a complexity 
that potentially would make the rule unmanageable.
First Threshold Criterion (``Trigger 1'')
    The first of the proposed threshold criteria, i.e., ``trigger 1,'' 
was the primary concern expressed in many public comments about the 
proposed rule. Most of the commenters believed that ``trigger 1'' 
prevented harmonization by limiting the periods during which the 
minimum actuarial liability could be recognized. Based on several 
analyses of ``trigger 1,'' these commenters concluded that ``trigger 
1'' retarded the recovery of prepayments accumulated before and after 
the applicability of the CAS Pension Harmonization Rule.
    Other concerns that were raised included the difficulty in 
predicting the minimum required contribution for forward pricing and 
the added volatility caused by using multiple ``triggers.'' These 
commenters uniformly urged the Board to eliminate ``trigger 1.''
    One commenter offered the following observations to assuage the 
Board's concerns with inappropriate increases in contract pension 
costs:

    But note that even with the elimination of this gateway, there 
would still be the five-year transition phase-in, the longer 
amortization period (a ten-year period versus the seven-year period 
in PPA), and greater asset smoothing than is permitted in PPA. These 
features will adequately control the cost increases that would 
otherwise be seen with a more direct and immediate harmonization.

    Another commenter remarked that, if the Board had added to the NPRM 
the three ``trigger'' prerequisite for using the minimum actuarial 
liability and minimum normal cost as a way of responding to its comment 
on the ANPRM, then the commenter believed that its prior recommendation 
was not properly implemented in the NPRM:
    In our ANPRM letter, we stated the following:

    If the intent of the CAS Harmonization Rule is to adjust the CAS 
assignable costs so that the excess of the PPA funding requirements 
over the CAS assignable costs are recovered on a timely basis, 
increasing the regular AAL to the MAL when the CAS cost is already 
greater than the PPA funding requirement for a given year may not be 
necessary, particularly if there are no existing prepayment credits.
    It appears that our suggestion was partly considered. However, 
Threshold Test 1 does not consider the existence of (mandatory) 
prepayment credits; it considers only the annual comparison of the 
minimum funding requirement and the regular CAS cost. As a result, 
it is too restrictive and will hinder full recovery of minimum 
funding requirements particularly for contractors who have been 
subject to the PPA requirements since 2008. Pension plans will 
eventually require funding contributions lower than CAS costs 
because the plans will become fully funded under the PPA earlier 
than when they will become fully funded under CAS. The plans will 
become fully funded under the PPA sooner because of the following 
reasons:
     The PPA became effective before the CAS Pension 
Harmonization Rule will become effective.
     The PPA has a 7-year amortization for unfunded 
liabilities, compared to the ten-year amortization period for gains/
losses and even longer amortization periods for other amortization 
bases (e.g., plan amendments, assumption changes, etc.) in the NPRM.
     The MAL and MNC are phased in and are not fully 
recognized during the transition period.
    Thus, plans will fail the ``trigger 1'' threshold test before 
contractors can recover all of the minimum funding contributions 
required of them.

Second and Third Threshold Criteria (``Trigger 2 and Trigger 3'')
    Several commenters recommended that the Board also eliminate 
``trigger 2,'' which requires that the sum of the minimum actuarial 
liability (MAL) and the minimum normal cost (MNC) exceed the sum of the 
actuarial accrued liability (AL) and normal cost (NC) as a precondition 
for recognition of the minimum actuarial liability and minimum normal 
cost. The general recommendation was to retain only the final threshold 
criterion, i.e., ``trigger 3'' and eliminate ``trigger 2'' because it 
was duplicative and added unnecessary complexity. One of these 
commenters believed that rather than comparing the liabilities and 
normal costs as a pre-condition, the rule should simply use the 
contract pension cost computed using the minimum actuarial liability 
and minimum normal cost as a minimum pension cost:

    Considering the ANPRM's ``MAL > AL'' criterion and how it 
impacts the calculations, we recommended that if no (mandatory) 
prepayment credits exist and if the regular CAS cost already exceeds 
the PPA minimum funding requirement, then the CAS cost need not be 
adjusted to reflect the MAL and the MNC to result in an even higher 
CAS assignable cost. Our recommendation was intended for the 
specific--and less frequent--situations when CAS reimbursements will 
have already caught up with the ERISA required cash funding of the 
plan on a cumulative basis, i.e., when there are no mandatory 
prepayment credits.
    In our ANPRM comment letter, we also recommended considering a 
minimum CAS cost approach for harmonization, in lieu of the ``MAL > 
AL'' criterion. In other words, there is no need to impose a ``MAL > 
AL'' criterion when satisfaction of this criterion simply results in 
reflecting the MAL and the MNC as ``floor'' liabilities and normal 
costs in the calculations. Instead, we recommended directly 
calculating the CAS cost based on the MAL and MNC, and use the 
result as a floor for the CAS cost.


[[Page 81303]]


    Some commenters made suggestions for improving the second criterion 
(``trigger 2'') if retained in the final rule. One commenter 
recommended that the final rule should ``provide that when ERISA or 
GAAP asset, liability, cost, or other values are to be used for CAS 
purposes, such values are per se CAS-compliant amounts. This will avoid 
unnecessary disputes with government auditors regarding whether these 
values are appropriate.''
    Another public comment recommended that ``the Board restore the 
ANPRM interest rate definition as it provides the necessary leeway for 
contractors to set interest rates assumptions that will be more stable 
than rates tied to current periods. Along with this definition, it will 
be helpful to retain the NPRM provision allowing the PPA rates as a 
safe harbor option.'' The comment noted that the ANPRM required that 
the interest rate be based on ``high quality'' corporate bonds, rather 
than the NPRM requirement that the rate be based on ``investment 
grade'' bonds.
    Response: The Board has been persuaded to eliminate the first 
threshold criterion (``trigger 1''), which was proposed in the NPRM, 
from the final rule. This test, which had been recommended in public 
comments to the ANPRM, adds complexity and inserts the vagaries of tax 
accounting into contract cost accounting.
    The Board has reviewed the advantages and disadvantages of 
retaining either the second threshold criterion (``trigger 2'') or the 
third threshold criterion (``trigger 3'') as the single prerequisite 
for using recognition of the minimum actuarial liability and minimum 
normal cost. Based on this review, the Board has concluded the second 
criterion directly implements the Board's intent that the minimum 
actuarial liability and minimum normal cost are minimum values for the 
pension cost measurement. The Board also notes that unless the second 
criterion is satisfied, the effort needed to compute the contract 
pension cost using the minimum values is not necessary. Moreover, first 
determining which liability to use lessens the potential for 
computation errors because the contract pension cost needs to be 
computed once instead of twice. Therefore, the third threshold 
criterion, ``trigger 3,'' has also been eliminated.
    The interest rate criteria used for measuring the minimum actuarial 
liability and minimum normal cost proposed in the NPRM referenced 
``investment grade'' fixed-income investments, which infers the top 
four levels of investments (e.g., Moody's Baa or higher) and differed 
from the ANPRM reference to ``high quality'' (e.g., Moody's Aa or 
higher) fixed-income investments, which as used for GAAP is restricted 
to the top two levels of investments. The Board believes that the 
criterion of ``the top three quality levels of investment grade'' is 
appropriate because it is restricted to the higher tier ratings from 
the bond rating agencies, e.g., Moody's' single ``A'' rated or higher, 
and is consistent with the investment quality required by the PPA as 
cited in 26 U.S.C. 430(h)(2)(D)(i). A lesser rated bond would pay more 
coupon interest, but the additional default risk is unacceptable for 
determining the contingent cost of liquidating all benefit obligations 
for contract cost accounting. The Board also believes that the criteria 
proposed in the NPRM permits less stringent interest rate criteria than 
the PPA. The final rule requirement for ``investment grade corporate 
bonds with varying maturities and that are in the top 3 quality levels 
available, such as Moody's' single `A' rated or higher,'' supports 
consistency and is less likely to engender disputes. The ANPRM criteria 
relied upon GAAP requirements, which must reflect the expected rates at 
which the pension benefits could be effectively settled. The criteria 
used in this final rule, which is the slightly more stringent than the 
criteria proposed in the NPRM, should also satisfy the GAAP 
requirements.
    The provisions of 9904.412-50(b)(7)(iii)(B) allows the contractor 
to elect to use investment grade corporate bond yield rates ``published 
or defined by the Secretary of the Treasury for determination of the 
minimum contribution required by ERISA'' as its established cost 
accounting practice for setting the interest to be used for 9904.412-
50(b)(7)(iii)(A) purposes. This permits the PPA yield curve to be used 
as a ``safe harbor.'' The 9904.412-50(b)(7)(iii)(A) criteria is 
consistent with, although less stringent than, the discount rate used 
to compute the accrued benefit obligation as described by GAAP which 
refers to ``high quality'' (e.g., Moody's Aa or higher) corporate 
bonds.
    Because all other assumptions must be based on best estimate 
assumptions that reflect long-term trends in accordance with 9904.412-
50(b)(4), this provision will preclude the use of the ``most valuable'' 
benefit assumptions, i.e., most conservative assumptions used to value 
the funding target for an ``at risk'' plan, unless there is a 
persuasive actuarial study that supports such assumptions as 
appropriate based on the past experience and future expectations for 
the plan. All other actuarial assumptions are also required by 
9904.412-50(b)(7)(iii)(D) to be the same as the assumptions used to 
compute the actuarial accrued liability on a going concern basis. Also, 
CAS 412 generally requires that the plan's liability be based on the 
terms of the written plan document, whereas GAAP requires that patterns 
of benefit improvements and other features of the ``substantive plan'' 
be recognized. These differences in the basis for measuring the 
liability for ERISA's funding target and GAAP's accrued benefit 
obligation can cause variances between those values and the minimum 
actuarial liability. Therefore the Board believes the automatic 
adoption of ERISA's funding target or GAAP's accrued benefit obligation 
is inappropriate.
Topic 3: Suggested Alternative Means of Achieving Harmonization
    Comments: Several commenters continue to recommend that the Board 
replace the going concern basis for liability measurement with the 
current mark-to-market measurement adopted by Congress for the PPA, and 
by the Financial Accounting Standards Board for financial statement 
reporting and disclosure. These commenters believe that issues unique 
to contract cost accounting can be addressed through existing or 
modified provisions, e.g., volatility might be addressed through longer 
amortization periods for contract costing purposes.
    There were differing views presented as to whether the CAS should 
directly reference ERISA and GAAP liabilities or simply establish a 
mark-to-market measurement basis. Proponents of direct reference 
believed that direct adoption of ERISA or GAAP values would permit 
contractors and auditors to rely on values already subject to review by 
the Internal Revenue Service (IRS) or independent audit. However, the 
opponents of this approach noted differences in the criteria concerning 
assumptions and events that must be recognized, such as ``at risk'' 
status under ERISA or anticipation of plan changes that may occur under 
GAAP.
    One commenter was concerned with switching back to a going concern 
liability basis when the ERISA or GAAP liability was fully funded. 
Besides the potential for complexity, the concern was that the proposed 
rule would impose a requirement to fund a contract cost for pensions in 
a period in which ERISA would have a lesser minimum required 
contribution or GAAP would recognize a lower pension expense.
    Another commenter agreed that the Board should recognize the mark-
to-market based liability, but

[[Page 81304]]

recommended that the current going concern measurement basis be phased 
out over a five-year transition period. The commenter believed that 
once the entire transition period was completed, then contract cost 
accounting should rely solely on the mark-to-market based liability.
    A different alternative to pension harmonization suggested by one 
commenter would be to retain exclusive use of the going concern basis 
for measuring pension liability, but allow the difference between the 
going concern actuarial accrued liability and the mark-to-market 
minimum actuarial liability during the initial year of harmonization to 
be amortized as the costs of a transitional ``special event.'' This 
commenter believes that this approach would greatly simplify 
harmonization while permitting the previously unrecognized portion of 
the mark-to-market liability to be included in contract costs.
    The third alternative approach suggested came from a commenter who 
believed that the CAS should retain the going concern basis for 
measuring the liability, but that any excess of the ERISA minimum 
required contribution over the contract cost would be amortized over a 
relatively short period, such as a five-year period. This commenter 
also argued that certain contractors, whose business is predominantly 
from cost-based Government contracts, be permitted to recognize the 
full excess in the current period because they do not have a sufficient 
business base to subsidize the excess during the amortization period.
    Response: The Board reiterates its belief that absent evidence to 
the contrary, defined benefit plans are ongoing commitments, and 
therefore contract costing should reflect the average cost based on 
expected average asset returns in the future. However, the Board 
believes that the mark-to-market liability must be recognized as a 
minimum value in order to reflect the risk that the pension plan may 
have to settle its liability for pension benefits. The suggested 
alternative for amortizaton of the initial excess of the minimum 
actuarial liability over the actuarial accrued liability might reduce 
the accumulated value of prepayment credits, but during extended 
periods of low bond rates, substantial prepayment credits could again 
accumulate.
    The Board does not believe that the suggested amortizing of the PPA 
minimum required contribution in excess of the going concern pension 
cost is a viable solution. Adding such amortization to the current 
computations of CAS 412 and 413 adds complexities, whereas the going 
concern based pension cost does adjust to the PPA minimum required 
contribution over a period of time. The simplier approach of adopting 
the PPA minimum required contribution, but using a smoothing mechanism, 
was one of the many options included in the Staff Discussion Paper, but 
it was ultimately rejected by the Board due to concerns that minimum 
funding might not achieve adequate funding in every economic 
environment.
Topic 4: Proposed Accelerated Gain & Loss Amortization
    Comments: Two commenters expressed their support for the proposed 
accelerated amortization of actuarial gains and losses over a ten-year 
period instead of the current fifteen-year period. As one commenter 
stated:

    We also believe the change in amortization period for actuarial 
gains and losses from a fifteen-year to ten-year period, while 
longer than the seven-year amortization period used for PPA, 
provides a reasonable balance between timely cost recovery and an 
acceptable level of volatility for pension costs measured for CAS.

    However, one commenter objected to the imposition of an 
amortization period that exceeded the amortization period required for 
the ERISA minimum required contribution. This commenter was concerned 
that the minimum required contribution would not be fully recognized 
for CAS purposes for a decade.
    In response to the Board's inquiry concerning whether there should 
be special recognition of a gain