[Federal Register Volume 73, Number 170 (Tuesday, September 2, 2008)]
[Proposed Rules]
[Pages 51261-51263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20255]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9904
Harmonization of Cost Accounting Standards 412 and 413 With the
Pension Protection Act of 2006
ACTION: . Advance Notice of Proposed Rulemaking.
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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting
Standards Board, invites public comments concerning an Advance Notice
of Proposed Rulemaking 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 November 3,
2008.
ADDRESSES: The full text of the Advance Notice of Proposed Rulemaking,
including the Board's response to public comments on the Staff
Discussion Paper and the draft proposed amendments to Cost Accounting
Standards 412 and 413, is available at: http://www.whitehouse.gov/omb/procurement/casb/2008_anprm.pdf and http://www.regulations.gov.
All comments to this Advance Notice of Proposed Rulemaking must be
in writing. Due to delays in the receipt and processing of mail,
respondents are strongly encouraged to submit comments electronically
to ensure timely receipt. Electronic comments may be submitted in any
one of three ways:
1. Comments may be directly sent via http://www.regulations.gov--a
Federal E-Government Web site that allows the public to find, review,
and submit comments on documents that agencies have published in the
Federal Register and that are open for comment. Simply type ``CAS
Pension Harmonization ANPRM'' (without quotes) in the Comment or
Submission search box, click Go, and follow the instructions for
submitting comments;
2. Comments may be included in an e-mail message sent to
[email protected]. The comments may be submitted in the text of the e-
mail message or as an attachment; or
3. Comments may also be submitted via facsimile to (202) 395-5105.
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Be sure to include your name, title, organization, postal address,
telephone number, and e-mail address in the text of your public comment
and reference ``CAS Pension Harmonization ANPRM'' in the subject line.
Comments received by the date specified above will be included as part
of the official record.
Please note that all public comments received will be available in
their entirety at http://www.whitehouse.gov/omb/procurement/casb/index_public_comments.html and http://www.regulations.gov 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 Advance Notice of Proposed Rulemaking is step two of the four-step
process.
B. Background and Summary
The Office of Federal Procurement Policy (OFPP), Cost Accounting
Standards Board, is today releasing an Advance Notice of Proposed
Rulemaking (ANPRM) 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 contributions to 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.
On July 3, 2007, the Board published a Staff Discussion Paper (72
FR 36508) in accordance with 41 U.S.C. 422(g) to solicit public views
with respect to the Board's statutory requirement to ``harmonize'' CAS
412 and 413 with the PPA. Differences between CAS 412 and 413 and the
PPA, as well as issues associated with pension harmonization were
identified in the Staff Discussion Paper (SDP). Respondents were
invited to identify and comment on any issues related to pension
harmonization that they felt were important. The SDP identified issues
related to pension harmonization and did not necessarily represent the
position of the Board.
The SDP noted basic conceptual differences between the CAS and the
PPA that affect all contracts and awards subject to CAS 412 and 413.
The PPA utilizes a settlement or liquidation approach to value pension
plan assets and liabilities, including the use of accrued benefit
obligations and interest rates based on current corporate bond rates.
On the other hand, CAS utilizes the going concern approach to plan
asset and liability valuations, i.e., assumes the company (or in this
case the pension plan and trust) will continue in business, and follows
accrual accounting principles that incorporate long-term, going concern
assumptions about future asset returns, future years of employees'
service, and future salary increases. These assumptions about future
events are absent from the settlement approach.
The full text of the public comments to the SDP is available at:
http://www.whitehouse.gov/omb/procurement/casb/index_public_comments.html under ``Combined Public Comments on the Staff Discussion
Paper on the Harmonization of Cost Accounting Standards 412 and 413
with the Pension Protection Act of 2006,'' and http://www.regulations.gov.
The Board believes that the accounting for pension costs for
contract costing purposes should continue to reflect the long-term
nature of the pension plan for a going-concern. The Cost Accounting
Standards are intended to provide cost data not only to determine the
incurred cost for the current period, but also to provide consistent
and reasonable cost data for forward-pricing contracts over the near
future. Financial statement accounting, on the other hand, is intended
to report the change in an entity's financial position and results of
operations during the current period. ERISA does not prescribe a unique
cost or expense for a period. The minimum required contribution rules
of ERISA, as amended by the PPA, instead require that the plan achieves
funding of its current settlement liability within a short period of
time. On the other hand, the ERISA tax-deductible maximum contribution
is based on the plan's long-term benefit levels plus a reserve against
adverse experience. ERISA permits the entity a wide contribution range
that allows the company to set long-term financial management decisions
on the funding of the ongoing pension plan.
The Board recognizes that contract cost accounting for a going
concern must, nevertheless, address the risk associated with inadequate
funding of a plan's settlement liability and therefore proposes
implementation of a minimum liability based on the accrued benefits
valued based on corporate bond rates. Furthermore, harmonization with
the PPA minimum required contribution, which is based on the ERISA
``funding target'' and ``target normal cost,'' will help alleviate the
disparity in timing between ERISA's minimum funding requirements and
recognition of such required funding in contract costing. Once
harmonization is achieved, maintaining the going concern basis for
contract costing allows contractors to set long-term funding goals that
avoid undue cost/contribution volatility.
The Board continues to believe that issues of benefit design,
investment strategy, and financial management decisions for the pension
plan fall under the contractor's purview. The Board also believes that
the Cost Accounting Standards must remain sufficiently robust to
accommodate evolving changes in financial statement reporting and
theory as well as Congressional changes to ERISA.
After considering the effects of accelerating recognition of
actuarial gains and losses, the Board proposes changing the
amortization period for gains and losses to a 10-year amortization
period from its current 15-year period to provide more timely
adjustment of plan experience while not introducing unmanageable
volatility. This shorter amortization period also more closely follows
the 7-year period
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required by ERISA to fully fund the plan's settlement liability.
In assessing the potential for volatility that would adversely
impact forward pricing, the Board noted that for pension plans that are
close to being fully funded, the sudden and unpredictable elimination
or emergence of significant pension costs has been problematic for many
years. Accordingly, the Board proposes to revise the ``assignable cost
limitation'' so that it does not apply until the actuarial value of
assets equals or exceeds 125% of the actuarial accrued liability plus
normal cost. In addition, the actuarial gains that give rise to surplus
assets will be amortized over 10 years and will reduce the surplus in
an orderly and timely fashion.
The Board proposes a specific transition method for implementing
harmonization. This transition method would apply to all contractors
subject to CAS 412 and 413 through full CAS-coverage or Federal
Procurement Regulation (FAR) Sec. 31.205-6(j). The proposed transition
will phase-in revisions to the liability and normal cost measurement
and to the amortization periods during the first 5 years as new
contracts are priced and awarded so that the cost effects of
harmonization are gradually recognized.
The proposed transition phase-in lasts for a specific 5-year period
that tracks the typical contracting cycle. More importantly, the
proposed transition phase-in should provide at least partial
harmonization relief for contractors with contracts that are exempt
from CAS-Coverage. At the same time the proposed phase-in provisions
are intended to make the possible cost increases due to harmonization
more manageable for the procuring agencies.
The draft proposed rule allows companies to use the same actuarial
methods and valuation software for ERISA, financial statement 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 agencies and government auditors to place
reliance on data from ERISA and financial statement valuations, and
allow contractors to avoid unnecessary actuarial effort and expense.
C. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this draft proposed rule, because this rule imposes no paperwork burden
on offerors, affected contractors and subcontractors, or members of the
public which requires the approval of OMB under 44 U.S.C. 3501, et seq.
The records required by this draft proposed rule are those normally
maintained by contractors who claim reimbursement of post-retirement
benefit costs under government contracts.
D. Executive Order 12866 and the Regulatory Flexibility Act
Because most contractors must measure and report their post-
retirement benefit liabilities and expenses in order to comply with the
requirements of SFAS 106 for financial accounting purposes, the
economic impact of this draft proposed rule on contractors and
subcontractors is expected to be minor. As a result, the Board has
determined that this draft proposed rule will not result in the
promulgation of an ``economically significant rule'' under the
provisions of Executive Order 12866, and that a regulatory impact
analysis will not be required. Furthermore, this draft proposed rule
does not have a significant effect on a substantial number of small
entities because small businesses are exempt from the application of
the Cost Accounting Standards. Therefore, this draft proposed rule does
not require a regulatory flexibility analysis under the Regulatory
Flexibility Act of 1980.
Paul A. Denett,
Chairperson, Cost Accounting Standards Board.
[FR Doc. E8-20255 Filed 8-29-08; 8:45 am]
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