[Federal Register Volume 72, Number 127 (Tuesday, July 3, 2007)]
[Notices]
[Pages 36508-36511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-12886]
[[Page 36508]]
=======================================================================
-----------------------------------------------------------------------
OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
Cost Accounting Standards: Staff Discussion Paper--Harmonization
of Cost Accounting Standards 412 and 413 with the Pension Protection
Act of 2006
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, OMB.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Office of Federal Procurement Policy, Cost Accounting
Standards Board, invites public comments concerning a Staff Discussion
Paper on the harmonization of Cost Accounting Standards 412 and 413
with the Pension Protection Act of 2006.
DATES: Comments must be in writing and must be received by September 4,
2007.
ADDRESSES: Due to delays in OMB's receipt and processing of mail,
respondents are strongly encouraged to submit comments electronically
to ensure timely receipt. Electronic comments may be submitted to
[email protected]. Be sure to include your name, title, organization,
and reference case ``CAS-2007-02S.'' Comments may also be submitted via
facsimile to (202) 395-5105. If you must submit via regular mail,
please do so at Office of Federal Procurement Policy, 725 17th Street,
NW., Room 9013, Washington, DC 20503, ATTN: Laura Auletta. Please note
that all public comments received will be posted in their entirety,
including any personal and/or business confidential information
provided, at http://www.whitehouse.gov/omb/procurement/casb.html after
the close of the comment period.
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.
2. Promulgate an Advance Notice of Proposed Rulemaking.
3. Promulgate a Notice of Proposed Rulemaking.
4. Promulgate a Final Rule.
This proposal is step one of the four-step process.
B. Background and Summary
The Office of Federal Procurement Policy (OFPP), Cost Accounting
Standards Board, is today releasing a Staff Discussion Paper (SDP) 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 and tax-
deductibility of pension plans under the Employee Retirement Income
Security Act of 1974 (ERISA). The PPA requires the Board to revise
Standards 412 and 413 of the CAS to harmonize with the amended ERISA
minimum required contribution not later than January 1, 2010.
This SDP solicits 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, and issues associated
with pension harmonization have been identified by the staff.
Respondents are welcome to identify and comment on any issues related
to pension harmonization that they feel are important. This SDP
reflects research accomplished to date by the staff of the Board in the
respective subject area, and is issued by the Board in accordance with
the requirements of 41 U.S.C. 422(g). Accordingly, this SDP does not
necessarily represent the position of the Board.
Basic conceptual differences exist 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 valuation, i.e., assumes the company (or in this
case the pension plan) will continue in business, and follows accrual
accounting principles that incorporate assumptions about future years
of employees' service and salary increases that are absent from the
settlement approach.
To comply with the Congressional mandate in Section 106 of the PPA
(Section 106), the Board must complete its statutorily required 4-step
promulgation process no later than January 1, 2010. Therefore, the
Board has determined that this case must be limited to pension
harmonization issues. As always, the public is invited to submit
comments on other issues regarding contract cost accounting for pension
cost that respondents believe the Board should consider. However,
comments unrelated to pension harmonization will be separately
considered by the Board in determining whether to open a separate case
on pension costs in the future. The staff continues to be especially
appreciative of comments and suggestions that attempt to consider the
concerns of all parties to the contracting process.
C. Public Comments
Interested persons are invited to participate by providing input
with respect to harmonization of CAS 412 and 413 with the PPA. All
comments must be in writing, and submitted as instructed in the
ADDRESSES section.
D. Staff Discussion Paper--Harmonization of Cost Accounting Standards
412 and 413 with the Pension Protection Act of 2006
I. Introduction
The PPA made substantial amendments to ERISA. In particular, the
PPA's minimum required contribution provisions, which apply to single
employer qualified defined-benefit plans, are very different from the
basic minimum funding requirements of ERISA that have existed since
1974. The PPA minimum required contribution computation also differs
from the measurement and assignment provisions of CAS 412 and 413.
The PPA is generally effective as of January 1, 2008. In Section
106, Congress instructs the Board to:
``* * * review and revise sections 412 and 413 of the Cost
Accounting Standards * * * to harmonize the minimum required
contribution * * * of eligible government
[[Page 36509]]
contractor plans and government reimbursable pension plan costs not
later than January 1, 2010.''
The PPA requires that any revisions to the CAS be called the CAS
``Pension Harmonization Rule.'' Section 106 defines ``eligible
government contractors'' as entities whose primary business is
performing work under contracts subject to the Federal Acquisition
Regulation and the Defense Federal Acquisition Regulation Supplement
(DFARS) with such revenues exceeding $5 billion annually. While the
Board is considering what action, if any, is needed to harmonize the
CAS with the PPA, these ``eligible government contractors'' have been
granted relief from the minimum required contribution and ``at risk''
provisions of Title I of the PPA.
II. Scope of the SDP
The PPA addresses many aspects of the treatment of pension plans
under ERISA. As part of Title I of the PPA, Section 106 applies to
single employer defined benefit plans only. Therefore, this SDP
requests public comment on what revisions to the provisions of CAS 412
and 413 regarding single employer defined benefit pension plans, if
any, are required to ensure pension harmonization.
Section 106 instructs the Board to harmonize the CAS with the
minimum required contribution for ``eligible government contractors.''
The Board has determined that the scope of this SDP will (1) Include
discussions regarding all contractors with contracts, grants or awards
subject to these Standards and (2) consider if and/or how the CAS
should be revised to address both the PPA minimum required contribution
and maximum tax-deductible amounts to achieve harmonization.
III. Background
The rules governing defined-benefit pension costs for financial
accounting, ERISA and CAS were developed for different purposes. The
purpose of financial accounting is to report the annual pension expense
and pension liability for use by shareholders, lenders, and other users
of the entity's financial reports. Financial accounting recognizes the
benefit liability presuming the pension plan will be ongoing unless
there is evidence to the contrary.
ERISA was passed in 1974 in response to widespread abusive
practices that prevented retirees from receiving promised pension
benefits. ERISA established a minimum funding requirement for benefit
security purposes and imposed a funding limit for tax policy purposes,
but did not establish accounting practices for pension costs. The
minimum contribution requirement and the maximum tax-deductible
limitation were measured on a projected benefit (going concern) basis.
ERISA has been amended several times to implement tax policy and
protect the benefits of plan participants.
In its 1992 Statement of Objectives, Policies, and Concepts (57 FR
31036, July 13, 1992), the Board stated that the primary purpose of the
CAS is to ``achieve (1) An increased degree of uniformity in cost
accounting practices among Government contractors in like
circumstances, and (2) consistency in cost accounting practices in like
circumstances by individual Government contractors over periods of
time.'' The Board addresses the recognition of pension costs in CAS 412
and 413. CAS 412 provides ``guidance for determining and measuring the
components of pension cost'' and ``the basis on which pension costs
shall be assigned to cost accounting periods.'' CAS 413 provides
``guidance for adjusting pension cost by measuring actuarial gains and
losses and assigning such gains and losses to cost accounting
periods.'' CAS 413 also provides ``the bases on which pension cost
shall be allocated to segments of an organization.''
The original CAS 412 and 413 were revised in 1995 in part to
address a conflict introduced by the Tax Reform Act of 1986 (TRA 86)
and the Omnibus Budget Reconciliation Act of 1987 (OBRA 87). TRA 86
imposed an excise tax on contributions that exceeded the tax-deductible
limit. OBRA 87 lowered the ERISA funding limitations which put
contractors in a ``catch-22'' situation. Contractors were faced with
the dilemma of either funding the full pension cost determined under
CAS while incurring a substantial excise tax which was not an allowable
cost for Government contracting purposes, or limiting the pension
contribution and losing current and future recognition of the costs
which would have otherwise been measured and assigned as pension costs
on Government contracts. On March 30, 1995, CAS 412 and 413 were
amended and removed the conflict by limiting the assignable pension
costs to a corridor measured by a zero dollar floor and ERISA's maximum
contribution amounts. The measurement and assignment of pension cost
under CAS 412 and 413 continued to be based on traditional accrual
accounting and long-term assumptions, which matches activities to the
cost of the long-term liability for pensions, and required funding to
substantiate the compellable amount. The preamble to the 1995
amendments to CAS 412 and 413 (60 FR 16534, March 30, 1995) reiterated
the relationship between the Standards and ERISA:
This final rule has not adopted ERISA as an accounting method, but
has modified accrual accounting to fit within the confines of
practicable funding.
IV. ERISA Contributions vs. CAS Cost
ERISA, as amended by OBRA 87, obligates plan sponsors, including
Government contractors, to make minimum pension contributions towards
their unfunded accrued benefit liabilities, which are measured on a
settlement basis. However, in some cases Government contractors are not
reimbursed immediately for the higher cash outlays in their government
contract costs and prices. Instead, the extra contribution is accounted
for as a prepayment credit which is deferred and reimbursed in later
years. As a result, many contractors have expressed serious concerns
about the detrimental impact on their current cash flow. The PPA may
further exacerbate this cash flow issue by increasing the differences
between required ERISA funding and the measurable and assignable cost
under CAS.
V. Relationship of CAS 412 and 413 to ERISA and ``Harmonization''
Congress instructed the Board to ``harmonize'' the CAS with the
minimum required contribution. However, neither the Act nor the Joint
Committee on Taxation report on the PPA (Technical Explanation of H.R.
4, the ``Pension Protection Act of 2006,'' as passed by the House on
July 28, 2006, and as considered by the Senate on August 3, 2006, JCX-
38-06, August 3, 2006) give any guidance or insight as to Congress'
meaning of the word ``harmonize.'' Thus, the Board has the
responsibility of interpreting the term ``harmonization,'' and in fact,
under the OFPP Act, the Board has the exclusive authority to
promulgate, amend, and interpret the Cost Accounting Standards.
This leads to the question of what it means to harmonize the two
sets of rules.
VI. Questions
This SDP seeks public input on possible revisions to CAS 412 and/or
413 to ``harmonize'' the CAS and the PPA. Therefore, the Board requests
input from interested parties on the following areas of concern. The
Board
[[Page 36510]]
welcomes comments on any other concerns, issues or input related to
harmonization of the CAS with the PPA.
1. Scope. Section 106 of the PPA instructs the Board to harmonize
the CAS with the minimum required contribution for ``eligible
government contractors.'' Contracts of ``eligible government
contractors'' are a small subset of contracts subject to CAS 412 and
413, which include all cost-based contracts subject to full CAS-
Coverage, contracts subject to Paragraph 31.205-6(j) of the Federal
Acquisition Regulation, and recipients of financial assistance who have
elected to use CAS 412 and 413 under OMB Circular A-87.
Question 1. Should the Board apply any revisions to all cost-based
contracts and other Federal awards that are subject to full CAS
coverage, or only to ``eligible government contractors'' as defined in
Section 106?
2. General Purpose. CAS 413.50(c)(12) currently provides for an
adjustment of previously determined pension cost in the event of a
segment closing, a plan termination, or a curtailment of benefits. The
adjustment is computed as the difference between the market value of
the assets and the actuarial accrued liability for the segment. If
there is a pension plan termination, the actuarial accrued benefit is
measured as the amount paid to irrevocably settle all benefit
obligations or paid to the PBGC. In this way, it could be argued that
CAS 413-50(c)(12) already satisfies the purpose of the PPA to protect
employee retirement security or to ensure the PBGC solvency, at least
for the contractor's segments that perform Government contracts. This
leads to the following question:
Question 2. Does the current CAS 412 and 413 substantially meet the
Congressional intent of the PPA to protect retirement security, to
strengthen funding and ensure PBGC solvency?
3. Harmonization. The PPA requires that the Board review and revise
CAS 412 and 413 to harmonize with the minimum required contribution,
but recognizing that the Board has exclusive authority concerning
contract cost accounting, leaves the determination of what constitutes
``harmonization'' to the Board's deliberation and conclusion. The CAS
pension harmonization rule could fall anywhere within the continuum
from avoidance of conflict with ERISA to full adoption of the
measurement and assignment concepts of the minimum required
contribution. The rule might be accomplished by changing the current
provisions of CAS 412 and 413, or possibly adding an adjustment
mechanism to ensure differences between the minimum required
contribution and the contract cost are reconciled within a reasonable
period of time. There might be other means by which harmonization could
be achieved.
Another issue is whether harmonization should examine the minimum
required contribution with or without application of the plan's credit
(carryover and prefunding) balances. The existence and application of
credit balances are treated differently for eight separate PPA funding
tests, such as ``at-risk'' status, benefit restrictions, and the
variable PBGC premium. Separate from their concerns with contract
costing, contractors will have to make complex decisions about whether
to retain or waive (permanently forego) credit balances. If all or some
of the credit balance is retained, the contractor must make decisions
as to the amount of the credit balance to apply to reduce the minimum
funding requirement and in which accounting period to apply the
reduction.
Question 3. Should CAS harmonization be focused only on the
relationship of the PPA minimum required contribution and the contract
cost determined in accordance with CAS 412 and 413?
(a) Do the measurement and assignment provisions of the current CAS
412 and 413 result in a contractor incurring a penalty under ERISA in
order to receive full reimbursement of CAS computed pension costs under
Government contracts?
(b) To what extent, if any, should the Board revise CAS 412 and 413
to harmonize with the contribution range defined by the minimum
required contribution and the tax-deductible maximum contribution?
(c) To what extent, if any, should ERISA credit balances (carryover
and prefunding balances) be considered in revising CAS 412 and 413?
(d) To what extent, if any, should revisions to CAS be based on the
measurement and assignment methods of the PPA?
(i) To what extent, if any, should the Board revise the CAS based
on rules established to implement tax policy?
(ii) To what extent, if any, should the Board consider concerns
with the solvency of either the pension plan, or the PBGC?
4. Cost Measurement. CAS measures the accrued pension liability and
pension cost on the ``going concern'' basis of accounting that assumes
the contractor and pension plan will continue lacking evidence to the
contrary. Conversely, PPA measurements are made on liquidation or
settlement cost basis.
Question 4. (a) Accounting Basis. For Government contract costing
purposes, should the Board (i) Retain the current ``going concern''
basis for the measurement and assignment of the contract cost for the
period, or (ii) revise CAS 412 and 413 to measure and assign the period
cost on the liquidation or settlement cost basis of accounting?
(b) Actuarial Assumptions. For contract cost measurement, should
the Board (i) Continue to utilize the current CAS requirements which
incorporate the contractor's long-term best estimates of anticipated
experience under the plan, or (ii) revise the CAS to include the PPA
minimum required contribution criteria, which include interest rates
based on current corporate bond yields, no recognition of future period
salary growth, and use of a mortality table determined by the Secretary
of the Treasury?
(c) Specific Assumptions. Please comment on the following specific
assumptions:
(i) Interest Rate: (1) For measuring the pension obligation, what
basis for setting interest rate assumptions would best achieve
uniformity and/or the matching of costs to benefits earned over the
working career of plan participants? (2) To what extent, if any, should
the interest rate assumption reflect the contractor's investment policy
and the investment mix of the pension fund?
(ii) Salary Increases: For measuring the pension obligation, should
the CAS exclude, permit or require recognition of future period salary
increases?
(iii) Mortality: For measuring the pension obligation, should the
CAS exclude, permit, or require use of a (1) Standardized mortality
table, (2) company-specific mortality table, or (3) mortality table
that reflects plan-specific or segment-specific experience?
(d) Period Assignment (Amortization). For contract cost
measurement, should the Board (i) Retain the current amortization
provisions allowing amortization over 10 to 30 years (15 years for
experience gains and losses), (ii) expand the range to 7 to 30 years
for all sources including experience gains and losses, (iii) adopt a
fixed 7 year period consistent with the PPA minimum required
contribution computation, or (iv) adopt some other amortization
provision?
(e) Asset Valuation. (i) For contract cost measurement, should the
Board restrict the corridor of acceptable actuarial asset values to the
range specified in the PPA (90% to 110% of the market value)?
[[Page 36511]]
(ii) For contract cost measurement, should the Board adopt the
PPA's two year averaging period for asset smoothing?
5. At Risk Plans. For plans with a low level of funding, the PPA
imposes certain provisions that may require higher ``at risk'' minimum
required contributions than is required for plans that do not have this
low level of funding. The ``at-risk'' provisions are intended to more
rapidly fund plans that are likely to fail due to underfunding and be
taken over by the PBGC.
Question 5. To what extent, if any, should the Board revise the CAS
to include special funding rules for ``at risk'' plans?
6. Cash Flow Considerations. The PPA may create a disincentive for
government contractors to continue their defined benefit plans if the
pattern of cash outlays for pension contributions are not matched by
the reimbursements for pension costs under Government contracts. The
mismatching of cash flows might occur for two distinct reasons: (i) The
pension costs assigned to a particular cost accounting period in
accordance with CAS may be substantially less than the minimum
contributions required by ERISA, or (ii) incurred pension costs may
dramatically exceed previously forecast costs due to plans emerging
from full funding and/or experiencing unexpected adverse asset or
demographic results.
Question 6. (a) To what extent, if any, should the measurement and
assignment provisions of CAS 412 and 413 be revised to address
contractor cash flow issues?
(b) To what extent, if any, do the current prepayment provisions
mitigate contractor cash flow concerns?
(c) To what extent, if any, should the prepayment credit provision
be revised to address the issue of potential negative cash flow?
7. Volatility in Contract Cost Projections. The second potential
source of cash flow mismatch is attributable not to the basic
measurement and assignment provisions of the Standards, but to the
volatility of contract costs for pensions and contribution requirements
(see Question 5 above). The ``all or nothing'' effects of the CAS 412
assignable cost limitation and the ceiling on assigned cost for income
tax purposes could significantly impact the volatility of contract cost
forecasts.
Question 7. (a)(i) To what extent, if any, would adoption of some
or all of the PPA provisions impact the volatility of cost projections?
(ii) Are there ways to mitigate this impact? Please explain.
(b) To what extent, if any, should the CAS assignable cost
limitation be revised as part of the efforts to harmonize the CAS with
the PPA?
(c) To what extent, if any, should the CAS be revised to address
negative pension costs in the context of cost volatility?
8. Segment Closings, Plan Terminations, and Benefit Curtailments.
Under the PPA, if a plan is determined to be severely ``at-risk,'' the
further accrual of benefits is prohibited. Under CAS 413, such a
cessation of accrual would be a curtailment of benefits. Currently, if
the contractor retains pension assets and liabilities subsequent to the
curtailment of benefits, CAS 413-50(c)(12) requires that the actuarial
liability be measured using the assumptions that have historically been
used to fund the plan. If the liability is transferred to an insurance
company or the PBGC, the insurance premium or PBGC valuation of the
liability determines the segment closing liability. The cost of the
insurance premium and the liability assumed by the PBGC may exceed the
PPA target liability and the actuarial liability measured by CAS 413-
50(c)(12) because of the addition of the ``risk premium'' against
adverse experience assessed by insurers.
Question 8. (a) To what extent, if any, would adoption of some or
all of the PPA provisions affect the measurement of a segment closing
adjustment in accordance with CAS 413.50(c)(12)?
(b) To what extent, if any, should the CAS 413 criteria for a
curtailment of benefits be modified to address the PPA mandatory
cessation of benefit accruals for an ``at risk'' plan?
9. Technical Issues. The PPA changes the ERISA provisions for (a)
Treatment of credit (carryover and prefunding) balances (analogous to
``prepayment credits'' under the CAS), (b) treatment of contributions
made after the end of the plan year, and (c) recognition of
collectively bargained benefits. CAS 412 requires prepayment credits to
be adjusted at the valuation rate of interest (the CAS valuation rate)
while the PPA requires credit balances to be adjusted based on the
pension fund's actual rate of ``return on plan assets.'' CAS 412 and
413 do not contain specific language on the treatment of contributions
made after the end of the plan year, while the PPA requires that such
contributions to be discounted at the PPA ``effective interest rate.''
CAS 412 recognizes only the benefits specified in existing collective
bargaining agreements, while the PPA recognizes anticipated changes in
benefits based on established patterns.
Question 9. (a) Prepayment Credits. Should prepayment credits be
adjusted based on the CAS valuation rate or the PPA requirement to use
the pension fund's actual ``return on plan assets'' for the period?
(b) Contributions Made After End of Plan Year. Should the interest
adjustment for contributions made after the end of the plan year be
computed as if the deposit was made on the last day of the plan year or
on the actual deposit as now required by the PPA?
(c) Collectively Bargained Benefits. (i) To what extent, if any,
should the CAS be revised to address the PPA provision that allows the
recognition of established patterns of collectively bargained benefits?
(ii) Are there criteria that should be considered in determining
what constitutes an established pattern of such changes?
10. Available Data on Costs under CAS vs. PPA. To fully examine the
relationship of the measurement and assignment of contract costs for
pensions, the minimum required contribution, and the maximum tax-
deductible contribution, the Board believes that data considering many
different scenarios would be very informative and enhance its
deliberations.
Question 10. The Board would be very interested in obtaining the
results of any studies or surveys that examine the pension cost
determined in accordance with the CAS and the PPA minimum required
contributions and maximum tax-deductible contribution.
11. Records and Visibility. Beginning in 2008, actuarial valuation
reports prepared for ERISA and financial accounting purposes will no
longer be required to include the accrued actuarial liability and
normal cost measured under cost methods and assumptions that comply
with the provisions of CAS 412 and 413. Actuaries and valuation
software could still produce such values, and such valuation results
would still be subject to the Actuarial Standards of Practice.
Question 11. In light of the changes to the PPA, should the Board
consider including specific requirements in CAS 412 and 413 regarding
the records required to support the contractor's proposed and/or
claimed pension cost?
Paul A. Denett,
Administrator, Office of Federal Procurement Policy.
[FR Doc. E7-12886 Filed 7-2-07; 8:45 am]
BILLING CODE 3110-01-P