[Federal Register Volume 75, Number 89 (Monday, May 10, 2010)]
[Proposed Rules]
[Pages 25982-26024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9783]
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Part III
Office of Management and Budget
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Office of Federal Procurement Policy
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48 CFR Part 9904
Cost Accounting Standards: Harmonization of Cost Accounting Standards
412 and 413 With the Pension Protection Act of 2006; Proposed Rule
Federal Register / Vol. 75 , No. 89 / Monday, May 10, 2010 / Proposed
Rules
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9904
Cost Accounting Standards: Harmonization of Cost Accounting
Standards 412 and 413 With the Pension Protection Act of 2006
AGENCY: Office of Management and Budget (OMB), Office of Federal
Procurement Policy (OFPP), Cost Accounting Standards Board (Board).
ACTION: Proposed rule with request for comments.
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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost
Accounting Standards Board (Board), invites public comments concerning
the harmonization of Cost Accounting Standards 412 and 413 with the
Pension Protection Act (PPA) of 2006. The PPA amended the minimum
funding requirements for defined benefit pension plans. The PPA
required the Board to harmonize with PPA the CAS applicable to the
Government reimbursement of the contractor's pension costs. The Board
has proposed several changes to harmonize CAS with PPA, including the
recognition of a ``minimum actuarial liability'' consistent with the
PPA minimum required contribution. The proposed CAS changes will lessen
the difference between the amount of pension cost reimbursable to the
contractor in accordance with CAS and the amount of pension
contribution required to be made by the contractor as the plan sponsor
by PPA.
DATES: Comments must be in writing and must be received by the July 9,
2010.
ADDRESSES: All comments to this Notice of Proposed Rulemaking (NPRM)
must be in writing. You may submit your comments via U.S mail. However,
due to delays in the receipt and processing of mail, respondents are
strongly encouraged to submit comments electronically to ensure timely
receipt. Electronic comments may be submitted in any one of three ways:
Federal eRulemaking Portal: Comments may be directly sent
via 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 NPRM'' (without
quotes) in the Comment or Submission search box, click Go, and follow
the instructions for submitting comments.
E-mail: Comments may be included in an e-mail message sent
to [email protected]. The comments may be submitted in the text of the
e-mail message or as an attachment;
Facsimile: Comments may also be submitted via facsimile to
(202) 395-5105; or
Mail: If you must submit your responses via regular mail,
please mail them to: Office of Federal Procurement Policy, 725 17th
Street, NW., Room 9013, Washington, DC 20503, Attn: Raymond J. M. Wong.
Be aware that due to the screening of U.S. mail to this office, there
will be several weeks delay in the receipt of mail. Respondents are
strongly encouraged to submit responses electronically to ensure timely
receipt.
Be sure to include your name, title, organization, postal address,
telephone number, and e-mail address in the text of your public comment
and reference ``CAS Pension Harmonization NPRM'' in the subject line.
Comments received by the date specified above will be included as part
of the official record.
Please note that all public comments received will be available in
their entirety at http://www.whitehouse.gov/omb/casb_index_public_comments/ and http://www.regulations.gov after the close of the comment
period.
For the convenience of the public, a copy of the proposed
amendments to Cost Accounting Standards 412 and 413 shown in a ``line-
in/line-out'' format is available at: http://www.whitehouse.gov/omb/procurement_casb_index_fedreg/ and http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Eric Shipley, Project Director, Cost
Accounting Standards Board (telephone: 410-786-6381).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
Rules, Regulations and Standards issued by the Cost Accounting
Standards Board (Board) are codified at 48 CFR Chapter 99. The Office
of Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the
Board, prior to the establishment of any new or revised Cost Accounting
Standard (CAS or Standard), complete a prescribed rulemaking process.
The process generally consists of the following four steps:
1. Consult with interested persons concerning the advantages,
disadvantages and improvements anticipated in the pricing and
administration of Government contracts as a result of the adoption of a
proposed Standard, the Staff Discussion Paper (SDP).
2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
3. Promulgate a Notice of Proposed Rulemaking (NPRM).
4. Promulgate a Final Rule.
This NPRM is step three of the four-step process.
B. Background and Summary
The Office of Federal Procurement Policy (OFPP), Cost Accounting
Standards Board, is today releasing a Notice of Proposed Rulemaking
(NPRM) on the harmonization of Cost Accounting Standards (CAS) 412 and
413 with the Pension Protection Act (PPA) of 2006 (Pub. L. 109-280, 120
Stat. 780). The Office of Procurement Policy Act, 41 U.S.C. 422(g)(1),
requires the Board to consult with interested persons concerning the
advantages, disadvantages, and improvements anticipated in the pricing
and administration of Government contracts as a result of the adoption
of a proposed Standard prior to the promulgation of any new or revised
CAS.
The PPA amended the minimum funding requirements for, and the tax-
deductibility of contributions to, defined benefit pension plans under
the Employee Retirement Income Security Act of 1974 (ERISA). Section
106 of the PPA requires the Board to revise Standards 412 and 413 of
the CAS to harmonize with the amended ERISA minimum required
contribution.
In addition to the proposed changes for harmonization, the Board
has proposed several technical corrections to cross references and
minor inconsistencies in the current rule. These technical corrections
are not intended to change the meaning or provisions of CAS 412 and 413
as currently published. The technical corrections for CAS 412 are being
made to paragraphs 9904.412-30(a)(1) and (9), paragraphs 9904.412-
50(c)(1), (2) and (5), and paragraph 9904.412-60(c)(13). In CAS 413,
the technical corrections are being made to paragraph 9904.413-
30(a)(1), subsection 9904.413-40(c), and paragraphs 9904.413-
50(c)(1)(i) and 9904.413-60(c)(12).
Prior Promulgations
On July 3, 2007, the Board published a Staff Discussion Paper (SDP)
(72 FR 36508) to solicit public views with respect to the Board's
statutory requirement to ``harmonize'' CAS 412 and 413 with the PPA.
Differences between CAS 412 and 413 and the PPA, as well as issues
associated with pension harmonization, were identified in the SDP.
Respondents were invited to
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identify and comment on any issues related to pension harmonization
that they felt were important. The SDP reflected research accomplished
to date by the staff of the Board, and was issued by the Board in
accordance with the requirements of 41 U.S.C. 422(g). The SDP
identified issues related to pension harmonization and did not
necessarily represent the position of the Board.
The SDP noted basic conceptual differences between the CAS and the
PPA that affect all contracts and awards subject to CAS 412 and 413.
The PPA utilizes a settlement or liquidation approach to value pension
plan assets and liabilities, including the use of accrued benefit
obligations and interest rates based on current corporate bond rates.
On the other hand, CAS utilizes the going concern approach to plan
asset and liability valuations, i.e., assumes the company (or in this
case the pension plan and trust) will continue in business, and follows
accrual accounting principles that incorporate long-term, going concern
assumptions about future asset returns, future years of employee
service, and future salary increases. These assumptions about future
events are absent from the settlement approach utilized by PPA.
On September 2, 2008, the Board published the Advance Notice of
Proposed Rulemaking (ANPRM) (73 FR 51261) to solicit public views with
respect to the Board's statutory requirement to ``harmonize'' CAS 412
and 413 with the PPA. Respondents were invited to comment on the
general approach to harmonization and the proposed amendments to CAS
412 and 413. The ANPRM reflected public comments in response to the SDP
and research accomplished to date by the staff of the Board, and was
issued by the Board in accordance with the requirements of 41 U.S.C.
422(g).
Because of the complexity and technical nature of the proposed
changes, many respondents asked that the Board extend the comment
period to permit submission of additional or supplemental public
comments. On November 26, 2008, the Board published a notice extending
the comment period for the ANPRM (73 FR 72086).
The ANPRM proposed nine general changes to CAS 412 and 413 that
were intended to harmonize the CAS with the PPA minimum required
contributions while controlling cost volatility between periods. The
primary changes proposed by the ANPRM were the recognition of a
``minimum actuarial liability,'' special recognition of ``mandatory
prepayment credits,'' an accelerated gain and loss amortization, and a
revision of the assignable cost limitation. Other proposed changes
addressed the PPA's mandatory cessation of benefit accruals for
severely underfunded plans, the projection of flat dollar benefits,
recognition of accrued contribution values on a discounted basis, and
interest on prepayments credits and prior period unfunded pension
costs. The final category of proposed changes provided for a phased-in
transition of the amendments to mitigate the initial increase in
contract price.
Public Comments
The Board received 17 public comments and 2 supplemental public
comments to the ANPRM, including the extension period. These comments
came from contractors, industry associations, Federal agencies, and the
actuarial profession. The Board appreciates the efforts of all parties
that submitted comments, and found their depth and breadth to be very
informative. A brief summary of the comments follows in Section C--
Public Comments to the ANPRM.
The NPRM reflects public comments in response to the ANPRM, as well
as to research accomplished to date by the staff of the Board in the
respective subject areas, and is issued by the Board in accordance with
the requirements of 41 U.S.C. 422(g).
Conclusions
The Board continues to believe that the accounting for pension
costs for Government contract costing purposes should reflect the long-
term nature of the pension plan for a going concern. As discussed in
the ANPRM, the Cost Accounting Standards are intended to provide cost
data not only to determine the incurred cost for the current period,
but also to provide consistent and reasonable cost data for the
forward-pricing of Government contracts over the near future. Financial
statement accounting, on the other hand, is intended to report the
change in an entity's financial position and results of operations
during the current period. ERISA does not prescribe a unique cost or
expense for a period. The minimum required contribution rules of ERISA,
as amended by the PPA, instead require that the plan achieves funding
of its current settlement liability within a relatively short period of
time. On the other hand, the ERISA tax-deductible maximum contribution
is based on the plan's long-term benefit levels plus a reserve against
adverse experience. ERISA permits a wide contribution range that allows
the company to establish long-term financial management decisions on
the funding of the ongoing pension plan.
The Board recognizes that contract cost accounting for a going
concern must address the risks to both the contractor and the
Government that are associated with inadequate funding of a plan's
settlement liability. The NPRM therefore proposes implementation of a
minimum actuarial liability and minimum normal cost that is based on
currently accrued benefits that have been valued using corporate bond
rates. Furthermore, recognition of the minimum actuarial liability and
normal cost that are consistent with the basis for the ERISA ``funding
target'' and ``target normal cost,'' will alleviate the disparity
between the CAS assigned cost and ERISA's minimum required
contribution. Once harmonization is achieved, maintaining the going
concern basis for contract costing allows contractors to set long-term
funding goals that avoid undue cost or contribution volatility.
The Board agrees with the public comments that since the general
approach to harmonization is tied to the minimum actuarial liability,
the recognition proposed in the ANPRM for post harmonization
``mandatory'' prepayment credits was unnecessary and overly complex. In
reviewing the proposed treatment of mandatory prepayments, the Board
noted that because the normal cost and actuarial accrued liability have
been harmonized with the minimum actuarial liability and minimum normal
cost, providing for supplemental recognition of the mandatory
prepayment credits would overstate the appropriate period cost. The
NPRM does not include any special recognition of mandatory prepayment
credits.
The Board continues to believe that issues of benefit design,
investment strategy, and financial management of the pension plan fall
under the contractor's purview. The Board also believes that the Cost
Accounting Standards must remain sufficiently robust to accommodate
evolving changes in financial accounting theory and reporting as well
as Congressional changes to ERISA.
After considering the effects of accelerating the recognition of
actuarial gains and losses and to provide more timely adjustment of
plan experience without introducing unmanageable volatility, the NPRM
proposes changing the amortization period for gains and losses to a 10-
year amortization period from its current 15-year period. This shorter
amortization period more closely follows the 7-year period
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required by ERISA to fully fund the plan's settlement liability.
The Board believes the 10-year minimum amortization period,
including the required amortization of any change in unfunded actuarial
liability due to switching from the actuarial accrued liability to the
minimum actuarial liability, or from the minimum actuarial liability
back to the actuarial accrued liability, provides sufficient smoothing
of costs to reduce volatility. Therefore, the NPRM does not include any
assignable cost limitation buffer. Under the NPRM, once the assignable
cost limitation is exceeded, the assigned pension cost continues to be
limited to zero.
The Board proposes a specific transition method for implementing
harmonization and moderating its cost effects. The proposed 5-year
transition method will phase-in the recognition of any adjustment of
the actuarial accrued liability and normal cost. This transition method
would apply to all contractors subject to CAS 412 and 413.
Benefits
The proposed rule of this NPRM harmonizes the disparity between the
PPA minimum contribution requirements and Government contract costing.
The proposed rule should provide relief for the contractors' concerns
with indefinite delays in recovery of cash expenditures while
mitigating the expected pension cost increases that will impact
Government and contractor budgets. The proposed rule should also reduce
cost volatility between periods and thereby enhance the budgeting and
forward pricing process. This will assist in meeting the uniformity and
consistency requirements described in the Board's Statement of
Objectives, Policies and Concepts (57 FR 31036), July 13, 1992).
The NPRM allows companies to use the same actuarial methods and
valuation software for ERISA, financial statements, and Government
contract costing purposes. Except for the interest rate, the same
general set of actuarial assumptions can be used for all three
purposes. This will allow Government agencies and auditors to place
reliance on data from ERISA and financial statement valuations while
allowing contractors to avoid unnecessary actuarial effort and expense.
Goals for Harmonization
This proposed rule is based upon the following goals for achieving
pension harmonization and transition that the Board established in the
ANPRM and reaffirms in this NPRM:
(1) Harmonization Goals
(a) Minimal changes to CAS 412 and 413.
(b) No direct adoption of ERISA as amended by the PPA, to avoid any
change to contract cost accounting without prior CAS Board approval
since Congress will amend ERISA in the future.
(c) Preserve matching of costs with causal/beneficial activities
over the long-term.
(d) Mitigate volatility (enhance predictably).
(e) Make ``user-friendly'' changes (avoid complexity to the degree
possible).
(2) Goals for Transition to Harmonization
(a) Minimize undue immediate impact on contract prices and budgets.
(b) Transition should work for contractors with either CAS or FAR
covered contracts.
Summary Description of Proposed Standard
The primary proposed harmonization provisions are self-contained
within the ``CAS Harmonization Rule'' at 9904.412-50(b)(7). This
structure eliminates the need to revise many long-standing provisions
and clearly identifies the special accounting required for
harmonization. Proposed revisions to other provisions are necessary to
harmonization and mitigate volatility. This proposed rule makes general
changes to CAS 412 and 413 that are intended to harmonize the CAS with
the PPA minimum required contributions while controlling cost
volatility between periods. These general changes are:
(1) Recognition of a ``minimum actuarial liability.'' CAS 412 and
413 continue to measure the actuarial accrued liability and normal cost
based on long-term, ``best-estimate'' actuarial assumptions, projected
benefits, and the contractor's established immediate gain actuarial
cost method. However, in order to ensure that the measured costs
recognize the settlement liability and normal cost as minimum values,
the proposed rule requires that the measured pension cost must be re-
determined using the minimum actuarial liability and minimum normal
cost if the criteria of all three (3) ``triggers'' set forth in the CAS
Harmonization Rule are met.
(i) If the minimum required amount exceeds the pension cost
measured without regard to the minimum liability and minimum normal
cost, then the contractor must determine which total period liability,
i.e., actuarial liability plus normal cost, must be used;
(ii) If the sum of the minimum actuarial liability plus the minimum
normal cost measured on a settlement basis exceeds the sum of actuarial
accrued liability plus normal cost measured on a long-term basis, then
the contractor must re-measure the pension cost for the period using
the minimum actuarial liability and minimum normal cost; and
(iii) If pension cost re-measured using the minimum actuarial
liability and minimum normal cost exceeds the pension cost originally
measured using the actuarial accrued liability and normal cost, then
the re-measured pension cost is used for the assignment and allocation
of pension costs for the period. Furthermore, the minimum actuarial
liability and minimum normal costs are used for all purposes of
measurement, assignment, and allocation under CAS 412.
The minimum actuarial liability definition is consistent with the
PPA funding target and the Statement of Financial Accounting Standard
No. 87 (FAS 87) ``accumulated benefit obligation.'' The minimum normal
cost is similarly defined to be consistent with the FAS 87 service cost
(without salary projection) and the PPA target normal cost.
The proposed rule does not require a change to the contractor's
actuarial cost method used to compute pension costs for CAS 412 and 413
purposes. Therefore, any change in actuarial cost method, including a
change in asset valuation method, would be a ``voluntary'' change in
cost accounting practice and must comply with the provisions of CAS 412
and 413.
(2) Accelerated Gain and Loss Amortization. The proposed rule
accelerates the assignment of actuarial gains and losses by decreasing
the amortization period from fifteen to ten years. This accelerated
assignment will reduce the delay in cost recognition and is consistent
with the shortest amortization period permitted for other portions of
the unfunded actuarial liability (or actuarial surplus).
(3) Revision of the Assignable Cost Limitation. The proposed rule
does not change the basic definition of the assignable cost limitation
and continues to limit the assignable cost to zero if assets exceed the
actuarial accrued liability and normal cost. Under the proposed rule,
the actuarial accrued liability and normal cost used to determine the
assignable cost limitation are adjusted for the minimum values if
applicable.
(4) Mandatory Cessation of Benefit Accruals. This proposed rule
will exempt any curtailment of benefit
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accrual required by ERISA from immediate adjustment under CAS 413-
50(c)(12). Voluntary benefit curtailments will remain subject to
immediate adjustment under CAS 413-50(c)(12). A new subparagraph has
been added to CAS 413-50(c)(12) that addresses the accounting for the
benefit curtailment or other segment closing adjustment in subsequent
periods.
(5) Projection of Flat Dollar Benefits. The proposed amendments
will allow the projection of increases in specific dollar benefits
granted under collective bargaining agreements. The recognition of such
increases will place reliance on criteria issued by the Internal
Revenue Service (IRS). As with salary projections, the rule will
discontinue projection of these specific dollar benefit increases upon
segment closing, which uses the accrued benefit cost method to measure
the liability.
(6) Asset Values and Present Value of Contributions. For
nonqualified defined benefit plans, the proposed rule discounts
contributions at the long-term interest assumption from the date paid,
even if made after the end of the year. For qualified defined benefit
plans, this proposed rule would accept the present value of accrued
contributions and the market value (fair value) of assets recognized
for ERISA purposes. Using the ERISA recognition of accrued
contributions in determining the market value of assets will avoid
unexpected anomalies between ERISA and the CAS, as well as support
compliance and audit efforts. The market and actuarial values of assets
should include the present value of accrued contributions.
(7) Interest on Prepayments Credits. Funding more than the assigned
pension cost is often a financial management decision made by the
contractor, although funding decisions must consider the minimum
funding requirements of ERISA. Since all monies deposited into the
funding agency share equally in the fund's investment results, the
prepayment is allocated a share of the investment earnings and
administrative expenses on the same basis as separately identified
segment assets. This recognition ensures that any investment gain or
loss attributable to the assets accumulated by prepayments does not
affect the gains and losses of the plan or any segments. The decision
or requirement to deposit funds in excess of the assigned cost should
have a neutral impact on Government contract costing.
(8) Interest on Unfunded Pension Costs. Funding less than the
assigned pension cost is a financial management decision made by the
contractor. The unfunded cost cannot be reassigned to current or future
periods and must be separately identified and tracked in accordance
with 9904.412-50(a)(2). Because there are no assets associated with
these unfunded accruals, the Board believes that these amounts should
not create any investment gain or loss. The proposed rule reaffirms
that the accumulated value of unfunded accruals is adjusted at the
long-term interest assumption and clarifies that the settlement
interest rate based on corporate bond yields does not apply.
(9) Required Amortization of Change in Unfunded Actuarial Liability
due to Recognition of Minimum Actuarial Liability Mitigates Initial
Increase in Contract Price. The proposed rule explicitly requires that
the actuarial gain or loss, due to any difference between the expected
and actual unfunded actuarial liability caused by the recognition of
the minimum actuarial liability, be amortized over a 10-year period
along with actuarial gain or losses from all other sources. This
amortization process will limit the immediate effect on pension costs
when the Harmonization Rule becomes applicable and thereby mitigates
the impact on existing contracts subject to these Standards.
There are two other important features included in this proposed
rule.
(1) Transition Phase-In of Minimum Actuarial Liability and Minimum
Normal Cost Mitigates Initial Increase in Contract Price. To allow time
for agency budgets to manage the possible increase in Government
contract costs and to mitigate the impact on existing contracts for
both the Government and contractors, the changes to CAS 412 and 413 are
phased-in over a 5-year period that approximates the typical
contracting cycle. The proposed phase-in allows the cost impact of this
draft proposal to be gradually recognized in the pricing of CAS-covered
and FAR contracts alike. Any adjustment to the actuarial accrued
liability and normal cost based on recognition of the minimum actuarial
liability and minimum normal cost will be phased in over a 5-year
period at 20% per year, i.e., 20% of the difference will be recognized
the first year, 40% the next year, then 60%, 80%, and finally 100%
beginning in the fifth year. The phase-in of the minimum actuarial
liability also applies to segment closing adjustments.
(2) Extended Illustrations. Many existing illustrations have been
updated to reflect the proposed changes to CAS 412 and 413. To assist
the contractor with understanding how this proposed rule would
function, extensive examples have been included in a new Section
9904.412-60.1, Illustrations--CAS Harmonization Rule. This section
presents a series of illustrations showing the measurement, assignment
and allocation of pension cost for a contractor with an under-funded
segment, followed by another series of illustrations showing the
measurement, assignment and allocation of pension cost for a contractor
with an over-funded segment. The actuarial gain and loss recognition of
changes between the long-term liability and the settlement liability
bases are illustrated in 9904.412-60.1(h). This structural format
differs from the format for 9904.412-60.
The Board realizes that these examples are longer than the typical
example in the Standards, but believes that providing comprehensive
examples covering the process from measurement to assignment and then
allocation will demonstrate how the proposed harmonization is
integrated into the existing rule.
C. Public Comments to the Advance Notice of Proposed Rulemaking
The full text of the public comments to the ANPRM is available at:
http://www.whitehouse.gov/omb/casb_index_public_comments/ and http://www.regulations.gov.
Summary of Public Comments
The public comments included a broad range of views on how to
harmonize CAS with the PPA. At one extreme, one commenter believed that
the Board should do nothing as the existing CAS rules are already
harmonized with the PPA. At the other extreme, others believed that CAS
412 and 413 should be amended to adopt the actuarial assumptions and
measurement techniques used to determine the PPA minimum required
contribution. In any case, there was overall consensus that any
amendments to CAS 412 and 413 should apply to all contractors with
Government contracts subject to CAS 412 and 413.
Most of the public comments expressed concern that the disparity
between CAS and the PPA has the potential to cause extreme cash flow
problems for some Government contractors. Many commenters believed that
the ERISA minimum required contribution must be recognized in contract
costing on a timely basis. Industry and professional groups generally
agreed that Section 106 of the PPA requires CAS 412 and 413 to be
revised to harmonize with the PPA minimum required contribution.
However, there were varying views on how to best accomplish that goal.
Many commenters suggested that the Board
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seize the opportunity offered by harmonization to bring the CAS rules
more in line with the evolving views of financial statement disclosure
of pension obligations, minimum funding adequacy to protect the plan
participants and the Pension Benefit Guarantee Corporation (PBGC), and
financial economics regarding the appropriate use of corporate
resources and shareholder equity. Rather than merely amend the existing
rules, the public comments suggested that a fresh look should be taken
by the Board to balance and reconcile the competing interests of
stakeholders and the intent of the various statutes.
Others argued that there is no mandate for the Board to address any
issue beyond the PPA minimum required contribution. These commenters
believed that any other issues should be addressed by the Board in a
separate case. There was no consensus on how far the Board should go
beyond the requirement to merely harmonize CAS with the PPA minimum
required contribution, e.g., should the Board also consider the PPA's
revisions to the maximum tax deductible limits.
For the most part, industry comments supported adoption of the PPA
minimum funding provisions including the provisions related to ``at-
risk'' plans. They believe that directly adopting the PPA minimum
funding provisions will preserve the equitable principle of the CAS
whereby neither contractors nor Government receives an unfair
advantage. They expressed concern that if the Board does not fully
adopt the PPA minimum funding provisions, the Government will have an
unfair advantage because the PPA compels the contractors to incur a
higher cost than they can allocate to Government contracts and recover
currently, thus, creating negative corporate cash flow. They noted that
although the prepayment provision in the current CAS is meant to
mitigate this situation, the cost methodology under the PPA is so
radically different that the prepayment provision in CAS 412 has
negligible impact in providing timely relief to the contractor from
this negative cash flow.
The views of one Federal agency on harmonization differed from
those of industry and opined that no revision to CAS was necessary to
harmonize with the PPA. This commenter argued that: (i) Harmony is
already achieved through prepayments credits; (ii) adopting the PPA
funding rules will run counter to uniform and consistent accounting;
(iii) adopting the PPA requirements weakens the causal/beneficial
relationship between the cost and cost objective; and, (iv) adopting
the PPA requirements will increase cost volatility. The commenter
expressed its belief that the purposes of the PPA, which are to better
secure pension benefits and promote solvency of the pension plan, are
different than the purposes of CAS. They also believed that since CAS
does not undermine the purposes of the PPA the two are already in
harmony.
This summary of the comments and responses form part of the Board's
public record in promulgating this case and are intended to enhance the
public's understanding of the Board's deliberations concerning Pension
Harmonization.
Abbreviations
Throughout the public comments there are the following commonly
used abbreviations:
AAL--Actuarial Accrued Liability, usually used to denote
the liability measured using long-term assumptions;
ACL--Assignable Cost Limitation;
ERISA--The Employees' Retirement Security Income Act of
1974, as amended to date;
MAL--Minimum Actuarial Liability, usually used to denote
the liability measured using interest based on current period
settlement rates;
MNC--Minimum Normal Cost, usually used to denote the
normal cost measured using interest based on current period settlement
rates;
MPC--Mandatory Prepayment Credit, which was a term used in
the ANPRM;
MRC--Minimum Required Contribution, which is the
contribution necessary to satisfy the minimum funding requirement of
ERISA for continued plan qualification; and
NC--Normal Cost, usually used to denote the normal cost
measured using long-term assumptions.
Responses to Specific Comments
Topic A: Proposed Approach to Harmonization. The principle elements
for harmonization that were proposed in the ANPRM are:
a. Continuance of the development of the CAS assigned pension cost
on a long-term, going concern basis;
b. Implementation of a minimum liability ``floor'' based on the
plan's current settlement liability in the computation of the assigned
cost for a period;
c. Acceleration of the gain and loss amortization from 15 to 10
years;
d. Recognition of established patterns of increasing flat dollar
benefits;
e. Adjusting prepayment credits based on the rate of return on
assets; and
f. Exemption of mandated benefit curtailments.
Comments: The majority of commenters found that the ANPRM presented
a fair and reasonable approach to harmonization. The commenters
submitted many detailed comments on improvements to specific provisions
as well as some additional provisions they believed might be useful.
Some commenters remarked that the extensive explanation of the
reasoning behind the Board's approach to harmonization enhanced their
understanding of the ANPRM.
As one commenter wrote:
We appreciate the effort put forth by the CAS Board and Staff to
study the issues and publish this ANPRM. The task of harmonization
is challenging and technically complicated. The harmonization of CAS
needs to respect the cash contribution requirements mandated by the
PPA, but it should be done in a way that best allows both
contractors and the government to budget for that cost and for the
contractors to recover that cost. The ANPRM provides an excellent
framework for developing revisions to the CAS in order to satisfy
the requirements for harmonization with PPA. However, we believe
that there are several areas where changes to the ANPRM would offer
significant improvement toward meeting the objective of
harmonization.
Another public comment read:
We commend the CAS Board for addressing the complex issues
concerning harmonizing pension costs under the CAS 412/413
requirements with the minimum funding requirements under the Pension
Protection Act (PPA) of 2006. We believe the ANPRM reflects an
excellent approach for addressing these important issues.
Commenting on the proposed approach and preamble explanation, a
commenter remarked:
Although the ANPRM does not establish as much commonality
between the building blocks underlying the CAS cost and ERISA
minimum funding requirements as we would have preferred, the
explanation of the Board's reasoning was quite helpful. In our view,
the ANPRM provides a reasonable framework for the necessary
revisions to CAS 412 and 413.
Response: The majority of commenters found that the ANPRM presented
a fair and reasonable approach to harmonization, and therefore this
NPRM is being proposed based upon the general concepts of the ANPRM. In
drafting this NPRM the Board has considered many detailed suggestions
concerning improvements to specific provisions and additional
provisions as submitted by the commenters. Because of the technical
nature of this proposed rule, the Board is again providing explanations
of the reasoning for any changes from the ANPRM.
The Board discussed the move towards fair value accounting by
generally accepted accounting
[[Page 25987]]
principles (GAAP) and ERISA versus the CAS goal of accounting on long-
term, ``going concern'' basis. The Board reaffirmed its desire to
retain the ``going concern'' basis and use long-term expectations to
value pension liabilities--this recognizes the long-term relationship
between the Government and most contractors. The long-term, ``going
concern'' basis serves to dampen volatility and thereby enhances
forward pricing--a function that is unique to the CAS.
The Board also believes that the minimum liability approach is the
highest extent of change which is academically/theoretically defensible
and consistent with the Board's Statement of Objectives, Principles and
Concepts.
Topic B: Supports Comments Submitted by AIA/NDIA, Some Have
Supplemental Comments.
Comments: Seven (7) of the contractors submitting comments also
stated that they support the comments submitted by industry
associations. Several of these commenters also stated their comments
augmented the industry associations.
Response: The Board has given full attention to the comments
submitted by AIA/NDIA because of their general support by other
commenters, and because their very detailed comments and proposed
revisions reflect thoughtfulness and appreciation for the special
concerns of contract cost accounting.
Topic C: General Comments on Differences between CAS, GAAP and
ERISA (PPA). The SDP and ANPRM discussed the similarities and
distinctions between the goals and measurement criteria of CAS, GAAP
and ERISA. The unique purpose and goal of the CAS was determinative of
the Board's proposed harmonization approach.
Comments: Several Commenters noted that ERISA, as amended by the
PPA, is intended to promote adequate funding of the currently accrued
pension benefit and set reasonable limits on tax deductibility. These
commenters remarked that the PPA minimum contribution is designed to
fully fund the current settlement liability of a plan within 7 years in
order to protect the participants' accrued benefit and to limit risk to
the PBGC.
As one commenter explained:
The PPA was enacted, in part, as a response to the failure of
companies with severely underfunded qualified defined benefit
pension plans (``pension plans''), even though companies had
typically contributed at least the minimum amount required under the
Internal Revenue Service (``IRS'') rules. PPA was designed to ensure
that corporations would fund towards liabilities measured on more of
a settlement basis over a 7-year period, so that plans would be less
likely to be severely underfunded.
They remarked that GAAP has adopted fair value accounting, also
known as ``mark-to-market'' accounting. The purpose of GAAP is to
disclose the current period pension expense based on the current
period's environment, including the volatility associated with a
changing environment. Another primary concern of GAAP is disclosing the
risk associated with the funding of the current settlement liability to
users of financial statement.
Two commenters reminded the Board that the purpose of CAS is (i)
consistency between periods and (ii) uniformity between contractors.
Unlike ERISA and GAAP, CAS is concerned with the cost data used to
price contracts over multiple periods. The CAS continues to be
concerned with the Government's participation in the funding of the
long-term pension liability via a continuing relationship (going
concern) with the contractor.
One of these commenters felt that use of the PPA and GAAP interest
assumption and cost method used to determine the liability and normal
cost for CAS measurements would enhance uniformity between contractors.
This commenter also believes that 10-year amortization of gains and
losses and the amortization of mandatory prepayment credits would
sufficiently mitigate any excessive volatility and therefore not harm
consistency between periods. Finally, this commenter suggested that
adoption of the PPA interest assumption and cost method would alleviate
the need to have the complex mandatory prepayment reconciliation rules.
Moreover, if the CAS values were based on fair value accounting used by
ERISA and GAAP, the Government would be able to place reliance on
measurements that were subject to independent review.
As this commenter articulated these concerns:
The proposed rule relies on the same fundamental approach for
measuring pension liabilities that has been in effect since the CAS
pension rules were first adopted in 1975. The CAS allows a
contractor to choose between several actuarial cost methods and
requires that the discount rate represent the expected long-term
rate of return on plan assets. Although the CAS measurement basis
was once consistent with the methods and assumptions in common use,
this is no longer the case. In 1985, the Financial Accounting
Standards (FAS) were modified to require that pension costs for
financial reporting purposes be calculated using the projected unit
credit (PUC) cost method and a discount rate that reflects the rates
of return currently available on high-quality corporate bonds of
appropriate duration. In 2006, the Employee Retirement Income
Security Act (ERISA) was amended by the PPA to require the use of
durational discount rates that are determined in a manner consistent
with the FAS. The PPA also requires all plans to use the unit credit
cost method (PUC without projection) to determine minimum funding,
and the PUC method to determine the maximum tax deductible
contribution.
These are material conflicts with the CASB objectives. We see no
way to resolve the conflicts except to modify the CAS to require
pension liabilities to be determined in a manner consistent with the
measurements used for both ERISA and financial reporting.
Specifically, the CAS should require the use of (i) the PUC cost
method, and (ii) a discount rate that reflects the rates of return
currently available on high-quality corporate bonds of appropriate
duration. These changes would also improve consistency between
contractors, a primary objective of the CAS.
Response: The goal of the ANPRM was to maintain predictability for
cost measurement and period assignment while providing for
reconciliation, i.e., recovery of required contributions within a
reasonable timeframe. The divergence of GAAP and ERISA from CAS is
primarily due to the adoption of ``mark-to-market'' cost measurement,
which can be disruptive to the contract costing/pricing process.
The Board remains cognizant of the following key distinctions
between ERISA, GAAP and CAS regarding funding of the pension cost:
ERISA's minimum funding is concerned with the funding of
the current settlement liability.
GAAP is not concerned with funding, but rather with the
disclosure of the results of operations in the current market
environment.
CAS continues to be concerned with the Government's
participation in the funding of the long-term pension liability via a
continuing (going concern) relationship with the contractor. CAS 412
and 413 are used to develop data for forward pricing over multiple
years, and is not just concerned with the current environment.
The Board wishes to retain the contractor's flexibility to choose
the actuarial cost method it deems most appropriate for its unique
pension plan. While the CAS permits the use of any immediate gain cost
method, most contractors already use the projected unit cost method,
which is required by ERISA and GAAP and compliant with CAS 9904.412-
40(b)(1). As long as the current CAS permits the use of methods
required by the PPA there is no reason to revise the CAS to be more
restrictive. Furthermore, the Board notes that for
[[Page 25988]]
CAS purposes a contractor may use the same actuarial cost method and
assumptions, except for the long-term interest assumption, as used to
value a plan under PPA that is not ``At Risk.'' (With the passage of
the PPA, ERISA no longer computes liabilities and normal costs using
long-term interest assumptions.)
The Board believes that the proposed 10-year amortization of the
gains and losses will sufficiently harmonize CAS with the PPA while
provide acceptable smoothing of costs between most periods. The Board
notes that the plunge in stock market values in the latter half of 2008
demonstrates how quickly things can change between periods, but remains
confident that the aberrant market losses for 2008 and early 2009 will
be adequately smoothed using 10 versus 15 years.
Topic D: Tension between Verifiability and Predictability.
Comments: One commenter also raised the issue of verifiability,
writing:
In 1992, the CASB released a Statement of Objectives, Policies,
and Concepts, which cites two primary goals for cost accounting
standards: (i) Consistency between contractors, and (ii) consistency
over time for an individual contractor. It also sets forth other
important criteria to be taken into consideration. Verifiability is
described as a key goal for any cost accounting standard, as is a
reasonable balance between a standard's costs and benefits. We
believe that the liability measurement basis under the proposed rule
severely conflicts with these goals.
This commenter was concerned that verifiability of the liability
and cost data might be compromised or lost since the GAAP expense and
ERISA contributions are no longer based on a long-term, ``going
concern'' concept. This commenter also was concerned with the added
expense of producing such numbers and the potential for disputes. This
commenter stated:
The pension liabilities used to develop contract costs must be
verifiable. If the data used for contract costs are not reconcilable
with the data used for other reporting purposes, the information
will be open to bias and manipulation.
Similarly, if the pension liabilities determined in accordance
with the CAS are inconsistent with those used for other purposes,
there will be no alternative source from which to obtain this
information. We have encountered many situations in which a
contractor was not aware of the requirement to compute a special
cost for contract reimbursement or did not maintain the CAS
information required for audit or segment closing calculation. In
these cases, ERISA reports or financial statements were used to
obtain the necessary liability information, and the CAS computations
could be reconstructed. The data required under the proposed rule
are obsolete for other reporting purposes and will not be available
if the calculations required under the CAS are not performed, or if
the documentation is not retained. It will be difficult or
impossible to develop reliable estimates from existing sources of
data.
This commenter was also concerned that actuaries of medium-sized
contractors may not be sufficiently familiar with the CAS rules, and
some of the younger practitioners may not be that familiar with the
concepts of long-term measurement methods. On occasion, the plan's
actuary may not be aware that his client has Government contracts and
therefore the required valuation data may not be produced.
Conversely, another commenter was receptive to use of the fair
market accounting liability as a minimum liability, but was concerned
that introduction of the current liability minimum might cause the CAS
to diverge from its long-standing goal of ``predictability.'' This
commenter wrote:
Because the proposed rule contains many technical and actuarial
provisions, I am concerned that the basic purpose of CAS, which
differs from those of other accounting standards and rules, may be
lost in the details.
This commenter said that the Board should not lose sight of
predictability (consistency between periods). Focusing on uniformity
between contractors, which is a concern of GAAP, might come at the
expense of predictability and harm the pricing function. This commenter
opines:
The CAS has been, and I agree the CAS should continue to be,
concerned with predictably (minimal volatility) across cost
accounting periods to support the estimating, accumulating and
reporting of costs for flexibly and fixed price contracts. Fair
value accounting of the liability (also called ``mark-to-market''
accounting) may be appropriate for financial disclosure purposes
under GAAP, but is inappropriate and disruptive of the contract
costing function. Likewise, ERISA's mandates and limits for current
period funding are inappropriate for cost predictability and
stability across periods.
I fully support the following goals for pension harmonization as
stated in the paragraph entitled ``(1) Harmonization Goals'' of the
Board's ANPRM:
(b) No direct adoption of the Employee Retirement Income
Security Act of 1974, (ERISA) as amended by the Pension Protection
Act (PPA), to avoid any change to contract cost accounting without
prior CAS Board approval since it is quite likely that Congress will
amend ERISA in the future.
(c) Preserve matching of costs with causal/beneficial activities
over the long-term.
(e) Mitigate volatility (enhance predictably).
This commenter also remarked that balancing the tension between
ERISA and the CAS has long been a concern of the Board, writing as
follows:
Harmonization is not a new subject to the CAS Board. Even in the
early 1990s the matching of ERISA funding and contract cost accruals
was of concern to the staff. The SDP continues:
The costing and pricing of Government contracts also requires a
systematic scheme for accruing pension cost that precludes the
arbitrary assignment of costs to one fiscal period rather than
another to gain a pricing advantage. The Government also has
sensitivity to the inclusion of unfunded pension costs in contract
prices. Conversely, the staff's research revealed one instance of a
contractor who, due to the shortened amortization periods now
contained in the Tax Code, faced minimum ERISA funding requirements
in excess of the CAS 412 pension cost and, thus could not be
reimbursed. That particular contractor felt, understandably, that
allowability ought to be tied to funding under the Tax Code.
Obviously, given the current tax law climate regarding full funding,
complete realization of all of these goals is not achievable. In the
staff's opinion, the goals of predictable and systematic accrual
outrank that of funding. However, funding still remains an important
consideration.
Response: The Board recognizes that there is a tension between the
benefits of verifiability, i.e., reliance on outside audited data, and
predictability, i.e., stability or at least minimized volatility. Most
of the commenters expressed positive opinions concerning the general
approach of the ANPRM and do not seem overly concerned with the
verifiability issue. Verifiability is always an audit issue and will
remain a consideration as the Board proceeds.
Contractors are required to provide adequate documentation to
support all cost submissions, including pension costs. Furthermore, the
American Academy of Actuaries' ``Qualification Standards for Actuaries
Issuing Statements of Actuarial Opinion in the United States''
expressly requires actuaries to be professionally qualified and adhere
to CAS 412 and 413--Actuarial communications and opinions regarding CAS
412 and 413 are recognized as ``Statements of Actuarial Opinion.''
Paragraph 3.3.3 of Actuarial Standards of Practice No. 41 requires
actuaries to provide information that is sufficient for another
actuary, qualified in the same practice area, to make an objective
appraisal of the reasonableness of the actuary's work as presented in
the actuary's report.
As discussed above, since a contractor may use for CAS the same
actuarial cost method and assumptions, except for the long-term
interest assumption, as used for valuing a plan under PPA that is not
``At Risk,'' there is a commonality to the values measured for CAS and
PPA. There will some additional effort expended since the contractor
and its
[[Page 25989]]
actuary will have to reconcile the liability and normal cost measured
under different interest rates. However demonstrating the difference
caused by the change of a single variable should not impose an undue
burden or expense.
Topic E: CAS 412.40(b)(3)(ii) Harmonization Rule's Minimum
Actuarial Liability Interest Rate Assumption.
Comments: Most commenters asked that the rule clearly identify the
allowable basis for the interest rate used to measure the MAL. Some
asked that a particular basis for the rate be stated or permitted,
i.e., PPA or FAS 87as a ``safe harbor''. PPA allows some leeway and
therefore one commenter said that it was not clear as to the date the
current bond rate would be measured. Others believed that the MAL
should be based on a long-term assumed rate for corporate bonds,
instead of the current PPA rate, in order to reduce volatility and
enhance forward pricing.
One commenter asked that the rule permit the use of a single
interest rate for the plan rather than separate rates by PPA segment or
full yield curve. Another commenter asked that the Board provide
examples illustrating selection and use of the interest rate.
The following captures the theme of many comments submitted:
* * * First, our comments regard the Interest Rate used for the
Minimum Actuarial Liability (MAL) and Minimum Normal Cost (MNC). We
believe the flexibility provided by using ``the contractors' best
estimate'' for selecting the source of the interest rate used in the
calculation of the MAL and MNC is desirable to achieve a meaningful
measure of the resulting pension cost for each contractor. However,
we have concerns that the criteria for the acceptable rates as
written are sufficiently unclear as to create a significant exposure
for interpretive disagreements. For example, we believe that the
ANPRM criteria as written allows for the use of a very short term
rate or a very long term rate, since either may reflect the rate at
which pension benefits could be effectively settled at a current or
future period, respectively. We encourage the CAS Board to adopt the
industry recommendation of inserting two new sentences after the
first sentence in CAS 412-40(b)(3)(ii) to read, ``Acceptable
interest rates selected by the contractor are those used for the PPA
funding target, FASB 87 discount rate, long term bond rate, or
another such reasonable measure. A contractor shall select and
consistently follow a policy for the source of the interest rate
used for the calculation of the minimum actuarial liability and
minimum normal cost.''
There was some concern expressed about the volatility between
periods caused the use of current corporate bond rates. As commenter
noted:
History shows that the FAS discount rate leads to volatile
pension expense as the discount rate changes from one measurement
date to the next. Exhibit A provides a monthly history of the
Citigroup Pension Liability Index from January 31, 1985 through
September 30, 2008. The Citigroup Pension Liability Index is a good
proxy for the FAS discount rate. To illustrate how dramatically the
index can change over a 12-month period, note that between May 31,
2002 and May 31, 2003, the Index dropped by 172 basis points. Using
general actuarial rules of thumb, this drop would translate to a 22%
increase in liability and a 41% increase in normal cost.
The interest assumption used for liabilities for determining
minimum funding requirements under the PPA is based on high-quality
corporate bonds, but PPA allows the plan sponsor the option to use a
24-month average of rates vs. a one month average.
Another commenter discussed the advantage of using an average bond
rate, writing:
This result is not consistent with the fundamental desire to
strive for predictability of cost in the government contracting
arena. The impact that unforeseen changes in cost can have on fixed
price contracts is obvious, but even unexpected cost increases on
flexibly priced business can place a strain on government budgets.
It is important to try to mitigate the potential pitfalls that might
create inequitable financial results for either the government or
the contractors.
The ANPRM maintains the concept of the actuarial accrued
liability (AAL) that is calculated using an interest rate that
represents the average long-term expected return on the pension
trust fund. This reflects the CAS Board's view of pension funding as
a long-term proposition. The ANPRM states that CAS 412 and 413 are
concerned with long-term pension funding and minimizing volatility
to enhance predictability. Since the new MAL is based on spot bond
rates it will experience more volatility from year to year than the
AAL. We believe that the addition of the MAL to the CAS calculations
is an important change that is very much needed. However instead of
measuring the MAL using spot bond rates each year, we feel very
strongly that it is important to allow contractors to have an option
to calculate the MAL using an expected long-term average bond rate.
This would allow contractors to use an interest assumption that
would not need to be changed each year, and would very significantly
reduce the volatility of the MAL and greatly improve predictability
of the pension cost. The MAL interest assumption would only need to
be changed if it was determined that average future bond yields over
a long-term horizon were expected to be materially different from
the current MAL assumption. For example, if long-term bond rates
were expected to fluctuate between 5.5% and 6.5% in the future, then
a valid assumption for the expected average future rate might be
6.0%. So this concept would hold some similarities to the interest
rate used for calculating the AAL. The main difference is that the
AAL interest rate represents the average expected long-term future
return on the investment portfolio, whereas the MAL interest rate
would represent the average expected future long-term yield on high-
quality corporate bonds. There should obviously be some correlation
between the MAL interest rate and the AAL interest rate, so the two
different rates should be determined on a consistent basis.
Several commenters suggested that the rule expressly permit use of
a long-term rate to improve predictability & reduce volatility. The
following is typical of this suggestion:
* * * However, because of the extreme volatility which could
result from changes in market interest rates, [we] believes the CAS
Board should explicitly take the position either in the standard or
the preamble to the final publication, that contractors are
permitted to calculate the minimum actuarial liability using a long-
term expectation of high-quality bond yields, moving averages of
reasonable durations beyond 24 months (a period described elsewhere
in the proposed rule) or other techniques which enhance
predictability.
Response: The ANPRM sets forth a conceptual description of the
settlement rate which would include the corporate bond yield rate
required by the PPA. Furthermore, the PPA permits several elections
concerning the yield rate, i.e., full or segmented yield curve, current
or average yield curve, yield curve as of the valuation date or any of
the 4 prior months. The Board agrees that a ``safe harbor'' should be
included for clarity and to avoid disputes. The Board also believes
that the election of the specific basis for the settlement interest
rate is part of the contractor's cost accounting practice. Accordingly,
the proposed rule at 9904.412-50(b)(7)(iv)(B) provides:
The contractor may elect to use the same rate or set of rates,
for investment grade corporate bonds of similar duration to the
pension benefits, as published or defined by the Government for
ERISA purposes. The contractor's cost accounting practice includes
any election to use a specific table or set of such rates and must
be consistently followed.
The Board reaffirms its belief that the recognition of the more
conservative assumptions required for plans whose funding ratio falls
below a specific threshold, such as plans deemed ``at risk'' under the
PPA, is inappropriate for the purposes of contract costing. The
proposed rule requires that all other actuarial assumptions continue to
be based on the contractor's long-term, best-estimate assumptions.
(9904.412-50(b)(7)(iii)(B)) (Note that the DS-1, Part VII asks for the
basis for selection of assumptions rather than the current numeric
value.)
Topic F: Recognition of Minimum Actuarial Liability and Minimum
Normal Cost.
Comments: One commenter was concerned with the added complexity
[[Page 25990]]
from introduction of the minimum actuarial liability and minimum normal
cost into the development of the assignable pension cost as follows:
While the ability to have contractors determine their CAS
assignable costs based on liabilities reflecting the yields on high-
quality corporate bonds is a significant relief for the negative
cash flow issue faced by government contractors, the process for
introducing the MAL into the development of the CAS Assignable Costs
will result in additional complexity in the calculations.
Several commenters were concerned that the assigned cost would
occasionally be larger than necessary under the ANPRM. They believed
that the assigned cost based on the adjusted liability would be
excessive if the unadjusted assigned cost already exceeded the PPA
minimum contribution. Some commenters recommended that the assigned
pension cost be adjusted based upon a revised assigned pension cost
only if the PPA minimum required contribution, without reduction for
any credit balances, exceeds the assigned cost as measured on a long-
term basis. As one commenter explained:
There can be situations where the CAS assignable cost developed
without regard to the MAL would be larger than the PPA funding
requirement. Regardless of this situation, under the ANPRM, if the
MAL is higher than the regular AAL, the liabilities and normal costs
will be adjusted to reflect the MAL and the MNC. This adjustment
will result in even higher CAS assignable costs
This commenter suggested an alternative approach as follows:
Instead of applying minimums to the liabilities and normal costs
used in the calculation of the CAS assignable cost, we present the
following alternative (which we shall refer to as the ``Minimum CAS
Cost'' alternative) for consideration and further study. We believe
this alternative addresses the Board's goals of minimizing changes
to CAS 412 and 413 and avoiding complexity as much as possible,
while addressing the difference between CAS assignable costs and PPA
minimum required contributions.
We believe this alternative will lead to less volatile CAS
assignable costs compared to the ANPRM. In Attachment II, we compare
results under this approach and under the ANPRM for a hypothetical
sample. We recommend further study of this approach.
Under this alternative, the CAS assignable cost will be the
greater of (a) and (b) below:
(a) The Regular CAS Cost, which is the CAS cost determined
without regard to the CAS Harmonization Rule (i.e., as determined
under the current CAS 412 but with a 10-year amortization of gains/
losses as proposed under the ANPRM),
(b) the Minimum CAS Cost which is equal to
(i) the Minimum Normal Cost; plus
(ii) a 10-year amortization of the unfunded MAL at transition;
plus
(iii) a 10-year amortization of each year's increase or decrease
in the unamortized unfunded MAL, where the unfunded MAL is equal to
the difference between the Minimum Actuarial Liability and the CAS
assets net of prepayment credits.
Thus, under this alternative, we impose a ``minimum CAS cost''
(i.e., item b above) instead of minimum liabilities and normal
costs. This will avoid the dramatic changes in CAS assignable costs
that occur due to the switching between the regular AAL/NC and MAL/
MNC.
Another commenter recommending this approach wrote:
As currently proposed, the MAL adjustment is only applied (or
``triggered'') when the MAL exceeds the AAL. When this occurs, the
AAL is adjusted, as well as the NC. We recommend that in order to
reduce cost volatility the Board consider a ``cost based'' trigger
instead. The cost trigger would adjust for the difference between
the MAL and AAL, and their associated normal costs, if: [the MAL
less AAL amortized over 10 years] plus [the MNC less NC] exceeds $0.
The commenter also was concerned about the effect of inactive
segments, writing:
One other issue exists with the proposed liability based MAL
trigger. An inequity can result in the application of the
requirements at the segment level, especially when a contractor has
an inactive segment.
This commenter continues and compares the results of the method
proposed in the ANPRM and a ``cost based'' trigger (identified as Plan
1 and Plan 2) and comments on the results as follows:
The liability trigger results in different costs for Plan 1 and
Plan 2 while the cost trigger results in the same cost for both
plans. Accordingly, a cost based trigger would treat contractors
with and without inactive segments more equitably. In addition, a
cost based trigger harmonizes with PPA better than a liability
trigger since it is more likely to produce plan level CAS costs
closer to PPA minimum contributions.
Regardless of whether a ``trigger'' approach is used, there was
consensus that the comparison should be based on total liability for
the period rather than separately testing the actuarial liability (also
known as past service liability) and normal cost (incremental liability
for the current period). These commenters suggested comparing the sum
of the actuarial accrued liability plus the normal cost to the sum of
the minimum actuarial liability and the minimum normal cost. One
commenter illustrated the problem of comparing the liability and normal
cost separately as follows:
The ANPRM proposes, at section 412-40(b)(3)(i), that the
actuarial accrued liability (AAL) be adjusted when ``the minimum
actuarial liability exceeds the actuarial accrued liability.''
Consider the following example:
----------------------------------------------------------------------------------------------------------------
Liability Normal Cost Total
----------------------------------------------------------------------------------------------------------------
AAL assumptions........................................... $100 $10 $110
MAL assumptions........................................... 95 20 115
----------------------------------------------------------------------------------------------------------------
Based on the ANPRM, the MAL assumptions would not be used for
this year because the MAL of $95 is less than the AAL of $100.
However, because the $115 sum of the MAL and the minimum normal cost
exceeds the corresponding amount of $110 on an AAL basis--which thus
indicates that the appropriate end-of-year theoretical funding goal
should be $115--the Board's intent would seem to be better
implemented if the test at 412-40(b)(3)(i) was based upon the
liabilities plus the normal costs for the year. This could be
accomplished by modifying the relevant language to read: ``* * * the
minimum actuarial liability (including minimum normal cost) exceeds
the actuarial accrued liability (including normal cost).''
On the other hand, one commenter noted that while a settlement
liability is generally inappropriate as a basis for measuring the
contract pension cost, such recognition of the settlement liability as
a minimum liability is an important element of harmonization and
provides better alignment for segment closing measurements.
While I am opposed to a fair value accounting as an accounting
basis for the CAS, I also agree with the Board's proposal to subject
the liability measurement to a settlement liability minimum.
I agree with this approach primarily because recognizing such a
minimum liability measurement will not only achieve harmonization,
but will better align the liability measured for period costing with
the liability basis for segment closing adjustments and thereby
increase predictability. * * *
Another public comment countered, arguing that the proposed ANPRM
is based on a ``hybrid approach,'' rather than a ``going concern''
approach and might not be appropriate given the Board's stated goals.
The proposed revisions to CAS 412 and 413 change the fundamental
cost accounting
[[Page 25991]]
approach used to measure and assign pension cost. The current CAS
412 and 413 measure and assign pension cost using the ``contractor's
best estimates of anticipated experience under the plan, taking into
account past experience and reasonable expectations of pension plan
performance.'' The supplementary information in ANPR refers to the
current rules as the ``going concern approach.''
The ANPR retains the ``going concern approach'' to measure the
minimum amount of pension cost for a given accounting period.
However, the ANPR requires an adjustment to the ``going concern''
amounts when either the cost of settling the pension obligation or
the PPA minimum funding amount is higher than the ``going concern''
amount. The ANPR refers to cost of settling the pension obligation
as the ``settlement or liquidation approach.''
The ANPR is therefore a hybrid of these two fundamentally
different accounting approaches. As a result, we anticipate that
applying the ANPR will both increase the complexity of the
contractor's yearly actuarial calculation of pension cost and the
amount of pension cost on Government contracts.
Finally, if the minimum actuarial liability is used as a minimum
liability basis, two commenters felt that the rule should record
changes in basis for the liability (AAL vs. MAL) between years as part
of the gain or loss amortization base. Recommending that the change
from actuarial accrued liability to the minimum actuarial liability
basis and vice-versa as an actuarial loss or gain, respectively, one
commenter wrote:
If the measurement basis is modified to reflect current bond
rates, we suggest that the rules provide that any change in
liability attributable to interest rates will be treated as a gain
or loss for cost purposes.
This commenter also suggested that the Board consider adopting the
PPA gain and loss approach that adjusts the new unamortized balance and
keeps the amortization installment unchanged.
Prior to the PPA, it was standard practice to recalculate
amortization payments if there was a change in the applicable
interest rate. The PPA introduced a new methodology whereby the
amortization amounts remain unchanged, and the difference in the
present values is included in a new amortization base established as
of the date of the change. For CAS purposes, this difference could
be included in the gain and loss base. This method supports the
objectives of the CASB because it is easier to apply and reduces the
volatility associated with interest rate changes. We therefore
recommend that the CAS adopt this approach or allow it as an option
without the need for advance approval.
And finally, a commenter asked whether the gain and loss
amortization charges reflect the MAL's current settlement interest rate
or the long-term return on investment interest rate when the minimum
liability applied.
If the MAL applies and the plan is setting up an amortization
base for either a plan change or an assumption change, should the
amortization base be set up reflecting liabilities on the same basis
as the MAL or on the same basis as the regular AAL.
This commenter continued:
If the MAL applies, should amortization charges reflect the
long-term interest rate or the MAL interest rate?
Response: The concept of the ANPRM was to recognize the
contractor's potential obligation for payment of the settlement
liability, which is the PPA funding target, as a minimum in the
computation of the assigned cost. Many commenters to the SDP believed
that adopting the PPA liability and normal cost would in and of itself
provide sufficient harmonization. The amortization of the mandatory
prepayment credits (discussed later) was added to the ANPRM to
guarantee that the contractor would recover all of its required
contributions within a reasonable time period.
As discussed in the ANPRM preamble, the Board continues to believe
that contract cost accounting should continue to be based on the going
concern basis. The Board also believes that recognition of the full
valid liability for the pension plan must consider the risk associated
with using the current settlement liability, especially during periods
of unusually low corporate bond rates. Therefore, the NPRM retains the
minimum actuarial liability as a ``floor.'' The Board observes that
during periods of low corporate bond rates the recognition of the
minimum actuarial liability and minimum normal cost will harmonize the
CAS with the measurement of the PPA minimum required contribution with
only a slight lag in recognition due to differences in amortization
periods (7 years vs. 10 years). In all other periods, the long-term
going concern approach will ensure that annual funding towards the
ultimate liability will continue to ensure that sufficient assets are
accumulated to protect the participants' benefits.
The Board takes special notice of the comments recommending that
the cost not be adjusted if the assigned cost equals or exceeds the PPA
minimum required contribution--otherwise the CAS would impose a funding
requirement above both the long-term assigned cost computation and
ERISA minimum funding contribution. This NPRM proposes the use of a 3-
step ``trigger,'' as described under ``Recognition of a ``minimum
actuarial liability'' in the summary of the proposed rule. The 3-step
trigger uses criteria for recognizing the minimum actuarial liability
that is based on a comparison of the assigned pension cost measured on
a long-term basis with the ERISA minimum required contribution measured
on a settlement basis for a ``non-at-risk'' plan. If the minimum
required contribution exceeds the cost measured by CAS for the period,
the minimum liability and minimum normal cost adjustments will be
determined, and the contract cost for the period will be re-determined
based on the minimum actuarial liability and minimum normal cost.
Finally, the pension cost for the period is measured as the greater of
the total pension cost measured using the long-term liability and
normal cost or the minimum actuarial liability and minimum normal cost.
The Board understands the appeal of recognizing additional
contributions made as permitted by IRC Section 436 to improve the
funding of a severely underfunded plan. However, the Board disagrees
with the suggestion to recognize any additional contribution made to
avoid the restrictions imposed by Section 436 of the IRC. The Board
believes that recognition of such additional contributions is
inappropriate for contract costing purposes because it would increase
the volatility of costs between periods, reduce consistency between
periods, and lessen comparability between contractors. Predictability
would be diminished because the funding level can be affected by sudden
changes in asset or liability values. Also, these additional
contributions are permitted by the PPA, but are not required.
Recognizing these contributions would subject contract costing to the
financial management and employee relations decisions of contractors,
which is distinctly different from proposing a rule that does not
restrict a contractor's financial management decision-making. If the
CAS would recognize such additional contributions, it might reduce the
disincentive for funding the additional amount and eventually passing
the unfunded liability on to the PBGC. However, it is not the purpose
of the CAS to protect contractors from choices involving moral hazard.
The preamble to the ANPRM made it clear that the change from
actuarial accrued liability to the minimum liability or vice-versa was
proposed to be treated as an experience gain or loss, which would be
amortized based on the long-term interest rate. For clarity the NPRM
explicitly requires that any change in the unfunded actuarial liability
due to the minimum actuarial liability be included as part of the
actuarial gain or loss measured for the
[[Page 25992]]
period and amortized over 10-years based on the long-term interest
assumption.
Frequent changes in the interest rates used for amortization
purposes would introduce volatility and deviate from the Board
objective of cost recognition on a long-term basis. Under the PPA, the
gain or loss due to a change in interest rate is captured in the new
amortization base and installment. The new installment is measured as
the unfunded liability (shortfall) less the present value of the
existing amortization installment based on the new interest rate. The
rule proposed in this NPRM does not change the way in which
amortization installments are measured. The long-term interest rate is
used to measure amortization installments and unamortized balances. The
Board would be interested in any analysis concerning the increase or
reduction of volatility if amortization installment amounts are not
changed once established and the effect of any interest rate change
measured as an actuarial gain or loss.
Topic G: Computation of Minimum Required Amount.
Many commenters believed that the Minimum Required Amount should be
measured without regard for any ERISA prefunding balances. Some
commenters presented illustrations of how requiring a reduction to the
minimum required amount for the prefunding balance would be inequitable
to contractors who believe it is prudent to fund more than the bare
minimum.
First, we understand that the intention of the ANPRM approach is
to limit the pension costs recovered to the contractors' cash
contributions to trusts that have been required to either fund a CAS
pension liability or to fund a PPA minimum required contribution for
ERISA. Thus, for Government contracting, the cash outlays the
contractor has been required to make by PPA are recoverable, while
those cash outlays made wholly at the discretion of the contractor
are not recoverable until such time as they are no longer
discretionary (e.g., they are used to fund CAS pension cost or
minimum funding requirements). We believe this approach to limit
cost recovery is fair and equitable and support this concept.
Fairness and equity might not prevail in some instances if
discretionary amounts were immediately recoverable as contractor
could influence from one accounting period to the next the amount of
pension cost simply by its funding patterns. In addition, we believe
this treatment intends to yield consistent cost recovery for
contractors with the same funding requirements but different funding
patterns over time. However, during our data modeling, we discovered
that as currently written, the ANPRM can result in inequitable and
inconsistent cost treatment for contractors with the same funding
requirements but different funding patterns over time (refer to
Illustration 1 in attachment). We believe this to be an unintended
consequence that may be corrected with two revisions to the ANPRM.
One commenter believed that the definition proposed at
9904.412.30(a)(18) should include additional contributions for severely
underfunded plans.
Additional contributions made to avoid benefit limitations
should be treated as a minimum required contribution for purposes of
computing mandatory prepayment credits. These contributions are not
added to the prefunding balance and may not be used to meet minimum
funding requirements for the current year or for any future period.
However, they will serve to reduce the minimum required contribution
determined for future periods and the mandatory prepayment credits
potentially available. Under the proposed standard, special
contributions to avoid benefit limitations in excess of the
assignable costs will be treated as voluntary prepayments and this
may significantly delay reimbursement of those costs. This rule may
therefore discourage or penalize contractors with severely
underfunded plans from making additional contributions to avoid
benefit restrictions.
Response: The Board has reviewed the potential inequities that
might arise if the minimum required amount is reduced for prefunding
credits. The Board agrees with the commenters and believes that the
appropriate comparison for determining when the assigned cost should be
adjusted for a minimum liability should be based on comparison of the
CAS assigned pension cost to the ERISA minimum required amount before
any reduction for CAS prepayments or ERISA prefunding balances,
including carry-over balances. This approach is consistent with the
Board's desire to allow the contractor latitude in the financial
management of its pension plan.
As discussed in the response to the previous topic, the Board
believes that recognition of additional contributions made to avoid
benefit restrictions are voluntary and could increase volatility. The
NPRM does not include recognition of these contributions in the
measurement of the minimum required amount.
Topic H: Special Accounting for Mandatory Prepayment Credits.
Comments: Two commenters believed that the special recognition of
mandatory prepayment credits creates excess pension expense given other
proposed rule harmonization features. One of the commenters believed
that the rules relating to mandatory prepayment credits were overly
complex and unnecessary.
We recommend that the CAS Board not adopt the proposed provision
for annual amortizations of mandatory prepayment credits. We believe
that the proposed mandatory prepayment credit provision, which is
intended to provide an additional relief for a ``negative cash
flow'' that the contractor may experience in early years, is
superfluous and unnecessary, and is difficult to ensure compliance.
In our opinion, harmonization of the CAS with the PPA has been
achieved sufficiently in the ANPRM that recognizes the PPA
liability, reduction in the amortization period for gains and
losses, and increase in the assignable cost limitation.
As elaborated below, we believe that the accounting
recordkeeping required for the proposed mandatory prepayment credits
is unduly complex, burdensome, and unnecessary to achieving
harmonization. Current CAS recognizes prepayment credits without
distinguishing voluntary from mandatory prepayment credits.
Moreover, the proposed creation of a mandatory prepayment account
requires separate identification, accumulation, amortization,
interest accrual, and other adjustment of mandatory prepayment
credits for each year. This process will increase administrative
costs, be prone to error, and be very difficult to validate the
accuracy and compliance during audit. In our view, harmony with
funding differences already exists in the current CAS provision for
prepayment credits that will increase in value at the valuation rate
of return for funding of future pension costs.
* * * * *
We fully agree with this comment that the ANPRM's recognition of
the PPA liability, which is determined by using its required
interest rate and mortality assumptions, will substantially close
the differences between CAS and PPA cost determinations. All other
differences would be minor. Accordingly, we believe that the ANPRM's
recognition of the PPA liability alone would accomplish the
Congressional mandate for the CAS Board to harmonize the CAS with
the PPA. Since the interest rates of corporate bonds are typically
less than long-term expected investment rates-of-return of a
diversified, bond and equity portfolio as espoused by CAS, the
``harmonized'' minimum actuarial liability will generally be greater
than the CAS-computed actuarial accrued liability. This larger
liability will result in a larger unfunded actuarial liability
which, in turn, will measure and assign greater pension cost
allocable to Government contracts. Recognition of greater pension
costs creates greater funding of the pension plan that will provide
the funding level required for settling pension obligations under
the plan.
Many other commenters advised the Board to revise provisions on
amortization of mandatory prepayment credits to simplify the rule and
to better coordinate rules for prefunding balances with the PPA. One of
these commenters agreed that the proposed rule was too complex and
suggested an approach to simplify the accounting for mandatory
prepayments:
The proposed rule requires mandatory prepayment charges to be
recalculated if the
[[Page 25993]]
balance is reduced by an amount in excess of the computed charge. We
believe that this requirement is overly complex and prefer an
approach that simply reduces the amortization period to reflect any
excess payments. The PPA methodology for interest rate changes
described in the preceding paragraph should also be permitted for
amortization of mandatory prepayment balances. These changes will
not only simplify the calculations but also improve the
predictability of costs.
There were several comments concerning the interest rate used to
update mandatory and voluntary prepayment credits. Most commenters
believed that the mandatory and voluntary prepayment accounts should be
updated using the same interest rate. They suggested that the rate
should be the actual rate of return on assets used to update ERISA
prefunding balances. One of the commenters stated:
The proposed CAS 412-50(a)(ii)(B) states that ``the value of the
voluntary prepayment account shall be adjusted for interest at the
actual investment return rate * * *.'' To avoid possible conflicts,
the regulations should more clearly describe how the ``actual
investment return rate'' is to be determined and whether that rate
should apply to contributions that generate voluntary prepayment
credits during the plan year.
Another one of these commenters opined that the prepayments, once
updated based on the actual rate of return, must be subtracted from the
market value of assets before measuring the smoothed, actuarial value
of the assets. The commenter believed this requirement should be
included in the rule and explained:
The rationale for crediting an actual rate of return to
prepayment balances is valid. However, if asset smoothing is used,
prepayment balances must first be subtracted from plan assets in
order to prevent unexpected results. The final standard should
therefore specify that asset smoothing is to be applied to the
assets after reduction for voluntary prepayment balances. This
change in methodology should not require advance approval.
One commenter was particularly concerned with the interest rate
used to update the mandatory and voluntary prepayment credits and
wrote:
First, on item 2, ``Mandatory Prepayment Credits,'' the actual
net rate of return on investments should be used to adjust the value
of and the accumulated value of mandatory prepayment credits. The
ANPRM states, ``Because neither the mandatory nor voluntary
prepayment credits have been allocated to segments or cost
objectives, these prepayments continue to be unallocated assets and
will be excluded from the asset value used to measure the pension
cost.'' Although prepayment credits are unallocated assets, the
ANPRM language overlooks the fact that the current use of the long-
term interest assumption rate to value prepayment credits has
historically impacted the measurement of pension cost. Because the
gains and losses attributable to prepayment credits do not accrue
against the prepayment credits, they are credited or charged against
the assets, thereby leveraging the impact of the gain or loss on the
measurement of pension costs. Therefore, for prepayment credits to
have no impact on the measurement of pension costs, they must be
valued at the actual net rate of return on investments.
A commenter argued that government contractors for whom the
percentage of their government contracting business is 90% or greater
should be permitted to choose to claim reimbursement of the mandatory
prepayment credit immediately when incurred.
We suggest, that for government contractors for whom the
percentage of their government contracting business is 90% or
greater, that they can choose to claim reimbursement of the
mandatory prepayment credit immediately when incurred. Because they
derive the vast majority of their income from government
reimbursement, we believe that the delayed reimbursement of required
cash contributions may create a difficult financing situation for
these contractors.
Three commenters asked the Board to clarify that any mandatory
prepayment charges are assigned to the period and allocated separately
from and in addition to the assignable cost. Two of these commenters
believed that the NRPM should not assign and allocate a mandatory
prepayment charge in addition to the normally assigned pension cost,
especially of the minimum liability concept was retained.
* * * In addition, when comparing the minimum required funding
amount under ERISA with the CAS assignable cost for purposes of
determining mandatory prepayment credits, it would be helpful to
clarify that the CAS assignable cost does not include any mandatory
prepayment charges assigned to the period.
Several commenters believed that the proposed record-keeping for
mandatory prepayment credits is unduly complex and burdensome. There
were many other comments expressing concerns or making detailed
recommendations on how to improve or simplify proposed special
accounting for mandatory prepayments. These recommendations included
suggestions such as converting any voluntary prepayment credits used to
fund the PPA minimum contribution to mandatory prepayment credits and
establishing a level 5-year payment when the mandatory prepayment is
created and maintaining that amount until the mandatory prepayment is
fully adjusted.
The public comments also were concerned with the accounting for
mandatory prepayment credits at the segment level. As one of these
commenters suggested, the rules should be expanded to address how
mandatory prepayment charges are apportioned among segments:
Special consideration is required when addressing the treatment
of prepayment charges and credits in situations in which a plan
maintains more than one segment. The proposed rules suggest that
such apportionment is done in a manner similar to how the maximum
deductible contribution is allocated. However, this approach does
not work very well primarily because the maximum deductible
contribution imposes a limit on the otherwise assignable cost, while
the prepayment charges represent an addition to the otherwise
assignable cost. Furthermore, while the maximum deductible
contribution is primarily related to annual costs, the prepayment
charges are generated through the underfunding of some segments.
Accordingly, we believe that the apportionment of the prepayment
charges is more appropriately related to funding levels. While such
underfunding is often associated with higher annual costs, there is
a much stronger relationship to funding levels.
However, before addressing this further, we think that the CAS
Board needs to clarify that the voluntary and the mandatory
prepayment accounts be maintained separately and not be apportioned
to individual segments. This request is based on our understanding
that the intention is for apportioning to occur when these accounts
are allocated as part of the assignable cost. The remainder of our
comments concerning the distribution of prepayment charges among
segments is predicated on this understanding.
Response: The Board agrees with the commenters that the prepayment
amortization rules proposed in the ANPRM are unduly complex and
burdensome. The Board believes that imposing a settlement-based,
minimum liability on the measurement of the pension cost for the period
will provide sufficient harmonization with the PPA. The NPRM retains
the current recognition of prepayment credits and does not distinguish
between mandatory and voluntary prepayments.
The concept presented in the ANPRM was intended to apply the
mandatory prepayments as quickly as possible to promote timely recovery
of the minimum contributions and lessen the short term cash flow
concerns of the contractor. Furthermore, the addition amortization of
the mandatory prepayment credits would measure and assign pension cost
in excess of that necessary to recognize the normal cost plus
amortization of the unfunded actuarial liability.
Amortizing the mandatory prepayment credits essentially achieves a
rolling average of the difference between the assigned cost and the
contractor's cash contribution. In considering the possible approaches
to
[[Page 25994]]
harmonization for the NPRM, the Board discussed the possibility of
replacing the current cost accrual rules and the proposed recognition
of the minimum actuarial liability with some mechanism to smooth the
cash contributions over a 3 or 5-year period. However, such an approach
would conflict with the Board's goal of basing pension costs on long-
term accrual costs and thereby achieve better matching of costs with
the activities of an ongoing concern.
This NPRM does not include any provisions to identify or account
for mandatory prepayment credits. Nonetheless, the Board appreciates
all the suggestions concerning improving the mandatory prepayment
provisions.
Topic I: Assignable Cost Limitation (ACL) Requires Modification.
Comments: Most commenters were receptive to the proposal revising
the assignable cost limitation and many submitted suggestions
concerning clarification of the methodology for calculating the
assignable cost limitation.
One commenter believed that the revision of the assignable cost
limitation was important for improving predictability for forward
pricing.
The impact of the ERISA full funding limitation, and more
recently the CAS 412 Assignable Cost Limitation, has presented long-
standing predictability problems for forward pricing. I am pleased
the Board is addressing this problem, which has always been a
predictability problem. This problem was first addressed in the
Staff Discussion Paper (SDP) entitled ``Fully Funded Pension
Plans.'' 56 FR 41151, August 19, 1991. In that Paper, the staff
wrote:
Government contract policymakers also have their own set of
special needs, some involving the rhythms peculiar to the pricing of
Government contracts, and others involving matters of public policy.
It seems obvious, that in the pension area, aggregate pension costs
included in prices must reasonably and accurately track accruals for
pension costs on the books for Government contract costing purposes.
In other words, booked pension costs need to be sufficiently
predictable so that forward pricing rates for fixed price contracts
are not based upon pension cost levels different from those
ultimately accrued for the period of contract performance. That has
not been happening in many instances when a fully funded status has
been reached unexpectedly. Thus, in a number of instances, where
estimated pension costs used for negotiating fixed price contracts
include a significant element of pension cost, the subsequent
achievement of full funding status served to eliminate pension costs
altogether for the period of contract performance.
This commenter continued:
Based on the present ANPRM, the effect of predictability, or the
lack thereof, on forward pricing remains a concern to the Board. In
response to ``11 Assignable Cost Limitation,'' the Board
explains:
The Board has reviewed the effect of the assignable cost
limitation on cost assignment, especially the effect on
predictability. Government agencies and contractors have both found
that the abrupt and substantive change in pension cost as a plan
goes above or below the current assignable cost limitation gives an
unintended windfall to one party or another with respect to fixed
price contracts. These abrupt and substantive changes also wreak
havoc on program budgeting for flexibly-priced contracts. Currently,
once assets equal or exceed the actuarial accrued liability and
normal cost, the pension costs drop to zero and the Government's
recovery of the surplus can be indefinitely delayed. When assets are
lower than the liability and normal cost, the reverse occurs and the
contract may never be able to recover substantial incurred pension
costs that were never priced.
Conversely, another commenter expressed the belief that the 25%
buffer was inappropriate and could allow excessive pension costs.
We do not think that the ACL should be raised to 125% of the
AAL, plus the normal cost. * * * We are finding that the 125%
threshold is unlikely to be reached, which may lead to excessive CAS
expense. What happens is that there are no mechanics to wipe out the
existing bases. On the other hand, under PPA, a plan is expected to
be ``fully funded'' in 7 years. In reality, under most contractors'
investment policy, it would be anticipated that there would be
investment gains further reducing the PPA required funding in the
long run, while CAS expense continues to grow under the ANPRM model.
Several commenters requested clarification concerning which
components of the assignable cost limitation were to be increased by
25%. As one commenter expressed their concern:
Section 9904.412-30(a)(9) defines the Assignable Cost Limitation
(ACL) to be ``the excess, if any, of 125 percent of the actuarial
accrued liability, without regard to the minimum actuarial
liability, plus the current normal cost over the actuarial value of
the assets of the pension plan.''
It is unclear whether the 125 percent factor applies only to the
AL, or to the Normal Cost and Actuarial Value of Asset as well. In
other words, it would be helpful if clarification is provided
regarding which of the following the ANPRM intends to be the ACL
definition:
(a) 125% x AL, plus NC minus Assets
(b) 125% x (AL plus NC), minus Assets
(c) 125% x (AL plus NC minus Assets)
We believe (b) above is appropriate. The new ACL definition--
which reflects the 125% factor--would allow for sufficient surplus
assets that would make CAS assignable costs less volatile compared
to the current definition.
Some commenters believe that the assignable cost limitation must
also recognize the minimum actuarial liability and minimum normal cost
to be consistent with computation of the pension cost. Furthermore,
harmonization must reflect the settlement liability that is the funding
goal of the PPA minimum required contribution.
It is our understanding that multiplying the AAL by 125% in
determining the ACL is intended to add a cushion based on long-term
funding. We also understand that multiplying the greater of the AAL
and the MAL by 125% could, in some situations, result in a cushion
that might be inappropriate from a policy perspective. At the same
time, however, we feel that it would be inappropriate from a
theoretical perspective for the ACL to limit costs in a manner that
would preclude full funding on a settlement basis. Accordingly, we
recommend that the ACL be calculated using liabilities/normal costs
equal to the greater of (a) 125% of the AAL plus 100% of the normal
cost and (b) 100% of the MAL plus 100% of the minimum normal cost.
Another commenter explained:
The second area with which we have a concern is the new
assignable cost limit (ACL) calculation. While we appreciate the
intent of the CAS Board to revise this calculation to reduce the
frequency with which plans enter and exit full funding and impact
pension costs significantly as a result, we do not believe the ANPRM
achieves the desired result nor is aligned with the overarching
purpose of this limitation. First, we understand the purpose of the
ACL is to prevent an excessive buildup of CAS assets that have
funded CAS pension cost. Since pension costs calculated under the
ANPRM are based on the greater of the AAL or MAL, it follows that if
the ACL is to prevent a buildup of assets that have funded pension
costs, it too should consider both the AAL and the MAL. We recognize
consideration of the MAL would allow for a higher level of assets,
but we believe this is acceptable given that the ANPRM provides for
a higher pension cost as well. If the ACL considers only the AAL, as
the ANPRM is written, we do not believe that the calculation is
aligned with its intended purpose.
We worked with [an actuarial firm] to support us in gathering
contractor data estimates to develop a practical assessment of the
materiality of the liabilities and normal costs anticipated to
consider the effects on ACL results. A total of 13 contractors
participated in this survey. Eleven of the survey participants are
in the top 100 Department of Defense contractors for 2007. Of the
top 100 contractors, many do not have defined benefit pension plans.
Based on a data survey (refer to Illustration 3) and modeling by
[the actuarial firm], it is the normal cost that will drive the
pension cost going forward and accordingly should be more
determinative in the ACL calculation to provide for the desired
result of reducing the frequency of plans entering and exiting full
funding. For these reasons, we recommend revising the calculation of
the ACL to include the greater of 125% of the AAL or 100% of the MAL
as measured at the end of the year when the respective normal costs
would be part of each liability measure. We have provided
recommended language for this
[[Page 25995]]
revision in the attachment in the section labeled CAS 412-30(a)(9).
Another commenter endorsed the 25% buffer but argued that the
assignable cost limitation should not consider the minimum actuarial
liability and minimum normal cost. As one commenter expressed their
argument:
To limit the amount of the pension cost charged to Government
contracts, the ANPRM provides a limitation to the amount of annual
pension costs. The limit is ``125 percent of the actuarial accrued
liability, without regard to the minimum actuarial liability, plus
the current normal cost over the actuarial value of the assets.'' We
agree with this limitation because it affords some protection
against the volatility caused by using the ``settlement or
liquidation approach.''
In response to the ANPRM question as to whether amortization should
continue unabated or be deemed fully amortized upon reaching or
exceeding the assignable cost limitation, one commenter opined:
The supplementary information with the ANPRM also asked for
comments on whether volatility might be better controlled if
amortization bases always continue unabated even if the assets
exceed the ACL limitation. We believe that allowing the amortization
bases to continue unabated could introduce undesirable problems, for
example where amortization bases are for negative amounts. We
recommend that this concept of unabated bases not be pursued.
Response: The proposed rule does not change the basic definition of
the assignable cost limitation and continues to limit the assignable
cost to zero if assets exceed the actuarial accrued liability and
normal cost. However, under this NPRM the actuarial accrued liability
and normal cost shall be revalued as the minimum actuarial liability
and minimum normal cost if the proposed criteria of 9904.412-50(b)(7)
are met.
The Board shares the commenters' concerns regarding the volatility
caused by the abrupt impact of the assignable cost limitation when
assets equal or exceed the liability plus the normal cost. While
predictability might be improved if pension costs continue to be
measured and assigned as the funding level (assets compared to the
liability plus normal cost) nears and then rises above and falls below
100%, the Board continues to have concerns with the accumulation of
excess assets. Recognition of the minimum actuarial liability and
minimum normal cost will decrease the circumstances when a contractor
would face having to make a contribution to satisfy ERISA but not have
an assignable pension cost for contract accounting purposes. If the
assets exceed both the long-term liability and normal cost, and also
the minimum actuarial liability and minimum normal cost, then there is
no valid cost liability to be funded in the current period.
The Board believes the 10-year minimum amortization period for
gains and losses and any liability increase due to the minimum
actuarial liability provide sufficient smoothing of costs. Therefore,
the NPRM does not include any assignable cost limitation buffer. Under
the NPRM, once the revised assignable cost limitation is exceeded, the
assigned pension cost continues to be limited to zero.
Topic J: Miscellaneous Topics.
(1) Comment--Funding Hierarchy: One commenter recommended that the
contributions in excess of the minimum required contribution and
voluntary prepayments be eliminated from the proposed ``Funding
Hierarchy''. This commenter wrote:
ANPRM section 412-50(a)(4) contains the following hierarchy of
pension funding:
1. Current contributions up to the minimum required funding
amount;
2. Mandatory prepayment credits;
3. Voluntary prepayment credits; and
4. Current contributions in excess of the minimum required
funding amount.
Although we have no particular concern with this hierarchical
approach, and we understand the need for a hierarchy with regard to
mandatory prepayment credits, we do have a concern with the required
order of items 3. and 4. Specifically, given the lack of explanation
in the ANPRM, and past experience at one Government agency, we are
concerned that CASB may be attempting to eliminate--with no
discussion--quarterly interest adjustments that have long been
considered allowable costs on contracts with the DoD and other
agencies.
* * * * *
To resolve this problem, we recommend that the funding hierarchy
be limited to the first two elements listed above. Alternatively, we
recommend that CAS 412 state explicitly that interest based on
presumed funding in accordance with the schedule contained in the
FAR shall be considered to be a component of pension cost. Under
this scenario, however, we note that a number of changes to CAS 412/
413 would be required that would be unrelated to harmonization.
Response: The application of current and prior contributions was an
important component of the special treatment of mandatory prepayments
credits. Since the NPRM does not provide for special treatment of
mandatory prepayment credits, the previously proposed funding hierarchy
is no longer necessary for the measurement, assignment, and allocation
of pension costs. The Board notes that the allowability of pension
costs and any associated interest is not addressed by the CAS. Issues
of allowability fall within the purview of Part 31 of the Federal
Acquisition Regulations (FAR).
(2) Comment--Future Salary Increases: One commenter urged the Board
to continue recognition of future salary increases in order to promote
full costing and to dampen volatility.
I applaud the Board for looking beyond mere coordination with
the ERISA minimum required contribution and consideration of the
effect of salary projections on the stability of costs across
periods. Under 8b--Salary Projections'' the Board states:
``The Board believes that the measurement of the actuarial
accrued liability and normal cost should continue to permit
recognition of expected future salary increases. Such recognition is
consistent with a long-term, going concern basis for the liability
measurement. Since the benefit increases attributable to the salary
increases are part of the long-term cost of the pension plan,
including a salary increase assumption helps to ensure that the
assigned cost adequately funds the long-term liability. Anticipating
future salary growth may also avoid sharp pension cost increases as
the average age of the plan population increases with the march of
the ``baby-boomers'' towards retirement.''
Response: The Board has approached harmonization by ensuring that
the liability used for contract costing purposes cannot be less than
the liability mandated for measuring the minimum required amount. The
NPRM does not add any new restrictions on the measurement of the going
concern liability. While ERISA and GAAP have moved to settlement
interest rates for computing the pension contribution or disclosed
expense, both include recognition of established patterns of salary
increases for purposes of determining the maximum tax-deductible
contribution and the disclosed net periodic pension expense.
(3) Comment--Cost Increase Due to Assumed Interest Rates: One
commenter expressed their belief that concerns about the increase in
contract costs attributable to recognition of a settlement interest
rate may be overstated. This commenter notes that the increase in
benefits being paid as lump sum settlements has already lessened the
difference between the going concern and the settlement liability. This
commenter explains as follows:
We concede that market-based bond rates may result in increased
costs, but the increases may be less than expected. For plans that
pay lump sums based on current bond rates in accordance with Sec.
417(e) of the Internal Revenue Code, the increased costs are
probably already reflected to some degree. For plans that pay
benefits not based on pay, and for many cash balance plans, costs
will likely be determined under the minimum liability provisions of
the proposed
[[Page 25996]]
rule and will therefore reflect the lower interest rates even if the
standard measurement basis is not changed. Finally, we expect that
many contractors will move to lower their projected long-term rates
of return and will cite the current economic situation as
justification for the change. These cost increases will be amortized
over as little as 10 years under the proposed rules but can be
phased-in more slowly under a transition rule if a change in the
measurement basis is mandated.
Response: The Board believes that the current and proposed use of
the long-term interest assumption, which is tied to the long-term
expected return of the investment portfolio, is the most appropriate
rate for contract costing that extends over multiple periods. A best
estimate for the going concern approach includes reasonable assumptions
regarding the payment of lump sums upon termination or retirement.
However, as a matter of CAS harmonization, the use of a settlement rate
basis for the limited purpose of determining the minimum actuarial
liability and minimum normal cost is permitted and exempted from the
general requirement that all assumptions be the contractor's ``best
estimate'' of long-term expectations.
(4) Comment--Interest Rate and Payment Amount to Amortize the
Unfunded Actuarial Liability: One commenter asked the Board to clarify
the interest rate used to amortize the unfunded actuarial liabilities
and submitted:
We believe the final rules need to clarify whether the long-term
interest rate assumption is to be used to develop all amortization
payments, regardless of whether the MAL is higher than the AAL.
Recommendation: We recommend the use of the long-term interest
rate assumption in developing all amortization payments. This will
simplify the calculations compared to an alternative that would
reflect the long-term interest rate assumption in some situations
and the MAL interest rate in other situations.
Another commenter was concerned with the re-computation of the
amortization installment when interest rates are changed and
recommended follows:
The proposed rule requires amortization payments to be based on
the assumed long-term rate of return. If the liability measurement
basis is changed to reflect current bond rates, the rules should
clarify that amortization payments will be calculated based on the
effective interest rate. Under ERISA/PPA, liabilities must be
discounted using rates that vary by duration, but the plan's actuary
is required to determine and disclose the single effective interest
rate that will produce an equivalent liability. This rate should be
materially consistent with the single discount rate used for FAS
purposes. The CAS rule does not need to tie directly to ERISA or
FAS, but if the language is properly drafted, it will allow the
liabilities and interest rate to be obtained directly from either an
ERISA report or a FAS report. Such a rule will also avoid confusion
with the PPA rules that require amortization payments to be
discounted using the yield curve or segment interest rates.
Response: The NPRM proposes to continue the current requirement to
determine a level annual amount based on the prevailing long-term
interest assumption and remaining amortization period. The Board notes
that potential variances between asset values due to prepayments and
asset valuation methods will often mean that the amortization bases and
installments shown in a valuation report prepared for ERISA purposes
will differ from amortization bases and installments shown in a
valuation report prepared for CAS purposes.
(5) Comment--Trust Expenses as a Component of Minimum Normal Cost:
One commenter requested that the rule specify that trust expenses are
part of normal cost based on the amendments made to the PPA by the
Worker, Retiree, and Employer Recovery Act of 2008 (WRERA).
The Senate passed H.R. 7327, the Worker, Retiree, and Employer
Recovery Act of 2008 on December 11, 2008. The bill was previously
passed by the House. It now goes to the President where signature is
expected. The Act contains provisions prescribing that pension asset
trust expenses be included as part of ERISA target normal costs.
These provisions were generically described as ``technical
corrections'' to the Pension Protection Act (PPA). Accordingly we
believe the change in treatment of trust expenses to be clearly
within the PPA harmonization mandate to the CASB. The implications
of this change would be significant for some contractors,
exacerbating the negative cash flows that will be experienced by
certain contractors.
[We believe] that PPA and CAS should be harmonized by revising
the ANPRM to call out trust expenses as a component of CAS normal
costs and to specify that reclassification of trust expenses as part
of normal costs under both the actuarial accrued liability and
minimum actuarial liability bases (versus a reduction to the
expected long term interest rate) results in a required change in
cost accounting practices whenever necessary to implement the
harmonized CAS.
Response: The Board agrees that the minimum required amount should
be computed in full accordance with the PPA and its amendments. The
Board also believes it is not necessary to make such a specification
concerning the long-term cost for CAS purposes. Currently the
recognition of plan expenses under CAS is part of the contractor's
actuarial assumptions and disclosed cost method. Expenses can be
recognized as an increment of normal cost, either as an additional
liability or as a decrement to the long-term interest assumption.
Additionally, the NPRM specifies that the accumulated value of
prepayment credits receives an allocation of administrative expenses in
conformity with allocations to segments. The CAS is not in conflict
with the PPA and there is no reason to change the current rule.
Administrative expenses can include the payment of investment and
trustee fees associated with the investment and management of the
assets, i.e., asset-related expenses. Administrative expenses can come
from the payment of the PBGC premium and distribution of benefit
payments associated with the participants in the plan, i.e.,
participant-related expenses. The Board is aware that the computation
of the pension cost for segments will implicitly or explicitly
recognize the estimated administrative expense for the period without
distinction between asset investments and participant related expenses.
When updating the market value of the assets, an allocation of asset-
related expenses across all segments and the accumulated value of
prepayment credits matches that expense with the causal/beneficial
source of the expense. Allocation of participant-related expenses
across all segments including the accumulated value of prepayment
credits causes a mismatch of that portion of the expense with the
causal/beneficial source of the expense. Conversely not allocating a
portion of the asset-related expense to the accumulated value of
prepayment credits causes a mismatch in the measurement of the period
cost.
The Board believes that the complexity, expense and administrative
burden associated with separate identification and allocation of asset-
related expenses and participant-related expenses exceed any
misallocations in measurement of the period costs, and/or in the
allocation of expenses in the updating of asset values. The Board would
be interested in any recommendations or analysis regarding the
allocation of administrative expenses.
(6) Comment--Require Use of Projected Unit Credit Actuarial Cost
Method: One commenter recommended that the CAS restrict the choice of
actuarial cost method to the projected unit credit (PUC) cost method
for the going concern basis of accounting.
The ANPRM notes that responses to the Staff Discussion Paper
overwhelmingly support the adoption of a liability basis consistent
with ERISA, as amended by the PPA. The Board narrowly interpreted
the PPA liability as the amount computed for minimum funding
purposes and rejected this
[[Page 25997]]
approach because it does not represent the liability for an ongoing
plan. We advocate the use of the PUC method, which is required for
financial reporting and also for determining the PPA maximum tax
deductible limit. The PUC approach reflects projected liabilities
(including estimated future salary increases) and is appropriate for
an ongoing plan.
The PUC cost method is acceptable under the current and proposed
CAS and many contractors are already using this method. Therefore,
the discount rate is the only material change required to eliminate
the conflict and ensure consistency between the CAS and other
pension standards. * * *
Response: The NPRM permits the use of any immediate gain actuarial
cost method, including the projected unit credit and therefore does not
conflict with ERISA. The Board believes that the contractor should be
permitted to use the actuarial cost method and assumptions that best
suits its long term financial goals. The Board has not been presented
with any risk to the Government or contractor that would demonstrate a
need for such a restriction in choice of method.
(7) Comment--Some Terminology is Inconsistent: One commenter noted
that the normal cost terminology was inconsistent in the ANPRM and
advised the Board as follows:
We recommend that the rule define the terms ``current normal
cost'' (used in CAS 412-30 but used in definition of Assignable Cost
Limitation), ``minimum normal costs'' and ``normal cost for
period.''
Response: The Board agrees. The NPRM includes proposed revisions
that should ensure all terminology is used consistently throughout CAS
412 and 413.
The major structural difference of the NPRM has been to place most
of the harmonization rule into one distinct paragraph at 9904.412-
50(b)(7). In this way, the existing measurement, assignment and
allocation language can stand unmodified, with some exceptions. If the
criteria of 9904.412-50(b)(7) are met, then the user constructively
substitutes the minimum actuarial liability value, through an
adjustment computation, for the actuarial accrued liability, and the
minimum normal cost for the normal cost, and then re-determines the
computed, assigned, and allocated costs.
(8) Comment--Illustrations are Complex: One commenter opined that
the illustrations are complex and suggested using a single reference
table of actuarial information.
The illustrations are difficult to evaluate because of the
complexity of the rule and the fact patterns of each illustration.
We recommend that one reference table be used for the actuarial
information covered under one or more illustrations.
Response: The Board agrees. The NPRM includes three examples of the
proposed harmonization accounting in a new subsection 9904.412-60.1,
Illustrations--CAS Harmonization Rule. The plan facts and actuarial
methods and assumptions used for all three harmonization illustrations
are described at 9904.412-60.1. These facts disclose that the
contractor computes pension costs separately for one segment and on a
composite basis for the remaining segments. A pension plan with all
segments having an unfunded actuarial liability is the subject of
9904.412-60.1(b), (c) and (d), while a pension plan with one of the
segments having an asset surplus is presented in 9904.412-60.1(e), (f)
and (g). These two comprehensive examples illustrate the process of
measuring, assigning and allocating pension costs for the period. The
last illustration, 9904.412-60.1(h), shows how changes over three years
between the long-term liability and the settlement liability bases are
recognized as actuarial gains or losses.
(9) Comment--Review the Board's Statement of Objectives, Principles
and Concepts: One commenter suggested that the Board should review and
reaffirm its Statement of Objectives, Principles and Concepts.
In conclusion, I recommend that the CAS Board consider
revisiting the Board's Statement of Objectives, Policies and
Concepts. Part of any such review should include a reaffirmation of
predictability as a specific goal or objective of CAS.
Response: The Board believes that while this may be a worthwhile
endeavor, such a project would be time consuming and is beyond the
scope and timetable for harmonization.
Topic K: Accounting at the Segment Level.
Comment: One commenter suggested that the Board explicitly state
how the minimum actuarial liability calculation should be applied in
segment accounting, writing:
The ANPRM is not clear regarding the comparison of the regular
AAL and MAL under segment accounting: should the comparison be done
at a plan level or for each segment individually?
This commenter then continued:
It would be helpful if the final rule is explicit regarding how
the MAL should be applied in segment accounting. Otherwise, two
contractors might apply the rules differently.
Response: Paragraphs 9904.413-50(c)(3) and (4) require the
contractor to measure pension costs separately for a segment or
segments whenever there is a difference in demographics, experience, or
funding level. A contractor is also permitted to voluntarily compute
pension costs on a segment basis. Currently a contractor is required to
apply the criteria of 9904.412 to the determination of pension cost for
each segment, or aggregation of segments, whenever costs are separately
computed. Accordingly, if pension costs are computed at the segment
level, under this proposed rule the minimum actuarial liability and
minimum normal cost shall be computed at the segment level and the
proposed provisions of 9904.412-50(b)(7) shall also be applied at the
segment level. If pension costs are permitted to be measured on a
composite basis and that is the contractor's established practice, then
the minimum actuarial liability and minimum normal cost shall be
measured for the plan taken as a whole.
Topic L: CAS 413-50(c)(12) Segment Closing Adjustments.
Comments: One commenter believes that the CAS 413-50(c)(12) segment
closing adjustment should be based on the ``going concern'' liability
unless there is an actual settlement. The commenter explained their
position as follows:
The CAS 413-50(c)(12) adjusts pension costs when certain non-
recurring events occur such as a curtailment of benefits or a
segment closing. Though we agree with using the ``settlement or
liquidation approach'' for the measurement of annual pension cost
(because of the burden of the added funding requirements of PPA), we
believe that the ``going concern approach'' is the superior method
of cost accounting for pension costs and should be generally
retained for purposes of computing the CAS 413-50(c)(12) adjustment.
We believe that the ``going concern approach'' provides the best
measure of the funds needed by the pension trust to pay pension
benefits absent a settlement of the pension obligation. Our
experience shows that defense contractors only very rarely settle
pension obligations. Therefore, we recommend that the use of the
``going concern approach'' when a segment has (i) been sold or
ownership has been otherwise transferred, (ii) discontinued
operations, or (iii) discontinued doing or actively seeking
Government business). We note that if the contractor settles the
pension obligation due to a segment closing, the current CAS rule
permits the use of the ``settlement or liquidation approach.'' Also,
we believe that using the ``settlement or liquidation approach'' for
a curtailment of benefits is appropriate since the segment and
Government contracts continue.
Three commenters believed that the Board should exempt segment
closing adjustments from the five-year phase-in of the minimum
liability. They believe that the segment closing adjustment, which is
based on the current fair value of assets, should be subject to the
current fair value liability for accrued benefits. It has been
suggested in other
[[Page 25998]]
venues that the absence of such recognition has created a moral hazard
wherein contractors purchase annuity contracts or pay lump sums to
capture the current value of the liability and pass the increased cost
to the Government. Comments included:
The transition rules at ANPRM section 413-64.1(c) provide that
the MAL is to be phased-in over five years for segment closing
purposes. Given that the premise of segment closing adjustments is
that prior-period costs must be trued-up because there are no future
periods in which to make adjustments, it does not make sense to us
to have a phase-in rule where there is a final settlement. Because
this phase-in does not apply to plan terminations, such a rule may
encourage contractors to engage in more expensive terminations as a
means of avoiding the phase-in. To correct this problem, we
recommend that the phase-in be eliminated for segment closing
calculations.
The proposed CAS 413-50(c)(12)(i) indicates that the liability
used in the determination of a segment closing adjustment shall not
be less than the minimum actuarial liability. In addition, the
proposed CAS 413-64.1(c) indicates that the minimum actuarial
liability is subject to a 5-year phase-in.
We recommend that a segment closing adjustment be determined
without regard to the 5-year phase-in. Without this change, a
segment closing adjustment can be significantly affected by the
exact timing of the event. All other things being equal, other than
the timing of the event (i.e., within the 5-year phase-in period
versus beyond this period), the ANPRM rules will result in different
segment closing adjustments.
The transition rules were put in place to ``allow time for
agency budgets to manage the possible increase in contract costs and
to mitigate the impact on existing non-CAS covered contracts.''
Since the segment closing adjustment represents a one-time event to
``true up'' CAS assets, it would be unreasonable to subject it to
the transition rules and never ``true up'' the assets to the
liability that would have been determined had the event occurred at
a later date.
Response: The Board agrees that ``the `going concern approach'
provides the best measure of the funds needed by the pension trust to
pay pension benefits absent a settlement of the pension obligation.''
During periods leading up to the segment closing the proposed on-going
contract accounting is intended to adequately fund the segment. The
settlement liability will serve as a floor to the long-term ``going
concern'' liability. Final accounting (i.e., the true-up of assets and
liabilities) when a segment is closed shall be based on the
contractor's decision on how to maintain future funding of the segment,
including the contractor's decision to accept risk of investment in
stock equities or to incur the additional expense of transferring the
liability. The segment closing provision continues to require that the
actuarial accrued liability be based on ``actuarial assumptions that
are ``consistent with the current and prior long term assumptions used
in the measurement of pension costs.'' The assumptions used to measure
the going concern liability may be influenced by modifications to the
investment policy for the plan based on changed circumstances (Gould,
Inc., ASBCA 46759, Sept. 19, 1997) or a persuasive experience study.
This is the same position the Board held when CAS 413 was amended in
1995 when the Board stated in the preamble:
Consistent with the requirement that actuarial assumptions be
individual best-estimates of future long-term economic and
demographic trends, this final rule requires that the assumptions
used to determine the actuarial liability be consistent with the
assumptions that have been in use. This is consistent with the fact
that the pension plan is continuing even though the segment has
closed or the earning of future benefits has been curtailed. The
Board does not intend this rule to prevent contractors from using
assumptions that have been revised based on a persuasive actuarial
experience study or a change in a plan's investment policy.
Because the segment closing adjustment shall continue to be
determined based on the going concern approach, whether the benefit
obligation is retained or settled, this NPRM has removed the 5-year
phase-in requirement since the 9904.412-50(b)(7) ``Harmonization Rule''
does not apply to 9904.413-50(c)(12) segment closing adjustments.
Topic M: CAS 413-50(c)(12) Benefit Curtailment Adjustments.
Several commenters believed that the NPRM should eliminate
voluntary benefit curtailments from the CAS 413-50(c)(12) required
adjustment as long as the segment and contractual relationship
continue, i.e., let the curtailment be adjusted as an actuarial gain.
These commenters noted that even if there is a complete benefit
curtailment, there can be future pension costs due to experience
losses. One commenter stated:
Since the CASB is addressing an issue related to plan
curtailments, we submit the following suggestion: Revise the
proposed rule to also exempt curtailments resulting from voluntary
decisions to freeze benefit accruals (in circumstances where the
segment is not closed and performance on Government contracts
continues) from pension segment closing adjustment requirements. In
these instances, gains and losses continue in the plan from
demographics, measurement of liabilities and from performance of
assets in the trust relative to expectations. Although there are no
ongoing normal costs, in order to eliminate risk to both the
Government and the contractor, (the contractor) believes these gains
and losses should be measured and allocated to final cost objectives
in cost accounting periods subsequent to the curtailment.
Another commenter was concerned that retaining the requirement to
adjust for a voluntary benefit curtailment might create an incentive to
settle the liability and potentially increase the government liability
unnecessarily, as follows:
In a case where ERISA would require a cessation of benefit
accruals for an ``at risk'' plan the ANPRM exempts that situation
from the segment closing adjustment under CAS 413. We would suggest
that CAS Board take this a step further and remove a curtailment of
benefits as one of the triggers for a segment closing adjustment.
This provision is unnecessary if the contractor is still conducting
business with the government. The ongoing calculation of annual
assignable cost could easily continue for a pension plan with frozen
benefits. Implementing a segment closing adjustment would only
provide incentive for the contractor to terminate the frozen plan
and settle the pension obligations through annuity purchases and
lump sum payments. That would only reduce the amount of any excess
assets or increase the amount of any funding shortfall, which would
then become an obligation of the government. It would seem to be
advantageous to both the government and the contracting companies
for the CAS Board to make this change.
One commenter believes that all benefit curtailments should be
exempted from adjustment under 9904.413-50(c)(12) as follows:
Under current CAS 413, even if there are ongoing contracts an
immediate segment closing adjustment occurs when a contractor
freezes its pension plan voluntarily. We note that even when a plan
is frozen, there are ongoing CAS costs. We also note that the
current CAS 413 is silent as to whether or not ongoing CAS costs can
be recognized. Because CAS 413 is silent, it is our understanding
that in some situations, contractors are not allowed to further
recognize the CAS costs, while there are other situations when such
CAS costs are allowed. This results in inequity.
We believe that CAS 413 should be amended to explicitly allow
ongoing CAS costs even after a contractor voluntarily freezes its
pension plan, if there are ongoing contracts. We note that ongoing
CAS costs are allowed under PPA-triggered plan freezes.
Another commenter echoed this request concerning post-curtailment
accounting, and asked that if the requirement to make a CAS 413-
50(c)(12) adjustment for voluntary benefit curtailments is retained,
then the Board should address how to account for subsequent costs and
events; i.e., a benefit curtailment followed by a segment closing or
plan termination.
The current and revised CAS rules require a CAS 413-50(c)(12)
adjustment when
[[Page 25999]]
certain events occur such as a divestiture, curtailment of benefits,
or pension plan termination. Over the history of a pension plan
several events may occur, each requiring its own CAS 413-50(c)(12).
Some of the events may impact the pension plan in total such as a
curtailment of benefits and termination. To clarify the cost
accounting rules, we recommend an illustration be added to show the
accounting of a curtailment of benefits followed years later by a
termination or when the contractor discontinues doing business with
the Government.
Finally, one commenter asked that the Board consider whether the
current government agency guidance on accounting for benefit
curtailments, ``Joint DCMA/DCAA Policy On Defined Benefit Plan
Curtailments'' dated August 2007, is consistent with the provisions of
CAS 413.
Consistent with our earlier recommendation, the Board has
provided that any temporary cessations of benefit accruals that may
be required by PPA will not be deemed to be ``curtailments'' under
CAS 413. Because curtailments must be revisited in any event to
achieve harmonization, we encourage the CASB to abandon the
curtailment concept in its entirety, given the ongoing nature of the
contractual relationship between the parties. Alternatively, the
CASB should consider whether or not current agency guidance, which
requires contractors to compute ongoing pension costs under CAS 412/
413 for periods following a curtailment, meets the requirements of
CAS 413.
Response: The Board believes that the existing CAS 413 curtailment
adjustment should be retained except for PPA mandated curtailments for
underfunded plans. The 1995 amendments added a $0 floor to the assigned
cost, a negative assigned cost would be measured based on the
amortization credit for associated actuarial gains, but not assigned
and adjusted. This raises a concern that recovery of the potentially
large actuarial gain could be indefinitely deferred. This concern was
remedied by the CAS 413-50(c)(12) adjustment which permits the
Government to recover the surplus either immediately or, if the segment
and plan continue, via an amortized contract cost adjustment external
to the CAS assigned cost.
For a 9904.413-50(c)(12) adjustment for a benefit curtailment, the
liability is adjusted to reflect the benefit curtailment, but the
liability is not settled. In this case there is no justification for
measuring the liability on a settlement basis. The Board realizes that
ability to influence the amount of the benefit curtailment adjustment
can provide an incentive for the contractor to consider settling the
liability by payment of a lump sum or purchase of an annuity. The Board
believes that the Cost Accounting Standards should not constrain the
contractor's decisions concerning the financial management that it
believes is most appropriate for the pension plan. The contract cost
accounting must reflect the cost of the pension plan based on the
actual financial management of the plan.
The Board agrees that after a benefit curtailment has occurred and
been adjusted, there will continue to be actuarial gains and losses due
to demographic and asset experience. To remove disputes concerning the
accounting for pension costs and adjustments that are incurred after
the benefit curtailment or other segment closing event, the provision
proposed at 9904.413-50(c)(12)(ix) provides accounting guidance on the
appropriate accounting for the adjustment charge or credit.
The Board does not comment on the administrative guidance issued by
individual agencies. Such concerns about the CAS and its administration
should be addressed to the Director of the Office of Federal
Procurement Policy. The Board notes that agency guidance may have to be
revised once this NPRM is issued as a Final Rule.
Topic N: CAS 412 Transition Rules Require Modification.
Comments: Some commenters expressed their concern that the
transition rules were lengthy and complex.
As a general rule, we feel that the transition rules require
additional thinking, and suggest that the Board carefully consider
alternative transition approaches in the time leading up to the
publication of a Notice of Proposed Rulemaking (NPRM). In
particular, we are concerned that the transition rules are
exceedingly complex. In our experience, this level of complexity
will inevitably lead to increased disputes and the associated
administrative costs. We understand that this is not an easy issue
and would be willing to meet with the CASB or staff in an attempt to
identify approaches that yield acceptable results to all parties.
One of these commenters remarked that the potential increase in
pension costs argued for a longer smoothing period, but also noted that
the contractors still had a concern with more immediate cost recovery.
We understand that the lengthy transition rules are intended to
provide for smoothing of the substantial increases in pension costs
likely to result from the final rules and the backlog of prepayment
credits from funding PPA minimum requirements prior to the
harmonization. Again, we worked with [an actuary] to gather
contractor data estimates to develop a practical measure of the
materiality of the increases anticipated to consider whether such an
extended and complex transition seemed justified. The same 13
contractors participated in this data survey. The survey considered
the effects of mandatory prepayments expected to be amortized under
the transition rules and the effects on pension cost of using the
higher of the AAL or MAL during the transition period. [The actuary]
shared with us our combined data results * * * We believe that
considering the data results in the context of the challenging
financial conditions likely to affect Government contracting now and
in the near future, the lengthy transition rules are generally
appropriate. Though from a contractor's perspective more immediate
cost recovery of cash outlays made as a result of PPA funding would
be desirable, there clearly are other more significant competing
considerations.
Gain and loss amortization: Two commenters recommended reducing the
current 5-year transition period to 3 years, and two other commenters
believed there should be no phase-in for the new 10-year gain/loss
amortization rule. Regarding reducing the transition period, one
commenter wrote:
[The commenter] believe that the rules providing for a five-year
phase-in of certain harmonization provisions result in an
undesirable and theoretically problematic shifting of costs from the
years when the harmonized CAS 412 and 413 become effective to later
years. This results in a bulge in costs in later years that will
make programs unaffordable and contractors who continue to maintain
defined benefit pension plans uncompetitive. This result is not
theoretically sound and importantly has the effect of punishing
contractors maintaining defined benefit pension plans, which is
contrary to the intent of the PPA. Accordingly, [the commenter]
recommends that the CASB shorten the current five-year transition
period to three years.
Another commenter noted that given the recent market collapse, the
elimination of the transition for gains and losses would result in a
favorable impact to contract costing, and recommended:
* * * In particular, we do not see a need to phase-in the
reduced amortization period for gains and losses. These costs (or
credits) will not emerge until after the effective date of the
revised standard. Unless the stock market recovers fairly quickly
from its current lows, there may be significant market-related gains
emerging during the transition period that could help to offset the
increased costs anticipated under the revised rule. A phase-in of
the 10-year amortization period will diminish the impact of these
potential gains.
One commenter expressed their belief that the benefits of the gain
and loss transition were not material, stating as follows:
We support the change from 15 years to 10 years in the
amortization period for actuarial gains and losses. However, we do
not agree with the 5-year transitional period that gradually reduces
the amortization period. There is no advantage to the transitional
[[Page 26000]]
period as it only adds unnecessary complexity. If the Board believes
that the current 15-year period delays recognition too far beyond
the emergence of the gain or loss, and that 10 years is more
appropriate, then there should simply be a change made from 15 years
to 10 years. We don't believe that the impact on the cost would be
material enough to justify adding a transition period for this
change.
Legacy prepayments: Many commenters asked that the Board clarify
how to make determination of mandatory vs. voluntary prepayment
credits. These commenters noted that the legacy voluntary prepayment
credits could be simply set equal to the ERISA credit balance. The
following comment summarizes the basis for their request:
The proposed CAS 412-64.1(c)(2) indicates that any prepayment
credit existing at the transition to the new rules will be deemed to
be Voluntary Prepayment Credits (VPC), unless they can be identified
as Mandatory Prepayment Credits (MPC).
It may be difficult for contractors to determine the split
between the MPC and the VPC at transition, particularly if
contributions were made many years ago. The burden will be greatest
on contractors who have the longest contractual relationships with
the Government. Also, contractors who have undergone merger and
acquisition activity will deal with additional complexities. Without
any provision specifying how the determination is to be made, how a
contractor decides to develop the MPC at transition is potentially
an area for dispute between the contractor and the Government.
Recommendation: We recommend a simplified method in determining
the VPC and the MPC at transition. Under our proposed method, the
VPC account at transition will be the ERISA Credit Balance. The MPC
account at transition will be equal to the difference between the
Prepayment Credit (as determined under the current CAS rules) and
the ERISA Credit Balance (including both Carryover and Prefunding
Balances as defined in PPA).
Note that the ERISA Credit Balance reflects the cumulative
excess of discretionary contributions over ERISA minimum required
contributions. This is akin to the ANPRM's intent of bucketing into
the VPC account the contributions in excess of ERISA minimum
required contributions, when the ERISA minimum required
contributions exceed the CAS assignable costs.
Any remaining Prepayment Credit not categorized as Voluntary
Prepayment Credit should thus be in the MPC account. If the
Prepayment Credit at transition exceeds the Credit Balance, then
that excess would be representative of the aggregate excess of ERISA
minimum required contributions over CAS assignable costs, which this
ANPRM intends to bucket into the MPC account.
Two commenters believed that the transition accounting for legacy,
mandatory prepayment credits is untimely and overly complex and should
be replaced with smoother 5-year amortization or a straight 7 to 10-
year amortization. One commenter discussed the issue as follows:
We also do not believe that there should be a transitional
provision for the amortization period that applies to mandatory
prepayment credits. We don't understand the desire to establish a
transitional period that roughly matches the typical contracting
cycle. It would be more appropriate for the amortization period (as
opposed to the transitional period) to roughly match the typical
contracting cycle. This would more closely follow the themes of the
FAR and CAS that prefer to match cost with the contracts under which
that cost arose, and would also more closely follow the goal of
harmonization with the PPA. So the amortization period for mandatory
prepayment credits should simply be established at 5 years with no
transition. If the government has a concern regarding the possible
magnitude of legacy prepayment credits that have been created prior
to the effective date of the harmonization rule then the government
should try to collect some data regarding the amount of those legacy
prepayment credits. If such data should demonstrate that the
amortization amounts related to the legacy mandatory prepayment
credits would impose a difficult financial burden on the government
then perhaps a longer amortization period (longer than 5 years)
should be established for the legacy mandatory prepayment credits.
Another commenter suggested the proposed tiered 12-year phase-in be
maintained, but modified so all amortization ends in year 12, writing:
[The commenter] believes that the proposed transition rule for
assigning existing mandatory prepayment credits to cost accounting
periods is overly complex. The proposed transition rule divides
existing mandatory prepayment credits into multiple increments which
are then spread over varying periods of up to twelve years with a
deferral of the commencement of the amortization of certain
increments for up to four years. In addition to being overly complex
and, unnecessarily protracted, the process described in the proposed
rule results in an undesirable shifting of costs from earlier
periods to the middle periods of the12-year range. This deferral
will create an unaffordable burden on program budgets due to the
theoretically problematic bulge in costs in the middle years of the
proposed 12-year period. [The commenter] believes that the Board
could remedy these issues by adopting a shorter overall amortization
period of seven to ten years and through utilization of a simple
straight line amortization technique.
In contrast, one commenter expressed its belief that transition
accounting for legacy, mandatory prepayment credits prior to 2008 is
unnecessary and that the special recognition should be limited to the
period from 2008 when the PPA became effective until the harmonization
rule is applicable.
Finally, the new PPA funding rules went into effect for plan
years beginning after 2007 unless a Defense contractor qualifies for
an exception pursuant to Section 106, which provides delayed
implementation at the earlier of the effective date of the CAS
Pension Harmonization Rule or January 1, 2011. Except for certain
large Defense contractors that are permitted for delayed
implementation, contractors are required to implement the PPA
beginning in 2008. Their minimum required contributions under the
PPA would likely exceed the CAS assigned cost resulting in
``mandatory prepayment credits.'' To avoid any disparity and attain
a fair playing field for all contractors, we recommend recognition
of mandatory prepayment credits that are created as a direct result
of the implementation of the PPA during the period between 2008 and
the effective date of the CAS Harmonization Rule. The method for
recognizing these ``mandatory prepayment credits'' under Government
contracts is provided in the Phase-in provision of the ANPRM. We
believe that recognition of mandatory prepayment credits as an
additional component of assignable pension costs should be limited
to these specific circumstances.
Response: In the ANPRM the Board explored several approaches for
transition to the harmonization provisions. The Board agrees that the
transition provisions of the ANPRM were too complex and that the
transition period may have been too long. Many of the transition
requirements proposed in the ANPRM have been eliminated from this NPRM.
The NPRM only addresses the transition treatment of the change in
unfunded liability due to recognition of the minimum actuarial
liability.
One of the contracting community's major concerns even prior to the
passage of the PPA was the large prepayment credits that had been
accumulated because the CAS assigned cost had been less than the ERISA
minimum required contribution, especially when the minimum was driven
by the additional ``deficit reduction contribution'' based on the
``current liability.'' The Board understands this concern. Several
elements of the proposed harmonization rule will shorten the waiting
period for using the prepayment because the allocable contract cost
will approximate or exceed the PPA minimum required contribution. Some
of these elements include the reduction of plan assets by prepayment
credit when measuring the unfunded actuarial liability for CAS
purposes, and continuing to base the CAS pension cost on the long-term
liability and normal cost in periods when the minimum actuarial
liability does not impose a floor liability.
The Board believes that the proposed 10-year amortization of
actuarial gains and losses provides adequate smoothing of costs and
avoids the build-up of amortization installments. Accordingly,
[[Page 26001]]
the NPRM includes no proposal to phase-in the 10-year amortization
period which eliminates complexity.
As previously addressed, this NPRM does not provide special
recognition of ``mandatory prepayment credits'' as defined in the
ANPRM. As part of the analysis of the proposed provisions of the ANPRM
and the public comments, the Board reviewed the requirements of Section
106 of the PPA. Section 106 only addresses harmonization of CAS 412 and
413 with the minimum funding requirement of the PPA. The Board believes
that any special recognition of ``legacy'' mandatory prepayments is
beyond the scope of this case.
The Board is concerned with the variance between the required
minimum contribution and the allocable cost during the delay of CAS
harmonization since PPA became effective in 2008. Assuming that CAS
harmonization had been in effect in 2008, the main drivers behind this
variance for a pension plan with no CAS prepayment credits and no ERISA
prefunding or carry-over balances are (1) the difference in
amortization periods for experience gains and losses, and (2) the
actuarial loss attributable to using the minimum actuarial liability.
The Board did consider providing a remedy for these variances during
the delay period. However, the recent extraordinary large asset losses
have so magnified the difference between the assigned pension cost and
the ERISA minimum contribution that the cost increase for any special
recognition is prohibitive and would skew the true cost for the period.
Once the initial effects of the market downturn and the initial
contribution increase attributable to the PPA have been recognized, the
proposed harmonization should bring CAS and ERISA into better alignment
while reducing the risk of any unnecessary budget shortfalls for the
government contracting agencies.
To manage possible increases in contract costs, the revised draft
proposed rule retains a transitional 5-year phase-in, approximating the
typical contracting cycle, for any liability adjustment. As proposed,
any adjustment to the actuarial accrued liability and normal cost,
based on recognition of the minimum actuarial liability and minimum
normal cost, will be phased-in over a 5-year period at 20% per year,
i.e., 20% of the difference will be recognized the first year, 40% the
next year, then 60%, 80%, and finally 100% beginning in the fifth year.
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.
Topic O: Consideration for Effect of Significant Declines in Asset
Values Given Extreme Adverse Economic Conditions.
Comment: One commenter was concerned that the amount of prepayments
will grow at the assumed long-term rate of interest while the market
value of assets declined 30%. This would allow the contractor to
unfairly, but unintentionally, gain an out of pocket windfall by
permitting an artificially larger prepayment balance to ``fund'' the
pension cost. The commenter noted:
We agree with the proposed change to use the actual net rate of
return on investments to adjust the value of and the accumulated
value of voluntary prepayment credits. However, we are concerned
with the implementation of the proposed change. Many Government
contractor pension plans have been around for a long time and have
accumulated large surpluses. We have seen an influx of significant
prepayment credits by Government contractors in recent years. The
current historic adjustment in the stock market is an extraordinary
event. Implementation of the new rule could create a situation where
huge market adjustments attributable to the prepayment credits will
be leveraged against the Government share of contractor pension
assets while the prepayment credits are left, not only untouched,
but increased by the long-term interest assumption rate. After
implementation of the proposed change, the prepayment credits will
then share in future market rebounds. Therefore, consideration
should be given to the impact of the asset loss from this
extraordinary event in the implementation of the proposed ruling.
Additionally, special recognition of extraordinary events should be
included in the basic rule for annual costing and segment closings.
Response: The Board appreciates this concern with the potential
windfall because the prepayment credits are adjusted with a positive
interest rate while the actual assets have declined precipitously. The
Board notes that during periods over the last few decades that pension
funds have earned returns in excess of the long-term assumption. The
net under or over-statement of the accumulated value of prepayments due
to the difference in assumed and actual rate of returns over time is
difficult to assess. For this reason, and because the Board may only
promulgate rules that are prospectively applied, this NPRM does not
provide for any special adjustment of the accumulated value of
prepayment credits prior to the applicability date of the proposed
rule.
Once harmonization becomes applicable, the proposed rule will
update the accumulated value of prepayment credits based on an
allocable portion of the actual rate of return. This will eliminate the
commenter's specific concern once harmonization is in effect.
The exceptional events in the market since late 2008 raise the
question as to whether there should be special provisions for the gains
and losses attributable to such circumstances. The Board is interested
in any comments concerning whether the gain or loss from exceptional
events should be amortized over a longer period, i.e., retain the 15-
year amortization for such gains and losses. The Board would also
appreciate comments on how an exceptional event might be defined or
identified.
Topic P: Effective Date and Applicability Date.
Comments: Many commenters asked the Board to revise the effective
date of the final rule so as to delay PPA funding requirements until 1/
1/2011 for ``eligible government contractors'' who report on a calendar
year basis. The contractors were also concerned that if the
harmonization rule was published close to the end of one calendar year
they could become subject to it on the first day of the following
calendar year without sufficient time to revise their internal cost
accounting systems or pricing models. A commenter stated:
Having a delayed effective date would be a reasonable way of
dealing with this problem. Another approach would be to allow
contractors to currently update forward pricing even though the
final changes to the CAS have not yet been determined. It is
unlikely that the Department of Defense would support that approach.
Therefore we feel that the CAS Board should clarify that the
effective date would not be until 2011.
Several other commenters asked the Board to clarify the effective
date of the rule change for existing and new CAS covered contracts. As
one of these commenters explained:
We agree with the ANPRM that the rule should be effective
immediately, so that contractors can begin incorporating the effects
of the new rule into pricing. We understand that the rule will then
become applicable for a contractor in the year following receipt of
a new contract or subcontract covered by CAS. We believe the CAS
Board intends for the final rule to be applicable to all CAS covered
contracts of the contractor after the applicability date not just
new contracts, so contractors will be calculating pension costs
under only the new CAS rules. However, this is unclear in the ANPRM.
Another commenter asked that the Board consider permitting early
[[Page 26002]]
adoption of the new rules subject to Contracting Officer approval,
especially if the contractor only had a very limited number of CAS-
covered contracts which would not be re-awarded for a delayed period.
The ANPRM states that the new rule will apply to the first cost-
accounting period commencing after the later of (i) the date the
final rule is published in the Federal Register, or (ii) the receipt
of a contract or subcontract covered by the CAS. This rule may
therefore have a delayed effective date for many CMS contractors who
operate under 5-year contracts. Since the new rule is intended to
resolve conflicts between the CAS and the PPA, we believe there
should be a provision to allow a contractor to adopt early
compliance, subject to the approval of the Contracting Officer.
Response: As proposed there are three key dates involved when this
rule is published:
1. Date published in the Federal Register;
2. Effective Date--Date when contractors must first comply with the
new or revised Standard when pricing new contracts or negotiating cost
ceilings for new contracts that will be performed after the
applicability date; and
3. Applicability Date--Date when the new or revised CAS must be
followed by the contractor's cost accounting system for the
accumulating, reporting and final settlement of direct costs and
indirect rates. This is the first cost accounting period following the
receipt of a contract subject to CAS 412 and 413 either through CAS-
Coverage or Part 31 of the FAR.
The Board is making every effort to complete this case as quickly
as possible. The Board cannot control the publication date for the
Federal Register, and the Final Rule might be published in 2010. The
NPRM proposes to make this rule ``effective'' as of the date published
in the Federal Register as a Final Rule.
Once the Final Rule is effective and a contractor accepts the award
of a new contract subject to CAS 412 and 413, that contract and any
subsequent contracts will be subject to the CAS Harmonization Rule
beginning with the next accounting period.
CAS-covered contracts awarded and priced prior to the effective
date, that priced or budgeted costs based on the existing CAS, may be
eligible for an equitable adjustment in accordance with FAR 52.230-2.
This includes contracts awarded on or after the publication date but
before the effective date.
To minimize the period between the publication and effective dates,
the Board will be closely monitoring the date the Final Rule will be
approved and the expected publication date.
The Board believes that the proposed coverage at 9904.412-63.1 and
9904.413-63.1 is consistent with the Board's authorizing statue and
past practice. The Board believes that basing the effective and
applicability date provisions on any event other than the award of a
new contract subject to the provisions of CAS 412 and 413 can cause
uncertainty and increase disputes. Therefore, the NPRM does not propose
any mechanism for early adoption of the proposed rule. Once the CAS
Harmonization Rule is published as a Final Rule, contractors that may
not receive a new contract subject to CAS 412 and 413 for several years
may request a voluntary change in accounting method and request that
the contracting officer consider the change as a desirable change. The
contracting officer's decision would be considered under the normal
administrative procedure for such requests and would be based on facts
and circumstances.
Topic Q: Change in Accounting Practice and Equitable Adjustments.
Comments: One commenter requested clarification that changes to
conform to the CAS Harmonization Rule are ``Mandatory'' Changes that
are eligible for Equitable Adjustments.
The response to item 19 in the background and summary of the
ANPRM indicates that new rules would be mandatory changes. However,
this is not specified in the proposed rules themselves. Recognizing
the significant impact of the changes being introduced, we would
suggest to ensure that the portions of the new rules, which should
be treated as required changes be clearly identified. Accordingly,
we ask the CAS Board to consider adding additional language * * * to
9904.412-63(d) and 9904.413-63(d) such as the following suggestion:
All changes to a contractor's cost accounting practices required
to comply with the revisions to the Standards in 9904.412 as
published [Date published in the Federal Register] shall be treated
as required changes in practice as defined under 9903.201-6(a) to be
applied to both existing and new contracts.
Two commenters asked that changes to better align their actuarial
cost method (cost accounting practice) with the PPA be deemed
``desirable'' changes, or possibly ``mandatory'' changes. Changes in
actuarial valuation of assets and treatment of expenses as a component
of normal cost were given as examples. They are hopeful that all such
mandatory and desirable changes could be combined for purposes of
measuring the cost impact and negotiating an equitable adjustment.
In our view, there would be significant advantages to both
contractors and the Government if contractors were permitted to
harmonize their CAS asset smoothing methodology to match their PPA
method without that change being deemed a voluntary change in cost
accounting practice. This approach would reduce administrative costs
by contractors, would simplify future audits and would be consistent
with the PPA requirement to harmonize CAS 412/413 with the PPA
minimum required contribution. In addition, this would simplify
contract and administration with respect to contractors that are
considering announcing soon that they intend to modify their asset
smoothing formula, effective January 1, 2011, to be the same as
their PPA method.
The ANPRM implies that any change in actuarial asset method
would be considered as a voluntary change in cost accounting
practice, even if a contractor wanted to adopt the same actuarial
asset value that is used for calculating ERISA costs under the
provisions of the PPA. We feel that such a change should not be
considered as a voluntary change in cost accounting practice. The
introduction of the MAL will better align the CAS accrued liability
with the ERISA liability. If a contractor determines that aligning
the actuarial asset value with the ERISA asset value would enhance
the objective of achieving harmonization then that specific change
should explicitly be allowed.
One commenter asked the Board to clarify that a contractor will
continue to have an ability to choose measurement bases and accounting
methods, writing as follows:
To minimize disputes, it will be helpful if the rules make clear
that in the areas where the contractor has options in how certain
items are determined (e.g., MAL interest assumption, actual return
on assets, etc.), those items would be considered part of the
contractor's CAS accounting policy. Any meaningful changes would be
subject to the rules on changes in accounting policy. Because every
contractor has their own methodologies and specific issues, general
rules that become part of the CAS accounting policy would be
preferential to any proscriptive rules. If proscriptive rules were
used, contractors would have more certainty around how a particular
item should be determined, but odd results could arise depending on
the contractor's particular situation.
One commenter asked that plan consolidations made in response to
the PPA be treated as a ``desirable'' change of cost accounting
practice.
Because of the increased funding requirements PPA imposes and
the sweeping nature of changes to CAS 412 and 413 contemplated by
the ANPRM, Northrop Grumman believes the CASB should consider
adopting a provision addressing consolidation of plans with
disparate practices by expressly providing for desirable change
treatment for the impact of consequential changes in cost accounting
practices. Such a provision could reasonably provide for tests to
ensure the government's interests were not harmed by materially
[[Page 26003]]
adverse reallocation of existing trust assets or pension
liabilities. We believe this would result in lower administrative
expense over time and should in certain circumstances partially
mitigate contractors' cash flow issues. Suggested additional
language might read as follows:
``Cost accounting practice changes required to implement pension
plan realignments and plan consolidations are deemed to be desirable
changes if the resulting combination does not materially reduce the
government's participation in pension plan assets net of pension
plan liabilities.''
Another commenter asked if the pension harmonization rule would
require a single or multiple equitable adjustments.
The Transition Method at 9904.412.64.1 provides that the
adjustment of the actuarial accrued liability, mandatory prepayment
credit, and normal cost are phased-in over a 5-year period. This
adjustment will require an equitable adjustment when the standard
becomes effective. While the equitable adjustment may be measured in
year one, the actual adjustment would need to be made in each of the
first five years (2011 through 2016). Some may argue that the
contracting officer may be required to enter into a series of
equitable adjustments for each change to the amortization period.
This approach is overly burdensome to the contracting officers and
may cause contract disputes. As a result, we recommend that the ANPR
add language to clarify this important point, or remove these phase-
in rules.
Response: While the NPRM includes changes to or introduction of new
elements regarding the measurement, assignment and allocation of
pension costs, the proposed amendment of CAS 412 and 413 causes a
single change in cost accounting practice. The change is from the
existing CAS 412 and 413 bases to the amended CAS 412 and 413 bases.
Implementation of the changes and any equitable adjustments that might
be required by this single mandatory change are CAS administration
processes and are beyond the Board's authority.
Changes not required to be made to conform to the proposed
amendments are voluntary changes. The determination of whether such
voluntary changes may or may not constitute a desirable change is also
a CAS administration matter and dependent upon the facts and
circumstances unique to each request.
Some contractors may have changed their asset valuation,
recognition of expenses, or other method in response to the PPA prior
to the publication of this proposed rule. The Board believes it would
be unfair for contractors to be afforded different treatments based on
when the change was made. As discussed elsewhere, the Board has only
proposed changes necessary to harmonize CAS with the PPA and has
avoided limiting or restricting the contractor's ability to adopt cost
methods that it believes are most appropriate for the pension plan.
The Board believes that changes in plan design, plan mergers and
other such changes are not contract cost accounting changes required by
the harmonization rule. Furthermore, some contractors may have made
many of these plan design and consolidation changes prior to the
harmonization rule's effective date. As with the desirable changes
discussed above, it would be unfair to provide different treatment
based on when changes on made.
Topic R: Opportunity for Additional Comments.
Comments: Several commenters asked the Board to consider (i)
extending the ANPRM comment period, (ii) publishing a second ANPRM for
additional public comment or (iii) publish a second NPRM if significant
changes are made from ANPRM. One of these commenters acknowledged the
short timeframe available to the Board.
Response: The Board published a notice on November 26, 2008 (73 FR
72086) extending the comment deadline to December 3, 2008. Two
supplemental comments and one new comment were received. While this
NPRM has changed, replaced or eliminated many of the proposed revisions
from the ANPRM, these changes are based on comments and recommendation
from the public. The NPRM does not introduce any significant new
concepts and the Board decided to publish the proposed changes as a
proposed rule. The Board has decided to publish the proposed revisions
as a NPRM and permit a 60-day comment period for this NPRM. The Board
does not anticipate permitting an extension of time to comment upon the
NPRM.
Surveys and Modeling Data. The Board continues to 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 contribution and maximum tax-deductible
contribution.
D. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this 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 proposed rule are those normally
maintained by contractors who claim reimbursement of pension costs
under Government contracts.
E. Executive Order 12866 and the Regulatory Flexibility Act
Because most contractors must measure and report their pension
liabilities and expenses in order to comply with the requirements of
FAS 87 for financial accounting purposes, the economic impact of this
proposed rule on contractors and subcontractors is expected to be
minor. As a result, the Board has determined that this 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
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 proposed
rule does not require a regulatory flexibility analysis under the
Regulatory Flexibility Act of 1980.
F. Public Comments to Notice of Proposed Rulemaking
Interested persons are invited to participate by providing input
with respect to this proposed rule for harmonization of CAS 412 and 413
with the PPA. All comments must be in writing, and submitted either
electronically via the Federal eRulemaking Portal, e-mail, or
facsimile, or via mail as instructed in the ADDRESSES section.
As with the ANPRM the Board reminds the public 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 costs 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.
List of Subjects in 48 CFR 9904
Government procurement, Cost Accounting Standards.
Daniel I. Gordon,
Chair, Cost Accounting Standards Board.
For the reasons set forth in this preamble, Chapter 99 of Title 48
of the Code of Federal Regulations is proposed to be amended as set
forth below:
[[Page 26004]]
PART 9904--COST ACCOUNTING STANDARDS
1. The authority citation for Part 9904 continues to read as
follows:
Authority: Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. 422.
2. Section 9904.412-30 is amended by revising paragraphs (a)(1),
(9) and (23) to read as follows:
9904.412-30 Definitions.
(a) * * *
(1) Accrued benefit cost method means an actuarial cost method
under which units of benefits are assigned to each cost accounting
period and are valued as they accrue; that is, based on the services
performed by each employee in the period involved. The measure of
normal cost under this method for each cost accounting period is the
present value of the units of benefit deemed to be credited to
employees for service in that period. The measure of the actuarial
accrued liability at a plan's measurement date is the present value of
the units of benefit credited to employees for service prior to that
date. (This method is also known as the Unit Credit cost method without
salary projection.)
* * * * *
(9) Assignable cost limitation means the excess, if any, of the
actuarial accrued liability plus the normal cost for the current period
over the actuarial value of the assets of the pension plan.
* * * * *
(23) Prepayment credit means the amount funded in excess of the
pension cost assigned to a cost accounting period that is carried
forward for future recognition. The Accumulated Value of Prepayment
Credits means the value, as of the measurement date, of the prepayment
credits adjusted for investment returns and administrative expenses and
decreased for amounts used to fund pension costs or liabilities,
whether assignable or not.
* * * * *
3. Section 9904.412-40 is amended by adding paragraph (b)(3) to
read as follows:
9904.412-40 Fundamental requirement.
* * * * *
(b) * * *
(3) For qualified defined benefit pension plans, the measurement of
pension costs shall recognize the requirements of 9904.412-50(b)(7) for
periods beginning with the ``Applicability Date of the Harmonization
Rule.''
* * * * *
4. In 9904.412-50, paragraphs (a)(1)(v), (2), (4), (b)(5) and
(c)(1), (2) and (5) are revised, and paragraph (b)(7) is added to read
as follows:
9904.412-50 Techniques for application.
(a) * * *
(1) * * *
(v) Actuarial gains and losses shall be identified separately from
unfunded actuarial liabilities that are being amortized pursuant to the
provisions of this Standard. The accounting treatment to be afforded to
such gains and losses shall be in accordance with Cost Accounting
Standard 9904.413. The change in the unfunded actuarial liability
attributable to the liability adjustment amount computed in accordance
with 9904.412-50(b)(7)(i)(A), including a liability adjustment amount
of zero if the provisions of 9904.412-50(b)(7) do not apply for the
period, shall be identified and included in the actuarial gain or loss
established in accordance with 9904.412-50(a)(1)(v) and 9904.413-
50(a)(1) and (2) and amortized accordingly.
* * * * *
(2)(i) Except as provided in 9904.412-50(d)(2), any portion of
unfunded actuarial liability attributable to either pension costs
applicable to prior years that were specifically unallowable in
accordance with the then existing Government contractual provisions, or
pension costs assigned to a cost accounting period that were not funded
in that period, shall be separately identified and eliminated from any
unfunded actuarial liability being amortized pursuant to paragraph
(a)(1) of this section.
(ii) Such portions of unfunded actuarial liability shall be
adjusted for interest at the assumed rate of interest in accordance
with 9904.412-50(b)(4) without regard to 9904.412-50(b)(7). The
contractor may elect to fund, and thereby reduce, such portions of
unfunded actuarial liability and future interest adjustments thereon.
Such funding shall not be recognized for purposes of 9904.412-50(d).
* * * * *
(4) Any amount funded in excess of the pension cost assigned to a
cost accounting period shall be accounted for as a prepayment credit.
The accumulated value of such prepayment credits shall be adjusted for
investment returns and administrative expenses in accordance with
9904.413-50(c)(7) until applied towards pension cost in a future
accounting period. The accumulated value of prepayment credits shall be
reduced for portions of the accumulated value of prepayment credits
used to fund pension costs or to fund portions of unfunded actuarial
liability separately identified and maintained in accordance with
9904.412-50(a)(2). The accumulated value of any prepayment credits
shall be excluded from the actuarial value of the assets used to
compute pension costs for purposes of this Standard and Cost Accounting
Standard 9904.413.
* * * * *
(b) * * *
(5) Pension cost shall be based on provisions of existing pension
plans. This shall not preclude contractors from making salary
projections for plans whose benefits are based on salaries and wages,
or from considering improved benefits for plans which provide that such
improved benefits must be made. For qualified defined benefit plans
that ERISA permits recognition of historical patterns of benefit
improvements under a plan covered by a collectively bargained
agreement, the contractor may recognize the same benefit improvements.
* * * * *
(7) ``CAS 412 Harmonization Rule'': For qualified defined benefit
pension plans, in any period that the minimum required amount, measured
for the plan as a whole, exceeds the pension cost, measured for the
plan as a whole and limited in accordance with 9904.412-50(c)(2)(i),
then the actuarial accrued liability and normal cost are subject to
adjustment in accordance with the provisions of paragraph (b)(7)(i) of
this section, and the measured cost shall be adjusted if the criteria
of paragraph (b)(7)(ii) of this section are met.
(i) Actuarial accrued liability and normal cost adjustment: In any
period that the sum of the minimum actuarial liability plus the minimum
normal cost exceeds the sum of the unadjusted actuarial accrued
liability plus the unadjusted normal cost, the contractor shall adjust
the actuarial accrued liability and normal cost as follows:
(A) The actuarial accrued liability and normal cost determined
without regard to this paragraph are the unadjusted actuarial accrued
liability and normal cost, respectively:
(B) The liability adjustment amount shall be equal to the minimum
actuarial liability, as defined by paragraph (b)(7)(iii)(A) of this
section, minus the unadjusted actuarial accrued liability. The
liability adjustment amount shall be added to the unadjusted actuarial
accrued liability to determine the adjusted actuarial accrued
liability. If the liability adjustment amount is a negative amount,
that amount shall be subtracted from unadjusted actuarial
[[Page 26005]]
accrued liability to determine the adjusted actuarial accrued
liability:
(C) The normal cost adjustment amount shall be equal to the minimum
normal cost, as defined by paragraph (b)(7)(iii)(B) of this section,
minus the unadjusted normal cost. The normal cost adjustment amount
shall be added to the unadjusted normal cost to determine the adjusted
normal cost. If the normal cost adjustment amount is a negative amount,
that amount shall be subtracted from unadjusted normal cost to
determine the adjusted normal cost; and
(D) The contractor shall measure and assign the pension cost for
the period in accordance with 9904.412 and 9904.413 by using the values
of the adjusted actuarial accrued liability and adjusted normal cost as
the values of the actuarial accrued liability and normal cost.
(ii) The pension cost for the period shall be the greater of either
the pension cost, measured for the period in accordance with paragraph
(b)(7)(i) of this section, or the pension cost measured without regard
to this paragraph. For purposes of this paragraph (b)(7)(ii), the
pension costs measured for the period shall be compared before limiting
the cost in accordance with 9904.412-50(c)(2)(ii) and (iii).
(iii) Special definitions to be used for this paragraph:
(A) The minimum actuarial liability shall be the actuarial accrued
liability measured under the accrued benefit cost method and using an
interest rate assumption as described in 9904.412-50(b)(7)(iv).
(B) The minimum normal cost shall be measured as the normal cost
measured under the accrued benefit cost method and using an interest
rate assumption as described in 9904.412-50(b)(7)(iv).
(C) Minimum required amount means the contribution required to
satisfy the minimum funding requirements of ERISA. For purposes of this
paragraph, the minimum required contribution shall not include any
additional contribution requirements or elections based upon the plan's
ratio of actuarial or market value of assets to the actuarial accrued
liabilities measured for ERISA purposes. The minimum required amount
shall be measured without regard to any prepayment credits that have
been accumulated for ERISA purposes (i.e., prefunding balances).
(iv) Actuarial Assumptions: The actuarial assumptions used to
measure the minimum actuarial liability and minimum normal cost shall
meet the following criteria:
(A) The interest assumption used to measure the pension cost for
the current period shall reflect the contractor's best estimate of
rates at which the pension benefits could effectively be settled based
on the current period rates of return on investment grade fixed-income
investments of similar duration to the pension benefits:
(B) The contractor may elect to use the same rate or set of rates,
for investment grade corporate bonds of similar duration to the pension
benefits, as published or defined by the Government for ERISA purposes.
The contractor's cost accounting practice includes any election to use
a specific table or set of such rates and must be consistently
followed:
(C) For purposes of this paragraph, use of the current period rates
of return on investment grade corporate bonds of similar duration to
the pension benefits shall not violate the provisions of 9904.412-
40(b)(2) and 9904.412-50(b)(4) regarding the interest rate used to
measure the minimum actuarial liability and minimum normal cost: and
(D) All other actuarial assumptions used to measure the minimum
actuarial liability and minimum normal cost shall be the same as the
assumptions used elsewhere in this Standard.
* * * * *
(c) * * *
(1) Amounts funded in excess of the pension cost assigned to a cost
accounting period pursuant to the provisions of this Standard shall be
accounted for as a prepayment credit and carried forward to future
accounting periods.
(2) For qualified defined-benefit pension plans, the pension cost
measured for a cost accounting period is assigned to that period
subject to the following adjustments, in order of application:
(i) Any amount of pension cost measured for the period that is less
than zero shall be assigned to future accounting periods as an
assignable cost credit. The amount of pension cost assigned to the
period shall be zero.
(ii) When the pension cost equals or exceeds the assignable cost
limitation:
(A) The amount of pension cost, adjusted pursuant to paragraph
(c)(2)(i) of this subsection, shall not exceed the assignable cost
limitation,
(B) All amounts described in 9904.412-50(a)(1) and 9904.413-50(a),
which are required to be amortized, shall be considered fully
amortized, and
(C) Except for portions of unfunded actuarial liability separately
identified and maintained in accordance with 9904.412-50(a)(2), any
portion of unfunded actuarial liability, which occurs in the first cost
accounting period after the pension cost has been limited by the
assignable cost limitation, shall be considered an actuarial gain or
loss for purposes of this Standard. Such actuarial gain or loss shall
exclude any increase or decrease in unfunded actuarial liability
resulting from a plan amendment, change in actuarial assumptions, or
change in actuarial cost method effected after the pension cost has
been limited by the assignable cost limitation.
(iii) Any amount of pension cost of a qualified pension plan,
adjusted pursuant to paragraphs (c)(2)(i) and (ii) of this section that
exceeds the sum of the maximum tax-deductible amount, determined in
accordance with ERISA, and the accumulated value of prepayment credits
shall be assigned to future accounting periods as an assignable cost
deficit. The amount of pension cost assigned to the current period
shall not exceed the sum of the maximum tax-deductible amount plus the
accumulated value of prepayment credits.
* * * * *
(5) Any portion of pension cost measured for a cost accounting
period and adjusted in accordance with 9904.412-50(c)(2)that exceeds
the amount required to be funded pursuant to a waiver granted under the
provisions of ERISA shall not be assigned to the current period.
Rather, such excess shall be treated as an assignable cost deficit,
except that it shall be assigned to future cost accounting periods
using the same amortization period as used for ERISA purposes.
* * * * *
5. Section 9904.412-60 is amended by revising paragraphs (b)(2) and
(3), (c)(1) through (5), (c)(13), and (d)(4) to read as follows:
9904.412-60 Illustrations.
* * * * *
(b) * * *
(2) For several years Contractor H has had an unfunded nonqualified
pension plan which provides for payments of $200 a month to employees
after retirement. The contractor is currently making such payments to
several retired employees and recognizes those payments as its pension
cost. The contractor paid monthly annuity benefits totaling $24,000
during the current year. During the prior year, Contractor H made lump
sum payments to irrevocably settle the benefit liability of several
participants with small benefits. The annual installment to amortize
these lump sum payments over
[[Page 26006]]
fifteen years at the long-term interest rate assumption is $5,000.
Since the plan does not meet the criteria set forth in 9904.412-
50(c)(3)(ii), pension cost must be accounted for using the pay-as-you-
go cost method. Pursuant to 9904.412-50(b)(3), the amount of assignable
cost allocable to cost objectives of that period is $29,000, which is
the sum of the amount of benefits actually paid in that period
($24,000) plus the second annual installment to amortize the prior
year's lump sum settlements ($5,000).
(3) Contractor I has two qualified defined-benefit pension plans
that provide for fixed dollar payments to hourly employees. Under the
first plan, the contractor's actuary believes that the contractor will
be required to increase the level of benefits by specified percentages
over the next several years based on an established pattern of benefit
improvements. In calculating pension costs, the contractor may not
assume future benefits greater than that currently required by the
plan. However, if ERISA permits the recognition of the established
pattern of benefit improvements, 9904.412-50(b)(5) permits the
contractor to include the same recognition of expected benefit
improvements in computing the pension cost for contract costing
purposes. With regard to the second plan, a collective bargaining
agreement negotiated with the employees' labor union provides that
pension benefits will increase by specified percentages over the next
several years. Because the improved benefits are required to be made,
the contractor can consider such increased benefits in computing
pension costs for the current cost accounting period in accordance with
9904.412-50(b)(5).
* * * * *
(c) * * *
(1) Contractor J maintains a qualified defined-benefit pension
plan. The actuarial accrued liability for the plan is $20 million and
has been adjusted based on the minimum actuarial liability required by
9904.412-50(b)(7). The actuarial value of the assets of $18 million is
subtracted from the actuarial accrued liability of $20 million to
determine the total unfunded actuarial liability of $2 million.
Pursuant to 9904.412-50(a)(1), Contractor J has identified and is
amortizing twelve separate portions of unfunded actuarial liabilities.
The sum of the unamortized balances for the twelve separately
maintained portions of unfunded actuarial liability equals $1.8
million. In accordance with 9904.412-50(a)(2), the contractor has
separately identified, and eliminated from the computation of pension
cost, $200,000 attributable to a pension cost assigned to a prior
period that was not funded. The sum of the twelve amortization bases
maintained pursuant to 9904.412-50(a)(1) and the amount separately
identified under 9904.412-50(a)(2) equals $2 million ($1,800,000 +
200,000). Because the sum of all identified portions of unfunded
actuarial liability equals the total unfunded actuarial liability, the
plan is in actuarial balance and Contractor J can assign pension cost
to the current cost accounting period in accordance with 9904.412-
40(c).
(2) Contractor K's pension cost computed for 2016, the current
year, is $1.5 million. This computed cost is based on the components of
pension cost described in 9904.412-40(a) and 9904.412-50(a) and is
measured in accordance with 9904.412-40(b) and 9904.412-50(b). The
pension cost measured for the total plan exceeds the minimum
contribution amount for the period, and therefore the actuarial accrued
liability and normal cost were not required to be adjusted in
accordance with 9904.412-50(b)(7). The assignable cost limitation,
which is defined at 9904.412-30(a)(9), is $1.3 million. In accordance
with the provisions of 9904.412-50(c)(2)(ii)(A), Contractor K's
assignable pension cost for 2016 is limited to $1.3 million. In
addition, all amounts that were previously being amortized pursuant to
9904.412-50(a)(1) and 9904.413-50(a) are considered fully amortized in
accordance with 9904.412-50(c)(2)(ii)(B). The following year, 2017,
Contractor K computes an unfunded actuarial liability of $4 million.
Contractor K has not changed his actuarial assumptions nor amended the
provisions of his pension plan. Contractor K has not had any pension
costs disallowed or unfunded in prior periods. Contractor K must treat
the entire $4 million of unfunded actuarial liability as an actuarial
loss to be amortized over ten years beginning in 2017 in accordance
with 9904.412-50(c)(2)(ii)(C) and 9904.413-50(a)(2).
(3) Assume the same facts shown in illustration 9904.412-60(c)(2),
except that in 2015, the prior year, Contractor K's assignable pension
cost was $800,000, but Contractor K only funded and allocated $600,000.
Pursuant to 9904.412-50(a)(2), the $200,000 of unfunded assignable
pension cost was separately identified and eliminated from other
portions of unfunded actuarial liability. This portion of unfunded
actuarial liability was adjusted for 8% interest, which is the interest
assumption for 2015 and 2016, and was brought forward to 2016 in
accordance with 9904.412-50(a)(2). Therefore, $216,000 ($200,000 x
1.08) is excluded from the amount considered fully amortized in 2016.
The next year, 2017, Contractor K must eliminate $233,280 ($216,000 x
1.08) from the $4 million so that only $3,766,720 is treated as an
actuarial loss in accordance with 9904.412-50(c)(2)(ii)(C).
(4) Assume, as in 9904.412-60(c)(2), the 2016 pension cost computed
for Contractor K's qualified defined-benefit pension plan is $1.5
million and the assignable cost limitation is $1.7 million. The
accumulated value of prepayment credits is $0. However, because of the
ERISA limitation on tax-deductible contributions, Contractor K cannot
fund more than $1 million without incurring an excise tax, which
9904.412-50(a)(5) does not permit to be a component of pension cost. In
accordance with the provisions of 9904.412-50(c)(2)(iii), Contractor
K's assignable pension cost for the period is limited to $1 million.
The $500,000 ($1.5 million - $1 million) of pension cost not funded is
reassigned to the next ten cost accounting periods beginning in 2017 as
an assignable cost deficit in accordance with 9904.412-50(a)(1)(vi).
(5) Assume the same facts for Contractor K in 9904.412-60(c)(4),
except that the accumulated value of prepayment credits equals
$700,000. Therefore, in addition to the $1 million tax-deductible
contribution, Contractor K can also apply the $700,000 accumulated
value of prepayment credits, which is available for funding as of the
first day of the plan year, towards the pension cost computed for the
period. In accordance with the provisions of 9904.412-50(c)(2)(iii),
Contractor K's assignable pension cost for the period is the full $1.5
million computed for the period. A new prepayment credit of $200,000 is
created by the excess funding after applying the full $700,000
accumulated value of prepayment credits, plus $800,000 of the $1
million tax deductible contribution, towards the assigned cost of $1.5
million creating a new prepayment credit ($700,000 + $1 million - $1.5
million). The remaining $200,000 prepayment credit is adjusted for
$14,460 of investment returns allocated in accordance with 9904.412-
50(c)(1) and 9904.413-50(c)(7) and the sum of $214,460 is carried
forward until needed in future accounting periods in accordance with
9904.412-50(a)(4).
* * * * *
(13) The assignable pension cost for Contractor O's qualified
defined-benefit
[[Page 26007]]
plan is $600,000. For the same period, Contractor O contributes
$700,000 which is the minimum funding requirement under ERISA. In
addition, there exists $75,000 of unfunded actuarial liability that has
been separately identified pursuant to 9904.412-50(a)(2). Contractor O
may use $75,000 of the contribution in excess of the assignable pension
cost to fund this separately identified unfunded actuarial liability,
if he so chooses. The effect of the funding is to eliminate the
unassignable $75,000 portion of unfunded actuarial liability that had
been separately identified and thereby eliminated from the computation
of pension costs. Contractor O shall then account for the remaining
$25,000 ([$700,000 - $600,000] - $75,000) of excess contribution as a
prepayment credit in accordance with 9904.412-50(a)(4).
* * * * *
(d) * * *
(4) Again, assume the set of facts in 9904.412-60(d)(2) except
that, Contractor P's contribution to the Trust is $105,000 based on a
long-term assumed interest assumption of 8%. Under the provisions of
9904.412-50(d)(2) the entire $100,000 is allocable to cost objectives
of the period. In accordance with the provisions of 9904.412-50(c)(1)
Contractor P has funded $5,000 ($105,000 - $100,000) in excess of the
assigned pension cost for the period. The $5,000 shall be accounted for
as a prepayment credit. Pursuant to 9904.412-50(a)(4), the $5,000 shall
be adjusted for an allocated portion of the total investment earnings
and expenses in accordance with 9904.412-50(a)(4) and 9904.413-
50(c)(7). The prepayment credit plus allocated earnings and expenses
shall be excluded from the actuarial value of assets used to compute
the next year's pension cost. The accumulated value of prepayment
credits of $5,400 (5,000 x 1.08) may be used to fund the next year's
assigned pension cost, if needed.
* * * * *
6. Section 9904.412-60.1 is added to read as follows:
9904.412-60.1 Illustrations--CAS Harmonization Rule.
The following illustrations address the measurement, assignment and
allocation of pension cost on or after the Applicability Date of the
Harmonization Rule. The first series of illustrations present the
measurement, assignment and allocation of pension cost for a contractor
with an under-funded segment, followed by another series of
illustrations which present the measurement, assignment and allocation
of pension cost for a contractor with an over-funded segment. The
actuarial gain and loss recognition of changes between the long-term
liability and the settlement liability bases are illustrated in
9904.412-60.1(h). The structural format for 9904.412-60.1 differs from
the format for 9904.412-60.
(a) Description of the pension plan, actuarial assumptions and
actuarial methods used for 9904.412-60.1 Illustrations. (1)
Introduction: Harmony Corporation has a defined-benefit pension plan
covering employees at seven segments, all of which have some contracts
subject to this Standard and 9904.413. The demographic experience for
employees of the Segment 1 is materially different from that of the
other six segments so that pursuant to 9904.413-50(c)(2)(iii) the
contractor must separately compute the pension cost for Segment 1.
Because the factors comprising pension cost for Segments 2 through 7
are relatively equal, the contractor computes pension cost for these
six segments on a composite basis. The contractor does not separately
account for pension costs related to its inactive employees. The
contractor has received its annual actuarial valuation for its
qualified defined benefit pension plan, which bases the pension benefit
on the employee's final average salary. The plan's Enrolled Actuary has
provided the following disclosure concerning the methods (Table 1) and
assumptions (Table 2) used to perform the valuation. The Contractor has
accepted and adopted these methods and assumptions as its cost
accounting practice for this pension plan.
Table 1--Actuarial Methods for CAS 412 and 413 Computations
------------------------------------------------------------------------
------------------------------------------------------------------------
Valuation date............... January 1, 2016
------------------------------------------------------------------------
Actuarial Cost Methods: .........................................
CAS 412 & 413 and Tax Projected Unit Credit Cost Method.
Deductibility.
Minimum Required Amount.. Unit Credit Cost Method without Salary
Projection.
------------------------------------------------------------------------
Asset Valuation Methods (Actuarial Value of Assets):
CAS 412 and 413.......... 5-Year delayed recognition of realized
and unrealized gains and losses; but
within 80% to 120% of Market Value of
Assets.
ERISA.................... 24-Month Average Value of Assets but
within 90% to 110% of Market Value.
------------------------------------------------------------------------
Table 2--Actuarial Assumptions for CAS 412 and 413 Computations
------------------------------------------------------------------------
------------------------------------------------------------------------
Long-term expected interest .........................................
rate:
Basis.................... Based on expected long-term return on
investment for each class of investment
and on the investment mix and policy.
Long-term best-estimate.. 7.50%
Corporate Bond ``Settlement'' .........................................
Rate:
Basis.................... 24-Month Average 3-Segment Yield Curve as
of preceding November 1.
Current Value (Effective 6.20%
Rate).
Future Salary Increases...... 3.00%
Mortality.................... RP2000 Generational Tables as published
by the Secretary of Treasury.
Expense Load on Liability or
Normal Cost:
Long-term liability & Included as decrement to long-term
Normal Cost. interest assumption.
Minimum liability & 0.5% of market value of assets added to
Normal Cost. minimum normal cost.
All other assumptions:....... Based on the long-term best estimate of
future events. Same set of assumptions
is used for ERISA without regard to ``At
Risk'' status.
Change in assumptions since None.
last year:.
------------------------------------------------------------------------
[[Page 26008]]
(2) Actuarial Methods and Assumptions: (i) Salary Projections: As
permitted by 9904.412-50(b)(5), the contractor includes a projection of
future salary increases and uses the projected unit credit cost method,
which is an immediate gain actuarial cost method that satisfies the
requirements of 9904.412-40(b)(1) for measuring the actuarial accrued
liability and normal cost. The unit credit cost method (also known as
the accrued benefit cost method) measures the liability for benefits
earned prior to and during the current plan year and is also an
immediate gain cost method that satisfies 9904.412-40(b)(1) and
50(b)(1).
(ii) Interest Rate:
(A) Long-Term Interest Rate: The contractor's basis for
establishing the long-term interest rate assumption satisfies the
criteria of 9904.412-40(b)(2) and 9904.412-50(b)(4).
(B) ``Settlement'' Rate: For purposes of measuring the minimum
actuarial liability and minimum normal cost the contractor has elected
to use a set of investment grade corporate bond yield rates published
by the Secretary of the Treasury. The basis and set of corporate bond
rates meet the requirements of 9904.412-50(b)(7)(iv)(A), (B) and (C).
(iii) Mortality: Mortality is based on a table of generational
mortality rates published by the Secretary of the Treasury and reflects
recent mortality improvements. This table satisfies 9904.412-40(b)(4)
which requires assumptions to ``represent the contractor's best
estimates of anticipated experience under the plan, taking into account
past experience and reasonable expectations.'' Alternatively, use of
the annually updated and published static mortality table would also
satisfy this requirement, but in that case the contractor should
disclose the source and annual nature of the mortality rate rather than
the specific table. The specific table used for each valuation shall be
identified.
(iv) Actuarial Value of Assets:
(A) The valuation of the actuarial value of assets used for CAS 412
and 413 is based on a recognized smoothing technique that ``provides
equivalent recognition of appreciation and depreciation of the market
value of the assets of the pension plan.'' The disclosed method also
constrains the asset value to a corridor bounded by 80% to 120% of the
market value of assets. This method for measuring the actuarial value
of assets satisfies the provisions of 9904.413-50(b)(2).
(B) The Actuarial value of assets used for ERISA purposes limits
the expected interest to a specific corporate bond rate regardless of
the investment mix and actual expectations. This method fails the
criteria of 9904.413-50(b)(2) by not allowing for recognition of
potential appreciation. The actuarial value of assets derived under
this method cannot be used for CAS 412 and 413 purposes. This actuarial
value of assets may be used to determine the minimum required amount
since that amount is measured in accordance with ERISA rather than CAS
412 and 413.
(v) An actuarial cost method, as defined at 9904.412-30(a)(4),
recognizes current and future administrative expenses. For contract
costing purposes, administrative expenses are implicitly recognized as
a decrement to the assumed interest rate. Since the published sets of
corporate bond rates are not decremented for expenses, the expected
expense is explicitly added to the minimum normal cost.
(b) Underfunded Segment--Measurement of Pension Costs. Based on the
pension plan, actuarial methods and actuarial assumptions described in
9904.412-60.1(a), the Harmony Corporation determines that Segment 1 and
Segments 2-7 each have an unfunded actuarial liability and measures its
pension cost for plan year 2016 as follows:
(1) Asset Values: (i) Market Values of Assets: The contractor
adjusts the prior period's market value of assets in accordance with
9904.413-50(c)(7). The accumulated value of prepayment credits are
separately identified from the assets allocated to segments and are
adjusted in accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7).
The adjustment of the market value of assets, including the accumulated
value of prepayment credits is summarized in Table 3.
Table 3--January 1, 2016 Market Value of Assets
----------------------------------------------------------------------------------------------------------------
Accumulated
Total plan Segment 1 Segments 2-7 prepayments Note
----------------------------------------------------------------------------------------------------------------
Market Value at January 1, $13,190,000 $1,503,000 $10,633,000 $1,054,000 1
2015.........................
Prepayment Credit Applied. ................ 49,000 390,700 (439,700) 1
Contribution.............. 940,080 104,400 835,680 ................ 1
Benefit Payments.......... (864,800) (80,600) (784,200) n/a 1
Investment Earnings....... 1,068,600 126,341 892,633 49,626 2
Administrative Expenses... (76,000) (8,986) (63,485) (3,529) 3
------------------------------------------------------------------------
Market Value at January 1, 14,257,880 1,693,155 11,904,328 660,397 ........
2016.........................
Weighted Average Asset Values. 13,227,640 1,563,900 11,049,440 614,300 4
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
Note 2: The investment earnings are allocated among segments and the accumulated value of prepayment credits
based on average weighted asset values in accordance with 9904.413-50(c)(7) and 9904.412-50(a)(4).
Note 3: The administrative expenses are allocated among segments and the accumulated value of prepayment credits
based on average weighted asset values in accordance with 9904.413-50(c)(7) and 9904.412-50(a)(4).
Note 4: The prepayment credits were transferred and applied on the first day of the plan year. The contribution
deposit and benefit payments occurred on July 1, 2015. The weighted average asset value for each segment and
the accumulated value of prepayment credits was computed by giving 100% weight to the prepayment credit
transfer amounts and 50% weighting to the contribution and benefit payments.
(ii) Actuarial Value of Assets: Based on the contractor's
disclosed asset valuation method, recognition of the realized and
unrealized appreciation and depreciation from the current and four
prior periods is delayed and amortized over a 5-year period. The
portion of the appreciation and depreciation that is deferred until
future periods is subtracted from the market value of assets to
determine the actuarial value of assets for CAS 412 and 413 purposes.
Table 4 summarizes the determination of the actuarial value of assets
by segment as of January 1, 2016.
[[Page 26009]]
Table 4--January 1, 2016 Actuarial Value of Assets
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
CAS 413 Actuarial Value of Assets................ (Note 1) ................ ................ ........
Market Value at January 1, 2016.............. ............... $1,693,155 $11,904,328 2
Total Deferred Appreciation.................. ............... (4,398) (31,400) 3
------------------------------------
Unlimited Actuarial Value of Assets.......... ............... 1,688,757 11,872,928 ........
CAS 413 Asset Corridor
80% of Market Value of Assets................ ............... 1,354,526 9,523,462 ........
Market Value at January 1, 2016.............. ............... 1,693,155 11,904,328 2
120% of Market Value of Assets............... ............... 2,031,788 14,285,194 ........
CAS Actuarial Value of Assets.................... $13,561,685 1,688,757 11,872,928 4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the actuarial value of assets is determined at the segment level, no values are shown for the
Total Plan except as a summation at the end of the computation.
Note 2: See Table 3.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
Note 4: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
Market Value of Assets.
(2) Liabilities and Normal Costs: (i) Long-Term Liabilities and
Normal Costs: Based on the plan population data and the disclosed
methods and assumptions for CAS 412 ad 413 purposes, the contractor
measures the liability and normal cost on a going-concern basis using a
long-term interest assumption. The liability and normal cost are shown
in Table 5.
Table 5--``Long-Term'' Liabilities as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability........................ $16,525,000 $2,100,000 $14,425,000 1
Normal Cost........................................ 947,700 94,100 853,600 1
Expense Load on Normal Cost........................ ............... ............... ............... 1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
(ii) Likewise, based on the plan population data and the disclosed
methods and assumptions for CAS 412 and 413 purposes, the contractor
measures the minimum actuarial liability and minimum normal cost on a
``settlement'' basis using a set of investment grade corporate bond
yield rates published by the Secretary of the Treasury. This
measurement is shown in Table 6.
Table 6--``Settlement'' Liabilities as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Minimum Actuarial Liability........................ $15,557,000 $2,194,000 $13,363,000 1
Minimum Normal Cost................................ 933,700 93,000 840,700 1
Expense Load on Normal Cost........................ 82,000 8,840 73,160 1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for ERISA purposes and
supporting documentation.
(3) ERISA Contribution Range: For ERISA purposes, the contractor
can deposit any amount that satisfies the minimum contribution
requirement and does not exceed the maximum tax deductible contribution
amount. The ERISA minimum required and maximum tax-deductible
contributions are computed for the plan as a whole. ERISA does not
recognize segments or business units.
(i) Funding Shortfall (Surplus):
(A) The contractor computes the funding shortfall (the unfunded
actuarial liability for ERISA purposes) as shown in Table 7.
Table 7--PPA Funding Shortfall as of January 1, 2016
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Funding Target.............................. $15,557,000 1
Actuarial Value of Assets for ERISA......... (13,469,400) 2
------------------
Total Shortfall (Asset Surplus)............. 2,087,600 ........
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Information taken directly from the actuarial valuation report
prepared for ERISA purposes and supporting documentation.
[[Page 26010]]
(B) The ERISA actuarial value of assets does not meet the criteria
for measuring the actuarial value of assets for CAS purposes.
Accordingly, there is a difference of $88,894 between the actuarial
value of assets used for ERISA purposes ($13,469,400) and the asset
value used for CAS purposes ($13,561,685) as developed in Table 4.
However, for purposes of this computation the contractor uses the
actuarial value of assets developed for ERISA purposes since this is an
ERISA computation.
(ii) Minimum Required Amount: In accordance with 9904.412-
50(b)(7)(iii)(C), the minimum required amount is the gross minimum
contribution required by ERISA, i.e. the minimum required contribution
unreduced by any prefunding balances. The contractor can satisfy the
ERISA minimum funding requirement by depositing an amount at least
equal to the minimum required contribution minus any prefunding
balances, subject to certain ERISA restrictions on use of the
prefunding balances. This calculation is done at the plan level in
accordance with 9904.413-50(c)(7). Table 8 shows the contractor's
computation of the minimum required amount (the unreduced minimum
required contribution for ERISA purposes) for CAS purposes.
Table 8--Minimum Required Contribution
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Target Normal Cost.......................... $933,700 1
Expense Load on Target Normal Cost.......... 82,000 1
Shortfall Amortization Amount............... 576,225 2
Minimum Required Contribution............... 1,591,925 3
Available Prefunding Balance................ (500,000) 4
ERISA Minimum Deposit....................... 1,091,925 5
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Net amortization installment required for the various portions
of the Funding Shortfall of $2,087,600 (Table 7) in accordance with
ERISA.
Note 3: The ERISA Minimum Required Contribution is the CAS 9904.412-
50(b)(7)(iii)(C) ``Minimum Required Amount.''
Note 4: Information taken directly from the actuarial valuation report
prepared for ERISA purposes and supporting documentation
Note 5: This is the minimum deposit the contractor must make to satisfy
ERISA.
(iii) Maximum Tax-Deductible Contribution: In accordance with
9904.412-50(c)(2)(iii), the assigned pension cost may not exceed the
ERISA maximum tax-deductible contribution plus any accumulated value of
prepayment credits. Presuming the tax-deductible contribution rules
have not changed since 2008, the contractor computes the maximum tax-
deductible contribution as shown in Table 9.
Table 9--Tax-Deductible Maximum
------------------------------------------------------------------------
Total Plan Notes
------------------------------------------------------------------------
Funding Target.............................. $15,557,000 1
Target Normal Cost.......................... 933,700 1
Expense Load on Target Normal Cost.......... 82,000 1
PPA Cushion (50% Funding Target)............ 7,778,500 ........
Projected Liability Increment............... 2,505,000 2
Liability for Deduction Limit............... 26,856,200 ........
Actuarial Value of Assets for ERISA......... (13,469,400) 3
Tax-Deductible Maximum...................... 13,386,800 4
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Increase in Funding Target if salaries increases are projected.
Note 3: See Table 7.
Note 4: The Tax-Deductible Maximum Contribution cannot be less than the
ERISA minimum required contribution developed in Table 8.
(4) Initial Measurement of Assigned Pension Cost: Before
considering if any adjustments are required by 9904.412-50(b)(7), the
contractor must first measure the pension cost for the period based on
the actuarial accrued liability and normal cost valued with the long-
term interest assumption and the actuarial value of assets.
(i) Measurement of the unfunded actuarial liability: The contractor
measures the unfunded actuarial liability in order to compute any
portions of unfunded actuarial liability to be amortized in accordance
with 9904.412-50(a)(1) and 9904.412-50(a)(2). (Note that the
accumulated value of prepayment credits is accounted for separately and
is not included in the actuarial value of assets allocated to
segments.) See Table 10.
Table 10--Initial Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability..................... $16,525,000 $2,100,000 $14,425,000 1
CAS Actuarial Value of Assets................... (13,561,685) (1,688,757) (11,872,928) 2
Unfunded Actuarial Liability.................... 2,963,315 411,243 2,552,072 ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5.
Note 2: See Table 4.
[[Page 26011]]
(ii) Measurement of pension cost: The new amortization
installment(s) are added to the amortization installments remaining
from prior years. The pension cost for the period is measured as the
normal cost plus the sum of the amortization installments. Because the
long-term interest assumption implicitly recognizes expected
administrative expenses, there is no separately identified increment
for administrative expenses added to the normal cost. See Table 11.
Table 11--Initial Measured Pension Cost
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Normal Cost........................................ (Note 1) $94,100 $853,600 2
Expense Load on Normal Cost........................ ............... ............... ............... 2
Net Amortization Installment....................... ............... 75,387 467,856 3
Measured Pension Cost.............................. $1,490,943 169,487 1,321,456 ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the pension cost is measured at the segment level, no values are shown for the Total Plan except
as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Net annual installment required to amortize the portions of unfunded actuarial liability, $411,243 for
Segment 1 and $2,552,072 for Segments 2-7, in accordance with 9904.412-50(a)(1).
(5) Harmonization Tests: (i) Harmonization Threshold Test:
(A) The pension cost measured for the period is only subject to the
adjustments of 9904.412-50(b)(7) if the minimum required amount for the
plan exceeds the pension cost, measured for the plan as a whole. See
Table 12.
Table 12--Harmonization Threshold Test
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
(Note 1) ........
CAS Measured Pension Cost.................... $1,490,943 2
ERISA Minimum Required Amount................ 1,591,925 3
------------------------------------------------------------------------
Note 1: The ERISA Minimum Required Amount is measured for the Total
Plan, therefore the Harmonization Threshold Test is performed for the
plan as a whole.
Note 2: See Table 11. CAS Measured Cost cannot be less than $0.
Note 3: See Table 8. The ERISA minimum required contribution unreduced
for any prefunding balance.
(B) In this case, the minimum required amount is larger, and
therefore the contractor proceeds to determine whether the pension cost
must be adjusted in accordance with 9904.412-50(b)(7). If the minimum
required amount had been equal to or less than the assigned pension
cost, then the pension cost measured for the period would not be
subject to the adjustment provisions of 9904.412-50(b)(7).
(ii)(A) Actuarial Liability and Normal Cost Threshold Test: The
contractor compares the sum of the actuarial accrued liability plus
normal cost, including any expense load, to the minimum actuarial
liability plus minimum normal cost to determine whether the assigned
cost for the segment must be adjusted in accordance with 9904.412-
50(b)(7)(i). This comparison and determination is separately performed
at the segment level in accordance with 9904.413-50(c)(2)(iii). See
Table 13.
Table 13--Harmonization ``Liability'' Test
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ............... ........
CAS Long-Term Liabilities: ............... ............... ............... ........
Actuarial Accrued Liability.................... ............... $2,100,000 $14,425,000 2
Normal Cost.................................... ............... 94,100 853,600 2
Expense Load on Normal Cost.................... ............... ............... ............... 2, 3
----------------------------------
Total Liability for Period................. ............... 2,194,100 15,278,600 ........
``Settlement Liabilities'': ............... ............... ............... ........
Minimum Actuarial Liability.................... ............... 2,194,000 13,363,000 4
Minimum Normal Cost............................ ............... 93,000 840,700 4
Expense Load on Normal Cost.................... ............... 8,840 73,160 4, 5
----------------------------------
Total Liability for Period................. ............... 2,295,840 14,276,860 ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the liability and normal cost used to measure the pension cost is determined at the segment
level, no values are shown for the Total Plan except as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Because the long-term interest assumption implicitly recognizes expected admin expense there is no
explicit amount added to the long-term normal cost.
Note 4: See Table 6.
Note 5: For settlement valuation purposes the contractors explicitly identifies the expected expenses as a
separate component of normal cost.
[[Page 26012]]
(B) As shown in Table 13, the minimum actuarial liability plus
minimum normal cost ($2,295,840) exceeds the actuarial accrued
liability plus normal cost ($2,194,100) for Segment 1 but not for
Segments 2 through 7. Therefore, the contractor must measure the
adjusted pension cost for Segment 1 only.
(6) Measurement of Potentially Adjusted Pension Cost: To determine
whether the pension cost measured for the period must be adjusted in
accordance with 9904.412-50(b)(7)(ii), the contractor measures the
unfunded actuarial liability, basic pension cost, and the assignable
cost limitation by substituting the minimum actuarial liability and
minimum normal cost for the actuarial accrued liability and normal
cost.
(i) Re-measured Unfunded Actuarial Liability (Table 14):
Table 14--Re-measured Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Minimum Actuarial Liability....................... ............... $2,194,000 ............... 1
CAS Actuarial Value of Assets..................... ............... (1,688,757) ............... 2
------------------
Unfunded Actuarial Liability...................... ............... 505,243 ............... ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: See Table 4.
(ii) Measurement of the Adjusted Pension Cost (Table 15):
Table 15--Adjusted Pension Cost
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Minimum Normal Cost................................ ............... $93,000 ............... 1
Expense Load on Normal Cost........................ ............... 8,840 ............... 1, 2
Re-measured Amortization Installments.............. ............... 88,126 ............... 3
-----------------
Adjusted Pension Cost.............................. ............... 189,966 ............... ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: For PPA purposes the contractors explicitly identifies the expected expenses as part of the normal cost.
Note 3: Net amortization installment based on the remeasured unfunded actuarial liability of $505,243 for
Segment 1.
(7) Harmonization of Measured Pension Cost: For Segment 1 the
contractor compares the unadjusted pension cost measured by the
unadjusted actuarial accrued liability and normal cost with the
adjusted pension cost re-measured by the minimum actuarial liability
and minimum normal cost. Because the adjusted pension cost exceeds the
unadjusted pension cost, the adjusted pension cost determines the
measured pension cost for Segment 1. For Segments 2 through 7 the
measured pension cost was not required to be adjusted. See Table 16.
Table 16--Harmonization Test
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ............... ........
(A) Unadjusted Pension Cost........................ ............... $169,487 $1,321,456 2
(B) Adjusted Pension Cost.......................... ............... 189,966 n/a 3
Harmonized Pension Cost............................ 1,511,422 189,966 1,321,456 4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the comparison of the unadjusted and adjusted pension cost is performed separately at the
segment level, no values are shown for the Total Plan except as a summation at the end of the computation.
Note 2: See Table 11.
Note 3: See Table 15.
Note 4: Greater of (A) or (B).
(c) Underfunded Segment--Assignment of Pension Cost. In 9904.412-
60.1(b) the Harmony Corporation measured the total pension cost to be
$1,511,422, which is the total of the adjusted pension cost of $189,966
for Segment 1 and the unadjusted pension cost of $1,321,456 for
Segments 2 through 7. The contractor must now determine if any of the
limitations of 9904.412-50(c)(2) apply.
(1) Zero Dollar Floor: The contractor compares the measured pension
cost to a zero dollar floor as required by 9904.412-50(c)(2)(i). In
this case, the measured pension cost is greater than zero and no
assignable cost credit is established. See Table 17.
[[Page 26013]]
Table 17--CAS 412-50(c)(2)(i) Zero Dollar Floor
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ............... ........
Measured Pension Cost >= $0........................ ............... $189,966 $1,321,456 2
Assignable Cost Credit............................. ............... ............... ............... 3
----------------------------------------------------------------------------------------------------------------
Note 1: Because the provisions of CAS 412-50(2)(i) are applied at the segment level, no values are shown for the
Total Plan except as a summation at the end of the computation.
Note 2: See Table 16. The Measured Pension Cost is the greater of zero or the Harmonized Pension Cost.
Note 3:There is no Assignable Cost Credit since the Harmonized Pension Cost is greater than zero.
(2) Assignable Cost Limitation:
(i) As required by 9904.412-50(c)(2)(ii), the contractor measures
the assignable cost limitation amount. The pension cost assigned to the
period cannot exceed the assignable cost limitation amount. Because the
measured pension cost for Segment 1 was adjusted as required by
9904.412-50(b)(7)(ii), the assignable cost limitation for Segment 1 is
based on the adjusted values for the actuarial accrued liability and
normal cost, including expense load. The unadjusted values of the
actuarial accrued liability and normal cost, including expense load,
are used to measure the assignable cost limitation for Segment 2
through 7. See Table 18.
Table 18--CAS 412-50(c)(2)(ii) Assignable Cost Limitation
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ................ ................ ........
Actuarial Accrued Liability...................... ............... $2,194,000 $14,425,000 2
Normal Cost...................................... ............... 93,000 853,600 3
Expense Load on Normal Cost...................... ............... 8,840 ................ 4
------------------------------------
Total Liability for Period................... ............... 2,295,840 15,278,600 ........
Actuarial Value of Plan Assets................... ............... (1,688,757) (11,872,928) 5
------------------------------------
(A) Assignable Cost Limitation Amount............ ............... 607,083 3,405,672 6
(B) 412-50(c)(2)(i) Assigned Cost................ ............... 189,966 1,321,456 7
(C) 412-50(c)(2)(ii) Assigned Cost............... 1,511,422 189,966 1,321,456 8
----------------------------------------------------------------------------------------------------------------
Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
calculated, no values are shown for the Total Plan.
Note 2: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Actuarial Accrued
Liability has been adjusted to equal the Minimum Actuarial Liability (Table 6). The unadjusted actuarial
accrued liability is used for Segments 2-7 (Table 5).
Note 3: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Normal Cost has been
adjusted to equal the Minimum Normal Cost (Table 6). The unadjusted normal cost is used for Segments 2-7
(Table 5).
Note 4: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Normal Cost is based
on the Minimum Normal Cost which explicitly identifies the expected expenses as a separate component of normal
cost (Table 6). For Segments 2-7, the expected expenses are implicitly recognized in the measurement of the
normal cost (Table 5).
Note 5: See Table 4.
Note 6: The Assignable Cost Limitation cannot be less than $0.
Note 7: See Table 17.
Note 8: Lesser of lines (A) or (B).
(ii) As shown in Table 18, the contractor determines that the
measured pension costs for Segment 1 and Segments 2-7 does not exceed
the assignable cost limitation and are not limited.
(3) Measurement of Tax-Deductible Limitation:
(i) Finally, after limiting the measured pension cost in accordance
with 9904.412-50(c)(2)(i) and (ii), the contractor checks to ensure
that the total assigned pension cost will not exceed $14,047,197, which
is the sum of the maximum tax-deductible contribution ($13,386,800) as
determined in Table 9 plus the accumulated value of prepayment credits
($660,397) shown in Table 3. Since the tax-deductible contribution and
prepayments are maintained for the plan as a whole, these values are
allocated to segments based on the assignable pension cost after
adjustment, if any, for the assignable cost limitation in accordance
with 9904.413-50(c)(1)(ii). See Table 19.
Table 19--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Maximum Deductible Amount.......................... $13,386,800 $1,682,546 $11,704,254 1, 2
Accumulated Prepayment Credits..................... 660,397 83,003 577,394 3, 4
---------------------------------------------------
(A) 412-50(c)(2)(iii) Limitation................... 14,047,197 1,765,549 12,281,648 ........
(B) 412-50(c)(2)(ii) Assigned Cost................. 1,511,422 189,966 1,321,456 5
Assigned Pension Cost.............................. 1,511,422 189,966 1,321,456 6
----------------------------------------------------------------------------------------------------------------
Note 1: Maximum Deductible Amount for the Total Plan is allocated to segments based on the 9904.412-50(c)(2)(ii)
Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation test.
Note 2: See Table 9.
[[Page 26014]]
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
50(c)(2)(ii) Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation
test.
Note 4: See Table 3.
Note 5: See Table 18.
Note 6: Lesser of lines (A) or (B).
(ii) The assignable pension cost of $1,511,422, measured after
considering the assignable cost limitation, does not exceed the
9904.412-50(c)(2)(ii) limit of $14,047,197.
(d) Underfunded Segment--Allocation of Pension Cost. In 9904.412-
60.1(c) the Harmony Corporation determined that the assigned pension
cost for the period was $1,511,422, which is the total of the assigned
pension cost of $189,966 for Segment 1 and $1,321,456 for Segments 2
through 7. See Table 19. The contractor determines the amount to be
contributed to the funding agency and the allocation of the assigned
cost as follows:
(1) Funding Decision: (i) The contractor examines several different
amounts to contribute to the plan. The contractor must contribute an
amount equal to the assigned pension cost of $1,511,422 (Table 19)
minus the accumulated value of prepayment credits of $660,397 (Table 3)
for the assigned cost to be fully allocable. The minimum contribution
amount that must be deposited is determined by segment is shown in
Table 20.
Table 20--CAS Funding Requirement
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost............................... $1,511,422 $189,966 $1,321,456 1
Accumulated Value of Prepayments................ (660,397) (83,003) (577,394) 2, 3
------------------------------------------------------
CAS Assigned Cost to be Funded.................. 851,025 106,963 744,062
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 19.
Note 2: See Table 3.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
50(c)(2) Assigned Cost (Table 19) so that the prepayments are proportionally allocated to each segment's
assigned pension cost.
(ii) To satisfy the minimum funding requirements of ERISA. The
contractor must contribute an amount equal to the minimum required
contribution minus any prefunding balances that are permitted to be
applied under ERISA. If the pension plan's funding level is below
certain ERISA thresholds, then the contractor may also consider
including an additional contribution amount to improve the plan's
funding level. In this case the plan is sufficiently funded and no
additional contribution is needed. See Table 21.
Table 21--ERISA Funding Requirement
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Gross Minimum Required Contribution......... $1,591,925 1
ERISA Prefunding Credits.................... (500,000) 1
------------------
Net Minimum Required Contribution........... 1,091,925
Additional Voluntary Contribution........... ................ 2
------------------
ERISA Minimum Deposit....................... 1,091,925 3
------------------------------------------------------------------------
Note 1: See Table 8.
Note 2: The plan is sufficiently funded and no additional contribution
is needed to avoid benefit restrictions.
Note 3: To satisfy ERISA's minimum funding contribution, at least
$1,091,925 must be deposited.
(iii) And finally, the contractor's financial management policy
for the pension plan is to deposit an amount equal to the cost as
determined by the aggregate actuarial cost method so that the liability
is liquated in even payments over the years of expected service of the
active employees. In this case, the plan's actuary reports that the
cost under the aggregate method is $1,254,000.
(iv) Table 22 shows the contractor's determination of the possible
range of contributions.
Table 22--Contribution Range
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
CAS Assigned Cost to be Funded............... $851,025 1
ERISA Minimum Required Deposit............... 1,091,925 2
Aggregate Method Normal Cost................. 1,254,000 3
Maximum Tax-Deductible Contribution.......... 13,386,800 4
------------------------------------------------------------------------
Note 1: See Table 20.
Note 2: See Table 21.
Note 3: Information taken directly from the actuarial valuation report
prepared for funding policy purposes and supporting documentation.
Note 4: See Table 9.
[[Page 26015]]
(v) The contractor decides to contribute $1,091,925, which is the
net ERISA minimum required contribution (MRC) after deducting any
permissible prefunding balances. The contractor applies this required
contribution amount toward the CAS assigned pension cost of $1,511,422
(Table 19) and then applies $419,497 ($1,511,422-$1,091,925 (Table 21))
of the $660,397 (Table 3) accumulated value of prepayment credits to
fully fund the CAS assigned pension cost for the period. The $1,091,925
is adjusted for interest and is deposited before the end of the year.
The prepayment credit of $419,497 is applied as of the first day of the
plan year. The funding of the assigned pension cost by segment is
summarized in Table 23:
Table 23--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost............................... $1,511,422 $189,966 $1,321,456 1
ERISA Minimum Deposit........................... (1,091,925) (137,241) (954,684) 2
------------------------------------------------------
Remaining Cost to be Funded..................... 419,497 52,725 366,772 ........
Regular Prepayments Credit Applied.............. (419,497) (52,725) (366,772) 3
------------------------------------------------------
Remaining CAS Assigned Cost..................... ................ ................ ................ ........
Contribution over Net MRC....................... ................ ................ ................ 4
------------------------------------------------------
Unfunded (Prepaid) Cost......................... ................ ................ ................ 5
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 19.
Note 2: The Net Minimum Required Contribution is proportionally allocated to segments based on the Harmonized
CAS Assigned Cost that must be funded to be allocable.
Note 3: Before the contractor expends any additional resources, CAS Assigned Cost is funded by application of
any available prepayment credits. The prepayment credits are proportionally allocated to segments based on the
Remaining Cost to be Funded that must be funded to be allocable in accordance with 9904.413-50(c)(1)(i).
Note 4: The contractor decided not to contribute any funds in excess of the ERISA minimum required contribution
reduced by the prefunding balance, if any.
Note 5: When prepayment credits are used to fund the CAS assigned pension cost for the current period, the
amount of prepayment credit used will be deducted from the accumulated value of prepayment credits and
transferred to segments when the market value of assets are updated for the next valuation. The application of
this prepayment credit will appear in the asset roll-up from 1/1/2016 to 1/1/2017.
(2)(i) Since the full $1,511,422 (Table 19) assigned cost is
funded, the entire assigned cost can be allocated to intermediate and
final cost objectives in accordance with 9904.412-50(d)(1). The pension
benefit is determined as a function of salary, and therefore, the
salary dollars of plan participants, i.e., covered payroll, is used to
allocate the assigned composite pension cost for Segment 2 through 7
(Table 19) among segments. Table 24 summarizes the allocation of
assigned pension cost to segment.
Table 24--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
Segment
Covered payroll allocation Allocated Notes
factor pension cost
----------------------------------------------------------------------------------------------------------------
Direct Allocation (Segmented Cost):
(A) Segment 1................................. $1,127,000 n/a $189,966 2
Indirect Allocation (Composite Cost) (Note 1)
Segment 2.................................. 810,000 0.099963 132,097 3
Segment 3.................................. 1,621,000 0.200049 264,356 3
Segment 4.................................. 2,026,000 0.250031 330,405 3
Segment 5.................................. 1,158,000 0.142910 188,849 3
Segment 6.................................. 1,247,000 0.153894 203,364 3
Segment 7.................................. 1,241,000 0.153153 202,385 3
----------------- -----------------
(B) Subtotal Segments 2-7...................... 8,103,000 1.000000 1,321,456 2
Total Plan (A)+(B)......................... 9,230,000 ............... 1,511,422 2
----------------------------------------------------------------------------------------------------------------
Note 1: Allocation factor for segment = segment's covered payroll divided by the total covered payroll for
segments 2 though 7, subtotal (B).
Note 2: See Table 19.
Note 3: Pension cost for Segments 2-7, subtotal (B), multiplied by allocation factor for the individual segment.
(ii) Once allocated to segments, the assigned pension cost is
allocated to intermediate and final cost objectives in accordance with
the contractor's disclosed cost accounting practice.
(e) Overfunded Segment--Measurement of Pension Cost. Assume the
same facts as shown in 9904.412-60.1(b), (c) and (d) for Harmony
Corporation except that Segment 1 has an asset surplus, the accumulated
value of prepayment credits is $0 and the January 1, 2016 Market Value
of Assets is $16,055,092 for the total plan.
(1) Asset Values: (i) Table 25 shows the market value of assets
held by the Funding Agency.
[[Page 26016]]
Table 25--Funding Agency Balance as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
Accumulated
Total plan Segment 1 Segments 2-7 prepayment Notes
----------------------------------------------------------------------------------------------------------------
Market Value at January 1, 2016... $16,055,092 $2,148,712 $13,906,380 ............... 1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
(ii) As before, the portion of the appreciation and depreciation
that is deferred until future periods is subtracted from the market
value of assets to determine the actuarial value of assets for CAS 412
and 413 purposes. The determination of the actuarial value of assets as
of January 1, 2016 is summarized in Table 26.
Table 26--January 1, 2016 Actuarial Value of Assets
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2--7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1)
CAS 413 Actuarial Value of Assets:
Market Value at January 1, 2016.............. ............... $2,148,712 $13,906,380 2
Total Deferred Appreciation.................. ............... (5,700) (35,200) 3
------------------------------------
Unlimited Actuarial Value of Assets...... ............... 2,143,012 13,871,180 ........
CAS 413 Asset Corridor:
80% of Market Value of Assets................ ............... 1,718,970 11,125,104 ........
Market Value at January 1, 2016.............. ............... 2,148,712 13,906,380 2
120% of Market Value of Assets............... ............... 2,578,454 16,687,656 ........
CAS Actuarial Value of Assets.................... $16,014,192 2,143,012 13,871,180 4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the actuarial value of assets is determined at the segment level, no values are shown for the
Total Plan except as a summation at the end of the computation.
Note 2: See Table 25.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
Note 4: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
Market Value of Assets.
(2) ERISA Contribution Range: (i) Funding Shortfall (Surplus): The
contractor computes the funding shortfall (the unfunded actuarial
liability for ERISA purposes), which in this case is an asset surplus,
as shown in Table 27.
Table 27--PPA Funding Shortfall as of January 1, 2016
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Funding Target.............................. $15,557,000 1
Actuarial Value of Assets for ERISA......... (16,895,000) 2
------------------
Total Shortfall (Surplus)............... (1,338,000) ........
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Information taken directly from the actuarial valuation report
prepared for ERISA purposes and supporting documentation.
(ii) Minimum Required Amount: Table 28 shows the contractor
computation of the minimum required amount (the unreduced minimum
required contribution for ERISA purposes).
Table 28--Minimum Required Contribution
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Target Normal Cost.......................... $933,700 1
Expense Load on Target Normal Cost.......... 82,000 1
Reduced by Asset Surplus.................... (1,338,000) 2
Shortfall Amortization Amount............... n/a ........
Minimum Required Contribution............... ................ 3
Available Prefunding Balance................ n/a ........
ERISA Minimum Deposit....................... ................ 4
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: See Table 27.
Note 3: The Minimum Required Contribution cannot be less than zero. The
ERISA Minimum Required Contribution is the CAS 9904.412-
50(b)(7)(iii)(C) ``Minimum Required Amount.''
Note 4: This is the minimum deposit the contractor must make to satisfy
ERISA.
[[Page 26017]]
(iii) Maximum Tax-Deductible Contribution: Presuming the tax-
deductible contribution rules have not changed since 2008, the
contractor computes the maximum tax-deductible contribution as the sum
of the funding target, target normal cost, the ``cushion'' amount and
the increase in the funding target for salary projections minus the
actuarial value of assets determined for ERISA purposes. The
contractor's computation is shown in Table 29.
Table 29--Tax-Deductible Maximum
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Funding Target.............................. $15,557,000 1
Target Normal Cost.......................... 933,700 1
Expense Load on Target Normal Cost.......... 82,000 1
PPA Cushion (50% Funding Target)............ 7,778,500 ........
Projected Liability Increment............... 2,505,000 2
------------------
Liability for Deduction Limit........... 26,856,200 ........
Actuarial Value of Assets for ERISA......... (16,895,000) 3
------------------
Tax-Deductible Maximum.................. 9,961,200 ........
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Increase in Funding Target if salaries increases are projected.
Note 3: See Table 27.
(3) Initial Measurement of Assigned Pension Cost: The pension cost
is initially measured on the actuarial accrued liability and normal
cost, including any expense load, before any adjustments that might be
required by 9904.412-50(b)(7)(ii).
(i) Measurement of the unfunded actuarial liability: The contractor
measures the unfunded actuarial liability in order to compute any
portions of unfunded actuarial liability to be amortized in accordance
with 9904.412-50(a)(1) and 9904.412-50(a)(2). See Table 30.
Table 30--Initial Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability..................... $16,525,000 $2,100,000 $14,425,000 1
CAS Actuarial Value of Assets................... (16,014,192) (2,143,012) (13,871,180) 2
------------------------------------------------------
Unfunded Actuarial Liability................ 510,808 (43,012) 553,820 ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5.
Note 2: See Table 26.
(ii) Measurement of pension cost: The new amortization
installment(s) are added to the amortization installments remaining
from prior years. The pension cost for the period is measured as the
normal cost plus the sum of the amortization installments. Because the
long-term interest assumption implicitly recognizes expected
administrative expenses, there is no separately identified increment
for administrative expenses added to the normal cost. See Table 31.
Table 31--Initial Measured Pension Cost
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Normal Cost....................................... (Note 1) $94,100 $853,600 2
Expense Load on Normal Cost....................... ............... ................ ............... 2
Net Amortization Installment...................... ............... (4,800) 88,700 3
-----------------------------------
Measured Pension Cost......................... $1,031,600 89,300 942,300 ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the pension cost is measured at the segment level, no values are shown for the Total Plan except
as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Net annual installment required to amortize the portions of unfunded actuarial liability, $(43,012),
which is a surplus for Segment 1 and $553,820 for Segments 2-7, in accordance with 9904.412-50(a)(1).
(4) Harmonization Threshold Test: (i) The pension cost measured
for the period is only subject to the adjustments of 9904.412-50(b)(7)
if the minimum required amount for the plan exceeds the pension cost,
measured for the plan as a whole. See Table 32.
Table 32--Harmonization Threshold Test
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
(Note 1) ........
[[Page 26018]]
CAS Measured Pension Cost.................... $1,031,600 2
ERISA Minimum Required Amount............ ............... 3
------------------------------------------------------------------------
Note 1: The ERISA Minimum Required Amount is measured for the Total
Plan, therefore the Harmonization Threshold Test is performed for the
plan as a whole.
Note 2: See Table 31. CAS Measured Cost cannot be less than $0.
Note 3: See Table 28. The ERISA minimum required contribution unreduced
for any prefunding balance.
(ii) In this case, the CAS measured cost is larger than the
minimum required amount for all segments, and therefore the contractor
does not need to determine whether the pension cost must be adjusted in
accordance with 9904.412-50(b)(7). The contractor can proceed directly
to checking the measured pension cost for assignability.
(f) Overfunded Segment--Assignment of Pension Cost. In 9904.412-
60.1(e) the Harmony Corporation measured the total pension cost to be
$1,031,600, which is the sum of the pension cost of $89,300 for Segment
1 and $942,300 for Segments 2 through 7. See Table 31. The contractor
must now determine if any of the limitations of 9904.412-50(c)(2)
apply.
(1) Zero Dollar Floor: The contractor compares the measured pension
cost to a zero dollar floor as required by 9904.412-50(c)(2)(i) as
shown in Table 33.
Table 33--CAS 412-50(c)(2)(i) Zero Dollar Floor
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ............... ........
Measured Pension Cost >= $0........................ ............... $89,300 $942,300 2
Assignable Cost Credit............................. ............... ............... ............... 3
----------------------------------------------------------------------------------------------------------------
Note 1: Because the provisions of CAS 412-50(2)(i) are applied at the segment level, no values are shown for the
Total Plan except as a summation at the end of the computation.
Note 2: See Table 31. The Measured Pension Cost is the greater of zero or the Harmonized Pension Cost.
Note 3: There is no Assignable Cost Credit since the Harmonized Pension Cost is greater than zero.
(2) Assignable Cost Limitation: (i) As required by 9904.412-
50(c)(2)(ii), the contractor measures the assignable cost limitation
amount. The pension cost assigned to the period cannot exceed the
assignable cost limitation amount. Because the measured pension costs
for Segment 1 and Segments 2-7 were not subject to adjustment pursuant
to 9904.412-50(b)(7)(ii), the assignable cost limitation for Segment 1
and Segments 2-7 are based on the unadjusted values of the actuarial
accrued liability and normal cost, including the implicit expense load.
See Table 34.
Table 34--CAS 412-50(c)(2)(ii) Assignable Cost Limitation
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
(Note 1) ................ ................ ........
Actuarial Accrued Liability...................... ............... $2,100,000 $14,425,000 2, 3
Normal Cost...................................... ............... 94,100 853,600 3, 4
Expense Load on Normal Cost...................... ............... ................ ................ 3, 5
------------------------------------
Total Liability for Period....................... ............... 2,194,100 15,278,600 ........
Actuarial Value of Plan Assets................... ............... (2,143,012) (13,871,180) 6
------------------------------------
(A) Assignable Cost Limitation Amount............ ............... 51,088 1,407,420 7
(B) 412-50(c)(2)(i) Assigned Cost................ ............... 89,300 942,300 8
(C) 412-50(c)(2)(ii) Assigned Cost............... $993,388 51,088 942,300 9
----------------------------------------------------------------------------------------------------------------
Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
calculated, no values are shown for the Total Plan.
Note 2: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Actuarial Accrued
Liability has not been adjusted.
Note 3: See Table 5.
Note 4: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Normal Cost has
not been adjusted.
Note 5: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Normal Cost is
based on the long-term Normal Cost which implicitly identifies the expected expenses within the measurement of
the normal cost.
Note 6: See Table 26.
Note 7: The Assignable Cost Limitation cannot be less than $0.
Note 8: See Table 33.
Note 9: Lesser of (A) or (B). Pension cost for Segment 1 is limited by the Assignable Cost Limitation.
(ii) As shown in Table 34, the contractor determines that the
measured pension cost for Segment 1 exceeds the assignable cost
limitation and therefore the pension cost for Segment 1 is limited. The
measured pension cost for
[[Page 26019]]
Segments 2-7 does not exceed the assignable cost limitation and is not
limited.
(3) Measurement of Tax-Deductible Limitation: (i) Finally, after
limiting the measured pension cost in accordance with 9904.412-
50(c)(2)(i) and (ii), the contractor checks to ensure that the assigned
pension cost will not exceed the sum of the maximum tax-deductible
contribution and the accumulated value of prepayments credits. Since
the tax-deductible contribution and prepayments are maintained for the
plan as a whole, these values are allocated to segments based on the
assignable pension cost after adjustment, if any, for the assignable
cost limitation in accordance with 9904.413-50(c)(1)(ii). See Table 35.
Table 35--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
Maximum Deductible Amount.......................... $9,961,200 $512,311 $9,449,389 1, 2
Accumulated Prepayment Credits..................... ............... ............... ............... 3, 4
---------------------------------------------------
(A) 412-50(c)(2)(iii) Limitation................... 9,961,200 512,311 9,449,389 ........
(B) 412-50(c)(2)(ii) Assigned Cost................. 993,388 51,088 942,300 5
Assigned Pension Cost.............................. 993,388 51,088 942,300 6
----------------------------------------------------------------------------------------------------------------
Note 1: Maximum Deductible Amount for the Total Plan is allocated to segments based on (B) 9904.412-50(c)(2)(ii)
Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation test.
Note 2: See Table 29.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
50(c)(2)(ii) Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation
test.
Note 4: See Table 25.
Note 5: See Table 34.
Note 6: Lesser of lines (A) or (B).
(ii) The assignable pension cost of $993,388, measured after
considering the assignable cost limitation, does not exceed $9,961,200,
which is the sum of the tax-deductible maximum ($9,961,200) plus the
accumulated value of prepayment credits ($0), and is therefore fully
assignable to the period.
(g) Overfunded Segment--Allocation of Pension Cost. In 9904.412-
60.1(f) the Harmony Corporation determined that the assigned pension
cost for the period was $993,388, which is the total of the assigned
pension cost of $51,088 for Segment 1 and $942,300 for Segments 2
through 7. (See Table 35.) The contractor must now determine the amount
to be contributed to the funding agency and then the allocation of the
assigned cost as follows:
(1) Funding Decision: (i) The contractor examines several different
amounts to contribute to the plan. The contractor must contribute an
amount equal to the assigned pension cost minus the accumulated value
of prepayment credits for the assigned cost to be fully allocable. See
Table 36.
Table 36--CAS Funding Requirement
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost.................................. $993,388 $51,088 $942,300 1
Accumulated Value of Prepayments................... 0 ............... ............... 2, 3
---------------------------------------------------
CAS Assigned Cost to be Funded..................... 993,388 51,088 942,300 ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 35.
Note 2: See Table 25.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
50(c)(2) Assigned Cost (Table 19) so that the prepayments are proportionally allocated to each segment's
assigned pension cost.
(ii) To satisfy the minimum funding requirements of ERISA the
contractor must also contribute an amount equal to the minimum required
contribution minus any prefunding balances that are permitted to be
applied under ERISA. If the plan's funding level is below certain ERISA
thresholds, then the contractor may also consider including an
additional contribution amount to improve the plan's funding level. In
this case the plan is sufficiently funded and no additional
contribution is needed. See Table 37.
Table 37--ERISA Funding Requirement
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
Gross Minimum Required Contribution.......... ............... 1
ERISA Prefunding Credits..................... n/a 1
Net Minimum Required Contribution............ ............... ........
Additional Voluntary Contribution............ ............... 2
ERISA Minimum Deposit........................ ............... 3
------------------------------------------------------------------------
Note 1: See Table 28.
Note 2: The plan is sufficiently funded and no additional contribution
is needed to avoid benefit restrictions.
Note 3: No contribution is needed to satisfy ERISA's minimum funding
contribution requirements.
[[Page 26020]]
(iii) And finally, the contractor's financial management policy for
the pension plan is to deposit an amount equal to the cost as
determined by the aggregate actuarial cost method so that the liability
is liquated in even payments over the years of expected service of the
active employees. In this case, the plan's actuary reports that the
cost under the aggregate method is $799,000.
(iv) As shown in Table 38, the contractor determines that the
possible range of contributions is:
Table 38--Contribution Range
------------------------------------------------------------------------
Total plan Notes
------------------------------------------------------------------------
CAS Assigned Cost to be Funded............... $993,388 1
ERISA Minimum Required Deposit............... 0 2
Aggregate Method Normal Cost................. 799,000 3
Maximum Tax-Deductible Contribution.......... 9,961,200 4
------------------------------------------------------------------------
Note 1: See Table 36.
Note 2: See Table 28.
Note 3: Information taken directly from the actuarial valuation report
prepared for funding policy purposes and supporting documentation.
Note 4: See Table 29.
(v) In this case the contractor must deposit $993,388 to fully fund
the assigned pension cost so that the full amount is allocable in
accordance with 9904.412-50(d)(1). The contractor decides to fund
$1,500,000 and build a prepayment credit/prefunding balance reserve
that can be used to fund pension costs in future periods. See Table 39.
Table 39--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
Total plan Segment 1 Segments 2-7 Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost............................... $993,388 $51,088 $942,300 1
ERISA Minimum Deposit........................... ................ 0 0 2
------------------------------------------------------
Remaining Cost to be Funded..................... 993,388 51,088 942,300 ........
Regular Prepayments Credit Applied.............. ................ ................ ................ 3
------------------------------------------------------
Remaining CAS Assigned Cost..................... 993,388 51,088 942,300 ........
Contribution over Net MRC....................... (1,500,000) (51,088) (942,300) 4
------------------------------------------------------
Unfunded (Prepaid) Cost......................... (506,612) ................ ................ 5
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 35.
Note 2: See Table 28. The Net Minimum Required Contribution is proportionally allocated to segments based on the
Harmonized CAS Assigned Cost that must be funded to be allocable.
Note 3: Before the contractor expends any additional resources, CAS Assigned Cost is funded by application of
any available prepayment credits. The prepayment credits are proportionally allocated to segments based on the
Remaining Cost to be Funded that must be funded to be allocable in accordance with 9904.413-50(c)(1)(i).
Note 4: The contractor decided not to contribute any funds in excess of the ERISA minimum required contribution
reduced by the prefunding balance, if any.
Note 5: When prepayment credits are used to fund the CAS assigned pension cost for the current period, the
amount of prepayment credit used will be deducted from the accumulated value of prepayment credits and
transferred to segments when the market value of assets are updated for the next valuation. The application of
this prepayment credit will appear in the asset roll-up from 1/1/2016 to 1/1/2017.
(2)(i) Since the full $993,388 assigned cost is funded, the entire
assigned cost can be allocated to intermediate and final cost
objectives in accordance with 9904.412-50(d)(1). The allocation of
assigned pension cost to segment is summarized in Table 40.
Table 40--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
Segment
Covered payroll allocation Allocated Notes
factor pension cost
----------------------------------------------------------------------------------------------------------------
Direct Allocation (Segmented Cost)
(A) Segment 1.................................. $1,127,000 n/a $51,088 2
Indirect Allocation (Composite Cost) ............... (Note 1) ............... ........
Segment 2.................................. 810,000 0.099963 94,195 3
Segment 3.................................. 1,621,000 0.200049 188,506 3
Segment 4.................................. 2,026,000 0.250031 235,605 3
Segment 5.................................. 1,158,000 0.142910 134,664 3
Segment 6.................................. 1,247,000 0.153894 145,014 3
Segment 7.................................. 1,241,000 0.153153 144,316 3
---------------------------------------------------
(B) Subtotal Segments 2-7...................... 8,103,000 1.000000 942,300 2
---------------------------------------------------
[[Page 26021]]
Total Plan (A)+(B)......................... 9,230,000 ............... 993,388 2
----------------------------------------------------------------------------------------------------------------
Note 1: Allocation factor for segment = segment's covered payroll divided by the total covered payroll for
segments 2 though 7, subtotal (B).
Note 2: See Table 36.
Note 3: Pension cost for Segments 2-7, subtotal (B), multiplied by allocation factor for the individual segment.
(ii) Once allocated to segments, the assigned pension cost is
allocated to intermediate and final cost objectives in accordance with
the contractors disclosed cost accounting practice.
(h) Actuarial Gain and Loss--Change in Liability Basis. (1) Assume
the same facts shown in 9904.412-60.1(b) for the Harmony Corporation
for 2016. The contractor measured the pension cost for 2015 through
2017, in accordance with 9904.412 and 9904.413 before making any
adjustments pursuant to 9904.412-50(b)(7) and compared the CAS measured
costs to the minimum required amounts for the same period. This
comparison is shown in Table 41.
Table 41--Harmonization Threshold Test
----------------------------------------------------------------------------------------------------------------
Total plan 2015 Total plan 2016 Total plan 2017 Notes
----------------------------------------------------------------------------------------------------------------
CAS Measured Pension Cost.......................... $1,426,033 $1,490,943 $1,496,497 1
ERISA Minimum Required Amount...................... 1,266,997 1,591,925 1,386,346 2
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 11 for 2016. CAS Measured Cost cannot be less than $0.
Note 2: See Table 8 for 2016. The ERISA minimum required contribution unreduced for any prefunding balance.
(2) Table 42 shows the actuarial liabilities and normal costs,
including any expense loads, for 2015 through 2017.
Table 42--Harmonization ``Liability'' Test
----------------------------------------------------------------------------------------------------------------
Segment 1 2015 Segment 1 2016 Segment 1 2017 Notes
----------------------------------------------------------------------------------------------------------------
CAS Long-Term Liabilities:
Actuarial Accrued Liability (AAL).............. $1,915,000 $2,100,000 $2,305,000 1
Normal Cost (NC)............................... 89,600 94,100 103,200 1
Expense Load on Normal Cost.................... ............... ............... ............... 1, 2
---------------------------------------------------
Total Liability for Period................. 2,004,600 2,194,100 2,408,200 ........
``Settlement Liabilities'':
Minimum Actuarial Liability (MAL).............. 1,901,000 2,194,000 2,312,000 3
Minimum Normal Cost (MNC)...................... 83,800 93,000 100,500 3
Expense Load on Normal Cost.................... 8,300 8,840 9,300 3, 4
---------------------------------------------------
Total Liability for Period................. 1,993,100 2,295,840 2,421,800 ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5 for 2016 values.
Note 2: Because the long-term interest assumption implicitly recognizes expected admin expense there is no
explicit amount added to the long-term normal cost.
Note 3: See Table 6 for 2016 values.
Note 4: For settlement valuation purposes the contractors explicitly identifies the expected expenses as a
separate component of normal cost.
(3) For 2015, the unadjusted pension cost measured in accordance
with 9904.412 and 9904.413 equals or exceeds the minimum required
amount and no adjustment to the actuarial accrued liability and normal
cost is required by 9904.412-50(b)(7). For 2016, the minimum required
amount does exceed the CAS measured pension cost and the contractor
must perform the test required by 9904.412-50(b)(7)(i), and in this
case the total settlement liability exceeds the total long-term
liability for the period and the actuarial accrued liability and normal
cost must be adjusted. This results in an adjusted actuarial accrued
liability of $2,194,000, an adjusted normal cost of $93,000 and an
adjusted expense load of $8,840. However, for 2017, although the total
settlement liability exceeds the total long-term liability for the
period, the actuarial accrued liability and normal cost are not
adjusted because the unadjusted CAS pension cost equals or exceeds the
minimum required amount. Table 43 shows the measurement of the unfunded
actuarial liability for 2015 through 2017.
[[Page 26022]]
Table 43--Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
Segment 1 2015 Segment 1 2016 Segment 1 2017 Notes
----------------------------------------------------------------------------------------------------------------
Current Year Actuarial Liability Basis............. AAL MAL AAL
Actuarial Accrued Liability, Including Adjustment.. $1,915,000 $2,194,000 $2,305,000 1
Actuarial Value of Assets.......................... (1,500,000) (1,688,757) (1,894,486) 2
---------------------------------------------------
Unfunded Actuarial Liability (Actual).............. 415,000 505,243 410,514 ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 42.
Note 2: The 2016 actuarial value of assets is developed in Table 4.
(4) Except for changes in the value of the settlement interest rate
used to measure the minimum actuarial liability and minimum normal
cost, there were no changes to the pension plan's actuarial assumptions
or actuarial cost methods during the period of 2015 through 2017. The
contractor's actuary measured the expected unfunded actuarial liability
and determined the actuarial gain or loss for 2016 and 2017 as shown in
Table 44.
Table 44--Measurement of Actuarial Gain or Loss
----------------------------------------------------------------------------------------------------------------
Segment 1 2015 Segment 1 2016 Segment 1 2017 Notes
----------------------------------------------------------------------------------------------------------------
Actual Unfunded Actuarial Liability.............. (Note 1) $505,243 $410,514 2
Expected Unfunded Actuarial Liability............ ............... (381,455) (448,209) 3
-----------------------------------------------------
Actuarial Loss (Gain)............................ ............... 123,788 (37,695) ........
----------------------------------------------------------------------------------------------------------------
Note 1: The determination of the actuarial gain or loss that occurred during 2014 and measured on 2015 is
outside the scope of this Illustration.
Note 2: See Table 43.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
(5) According to the actuarial valuation report, the 2016 actuarial
loss of $123,788 includes a $94,000 actuarial loss ($2,194,000-
$2,100,000) (Table 42) due to a change from a long-term liability to a
settlement liability basis, including the effect of any change in the
value of the settlement interest rate. As required by 9904.412-
50(a)(1)(v), the $94,000 loss due to the change in the liability basis
will be amortized as part of the total actuarial loss of $123,788 over
ten years in accordance with 9904.413-50(a)(1) and (2). Similarly, the
next year's valuation report shows a 2017 actuarial gain of $37,695
includes a $7,000 actuarial gain ($2,305,000-$2,312,000) due to a
change from a settlement liability back to a long-term liability basis,
which includes the effect of any change in the value of the settlement
interest rate. As required by 9904.412-50(a)(1)(v), the $7,000 gain due
the change in the liability basis will be amortized as part of the
total $37,695 actuarial gain over ten years in accordance with
9904.413-50(a)(1) and (2).
7. Section 9904.412-63 is revised to read as follows:
9904.412-63 Effective date.
(a) This Standard is effective as of [DATE OF PUBLICATION OF FINAL
RULE IN THE FEDERAL REGISTER].
(b) This Standard shall be followed by each contractor on or after
the start of its next cost accounting period beginning after the
receipt of a contract or subcontract to which this Standard is
applicable in accordance with paragraph (a) of this section. The date
this version of the Standard is first applicable to a contractor's cost
accounting period is the ``Applicability Date of the Harmonization
Rule'' for purposes of this Standard.
(c) Contractors with prior CAS-covered contracts with full coverage
shall continue to follow the Standard in 9904.412 in effect prior to
[DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], until this
Standard, effective [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL
REGISTER], becomes applicable following receipt of a contract or
subcontract to which this Standard applies.
8. Section 9904.412-64.1 is added to read as follows:
9904.412-64.1 Transition Method for Pension Harmonization.
Contractors that were subject to this Standard prior to [DATE OF
PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER] shall recognize the
change in cost accounting method over the initial 5-year period of
applicability, determined in accordance with 9904.412-63(c), as
follows:
(a) Phase-in of the Minimum Actuarial Liability and Minimum Normal
Cost Adjustments. The contractor shall recognize on a pro rata basis
the actuarial accrued liability and normal cost adjustment amounts
measured in accordance with 9904.412-50(b)(7)(i). The actuarial accrued
liability and normal cost adjustment amounts shall be multiplied by a
percentage based on the year of applicability for this amendment. The
percentages are as follows: 20% First Year, 40% Second Year, 60% Third
Year, 80% Fourth Year, and 100% thereafter.
(b) Transition illustration. Assume that in the second year that
this amendment is applicable, Contractor J in Illustration 9904.412-
60(c)(1) again measures $18 million as the actuarial accrued liability,
$20 million as the minimum actuarial liability, $4 million as the
normal cost and $4.5 million as the minimum normal cost. Under
9904.412-64.1(a), the $2 million excess of the minimum actuarial
liability over the actuarial accrued liability and the $0.5 million
excess of the minimum normal cost over the normal cost are multiplied
by 40%. The actuarial accrued liability is adjusted to $18.8 million
($18 million + [40% x $2 million]) and the normal cost is adjusted to
$4.2 million ($4 million + [40% x $0.5 million]).
9. Section 9904.413-30 is amended by revising paragraphs (a)(1) and
(16) to read as follows:
[[Page 26023]]
9904.413-30 Definitions.
(a) * * *
(1) Accrued benefit cost method means an actuarial cost method
under which units of benefits are assigned to each cost accounting
period and are valued as they accrue; that is, based on the services
performed by each employee in the period involved. The measure of
normal cost under this method for each cost accounting period is the
present value of the units of benefit deemed to be credited to
employees for service in that period. The measure of the actuarial
accrued liability at a plan's measurement date is the present value of
the units of benefit credited to employees for service prior to that
date. (This method is also known as the Unit Credit cost method without
salary projection.)
* * * * *
(16) Prepayment credit means the amount funded in excess of the
pension cost assigned to a cost accounting period that is carried
forward for future recognition. The Accumulated Value of Prepayment
Credits means the value, as of the measurement date, of the prepayment
credits adjusted for investment returns and administrative expenses and
decreased for amounts used to fund pension costs or liabilities,
whether assignable or not.
* * * * *
10. Section 9904.413-40 is amended by revising paragraph (c) to
read as follows:
9904.413-40 Fundamental requirement.
* * * * *
(c) Allocation of pension cost to segments. Contractors shall
allocate pension costs to each segment having participants in a pension
plan. A separate calculation of pension costs for a segment is required
when the conditions set forth in 9904.413-50(c)(2) or (3) are present.
When these conditions are not present, allocations may be made by
calculating a composite pension cost for two or more segments and
allocating this cost to these segments by means of an allocation base.
When pension costs are separately computed for a segment or segments,
the provisions of Cost Accounting Standard 9904.412 regarding the
assignable cost limitation shall be based on the actuarial value of
assets, actuarial accrued liability and normal cost for the segment or
segments for purposes of such computations. In addition, for purposes
of 9904.412-50(c)(2)(iii), the amount of pension cost assignable to a
segment or segments, for the plan as a whole and apportioned among the
segment(s), shall not exceed the sum of
(1) The maximum tax-deductible amount computed, plus
(2) The accumulated value of prepayment credits.
11. Section 9904.413-50 is amended by revising paragraphs (a)(2),
(c)(1)(i) and (c)(7) and adding paragraphs (b)(6) and (c)(12)(viii) and
(ix) to read as follows:
9904.413-50 Techniques for application.
(a) * * *
(2) For periods beginning prior to the ``Applicability Date of the
Harmonization Rule,'' actuarial gains and losses determined under a
pension plan whose costs are measured by an immediate-gain actuarial
cost method shall be amortized over a 15-year period in equal annual
installments, beginning with the date as of which the actuarial
valuation is made. For periods beginning on or after the
``Applicability Date of the Harmonization Rule,'' such actuarial gains
and losses shall be amortized over a 10-year period in equal annual
installments, beginning with the date as of which the actuarial
valuation is made. The installment for a cost accounting period shall
consist of an element for amortization of the gain or loss plus an
element for interest on the unamortized balance at the beginning of the
period. If the actuarial gain or loss determined for a cost accounting
period is not material, the entire gain or loss may be included as a
component of the current or ensuing year's pension cost.
* * * * *
(b) * * *
(6) The market value of the assets of a pension plan shall include
the present value of contributions received after the date the market
value of plan assets is measured.
(i) Except for qualified defined benefit pension plans, the long-
term assumed rate of interest shall be used to determine the present
value of such receivable contributions as of the valuation date.
(ii) For qualified defined benefit pension plans, the present value
of such receivable contributions shall be measured in accordance with
ERISA
(iii) The market value of plan assets measured in accordance with
paragraphs (b)(6)(i) or (ii) of this section shall be the basis for
measuring the actuarial value of plan assets in accordance with this
Standard.
* * * * *
(c) * * *
(1) * * *
(i) When apportioning to segments the sum of (A) the maximum tax-
deductible amount, which is determined for a qualified defined-benefit
pension plan as a whole pursuant to the Employee Retirement Income
Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., as amended, plus
(B) the accumulated value of the prepayment credits, the contractor
shall use a base that considers the otherwise assignable pension costs
or the funding levels of the individual segments.
* * * * *
(7) After the initial allocation of assets, the contractor shall
maintain a record of the portion of subsequent contributions, permitted
unfunded accruals, income, benefit payments, and expenses attributable
to the segment and paid from the assets of the pension plan. Income
(investment returns) shall include a portion of any investment gains
and losses attributable to the assets of the pension plan. Income and
expenses of the pension plan assets shall be allocated to the segment
in the same proportion that the average value of assets allocated to
the segment bears to the average value of total pension plan assets,
including the accumulated value of prepayment credits, for the period
for which income and expenses are being allocated.
* * * * *
(12) * * *
(viii) If a benefit curtailment is caused by a cessation of benefit
accrual mandated by ERISA based on the plan's funding level, and it is
expected that such accruals will recommence in a later period, then no
adjustment amount for the curtailment of benefit pursuant to this
paragraph (c)(12) is required. Instead, the curtailment of benefits
shall be recognized as an actuarial gain or loss for the period.
Likewise the recommencement of benefit accruals shall be recognized as
an actuarial gain or loss in the period in which benefits recommenced.
If the written plan document provides that benefit accruals will be
retroactively restored, then the intervening valuations shall continue
to recognize the accruals in the actuarial accrued liability and normal
cost during the period of cessation.
(ix) Once determined, any adjustment credit shall be first used to
reduce the accumulated value of permitted unfunded accruals. After the
accumulated value of permitted unfunded accruals has been fully
reduced, any remaining adjustment amount shall be accounted for as a
prepayment credit. Any adjustment charge shall be accounted for as a
permitted unfunded accrual to the extent that funds are not added to
the fair value of assets. All unamortized balances maintained in
accordance with 9904.412-50(a)(1) and 9904.413-
[[Page 26024]]
50(a)(1) and (2) shall be deemed immediately recognized and eliminated
as part of the adjustment charge or credit. If the segment no longer
exists, the accumulated value of prepayment credits, the accumulated
value of permitted unfunded accruals and the balance separately
identified under 9904.412-50(a)(2) shall be transferred to the former
segment's immediate home office.
12. Section 9904.413-60 is amended by revising paragraphs (a) and
(c)(12) and adding paragraphs (b)(3) and (c)(26) to read as follows:
9904.413-60 Illustrations.
(a) Assignment of actuarial gains and losses. Contractor A has a
defined-benefit pension plan whose costs are measured under an
immediate-gain actuarial cost method. The contractor makes actuarial
valuations every other year. In the past, at each valuation date, the
contractor has calculated the actuarial gains and losses that have
occurred since the previous valuation date and has merged such gains
and losses with the unfunded actuarial liabilities that are being
amortized. Pursuant to 9904.413-40(a), the contractor must make an
actuarial valuation annually and any actuarial gains or losses measured
must be separately amortized over a specific period of years beginning
with the period for which the actuarial valuation is made in accordance
with 9904.413-50(a)(1) and (2). If the actuarial gain or loss is
measured for a period beginning prior to the ``Applicability Date for
the Harmonization Rule,'' the gain or loss shall be amortized over
fifteen years. For gains and losses measured for periods beginning on
or after the ``Applicability Date for the Harmonization Rule,'' the
gain or loss shall be amortized over ten years.
* * * * *
(b) * * *
(3) Assume that besides the market value of assets of $10 million
that Contractor B has on the valuation date of January 1, 2014, the
contractor makes a contribution of $100,000 on July 1, 2014 to cover
its prior year's pension cost. For ERISA purposes, the contractor
measures $98,000 as the present value of the contribution on January 1,
2014 and therefore recognizes $10,098,000 as the market value of
assets. The contractor must also use this market value of assets for
contract costing purposes as required by 9904.413-50(b)(6)(ii). The
actuarial value of assets must also reflect the $98,000 present value
of the July 1, 2014 contribution.
(c) * * *
(12) Contractor M sells its only Government segment. Through a
contract novation, the buyer assumes responsibility for performance of
the segment's Government contracts. Just prior to the sale, the
actuarial accrued liability under the actuarial cost method in use is
$18 million and the market value of assets allocated to the segment is
$22 million. In accordance with the sales agreement, Contractor M is
required to transfer $20 million of assets to the new plan. In
determining the segment closing adjustment under 9904.413-(50)(c)(12)
the actuarial accrued liability and the market value of assets are
reduced by the amounts transferred to the buyer by the sale. The
adjustment amount, which is the difference between the remaining assets
($2 million) and the remaining actuarial liability ($0), is $2 million.
* * * * *
(26) Assume the same facts as Illustration 9904.413-60(c)(20),
except that ERISA required Contractor R to cease benefit accruals. In
this case, the segment closing adjustment is exempted by 9904.413-
50(c)(12)(viii). If the written plan document provides that benefit
accruals will automatically be retroactively reinstated when permitted
by ERISA, then the actuarial accrued liability and normal cost measured
for contract costing purposes shall continue to recognize the benefit
accruals. Otherwise, the actuarial accrued liability and normal cost
will not recognize any benefit accruals until and unless the plan is
subsequently amended to reinstate the accruals. Furthermore, the
decrease in the actuarial accrued liability will be measured as an
actuarial gain and amortized in accordance with 9904.413-50(a)(2).
13. Section 9904.413-63 is revised to read as follows:
9904.413-63 Effective date
(a) This Standard is effective as of [DATE OF PUBLICATION OF FINAL
RULE IN THE FEDERAL REGISTER].
(b) This Standard shall be followed by each contractor on or after
the start of its next cost accounting period beginning after the
receipt of a contract or subcontract to which this Standard is
applicable in accordance with paragraph (a) of this section. The date
this version of the Standard is first applicable to a contractor's cost
accounting period is the ``Applicability Date of the Harmonization
Rule'' for purposes of this Standard.
(c) Contractors with prior CAS-covered contracts with full coverage
shall continue to follow the Standard in 9904.413 in effect prior to
[DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], until this
Standard, effective [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL
REGISTER], becomes applicable following receipt of a contract or
subcontract to which this Standard applies.
14. Section 9904.413-64.1 is added to read as follows:
9904.413-64.1 Transition Method for Pension Harmonization.
See 9904.412.64.1 Transition Method for Pension Harmonization.
[FR Doc. 2010-9783 Filed 5-7-10; 8:45 am]
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