[Federal Register: October 5, 2000 (Volume 65, Number 194)]
[Proposed Rules]
[Page 59503-59548]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc00-18]
[[Page 59503]]
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Part II
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 Board; Accounting for the Costs of Post-
Retirement Benefit Plans Sponsored by Government Contractors; Proposed
Rule
[[Page 59504]]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9904
Cost Accounting Standards Board; Accounting for the Costs of
Post-Retirement Benefit Plans Sponsored by Government Contractors
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, OMB.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting
Standards Board (CASB), invites public comments on a proposed Cost
Accounting Standard (CAS) on the costs of post-retirement benefit plans
to be recognized as contract cost under Government cost-based contracts
and subcontracts. This is a new Standard that would directly address
the costs of post-retirement benefit plans for the first time in
detail. The proposed Standard provides criteria for measuring the costs
of post-retirement benefit plans, assigning the measured costs to cost
accounting periods, and allocating the assigned costs to segments of an
organization. The allocation of a segment's assigned post-retirement
benefit costs to contracts and subcontracts is addressed in other
existing Standards. The proposed Standard also provides for the
adjustment of post-retirement benefit costs for the effect of a
curtailment of a post-retirement benefit plan, a settlement of a post-
retirement benefit obligation, a granting of termination benefits, a
termination of a post-retirement benefit plan, or a segment closing.
DATES: Comments must be in writing and must be received by December 19,
2000.
ADDRESSES: Comments regarding this Advance Notice of Proposed
Rulemaking should be addressed to Mr. Eric Shipley, Project Director,
Cost Accounting Standards Board, Office of Federal Procurement Policy,
725 17th Street, NW, Room 9013, Washington, DC 20503, Attn: CASB Docket
No. 96-02A. Please include an electronic copy of your comments in a
format readable by MS Word.
FOR FURTHER INFORMATION CONTACT: Eric Shipley, Project Director,
(telephone: 410-786-6381 or e-mail: EShipley@hcfa.gov) or Rein Abel,
Director of Research, Cost Accounting Standards Board (telephone: 202-
395-3254).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The Cost Accounting Standards Board's rules, regulations and
Standards are codified at 48 CFR Chapter 99. Section 26(g)(1) of the
Office of Federal Procurement Policy Act, 41 U.S.C. 422(g)(1), requires
that the Board, prior to the establishment of any new or revised Cost
Accounting 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 (e.g., promulgation of a Staff Discussion Paper.)
2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
3. Promulgate a Notice of Proposed Rulemaking (NPRM).
4. Promulgate a Final Rule.
This ANPRM is issued by the Board in accordance with the
requirements of 41 U.S.C. 422(g)(1)(B) and (C) and is step two of the
four-step process.
B. Background and Summary
Prior Promulgations
Post-retirement benefit plans have existed for many years,
sometimes as an adjunct to a company's pension plan, but they generally
received little attention until the Financial Accounting Standards
Board (FASB) decided to examine the potential liabilities and costs of
these plans and ultimately issued Statement No. 106, ``Employers'
Accounting for Post-Retirement Benefits Other Than Pensions,'' (SFAS
106) in December of 1990. The adoption of SFAS 106 had the effect of
exposing the substantial unfunded liabilities associated with post-
retirement benefit plans.
The Cost Accounting Standards Board has received numerous public
comments recommending that it establish a case concerning the
measurement, assignment, and allocation of the costs of post-retirement
benefit plans. These letters came from Federal Government agencies,
Government contractors, law firms, trade associations and other
respondents. The Board recognized the need to establish a case
addressing contract cost accounting issues related to post-retirement
benefit plans, but because of the similarities between post-retirement
benefit plans and more traditional pension plans, it was decided to
defer commencement of this case until the pension case was completed.
The pension case was completed when the amendments to Cost Accounting
Standards 9904.412 and 9904.413 were published as a final rule on March
30, 1995 (60 FR 16534). At its February 24, 1995 meeting, the CAS Board
directed the staff to begin work on a Staff Discussion Paper addressing
the accounting treatment of costs of post-retirement benefit plans.
As part of the development of the Staff Discussion Paper, the staff
solicited preliminary comments from certain interested and
knowledgeable organizations and individuals from both the procuring
agencies and contractor communities. The staff also sought comments
from organizations and individuals from the accounting, actuarial, and
legal professions. The staff asked for assistance in identifying
existing guidance and operational practices that should be
investigated. These comments provided important information and ideas
that were incorporated into the Staff Discussion Paper.
The Board made available on September 20, 1996, (61 FR 49533), a
Staff Discussion Paper, Post-Retirement Benefit Plans Other Than
Pension Plans Sponsored by Government Contractors, identifying the cost
accounting issues related to post-retirement benefit plans. The Staff
Discussion Paper identified major topics for consideration by the Board
in its deliberations concerning the possible promulgation of an
Interpretation, an amendment to existing Standards, or a new Standard
regarding post-retirement benefit costs. The Staff Discussion Paper
neither advocated nor assumed any position regarding the accounting
treatment of post-retirement benefit costs. Rather, the Staff
Discussion Paper explored many different approaches in depth so that
the Board would have an opportunity to fully consider alternative
treatments for costs of post-retirement benefit plans.
As the Board and its staff analyzed the comments and other
information submitted for consideration, it became apparent that many
commenters had strongly held opposing positions regarding the firmness
of the SFAS 106 liability and the role, if any, that funding should
play. To better understand these opposing positions, and hopefully to
be able to reconcile these positions, on January 12, 1999 the Board
sent a letter to all the respondents to the Staff Discussion Paper.
This letter was also made widely available for public comment on
February 18, 1999 (64 FR 8141).
[[Page 59505]]
Public Comments
The Board received eighteen (18) sets of public comments in
response to the Staff Discussion Paper. These comments came from
contractors, Government agencies, professional associations, actuarial
firms, and individuals. These public comments are briefly summarized as
follows:
Most respondents did not favor the promulgation of a new
Standard and believed that the Board could adequately address post-
retirement benefit costs through amendments to CAS 9904.412 and
9904.413. A few respondents expressed the belief that the
measurement, assignment, and allocation of post-retirement benefit
costs were complex and technical subjects and recommended that the
Board address post-retirement benefit costs in a comprehensive
manner.
The respondents almost universally agreed that accrual
accounting following the provisions of SFAS 106 was the most
appropriate basis for measuring and assigning the costs of a post-
retirement benefit plan that created a firm liability. They stated
that the pay-as-you-go cost method (cash basis accounting) was
appropriate if there was not a firm; i.e., compellable, liability to
provide the promised benefits. However, there was no general
agreement as to the criteria for ascertaining the firmness of a
plan's liability; especially as to whether funding of the cost
should serve as a criterion. There was agreement that if funding was
to be a prerequisite for accrual accounting, then any rule or
amendments should provide sufficient flexibility in the choice of
accounting methods to permit contractors to align their cost
accounting practice with their funding opportunities.
Respondents recommended that the Board address special events
such as a curtailment of benefits or the termination of the post-
retirement benefit plan. Many commenters suggested that a funding
requirement may not be necessary if the Board provided adequate
safeguards in case of a plan termination or segment closing. Some
respondents asked that the segment closing provisions for post-
retirement benefit costs be explicitly coordinated with the segment
closing provisions of paragraph 9904.413-50(c)(12) regarding
pensions.
The Board also received ten (10) sets of comments in response to
the Board's letter of January 12, 1999 which can be summarized as
follows:
The comments from contractors and other industry representatives
reiterated their belief that funding was not necessary to
substantiate the liability. Several of these respondents opined that
funding did not improve the firmness of the liability. Instead,
these respondents expressed the belief that the terms of the post-
retirement benefit plan determined the firmness of the liability.
Most commenters, including the Office of the Under Secretary of
Defense (OUSD), argued that funding was an allowability; i.e.,
procurement policy issue, and not an accounting issue. The other two
Government respondents expressed a strong belief that funding
demonstrated the contractor's intent to continue the post-retirement
benefit plan and to be financially prepared to provide the promised
benefits.
The Board also reviewed proposed amendments to CAS 9904.412 and
9904.413 addressing post-retirement benefit costs which were
voluntarily submitted by the Council of Defense and Space Industry
Associations (CODSIA), as well as comments submitted by the American
Bar Association's (ABA) Public Contract Law Section regarding CODSIA's
proposal.
The Board reviewed information from the Towers Perrin surveys of
``SFAS 87 [Statement 87 of the Financial Accounting Standards Board]
and SFAS 106 Annual Report Footnote Data'' for years 1995, 1996, 1997,
and 1998 which was extracted from the corporate financial statements of
the ``Fortune Top 100'' companies. The Board notes three (3) major
observations that one can generally conclude from this survey
information that influenced the development of this proposed Standard.
1. For pensions, the plan assets generally equaled or exceeded the
liability for projected benefits, as measured by the SFAS 87 projected
benefit obligation. On the other hand, only slightly over one-half (\1/
2\) \1\ of the companies included in the survey reported any plan
assets for their post-retirement benefits plans. For companies that did
report plan assets, for 1998 the average plan assets only covered
around one-third (\1/3\) of the average SFAS 106 accumulated post-
retirement benefit obligation.
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\1\ 82 companies reported pension plan assets in their SFAS 87
footnotes and 45 companies reported post-retirement benefit plan
assets in their SFAS 106 footnotes.
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2. While the average SFAS 106 accumulated post-retirement benefit
obligation for these Fortune 100 companies is less than one-third \2\
of the average SFAS 87 projected benefit obligation for pensions, at
$2,312.5 million for 1998, the average post-retirement benefit
obligation is still quite large.
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\2\ The average Projected Benefit Obligation reported in the
SFAS 87 footnotes was $7,170.6 million.
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3. The 1998 average net periodic cost for post-retirement benefit
plans ($150.7 million) exceeds the average net periodic cost for
pension plans ($58.4 million).
This proposed Standard is based upon the continuing research
performed by the staff of the Cost Accounting Standards Board and the
public comments received in response to the Staff Discussion Paper and
the Board's January 12, 1999 letter.
The various comments and proposals are discussed in greater detail
under Section E, Public Comments. The Board and its staff would like to
thank all the organizations and individuals who provided comments and
information in response to the Staff Discussion Paper and the Board's
January 12, 1999 letter.
Conclusions
While accounting for post-retirement benefits has some similarities
with pension accounting, the Board has concluded that post-retirement
benefit costs should be treated distinctly from pension costs. The
Board proposes to address the accounting treatment of post-retirement
benefit costs through the promulgation of a new Cost Accounting
Standard rather than through an Interpretation of or an amendment to an
existing Standard or Standards. Post-retirement benefits, pensions, and
insurance are each intrinsically complex and technical subjects. The
Board has determined that it would be extremely difficult, if not
impossible, to effectively and efficiently interleave coverage for
post-retirement benefit costs into either the pension or insurance
Standards.
The Board believes that accrual accounting is the appropriate
method for determining the costs of post-retirement benefit plans that
create a sufficiently firm liability for contract cost recognition. The
Board has concluded that SFAS 106 with some modifications and
restrictions provides adequate and appropriate accounting guidance
regarding the measurement and period assignment of post-retirement
benefit costs when accrual accounting is utilized. In order to
implement a definite determination of a firm liability, the Board
decided that the annual accrual of the post-retirement benefit cost
must be compared to the nonforfeitable portion of the accumulated post-
retirement benefit obligation. Post-retirement benefit plans that do
not create a firm liability for contract costing purposes must be
accounted for using the pay-as-you-go cost method.
The Board has also determined that specific guidance is required
regarding the allocation of post-retirement benefit cost to segments.
Specifically, the Board believes criteria are necessary regarding when
the post-retirement benefit costs of a segment should be based on a
general allocation or a separate calculation. Furthermore, because the
current and future costs of post-retirement benefit plans are dependent
upon the costs accrued in prior periods and the funding of such prior
accruals, the Board finds it necessary to provide for the accounting
treatment for assets
[[Page 59506]]
and for the accumulation and reporting of unfunded accruals at the
segment level.
The Board has concluded that the SFAS 106 provisions on benefit
curtailments, liability settlements, and the granting of special
termination benefits are inadequate for contract costing purposes and
additional guidance is needed. The Board further concluded that
specific guidance is needed to address the appropriate contract cost
accounting when a segment, as defined by paragraph 9904.403-30(a)(4),
is abandoned, sold, or otherwise closed.
Benefits
The Board's proposal will eliminate the existing confusion as to
which Standard, if any, addresses the contract cost accounting for
post-retirement benefits. There have been various opinions and theories
as to the proper basis for contract cost accounting for post-retirement
benefit plans. Various parties have advocated using either the pension
Standards, CAS 9904.412 and 9904.413, or the insurance Standard, Cost
Accounting Standard 9904.416. Others have expressed a belief that no
existing Cost Accounting Standard addresses such costs. Many parties
have argued that Generally Accepted Accounting Principles (GAAP) as
evidenced by SFAS 106 should govern the accounting of post-retirement
benefit costs, and in fact, paragraph 31.205-6(o) of the Federal
Acquisition Regulation (FAR 31.205-6(o)) specifies SFAS 106 as the
basis for accrual accounting. A few have even suggested that the tax
accounting rules for Internal Revenue Code (IRC) section 501(c) (26
U.S.C. 501(c)) trusts might be an appropriate basis. The Board proposes
to clarify the accounting treatment of post-retirement benefit costs
for Government contract costing purposes by specifying SFAS 106 as the
basis for measurement and period assignment when the proposed criteria
for accrual accounting are satisfied.
The Board acknowledges that the accounting for post-retirement
benefit costs is a complex subject. When accrual accounting is used,
the reliance on the methods and techniques of SFAS 106 for measurement
and period assignment eases the burden of complying with this proposed
Standard because contractors will be able to use much of the same data
and methods used for financial accounting purposes. If use of the pay-
as-you-go cost method is required, the determination of costs will be
based on actual payments of benefits. Therefore, there should be
minimal additional cost associated with complying with the Standard for
the plan as a whole, although certain additional effort may be
necessary to comply with the proposed provisions regarding the
accounting for costs of segments. Furthermore, the proposed criteria
regarding when to use accrual accounting or the pay-as-you-go cost
method will eliminate disputes and will increase uniformity among
contractors.
In the Board's judgement, a Standard is needed to increase
consistency of results between accounting periods. Various provisions
of SFAS 106 permit contractors to select between full immediate
recognition, amortization, and in the case of annual gains and losses,
delayed recognition of the various components of post-retirement
benefit cost. The Standard being proposed today generally limits the
contractor's cost recognition to the amortization method. Besides
enhancing uniformity between accounting periods, dampening volatility
through amortization will increase predictability when cost data is
used to price contracts covering future periods.
The provisions of SFAS 106 and GAAP generally do not address the
allocation of costs to segments of the contractor. The additional
guidance being proposed addresses this point. While SFAS 106 addresses
how major changes in the post-retirement benefit plan; i.e., benefit
curtailments, liability settlements, and granting special termination
benefits, are to be reported within the results of operations for
financial reporting purpose, SFAS 106 does not address how such results
are allocated to cost objectives. This proposal provides guidance on
how the costs resulting from such major changes in post-retirement
benefit plans are to be allocated and recognized for Government
contract costing purposes. This proposed Standard also provides for a
final settlement based on the proposed measure of the firm liability
when the contracting relationship between the Government and a segment
ends; this is not addressed by SFAS 106.
The proposed Standard also delineates how post-retirement benefit
assets and liabilities are to be accounted for when a segment is
divided or combined with another segment as part of an internal
reorganization, corporate merger, or when part of the segment is sold
or ownership is transferred. This delineation will enable the parties
to the sale or transfer to better determine the value of the segment's
post-retirement benefit plan assets and liabilities maintained for
Government contracting purposes.
In summary, the Board believes that the consistency with financial
accounting, specificity as to which benefits are recognized on an
accrual or cash accounting basis, and the guidance on allocation of
cost to segments will enhance the cost proposal, price negotiation,
contract administration and audit processes. The benefits of such
enhancements should be substantial and should greatly outweigh any
added costs.
Summary Description of Proposed Standard
The proposed Standard is divided into six subsections which address
(a) the recognition and identification of post-retirement benefit
costs, (b) the measurement and period assignment of post-retirement
benefit costs, (c) the allocation of post-retirement benefit costs to
segments, (d) the allocation of post-retirement benefit costs from
segments to the intermediate and final cost objectives of a segment,
(e) the adjustment of the contractor's records when there is a
curtailment, settlement, or granting of special termination benefits,
and (f) the adjustment of contract pricing when a segment is closed.
Once it is determined under subsection (a) whether the cost of a
particular post-retirement benefit plan is to be accounted for using
accrual accounting or the pay-as-you-go cost method, the other sections
present the relevant provisions in the following order of
applicability: all plans, plans using the pay-as-you-go cost method,
defined-contribution plans using accrual accounting, and finally,
defined-benefit plans using accrual accounting. In this way,
readability and the ability to reference is enhanced. For example,
contractors using the more straightforward pay-as-you-go cost method do
not need to search the entire subsection for applicable guidance.
1. Definitions
Proposed subsection 9904.419-30(a) includes several new definitions
of terms that are unique to post-retirement benefit plans. These new
definitions include modified SFAS 106 definitions and selected
unmodified SFAS 106 definitions that are frequently used in the
proposed Standard. Terms that are applicable to post-retirement
benefits plans, but which have previously been defined for pensions,
have been modified (usually substituting ``post-retirement benefit''
for ``pension'') in subsection 9904.419-30(b) for purposes of this
proposed rule. Subsection (c) incorporates all other SFAS 106
definitions into the proposed Standard.
[[Page 59507]]
2. Recognition of Post-Retirement Benefit Costs
(a) Criteria for accrual accounting. For SFAS 106 purposes, the
post-retirement benefit promise arises from the written documents or
established practices that comprise the ``substantive plan.''
Subsection 9904.419-40(a) sets forth criteria for determining when the
liability for the post-retirement benefit is sufficiently estimable,
contractually obligated (compellable), and reasonably foreseeable to
warrant accrual accounting for government contract accounting purposes.
The proposed criteria require that the promise of future benefits be:
(i) Documented in writing, (ii) communicated to employees, (iii)
nonforfeitable once earned, and (iv) legally enforceable.
The proposed Standard's requirement that the benefit promise be
formalized in writing is consistent with similar CAS provisions
regarding pension, insurance, and deferred compensation costs. The
pension and insurance Standards require that costs of employee benefits
contingent on post-retirement events, such as mortality and inflation,
be actuarially determined and funded. This proposed Standard, like Cost
Accounting Standard 9904.415, which addresses the accounting for costs
of deferred compensation, does not require funding but instead requires
that the contractor have a duty to pay the benefit earned by the
employee which the contractor cannot unilaterally avoid. As with the
pension and insurance Standards, if the post-retirement benefit plan
fails to meet the specified criteria for accrual accounting, then the
contractor must use the pay-as-you-go cost method.
(b) Identification of the post-retirement benefit plan. Some
companies that have chosen to fund all or a portion of their post-
retirement liability use a combination of investment vehicles to
achieve tax-efficient funding of post-retirement benefits. Companies
sometimes find they must sponsor somewhat different retiree insurance
plans for different plants, states, or classes of employees in order to
provide an overall general post-retirement benefit promise. Thus, their
post-retirement benefit program is frequently not a single benefit
plan, but several different benefit promises to different groups of
employees.
To accommodate such pragmatic concerns associated with sponsoring
and administering a post-retirement benefit program, the proposal being
published today permits contractors to combine different investment
vehicles and trust arrangements when identifying the assets of a post-
retirement benefit plan. Similarly, the proposed Standard also provides
that different benefits provided to the same group of employees, or the
same benefit provided to different groups of employees may be
aggregated for Government contract accounting purposes. Conversely,
different benefits within a single overall plan may be accounted for
separately.
Consistent with the position taken by the FASB, the proposed
paragraph 9904.419-50(a)(7) explicitly covers separate accounts for
medical benefits that are a part of a qualified pension plan and trust
(IRC section 401(h) accounts) in this proposed Standard on post-
retirement benefits. These medical benefit accounts, which are
established, accounted for, and funded distinctly from the retirement
income benefit of a qualified pension plan, are not an ``integral part
of a pension plan.''
3. Measurement and Assignment of Post-Retirement Benefit Costs
(a) Pay-as-you-go cost method. The proposed Standard provides that
for plans using the pay-as-you-go cost method, the assignable cost is
measured by an amount equal to the payments made to or on behalf of the
plan beneficiaries, providers, and insurers for benefits incurred
during the current period, except that any amount paid to settle or
terminally fund a liability for current and future benefits must be
amortized over fifteen (15) years. Because the fifteen-year period
represents an approximation to the life expectancy of a newly retired
employee, this provision is consistent with paragraph 52 of SFAS 106
which requires the cost to be spread over the life expectancy of the
retirees if the obligation is primarily attributable to such retirees.
The proposed Standard is also consistent with the analogous provisions
for pensions and insurance which are found at 9904.412-40(b)(3)(ii) and
9904.416-50(a)(1)(v)(C), respectively. The proposed transition
provisions permit the continued use of the terminal funding method
(without amortization) for contractors who have an established practice
of terminal funding prior to this proposed Standard becoming
applicable.
When describing the post-retirement benefit payments considered
under the pay-as-you-go cost method, the proposed Standard augments the
CAS 9904.412 definition of the ``pay-as-you-go cost method'' by adding
the phrase ``or on behalf of'' because post-retirement benefit payments
are often made directly to third parties, e.g., health care providers.
The proposed Standard also refers to the ``net amount'' of the benefit
paid to indicate that the cost is based on the contractor's share of
the post-retirement benefit after considering refunds, co-payments,
deductibles, and amounts payable by unrelated third parties, such as
Medicare and Medicaid. This use of ``net amount'' is consistent with
the SFAS 106 provisions relating to ``incurred claim cost (by age)''
and ``net incurred claim cost (by age).'' This concept is also
consistent with subparagraphs 9904.416-50(a)(1)(i) and (a)(1)(vi) of
the insurance Standard, CAS 9904.416.
(b) Accrual accounting for defined-contribution plans. For defined-
contribution plans using accrual accounting, the proposed Standard
follows paragraph 104 of SFAS 106 and measures the assignable cost as
the annual amount paid to or otherwise distributed to individual
participant accounts. However, in contrast to paragraph 105 of SFAS
106, the proposed Standard does not permit the pre-retirement accrual
of contributions expected to be made after retirement. Rather,
contributions made after retirement are recognized in the period when
the contribution is required under the terms of the plan. This proposed
provision, paragraph 9904.419-40(b)(3), is generally consistent with
paragraph 9904.412-40(a)(2) of the pension Standard.
(c) Accrual accounting for defined-benefit plans. For post-
retirement benefit plans that meet the proposed prerequisites for
accrual accounting, the Standard being proposed today accepts the
actuarial cost method and actuarial assumptions used by the contractor
for financial accounting purposes under SFAS 106. The assignable cost
is based on the same six (6) components used by SFAS 106, namely:
service cost, interest cost, actual return on assets, amortization of
prior service costs, amortization of gains and losses, and recognition
of the transition obligation.\3\ However, the Board proposes to modify
or restrict the SFAS 106 measurement and assignment of some components
as explained below. Therefore, the values of these components used for
contract costing purposes may differ from the values used for financial
accounting purposes. Because the proposed measurement and assignment
methods and techniques follow SFAS 106 rather than CAS 9904.412, there
is no floor placed on the measurement and assignment of the period
cost; e.g., the
[[Page 59508]]
assignable post-retirement benefit cost could be a negative amount.
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\3\ Throughout this preamble, the term ``transition obligation''
is used to refer to either a transition obligation or a transition
asset.
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Because contractors may wish to maintain the right to curtail or
terminate the benefits for employees who have not yet reached full
eligibility, the Board has decided that it would be inappropriate for
Government contract costing purposes for the accumulated value of
accruals, whether funded or unfunded, to exceed the unavoidable
liability for post-retirement benefits. The proposed rules include a
ceiling on the accrual cost recognition equal to the benefits paid
during the period plus the unfunded portion of the accumulated post-
retirement benefit obligation for benefits that cannot be forfeited.\4\
The Board notes that the greater the portion of forfeitable benefits
included in the accumulated post-retirement benefit obligation, the
more restrictive will be the effect of the ceiling.
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\4\ Hereafter, the accumulated post-retirement benefit
obligation for benefits that cannot be forfeited is referred to as
the ``nonforfeitable post-retirement benefit obligation.''
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(i) Service cost, amortization of prior service costs, and interest
components. The Board proposes to accept the SFAS 106 provisions
regarding the measurement and assignment of the service cost and the
amortization of prior service cost components of post-retirement
benefit cost but restricts that measurement to the written terms of the
post-retirement benefit plan rather than the ``substantive plan.''
Otherwise, there are no modifications or restrictions to the SFAS 106
measurement and assignment provisions for these three components of
post-retirement benefit cost.
(ii) Return on assets component and associated asset values. The
Board proposes to accept the same measurement of the fair value of
assets and the market-related value of assets used for financial
accounting. The terminology of the proposed Standard follows that of
SFAS 106 and differs from that used for pensions in CAS 9904.412 and
9904.413. The CAS 9904.412 term ``market value of plan assets'' is
analogous to the term ``fair value of plan assets'' as used in SFAS 106
and this proposed Standard. The term ``actuarial value of assets'' used
in the Employees' Retirement Income Security Act of 1974 (ERISA) and
CAS 9904.412 is defined similarly to the ``market-related value of plan
assets'' as used by SFAS 106 and this proposed Standard. For pensions
the actuarial value of assets not only affects the recognition of gains
and losses, but also is used to determine the unfunded actuarial
liability. However, the market-related value of plan assets is only
used to measure the annual asset gain or loss under SFAS 106 and this
proposal. In SFAS 106 and in this proposed Standard, the fair value of
assets is used to determine the unfunded accumulated post-retirement
benefit obligation.
SFAS 106 is not concerned with the sources of any net accumulated
accrued (unfunded) or prepaid post-retirement benefit cost. By
contrast, the Board proposes that the contractor record and track each
portion of unfunded accrual and prepayment credit. Consistent with CAS
9904.412, the accumulated values of unfunded accruals and prepayment
credits are carried forward and adjusted for interest. The accumulated
value of unfunded accruals is treated as if it were a plan asset and
the accumulated value of prepayment credits is treated as a reduction
to assets. The proposed Standard requires that the actual return on
assets component be increased by an interest equivalent on the
accumulated value of unfunded accruals to reflect that assets would
have generated earnings had the full accrual amount been funded.
Similarly, the actual return on assets component is reduced by an
interest equivalent on the accumulated value of prepayment credits to
reflect the additional earnings generated by any funding in excess of
the annual accrual.
The Board has decided that the interest rate determined by the
Secretary of the Treasury pursuant to Public Law 92-41, 85 Stat. 97,
shall be used to measure the interest equivalent on the accumulated
values of unfunded accruals and prepayment credits. The Board notes
that for unfunded plans, there are no assets (no investments) and the
contractor does not need to make an assumption concerning the long-term
expected rate of return. In other cases, the amount of plan assets may
be so small that reliance on this assumption may be inappropriate for
Government contracting purposes. Also, use of the Treasury rate is
consistent with the other Standards.
(iii) Annual gain or loss component. In order to more closely
assign costs to cost accounting periods in which they arise, the
proposed Standard requires the amortization over the average remaining
service period of active participants \5\ of the full amount of the
annual gain or loss for a cost accounting period, that is, gains and
losses other than gains and losses attributable to curtailments,
settlements, or special termination benefits. While SFAS 106 permits
such amortization, SFAS 106 only requires amortization of that part of
the cumulative net gain or loss that falls outside a corridor defined
by 10% of the greater of the accumulated post-retirement benefit
obligation or the market-related value of plan assets. Under SFAS 106,
recognition of any gain or loss within that corridor may be delayed
indefinitely. Such delayed recognition is not permitted by this
proposed Standard.
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\5\ If the plan population is composed primarily of retirees,
the gain or loss is spread over the life expectancies of the
retirees. (See paragraphs 52 and 112 of SFAS 106.)
---------------------------------------------------------------------------
(iv) Amortization of the transition obligation component. This
proposed Standard restricts the measurement and period assignment of
the transition obligation to the delayed recognition method described
in paragraphs 112 and 113 of SFAS 106. The proposed Standard provides
that when a contractor first becomes subject to the proposed Standard,
the contractor will base its period costs on the annual amortization
installment for the unrecognized portion of the transition obligation
already established for financial accounting purposes. The proposed
transition provisions address the recognition of any portion of the
SFAS 106 transition obligation that was recognized for financial
statement purposes during prior periods for those contractors that used
the pay-as-you-go cost method for Government contract costing purposes.
(d) Post-retirement benefits provided through insurance contracts.
If the contractor provides all or a portion of the post-retirement
benefit by purchasing insurance, the Board proposes that the contract
accounting cost be determined by the net premium paid for such
insurance and that the measurement, assignment to cost accounting
periods, and allocation of such premium be subject to the provisions of
CAS 416. However, if the insurance is acquired from a captive insurer,
then the cost of the post-retirement benefit remains subject to the
provisions of this proposed Standard. Because the SFAS 106 definition
of ``captive insurer'' differs from the term as used in the FAR, a
potential for disputes exists. In addition, the proposed definition
clarifies that affiliates, related organizations and entities that are
``owned by or under the control of'' the contractor are also included
so that the proposed Standard incorporates the phrase found at FAR
31.201-19(c) which is already in use for Government contracting
purposes. Consistent with SFAS 106, this proposed Standard permits
benefits provided by purchased insurance to be accounted for separately
from any portion of a plan's benefits that are not
[[Page 59509]]
provided through such insurance. The Board notes that this treatment
contrasts with the analogous provision in the pension Standard,
paragraph 9904.412-50(a)(6), which specifies the accounting for so-
called ``split-funded'' plans.
4. Allocation of Post-Retirement Benefit Costs to Segments
The proposed Standard applies to all post-retirement benefit plans
regardless of whether accrual accounting or the pay-as-you-go cost
method is used. It embraces the general precepts of paragraph 9904.403-
40(b)(4) dealing with the allocation of central payments and accruals
to segments. However, this proposed Standard provides specific criteria
regarding the allocation of post-retirement benefit costs to
intermediate home offices and segments.\6\ The contractor must allocate
a portion of the total post-retirement plan cost to each segment,
including home offices, either by use of an appropriate allocation base
(i.e., indirect allocation) or, if certain conditions exist, by use of
post-retirement benefit costs separately computed (i.e., direct
allocation) at the segment level.
---------------------------------------------------------------------------
\6\ Throughout the discussions of allocations to segments and to
intermediate and final cost objectives, the term ``segment'' is used
to refer to a segment, home office, or intermediate home office.
---------------------------------------------------------------------------
Consistent with the pension and insurance Standards, the Board
proposes that the total post-retirement benefit plan cost be allocated
to intermediate home offices and segments based upon the factors used
to determine the costs. For plans that are accounted for using the pay-
as-you-go cost method, the cost is to be allocated only to segments and
intermediate home offices that can be identified with the post-
retirement benefit plan (e.g., those segments having inactive
participants who are eligible to receive benefits under that plan). For
defined-benefit plans using accrual accounting, the proposed Standard
requires that both active and inactive plan participants of the segment
or intermediate home office be included in the allocation base because
five of the six components of post-retirement benefit cost are
dependent upon the obligation for both groups.\7\
---------------------------------------------------------------------------
\7\ The service cost component is only determined for active
plan participants who are still in the attribution period, i.e.,
prior to the date of full eligibility. A service cost is not
developed for inactive plan participants.
---------------------------------------------------------------------------
The criteria requiring separate calculation are similar to those
found in CAS 9904.413 for pension costs of segments. If actual benefits
are disproportionately paid to participants of certain segments, the
proposed Standard requires a separate calculation of the cost for the
segment instead of an allocation, even for costs determined under the
pay-as-you-go cost method. An additional criterion for separate
calculation that looks at the ``cost of benefits'' reflects the fact
that post-retirement benefit costs may vary significantly due to
differences in state laws, geographical location, or insurance market.
Unless the post-retirement benefit cost allocable to a segment is
separately calculated, the same set of actuarial assumptions is used to
determine the cost for all segments. Similar to CAS 9904.413, if costs
are separately calculated, only those assumptions relating to the
demographic differences of a segment's employees are permitted to be
different than the assumptions used for other segments. For example,
the use of a different turnover assumption to reflect the unique
termination of employment experience of one segment does not permit the
contractor to use a different pre-retirement mortality assumption
without evidence that the segment's mortality is materially different
from the average mortality assumed for the plan as a whole.
For defined-benefit plans using accrual accounting the proposed
Standard requires that the tracking of assets and funding at the
segment level be maintained if costs are separately calculated for the
segment. This provision increases the visibility and verifiability of
post-retirement benefit costs that are separately calculated for a
segment.
This proposed Standard also requires that the market-related value
of plan assets be allocated each year in proportion to the fair vale of
plan assets allocated to the segments. This provision ensures that the
sum of the market-related value of plan assets for all segments equals
the total plan's market-related value of assets.
The proposed provisions regarding transfers of plan participants
between segments reflect the fact that the accumulated post-retirement
benefit obligation is determined by and must follow the plan
participants. Therefore, both the assets that funded the obligation and
the unfunded portion of the accumulated post-retirement benefit
obligation follow the participants, so that future contract costs
better follow the performance of future contracts. The Board notes that
the exception for immaterial transfers might create a small gain or
loss because assets and other values are not transferred.
5. Allocation to Intermediate and Final Cost Objectives of the Segment
Once the post-retirement benefit cost has been measured, assigned
to a period, and initially allocated to segments and home offices, the
Board believes that Cost Accounting Standard 9904.403 adequately
addresses the reallocation from home offices to segments and that Cost
Accounting Standard 9904.410 and Cost Accounting Standard 9904.418
fully and adequately address the intra-segment allocation of cost to
intermediate and final cost objectives.
6. Adjustments for Curtailments, Settlements, and Special Termination
Benefits
(a) Defined-contribution plans using accrual accounting. While a
defined-contribution plan is on-going, any nonvested account balances
that are forfeited by participants who terminate employment during a
cost accounting period are typically either reallocated to the other
participants or used to reduce the contribution (deposit) required
under the terms of the plan. The Board presumes that such forfeiture
credits are fairly evenly distributed among periods and therefore no
undue volatility occurs. However, when a defined-contribution plan is
terminated, the forfeiture of nonvested account balances could cause an
inordinately large and non-recurrent credit. In fact, the values of the
non-vested account balances could revert to the contractor. To prevent
the disruption to the budgeting process for cost type contracts and the
forward pricing process for cost-based fixed price contracts, the Board
proposes that forfeiture credits due to a termination of a defined-
contribution plan using accrual accounting be amortized over 10 years
so that the credit can flow to costs included in both cost type
contracts and the forward pricing of other negotiated cost-based
contracts.
The Board also proposes that this provision will apply to
forfeitures that occur whenever the plan participants' rights to become
vested are eliminated because the right to earn future vesting or
retirement eligibility service is curtailed or terminated by plan
amendment or other unilateral action of the contractor.
The pension Standards do not contain a similar provision because
qualified pension plans are subject to the vesting requirements of
ERISA. However, many post-retirement benefit plans are not subject to
similar vesting standards and the Board believes these provisions are
necessary to address the significant
[[Page 59510]]
amount of nonvested account balances that might be forfeited.
(b) Defined-benefit plans using accrual accounting. Consistent with
the Board's intention to accept the accounting provisions of SFAS 106
where practicable, the proposed Standard begins by accepting the SFAS
106 measurement of the adjustment for gains and losses due to benefit
curtailments, benefit settlements, and granting of special termination
benefits. SFAS 106 provides that any gain or loss not offset against
the unrecognized gain or loss, unrecognized transition obligation, or
unrecognized prior service cost, as appropriate under SFAS 106, will be
immediately recognized in income. To require an analogous immediate
recognition for Government contract costing purposes could disrupt the
budgeting of cost type contracts as well as the forward-pricing process
for cost-based fixed price contracts. Regardless of whether or not the
post-retirement plan is terminated, the proposed Standard requires that
an adjustment be recorded and that the adjustment for the curtailment,
settlement, or termination benefit gain or loss be amortized over a
period of 10 years.
7. Adjustments for Segment Closings.
The Board proposes to adopt the CAS 9904.413 definition of segment
closing which encompasses three situations: (i) The ownership of the
segment changes by sale or transfer, (ii) the segment discontinues
operations or is abandoned, and (iii) the contractor is no longer
performing or actively seeking government contract work at that
segment. Based on comments regarding the amendments to the pension
rule, the Board has modified the CAS 9904.413 definition of segment
closing to explicitly state that segment mergers or splits within the
contractor's on-going operations are not considered to be a segment
closing for purposes of this proposed Standard.
(a) Pay-as-you-go cost method. When a segment is closed for any of
the reasons described above, this proposed Standard does not provide
for any adjustment to current or previously determined post-retirement
benefit costs for plans that use the pay-as-you-go cost method. The
post-retirement benefit costs attributable to current and prior periods
were previously determined by the net amount paid to or on behalf of
retired employees or their beneficiaries for post-retirement benefits
incurred during those periods. The measurement of these prior actual
expenditures is unaltered by the segment closing. These previously
determined costs include any amortization installments assigned to such
prior periods for net amounts paid to irrevocably settle an obligation
for post-retirement benefits.
The proposed segment closing provisions also require that any
inactive participants left ``homeless'' (that is, inactive participants
that are no longer associated with an operational segment) when a
segment is sold or abandoned must be moved to the intermediate or
corporate home office to which the closed segment had directly
reported. In the future the pay-as-you-go costs for these transferred
inactive participants will be included in the post-retirement benefit
costs allocated by the closed segment's immediate home office (the
proximate home office to which the segment had reported.) Likewise the
amortization of lump sums and other settlements for these inactives
will continue unabated after being transferred to the closed segment's
immediate home office. Any Government contracts performed in other
segments reporting to that home office will receive an allocated
portion of the post-retirement benefit costs attributable to the
transferred inactive participants.
(b) Defined-contribution plans using accrual accounting. When a
segment is closed for any of the reasons described above, the Board
proposes that the contractor measure an immediate period adjustment to
recognize any unrecognized portions of any credits for forfeited
nonvested account balances due to plan termination or curtailment of
vesting or retirement eligibility service. Essentially, this provision
aborts the amortization of these credits because there will be no
Government contracts in future periods to absorb a share of the credit.
(c) Defined-benefit plans using accrual accounting. When a segment
is closed for any of the reasons described above, the Board proposes
that the contractor measure an immediate period adjustment based upon
the unavoidable liability for post-retirement benefits. The adjustment
is measured as the difference between the nonforfeitable post-
retirement benefit obligation and the sum of the plans assets plus the
accumulated value of unfunded accruals (net of any prepayment credits.)
Basing the segment closing adjustment on the nonforfeitable post-
retirement benefit obligation may appear to be a fundamental conceptual
departure from both the original and amended CAS 9904.412 and 9904.413.
The benefit liability for pension plans generally is subject to the
stringent controls of ERISA. For post-retirement benefit plans, the
nonforfeitable post-retirement benefit obligation provides the nearest
analogue to the ERISA protected liability.
In addition to the above proposed general rules for segment
closings, the following points should be noted:
(i) Massive layoff gains. The Board notes that when a segment
closes, often there is a sizable termination of employees which was one
of the original Board's concerns that eventually led to the original
9904.413-50(c)(12) segment closing provision. For post-retirement
benefit plans, the effects of any ``abnormal forfeitures'' or massive
layoff gain will dramatically reduce the liability such that the
remaining accumulated post-retirement benefit obligation will
approximate or equal the nonforfeitable post-retirement benefit
obligation.
(ii) Sale or other transfer of ownership of a segment. When a
segment is sold or transferred, the active participants of the segment
immediately before the sale is effective can be: (i) Transferred with
the segment and become active employees of the buyer, (ii) transferred
as active employees to other operational segments of the seller, or
(iii) terminated and become inactive participants of the seller. When
analyzing the proposed provision concerning the sale or transfer of a
segment, the reader should carefully consider the plan participants'
status in the post-retirement benefit plans of each party to the sale.
If both parties to the sale sponsor post-retirement benefit plans, the
segment's employees can be both inactive participants in the seller's
post-retirement benefit plan and active participants in the buyer's
plan.
If only a portion of the operations of a segment is acquired, the
proposed Standard provides that the selling contractor first divide the
accounting records for the segment into two groups based upon the
liability for participants being retained and transferred. Then the
segment closing adjustment will be determined using the accounting
records for the participants being transferred to the buyer or
transferee. This proposed Standard also provides that, when a segment
is divided into two or more segments as part of a reorganization, the
assets shall be divided in proportion to the accumulated post-
retirement benefit obligation. This provision is more specific than the
similar coverage found at 9904.413-50(c)(v) for pension plans.
If no active employees are retained in the segment, the
unrecognized transition obligation, prior service cost, gains and
losses attributed to the remaining inactive participants are moved up
to the next immediate home office along with the associated fair
[[Page 59511]]
value of plan assets, accumulated value of unfunded accruals and
accumulated value of prepayment credits. All amortizations continue
unabated. This amortization of these unrecognized amounts parallels the
treatment of the liability for future payments to remaining inactives
under the pay-as-you-go method.
Unless a segment is sold to a successor-in-interest, the adjustment
will be determined using the values of assets and accumulated benefit
obligations immediately prior to the sale. If the segment is sold to a
successor-in-interest, this proposed Standard provides that the segment
accounting will continue at the successor contractor based on the
segment accounting up to the time of the sale, taking into account any
division of the segment's assets and obligations.
(iii) Government's share of segment closing adjustment. The
Government's share of the segment closing adjustment shall reflect the
Government's historical participation in post-retirement benefit cost
from the time this proposed Standard first becomes applicable. The
intent of this provision is for the cognizant Federal agency official
and the contractor to generally determine the Government's historical
share of post-retirement benefit costs that were allocated to cost type
and negotiated cost-based fixed price contracts. The proposed
transition provisions extend this period of participation for
contractors who employed accrual accounting for Government contract
costing in accordance with SFAS 106 prior to this proposed Standard
becoming applicable. In such cases, the Government's participation
shall be measured from the date that SFAS 106 accruals used for
financial statement purposes were first used for Government contract
costing purposes. The proposed Standard also permits the parties to
negotiate a delayed recognition of the segment closing adjustment
through an amortization process. This proposed provision provides more
flexibility for the parties to determine the appropriate proportion
than paragraph 9904.413-50(c)(vii) of the pension Standard.
8. Illustrations
Generally the illustrations show the accumulated post-retirement
benefit obligation and other liabilities or losses as debit balances
and the fair value of assets and other asset equivalent values and
gains as credit balances. However, for consistency with financial
accounting presentation, when the illustrations include SFAS 106
disclosures, the accumulated post-retirement benefit obligations are
shown as credit balances and fair values of assets and other asset
equivalent values are shown as debit balances.
Because health and life benefits account for about 98% of all post-
retirement benefit plan obligations, there are no illustrations or
special provisions for post-retirement benefits other than health and
life benefits. This lack of text or illustrations regarding other types
of post-retirement benefits does not imply nor indicate that the
obligations for such benefits, if material, are excluded from coverage
under this proposed Standard.
9. Transition Provisions
One of the issues raised in discussions about post-retirement
benefit costs concerns inactive plan participants who may have worked
for a strictly commercial segment or a government segment that was sold
or abandoned at some time in the past. It has been argued that the
post-retirement benefit costs associated with these so-called
``homeless'' inactives should be explicitly excluded from the post-
retirement benefit costs allocated to current and future Government
contracts. However, often it is impossible to ascertain whether these
``homeless'' inactives were formerly employed in an abandoned or sold
segment or if they are ``homeless'' because of incomplete human
resource records. Rather than require a herculean and possibly futile
effort to identify where these inactive participants had been employed,
the Board proposes that the retained liability for these ``homeless''
inactive participants be assigned to an intermediate home office or
corporate office in accordance with the contractor's past practice. The
costs associated with these inactive participants will be treated as a
general cost of doing business for such home office and allocated in
accordance with CAS 9904.403.
Some contractors may not have established a specific practice or
method for assigning the ``homeless'' participants to a corporate or
intermediate home office. In that case, the Board envisions several
acceptable methods of making such an assignment to home offices. These
include, but are not limited to:
(i) Assigning all ``homeless'' to the corporate home office if
the post-retirement plan covers employees in all units that report
to the corporate home office;
(ii) Assigning the ``homeless'' to the immediate home office
that had responsibility for the closed or abandoned segment;
(iii) If the closed or abandoned segment(s) were primarily
associated with a portion of the contractor's current business,
assigning the ``homeless'' to a home office which allocates the
post-retirement benefit cost as a residual expense to segments
currently performing work for that portion of the contractor's
business; or,
(iv) Those ``homeless'' participants for whom employment records
are unavailable, or who worked in a multiplicity of the contractor's
operations could be assigned to the corporate home office.
In any of these cases, the Board accepts the fact that the costs
associated with these ``homeless'' will bear no relationship to its
current activities and the cost would be allocated to intermediate home
offices and segments as an residual expense.
The proposed transition provisions address how a contractor's prior
accounting practices are to be reconciled with the accounting
provisions of the proposed rule. Some contractors who were using
accrual accounting prior to becoming subject to the proposed rule will
continue to use accrual accounting if the criteria for accrual
accounting are satisfied. Likewise, other contractors who had been
using the pay-as-you-go method will continue to use the pay-as-you-go
method if those criteria are not satisfied. However, special provisions
are needed whenever a contractor must change its previously disclosed
accounting practice for post-retirement benefit costs.
If a contractor changes from the pay-as-you-go cost method to
accrual accounting for contract costing purposes, the transition
section of the proposed Standard provides for the establishment of a
supplemental transition obligation so that prior SFAS 106 accruals
measured during prior periods when the contractor had cost-based
Government contracts can be assigned to periods after the contractor
becomes subject to the proposed Standard. Once established, the
supplemental transition obligation is accorded the same treatment as
the SFAS 106 transition obligation. The prior accruals included in the
supplemental transition obligation are based on the delayed recognition
of the transition obligation regardless of how the transition
obligation was recognized for financial accounting purposes. As an
alternative to establishing a supplemental transition obligation, the
proposed Standard permits these contractors to use a so-called ``fresh
start'' approach provided the contractor has continually been
performing government cost-based contracts since adopting SFAS 106.
[[Page 59512]]
If a contractor switches from accrual accounting to the pay-as-you-
go cost method, this proposed Standard requires that the accumulated
value of prior unfunded accruals measured during periods when the
contractor had cost type or cost-based fixed price Government contracts
be carried forward. Like the analogous provision in the amendments to
the pension Standard, CAS 9904.412, benefit payments must be charged
against the accumulated value of unfunded accruals before pay-as-you-go
costs can be measured, assigned to cost accounting periods, and
allocated to cost objectives.
If the contractor has an established practice of using terminal
funding for its post-retirement benefit costs, that contractor may
continue the use of the terminal funding method. A switch from terminal
funding to pay-as-you-go accounting is permitted if the criteria for
accrual accounting are not met. Any payments previously considered as
terminal funding and allocated to cost objectives would not be subject
to the fifteen-year amortization requirement. If the criteria for
accrual accounting are met and the contractor switches from terminal
funding to accrual accounting, then any prior SFAS 106 accruals that
exceeded amounts paid for terminal funding may be treated as a
supplemental transition obligation
C. 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 post-retirement
benefit costs under government contracts.
D. Executive Order 12866 and the Regulatory Flexibility Act
Because most contractors must measure and report their post-
retirement benefit liabilities and expenses in order to comply with the
requirements of SFAS 106 for financial accounting purposes, the
economic impact of this final rule on contractors and subcontractors is
expected to be minor. As a result, the Board has determined that this
rule will not result in the promulgation of a ``major 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 rule does not require a
regulatory flexibility analysis under the Regulatory Flexibility Act of
1980.
E. Public Comments
Public Comments: This proposed Standard is based upon responses to
the Staff Discussion Paper made available for public comment on
September 20, 1996, 61 FR 49533. Eighteen (18) sets of public comments
were received from contractors, Government agencies, professional
associations, actuarial firms, law firms, public accounting firms, and
individuals. The proposed Standard is also based upon the ten (10) sets
of responses to the Board's letter of January 12, 1999 which was also
made available for public comment on February 18, 1999, 64 FR 8141. The
comments received and the Board's actions taken in response thereto are
summarized below:
1. Need for a Cost Accounting Standard
Comment: The industry associations and some contractors expressed
the belief that a Standard might not be needed because GAAP, as
articulated by SFAS 106 and augmented by CAS 9904.403, 9904.412,
9904.413, and 9904.418, provide full and adequate guidance on the
measurement, assignment to periods, and allocation of post-retirement
benefit costs. Some commenters expressed the notion that the
promulgation of a Cost Accounting Standard on any subject already
addressed by a FASB Statement would be superfluous. But, many
respondents noted subject areas where SFAS 106 was either inadequate or
inappropriate for contract cost accounting purposes and suggested that
some CASB guidance would be helpful.
Both contractor and Government commenters generally preferred
amendments to the pension Standards, CAS 9904.412 and 9904.413, and
possibly the insurance Standard, CAS 9904.416, rather than the
promulgation of a new Standard. The commenters unanimously agreed that
a Board Interpretation would be insufficient to address the new and
complex issues concerning post-retirement benefit costs. Several
commenters opined that substantive action should be taken by the Board.
SDP Technologies wrote: ``While many technical questions need to be
resolved, SDP urges the CASB to pursue this effort and develop a
comprehensive solution.'' And, TRW stated, ``the level of detail and
range of issues posed in the Discussion Paper highlight the numerous
accounting, legal, and practical considerations that must be
addressed.'' The OUSD generally concurred when it stated: ``While it is
generally preferable to amend existing Standards, a new Standard may be
necessary if amendments of existing Standards cannot be accomplished
without unreasonably complicating existing Standards.''
In its letter of August 4, 1997, CODSIA submitted a straightforward
and simple proposal to illustrate how the Board might address post-
retirement benefit costs by amending CAS 9904.412 and CAS 9904.413.
CODSIA did not support the development of a separate Cost Accounting
Standard on post-retirement benefits on the grounds that it would not
be an economical and efficient way to address this issue. The Board
also received a letter from the ABA discussing some of the shortcomings
of the CODSIA proposal, but which generally favored CODSIA's approach
of amending the pension Standards.
Response: The Board recognizes the concerns expressed regarding the
promulgation of a new Standard. These concerns appear to be driven by
fears that a new Standard might be conceptually different from the
current pension and insurance Standards. However, the Board has
determined that amending CAS 9904.412, 9904.413, and 9904.416 would be
extremely cumbersome and would add unnecessary complexity. The Board
notes that the FASB did not merely extend Statements 87 and 88 (SFAS 87
and 88) to post-retirement benefits, but promulgated a separate
Statement, SFAS 106, building upon the concepts and structures of SFAS
87 and 88. The Board believes that the most manageable approach to
providing substantive measurement, assignment, and allocation criteria
is the promulgation of a new and separate Standard addressing the costs
of post-retirement benefits. The Board does not see any reason to
unnecessarily muddy the water for the sake of arbitrarily avoiding the
promulgation of another Standard.
The Board believes it is appropriate to promulgate a separate Cost
Accounting Standard on a subject matter that the FASB has addressed for
financial accounting purposes. The Board notes the CASB Concepts
Statement (57 FR 31039) which states:
The Board will give careful consideration to the pronouncements
affecting financial and tax reporting and, in the development of
Cost Accounting Standards, it will take those pronouncements into
account to the extent it can do so in accomplishing its objectives.
[[Page 59513]]
The nature of the Board's authority and its mission, however, is
such that it must retain and exercise full responsibility for
meeting its objectives.
In this regard the Board must specifically consider what elements
constitute a proper measure of post-retirement benefit costs for
contract cost accounting purposes.
The Board agrees that SFAS 106 should be used as the baseline for
the development of any promulgation regarding post-retirement benefit
costs. However, the Board believes that SFAS 106, augmented by existing
Standards, does not provide adequate guidance on contract cost
accounting for post-retirement benefit costs. The Board proposes to
generally accept the terminology, measurement, assignment, and
adjustment provisions of SFAS 106. Modifications and restrictions are
made only where necessary for Government contract cost accounting
purposes. Thus, the Standard being proposed today does modify, augment,
and restrict SFAS 106 provisions that are either inadequate or
inappropriate for contract cost accounting. This proposed Standard also
augments SFAS 106 and existing Standards by addressing the allocation
of costs to segments, segment closing adjustments, and the transition
from current contract cost accounting practices to this new Cost
Accounting Standard for post-retirement benefit costs.
The essence of the CODSIA proposal to amend CAS 9904.412 was simply
to add a sentence to subsection 9904.412-40(b) stating that for
administrative convenience, the contractor may, at its option, utilize
the methodology provided in SFAS 106 to measure the costs of
postretirement medical and life insurance costs. The CODSIA approach
would permit very different alternative accounting practices for the
same category of cost without any justification for having a choice of
accounting methods. Such an approach would be contradictory to the
Board's goal of uniformity. The Board does not believe that post-
retirement benefit costs should be subjected to the pension rules of
CAS 9904.412 and 9904.413 that were originally designed and recently
amended to coordinate with the vagaries of the tax code. Furthermore,
the subject matter and the terminology employed in the current CAS
9904.412 and 9904.413, as compared with SFAS 106, are so different that
any attempt to treat them together in a single amended CAS 9904.412 and
9904.413 would produce an unwieldy document that would be difficult to
comprehend or implement.
Thus, the Board has concluded that the promulgation of a new
Standard is necessary to adequately and clearly address the cost
accounting (measurement, period assignment, and allocation) issues
unique to post-retirement benefit costs of Government contracts. Having
a separate and distinct Standard will make it clear to users and
practitioners where the CAS Standards and GAAP are in agreement and
where the Standards and GAAP diverge. Promulgating a new and separate
Standard will reduce the administrative burden of trying to apply a
single pronouncement for two different purposes; to wit, financial
reporting and contract cost determination.
2. Relationship to Existing Standards
Comment: Generally the respondents agreed that tax consequences
should not be considered in the determination of contract cost. The
Aerospace Industries Association (AIA) did suggest that if funding were
required as a condition of using accrual accounting, the tax
consequences might have to be considered ``because funding and tax
considerations are irretrievably interwoven.'' The AIA also noted that
if the Board ``permits accrual accounting without a funding
requirement, tax consequences are generally irrelevant.'' The industry
associations and most contractors believed that CAS 9904.412 and
9904.413, possibly augmented by CAS 9904.416, should form the baseline
if there were to be a funding requirement. While some industry
commenters felt that the Board should consider tax-rate complementary
funding, others expressed their belief that tax-rate complementary
funding for nonqualified pension plans in CAS 9904.412 is overly
complicated. While Government respondents opposed the use of such tax-
rate complementary funding, the OUSD did express its belief that ``tax
consequences should be considered only to the extent the contractor is
unable to fund the entire amount of the accrued cost to a tax
deductible funding vehicle.''
Some industry commenters expressed their belief that if funding
were to be required for cost recognition, then an ``assignable cost
limitation'' would be reasonable, especially if spread-gain actuarial
cost methods were permitted. The AIA noted, ``the original CAS Board
limited the application of spread gain methods by imposing an
assignable cost limitation (see old CAS 412.50(b)(2)).'' Government
respondents believed there should be an assignable cost limitation
defined similarly to the one used for pensions regardless of whether
funding would be required as a prerequisite for accrual accounting.
The Government respondents did not favor any explicit linkage
between segment closing adjustments for pension and post-retirement
benefit plans. Industry respondents asked that the Board provide that
any pension surplus measured under 9904.413-50(c)(12) be explicitly
offset against any unfunded post-retirement benefit obligation when a
segment closes. Texas Instruments stated:
Conceivably, the same business interruption event that triggers
an adjustment to PRB costs will also trigger a similar adjustment to
pension costs. Therefore, both these determinations should be
connected.
The Department of Defense commenters expressed an interest in
amending CAS 9904.416 to reflect the differences between life
insurance, medical insurance, and property and casualty insurance.
These respondents noted that each of these types of insurance requires
unique actuarial approaches and are generally unrelated to each other.
They also recommended that the Board review workers' compensation
coverage, which includes health, disability and liability provisions.
The comments from industry generally stated that they had no major
concerns or problems with CAS 9904.416.
Response: When developing these proposed modifications to SFAS 106,
the Board sought to maintain consistency where practicable with the
analogous provisions of (a) CAS 9904.412 and 9904.413 on pensions, (b)
CAS 9904.415 on deferred compensation plans, and (c) CAS 9904.416 on
insurance costs. However, this proposed Standard addresses the
accounting issues of measurement and period assignment of post-
retirement benefit costs and does not address tax-deductibility
concerns. The recent amendments to CAS 9904.412 and 9904.413 were
exceptional in the incorporation of tax-implications into a Standard.
The Board recognizes that tax accounting rules can produce volatility
and that such tax rules primarily affect the timing of cost
recognition. The Board notes that pension accounting and practices,
unlike those for post-retirement benefits, evolved in an environment in
which funding was not only permitted, but dominated by tax law and
Internal Revenue Service (IRS) and Department of Labor regulations
regarding the determination of the benefits and the actual funding and
administration of pension plans.
In this proposed Standard, the determination of the cost for a
period when accrual accounting is used generally follows SFAS 106 with
some
[[Page 59514]]
restrictions and modifications. SFAS 106 imposes no minimum or maximum
limits, such as the assignable cost limitation, on the determination of
the net periodic post-retirement benefit cost, and neither does this
proposed Standard.\8\
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\8\ As discussed elsewhere, the proposed Standard does compare
and limit the net periodic post-retirement benefit cost so that the
accumulated value of plan assets and unfunded accruals do not exceed
the unavoidable liability, i.e., the nonforfeitable post-retirement
benefit obligation.
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The proposed Standard does not address the offsetting of a post-
retirement benefit segment closing adjustment against any pension
segment closing adjustment. The Board believes that CAS 9904.413
determines the plan termination and segment closing adjustment for
pension plans and this proposed Standard would determine the adjustment
for post-retirement benefit plans. How either adjustment is actually
transacted or effected is best determined by the contracting parties.
This proposed Standard and CAS 9904.413 neither require nor preclude
the aggregation of these adjustments with each other or other issues
for resolution and settlement purposes.
This proposed Standard addresses many issues similar to those
considered in the March 30, 1995 amendments to CAS 9904.412 and
9904.413. The fact that any of these issues are treated differently in
this proposed Standard on post-retirement benefit costs does not
necessarily imply that changes will be made to the pension Standards,
nor does it preclude such possibility.
The Board notes the comments from the Department of Defense
regarding a general review of CAS 9904.416, but believes that
addressing post-retirement benefits as defined by SFAS 106 is a
substantial task in its own right. To expand this case to include a
comprehensive review of CAS 9904.416 would make the case unmanageable.
The Board proposes that the provisions of CAS 9904.416 relating to
prefunding of retiree benefits be replaced by this Standard. Otherwise
the Board has concluded that any general review of CAS 9904.416 is
outside the scope of this project.
3. Funding as a Prerequisite for Accrual Accounting
Comment: The perception that any post-retirement benefit liability
recognized in the financial statements might be a ``soft'' liability
led some respondents, especially Government respondents, to express the
belief that funding must be used as a tool in assessing the firmness of
these liabilities.
In general, industry commenters argued funding does not necessarily
substantiate the liability. They expressed their belief that funding
may be an important business consideration, but such considerations
generally deal with cash flow consequences and income tax
considerations. They recommended that any criteria established as a
prerequisite for accrual accounting should address the existence of the
liability rather than the existence of funding. They also believed that
funding is an allowability issue, not an accounting issue.
The ABA noted that for financial accounting purposes the threshold
for recognition is met by a probability that an obligation exists. The
ABA did suggest there may be situations when the funding of the annual
accrual might serve a legitimate purpose. The ABA wrote in part:
We do, however, agree that contractors should not be permitted
to accrue costs without funding them in cases where the payment
cannot be compelled. In such cases, no valid liability has been
incurred unless the liability is funded. Additionally, if
circumstances indicate that a contractor is likely to default on its
PRB obligations, accrual without funding should not be allowed.
The NDIA also acknowledged that while funding could be one means to
substantiate (validate) the obligation, there were disadvantages to
using funding for contract cost measurement and assignment.
It is clear that funding validates a liability. It is also clear
that funding does not match cost with products. It is also clear
that the use of funding (or any other cash payment) as a determinant
of cost incurrence decreases uniformity and consistency in
accounting.
Industry representatives pointed out the reason for including a
funding requirement in the pension Standards and the inappropriateness
of a funding requirement for post-retirement benefits costs. The AIA
made the point as follows:
Public policy, as articulated in the tax code, has long
encouraged pension plan sponsors to fund their programs at an
adequate level. While industry does not agree that funding has any
place in the Cost Accounting Standards, the addition of a funding
requirement in the recent changes to CAS 412, as well as explicit
recognition of tax deductible limits, did not create tension between
public policies as expressed in the Internal Revenue Code and the
Cost Accounting Standards. ``In contrast, however, Congress has
intentionally discouraged prefunding of post-retirement medical
benefits. It would be inconsistent for the Cost Accounting Standards
Board to in essence force contractors to fund these post-retirement
benefit costs.
On the other hand, in its response to the Staff Discussion Paper,
the OUSD articulated the concern of some members of the Government
procurement community that any potential risk that the liability might
not be liquidated is unacceptable. The OUSD unequivocally stated:
Yes, funding is necessary to substantiate accrual of costs. The
level of funding necessary is 100 percent of the maximum amount of
possible funding in accordance with the contractor's funding
vehicle. Permitting funding at less than 100 percent of the cost
accrual results in a potential risk that the liabilities for which
the Government has paid its fair share might never be liquidated. A
100 percent funding requirement assures the Government that the
money will be available when the liability must be paid. If there
are valid reasons to accrue the liabilities, the accruals should be
fully funded. Permitting less than 100 percent funding effectively
results in the Government providing a long-term interest free loan
to contractors. Permitting funding at less than 100 percent of the
cost accrual would require that earnings on the unfunded amounts be
imputed each year to preclude increased costs to the Government
resulting from lost earnings on the unfunded amounts.
Government respondents stated there are no appropriate alternatives
to a requirement that the cost accrual be fully (100%) funded.
Generally, industry respondents stated that the Board did not need to
consider any alternatives to a funding requirement because funding was
unnecessary to substantiate the cost accrual. Boeing concurred with the
belief that funding does not necessarily substantiate the liability,
but suggested that more restrictive measures of accrual accounting or
cash basis accounting might be used where the contractual rights to a
benefit are lacking. Boeing commented that:
The accounting must be based upon the likelihood that the
contractor will liquidate the liability. If the likelihood is in
some doubt or remote then the costs should be recognized on more
limited accrual basis, i.e., terminal funding or those vested, or if
not appropriate on a cash basis. Otherwise the costs must be
recognized on an accrual basis over the period of time the benefit
is earned.
The responses to the Board's January 12, 1999 letter did focus and
advance the discussions regarding the role of funding. Most industry
representatives continued to argue that funding neither enhances nor
proves the firmness of the liability for post-retirement benefits. Some
industry commenters expressed the belief that once established, a
contractor's promise to provide post-retirement benefits could not
easily be avoided and therefore, a funding
[[Page 59515]]
requirement might be superfluous. Industry commenters again argued that
funding was merely a cash-flow or financial management decision and as
such, was an inappropriate consideration for an accounting standard.
These respondents did believe that funding would be a proper
consideration for an allowability rule which addresses procurement
policy concerns.
Comments from the Department of Defense Inspector General (DOD IG)
and the Department of Energy reiterated the position that full (100%)
funding of post-retirement benefit costs should be included in the
criteria for accrual accounting. The OUSD maintained its opinion that
post-retirement benefit costs must be funded, but agreed with the
industry comments that funding should be addressed as an allowability
constraint and not within the allocability criteria of an accounting
standard.
Response: In Standards promulgated by the original CAS Board
dealing with pension and insurance costs, in most instances the
applicable Standards require that pension and retiree insurance costs
be funded. Therefore, the Board believes that to maintain consistency
with the promulgations of the original CAS Board and amendments
promulgated by the current Board, the Board had to consider the role of
funding as a prerequisite for the use of accrual accounting for the
costs of post-retirement benefits. The Board considered a criterion for
accrual accounting based on the contractor's documented commitment to
fund at least the government segments' post-retirement benefit costs.
But, after reviewing the merits of assessing the liability's firmness
using funding as opposed to the terms of the post-retirement benefit
plan, the Board decided to propose criteria concerning the contractor's
ability to unilaterally reduce or eliminate benefits.
The original pension Standard, CAS 412, and the March 30, 1995
amendments were developed in an environment wherein the large majority
of pension costs arose from qualified pension plans subject to ERISA.
For qualified pensions plans there was less concern with whether the
pension obligation would be systematically funded as costs are accrued
for benefits earned by employees working on Government contracts. Tax
accounting, financial accounting and contract cost accounting for
pensions mostly differ in the pattern in which tax deductible accruals
(contributions), financial accounting expense accruals and the contract
cost accruals are ascribed to accounting periods.
Generally CAS 412 did not have to establish the contractor's
commitment to fund its tax-qualified pension plan as a prerequisite for
accrual accounting, the funding requirement was already imposed by
ERISA. Even as far back as 1968 paragraph 42 of APB-8 stated: ``This
Opinion [APB 8] is written primarily in terms of pension plans that are
funded.'' Conversely, for post-retirement benefits, financial
accounting uses ``pure'' accrual accounting while tax accounting for
post-retirement benefits is generally limited to cash basis accounting.
Thus post-retirement benefits are shown on an accrual basis for the
more conservative financial accounting purposes (which tend to maximize
liability recognition), but are usually operated on a pay-as-you-go
basis.
Despite assertions by some respondents, the original Board did
believe that funding played a legitimate role in determining whether
the liability for a pension or post-retirement benefit was sufficiently
firm for contract cost recognition. In the May 15, 1978 preamble to the
Notice of Proposed Rulemaking for CAS 416 (43 FR 20806), the original
Board addressed the funding issue when it proposed subparagraph
416.50(a)(1)(v) (which was unchanged when published in the final rule):
``One respondent objected to the requirement that costs which
represent additions to a `retired lives' reserve be evidenced by
payments to an insurer or trustee. Retired lives benefits are
analogous to pension costs in that a contract cost is to be
recognized in the present but payment of the benefit is to take
place in the relatively distant future. In most such programs, the
employer reserves the right to discontinue the program at any time,
and benefits are limited to those which can be provided by amounts
already funded. If an amount is to be recognized currently as a cost
of a retired lives program, there should be some evidence that a
contractor has, in fact, incurred a liability which he cannot
subsequently avoid by a unilateral decision.
``Some respondents suggested the deletion of the requirement
that the contractor have no right of recapture of the fund as long
as any active or retired participant in the program remains alive.
Under some fully prefunded programs, a substantial portion of the
fund is to provide for liability to active employees. Without the
cited provision, it would be possible for the contractor, at any
time, to terminate the program as to employees who had not yet
retired, thereby creating a surplus in the fund and obtaining a
windfall.''
And in Section (1) ``RELATIONSHIP TO THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974 AND TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES''
of the September 24, 1975 preamble to the promulgation of CAS 412 as a
final rule (40 FR 43873), the original Board stated:
APB-8 provides criteria for accounting for the cost of pension
plans for financial accounting purposes. The Board believes that
certain of these criteria are not appropriate for Government
contract costing purposes. For example, a fundamental concept of
APB-8 is that the annual pension cost to be charged to expense for
financial accounting purposes is not necessarily determined by the
funding of a pension-plan. The Board believes that a requirement of
law for annual minimum funding of pension costs on an irrevocable
basis, is strong evidence that an obligation for at least such
period.
The Board went on to state:
In developing the accompanying Cost Accounting Standard, the
Board has attempted to stay within the general constraints of APB-8
and the funding provisions of ERISA.
Later, in Section (11) ``ASSIGNMENT OF PENSION COST'' of the
September 24, 1975 Preamble, the Board writes:
``Certain commentators expressed their disagreement with the
sections of the Federal Register proposal dealing with the
assignment of pension costs among cost accounting periods. The
concept set forth in the proposal related in the assignment of costs
to the validity of the liability for such costs. Commentators
referred to the concept set forth in APB-8 that the accrual of
pension expenses and the funding of pensions are not necessarily
related. They stated that cost should be assigned to cost accounting
periods irrespective of whether or when funded.
``The Board believes that assigning pension costs to cost
accounting periods on a cash basis is inappropriate from an
accounting viewpoint and could lead to the improper assignment of
pension costs among periods. The Board believes also that the
concept which states that funding is unrelated to pension accruals
is not appropriate for contract costing because, under such a
concept, pension costs could be assigned to cost accounting periods
and never be funded; yet such costs would be reimbursed by the
Government. (Emphasis added)
``The underlying concept of the Standard is that when a valid
liability exists, the corresponding costs may be accrued
irrespective of when the liability is liquidated. If the liability
(to the pension fund or, for pay-as-you-go plans, to retirees) is
not valid, it cannot be accrued; in order for it to be allocated to
cost objectives of the current period, it must be liquidated
(funded) in that period or within a reasonable period of time
thereafter. In order to clarify its intent with regard to the
allocation of pension costs to cost objectives of individual cost
accounting periods, the Board has revised the wording of 412.40(c)
of the Standard.''
Clearly, the original Board believed that funding was a proper
accounting
[[Page 59516]]
consideration in promulgating a Cost Accounting Standard. This Board
agrees and recognizes that in any case, funding is one method for
validating the liability.
The Board also considered adopting the tax-rate complementary
funding requirement applicable to nonqualified pension plans. While
negating the tax consequences of funding such plans, tax-rate
complementary funding adds administrative burden and complexity. Since
the amendments to the pension Standards were published in March 1995,
it appears that very few, if any, contractors have elected to use the
``tax-complement'' approach. Furthermore, unlike pensions, the funding
of post-retirement benefits is not driven by tax law. The Board has
concluded that it is inappropriate to develop provisions of this
proposed rule based on tax law.
Looking to other accounting standards, an alternative to imposing a
funding requirement might be to follow the approach that the National
Association of Insurance Commissioners (NAIC) uses for the statutory
accounting policy for ``Employer's Accounting for Post-retirement
Benefits Other Than Pensions'' wherein the obligation is determined for
recognizing only benefits for which plan participants are currently
eligible. However, the responses to the Staff Discussion Paper,
``Accounting for Unfunded Pension Costs,'' published on June 17, 1991
(56 FR 27780), argued that such recognition would neither have the
simplicity and ease of cash basis accounting nor the matching of costs
with activities achieved by accrual accounting. These same comments and
criticisms would apply to such an approach for post-retirement benefit
costs. The Board disagrees and believes that such a restrictive
approach does have merit and can address the issue of whether a firm
liability exists. Therefore, the Standard being proposed today imposes
a cap on the net periodic post-retirement benefit cost for a period
which is based on the firm liability for benefits payable to vested and
fully-eligible participants.
There is much confusion, misinformation, and perhaps
disinformation, concerning funding as a prerequisite for accrual
accounting. The Board believes the question of whether accrual
accounting or cash basis accounting should be used to measure, assign
and allocate costs to Government contracts is an accounting question
within the purview of the Cost Accounting Standards Board. The
establishment of criteria concerning when alternative accounting
approaches (cash versus accrual) should apply is also an accounting
question that the CAS Board can and should address. (See CASB Statement
of Objectives, Policies and Concepts published May 1992, after SFAS 87
and 106 were promulgated.) The Board disagrees that requiring funding
of the period cost developed under an accrual accounting method
converts the funded accrual to cash basis accounting because the
primary measurement and assignment is still based on accrual
accounting. Although this proposal does not impose a funding
requirement, the Board reiterates its belief that funding can be an
appropriate criterion to ascertain the contractor's commitment to
ultimately provide a promised benefit.
4. Criteria for Assessing the Firmness of the Post-Retirement Benefit
Liability
Comment: The Staff Discussion Paper asked if the post-retirement
benefit liability was reasonably foreseeable and could be reasonably
estimated. The response from the National Defense Industrial
Association (NDIA) was representative of the comments from both
industry and the government when NDIA stated: ``If it can be determined
that there is a valid obligation to pay, determining an annual estimate
of the cost of that liability is feasible.'' Several commenters
concurred with AIA who noted that the FASB had ``considered this issue
at length, and concluded that these amounts could be reasonably
estimated (see paragraphs 159 through 163 of SFAS 106).'' Towers-
Perrin, an actuarial consulting firm, stated that it performs nearly
600 SFAS 106 postretirement benefit plan valuations for nearly 600
clients each year.
Most commenters who addressed the SFAS 106 definition of the
``substantive plan'' stated the definition might be inadequate for
contract cost accounting purposes. There appeared to be a general
consensus that in order for a post-retirement benefit to be
recognizable, criteria similar to that found in CAS 412 requiring that
the plan be in writing and communicated to the employees, and that the
benefits be materially nonforfeitable should be applied.
However, comments from the industry associations questioned the
usefulness of requiring that the post-retirement benefit plan be
written as adequate evidence of a firm liability. NDIA argued that the
SFAS 106 concept of established practice coupled with employee
communication might be more appropriate: ``A written document enhances
the likelihood that there is a valid obligation. However, employee
notification of future benefits, coupled with a history of payment of
benefits, also seems to be substantial evidence of an intent to pay.''
AIA agreed with NDIA: ``A formal document does not make the liability
any more compellable than informal documentation or an established
practice. A formal document may enhance the auditing of the liability
but it doesn't necessarily enhance the validity of the liability.''
Funding as a precondition to the use of accrual accounting remains
controversial and was discussed in the previous subsection (3). Other
than a funding requirement, no commenters suggested any additional or
alternative criteria that might be used to assess the firmness of the
post-retirement benefit obligation.
The Staff Discussion Paper also inquired whether the firmness of
the liability could be enhanced by not projecting benefit levels. None
of the commenters found any utility to placing such a restriction on
the recognition of the post-retirement benefit liability.
Response: The Board agrees that the liability for a plan that meets
the criteria for accrual accounting set forth in this proposed Standard
can be reasonably estimated. However, the Board does not believe that a
liability is a firm liability simply because it can be estimated. The
financial effect of many contingencies can be estimated, but the
estimated value associated with these contingencies may not rise to the
level of a firm liability for contract costing purposes without meeting
other criteria.
The SFAS 106 definition is intended to identify any potential
liability for financial accounting disclosure purposes. For contract
cost accounting purposes, the Board believes there must be a greater
expectation that the benefits will ultimately be paid to the employees.
The Board concludes that, at a minimum, when accrual accounting is used
for contract cost accounting, the benefits must be described in a
formal written document, the right to the benefits must be communicated
to the plan participants, and the benefit must be materially
nonforfeitable once eligibility is attained. The formal document
provides the vehicle by which employees can legally enforce payment of
the promised benefits. Furthermore, with the numerous changes that
corporations have been making to their post-retirement benefit plans to
reduce or eliminate benefits or shift the cost to the employees, the
Board believes that only benefits currently provided by the written
document and which the contractor cannot unilaterally negate or
otherwise eliminate form a firm liability that should be recognized on
an accrual basis.
[[Page 59517]]
The Board notes that, unlike pension benefits, employees' rights to
promised post-retirement benefits often do not vest until the employee
approaches retirement eligibility, e.g., age 50 and 20 years of
employment. Because of this substantial delay in vesting, a contractor
can have a formal, ironclad contractual promise that is communicated to
its employees, but still be able to discontinue the plan leaving only
those employees who are currently eligible or close to eligibility with
rights to post-retirement benefits. This Board, like its predecessor,
is concerned that the contractor could reap a substantial gain
attributable to the liability released by nonvested participants. The
recent court decision in Sprague v. General Motors Corporation, (Nos.
94-1896, 94-1897, 94-1898, 94-1937, U.S. Court of Appeals, 6th Circuit,
January 7, 1998) throws into question the usefulness of relying on
established practice, documentation, and communication collectively or
individually. Even when the post-retirement benefits are provided
pursuant to a collectively bargained agreement, a Circuit Court
recently found that the commitment to provide post-retirement benefits
does not survive beyond the current bargaining agreement (Joyce,
Charles v. Curtiss-Wright Corporation (1999, CA2, 1999 WL 152535). The
Board is aware that a similar systemic weakness in the promise of
pension benefits to the employees of Studebaker Corporation was a major
impetus for the enactment of ERISA in 1974.
The Board examined how the earning of post-retirement benefits is
attributed to cost accounting periods by the actuarial cost method
employed by SFAS 106. The Board also considered the ERISA and DOL rules
which require that pension benefits, once earned, cannot be reduced by
the plan sponsor. For accrual accounting, this proposed Standard
similarly requires that the portion of the post-retirement benefit for
which the employee has achieved eligibility cannot be eliminated or
reduced by the unilateral action of the contractor.
Because the Board does not accept the SFAS 106 substantive plan as
the basis for the recognizable liability and has chosen not to use
funding to substantiate the cost, the proposed rule relies on the
nonforfeitable portion of the accumulated post-retirement benefit
obligation as the measure of the valid, that is, compellable,
liability. To accomplish this, the proposed rule imposes a limitation
on the post-retirement benefit cost measured for a period. The proposed
limitation is measured as the benefits paid during the period plus the
unfunded amount of nonforfeitable accumulated post-retirement benefit
obligation. The amount of valuation assets is the fair value of plan
assets plus the accumulated value of unfunded accruals minus the
accumulated value of prepayment credits. The proposed rule further
requires that the measurement of nonforfeitable accumulated post-
retirement benefit obligation include nonforfeitable benefits that
would be earned during the year.\9\
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\9\ Including the additional nonforfeitable post-retirement
benefit obligation accrued during the year is analogous to, but more
straight-forward than, measuring and adding a nonforfeitable annual
service cost.
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5. Identification of the Post-Retirement Benefit Plan
Comment: Industry and Government commenters alike argued that the
Board should permit the use of different accounting methods for
different benefits because a post-retirement benefit plan often is not
a single-purpose, homogeneous plan. As the AIA expressed it:
One area of difference between pensions and post-retirement
benefits concerns the definition of a single ``plan.'' While the
contracting parties must be clear as to the underlying benefits that
are reflected in contract costs, and how amounts funded or accrued
relate to those individual cost elements, industry feels strongly
that the CAS Board should not require contractors to restructure
their plans from an ERISA perspective in order to achieve effective
cost allocation. In other words, form should not be elevated over
substance with regard to plan structure.
The OUSD summed it up this way:
If separate plans are used to provide different types of post-
retirement benefits, different accounting methods should be
permitted. Different accounting methods also should be permitted for
different benefits provided through the same plan, but only if
separate records are maintained. Different accounting methods
generally should not be permitted for different groups within the
same plan population (e.g., union versus non-union). However, if
contractors are permitted to use cash accounting for current retired
employees and accrual accounting for active employees, the treatment
of post-retirement benefit costs for future retirees must be on an
accrual basis. Since the post-retirement benefit liability would
have already been accrued during the period of active employment,
there is no additional liability to be recognized when active
employees retire.
Most commenters felt that immaterial benefits, e.g., legal
services, retiree discounts, etc., could be accounted for by the
contractor in any reasonable manner. They stated that, as with any item
of cost, the CAS should only address costs that are material.
Response: The Board agrees. The Board is aware that it is often
necessary for a company to use a combination of investment vehicles,
e.g., a Voluntary Employee Benefit Association (VEBA) trust combined
with an IRC Sec. 401(h) trust, to achieve tax-favorable funding of
post-retirement benefits. Similarly, slightly different retiree
insurance plans may be required in different plants, locations, or
states to provide an overall general post-retirement benefit promise.
Thus, the post-retirement benefit plan is frequently not a single
benefit plan, but several different benefit promises to different
groups of employees.
The proposed Standard permits the contractor to parse its overall
post-retirement benefit plan or its plan population into several
separately identified plans for purposes of contract cost accounting.
Once so established, such division of the plan or population must be
consistently maintained and often will require disclosure on the DS-1
Statement. For administrative ease, the proposed Standard also allows
the contractor to aggregate different plans or populations for which
the same contract cost accounting method is used.
Costs of post-retirement benefits that are immaterial may be
accounted for separately on a consistent basis. This proposed Standard
does not address post-retirement benefit costs that are immaterial.
6. Cash Basis Accounting (Pay-as-You-Go Cost Method and Terminal
Funding)
Comments: Many commenters expressed their belief that cash basis
(pay-as-you-go) accounting is appropriate whenever the post-retirement
benefit liability is not firm. Some commenters expressed a desire for
cash basis accounting to be permitted even when the criteria for
accrual accounting are satisfied so that contractors could maintain the
flexibility to coordinate their contract cost accounting with their
financial management decisions regarding the funding of the liability.
Other commenters asked that cash basis accounting be permitted as an
alternative if a funding requirement were to be imposed as a
prerequisite to accrual accounting.
The commenters who addressed terminal funding stated that while
terminal funding was not an acceptable accounting method, the Board
should permit contractors to continue use of the terminal funding
method.
Response: The Board generally agrees. Therefore, this proposal
provides that if the post-retirement benefit plan does
[[Page 59518]]
not satisfy the criteria for accrual accounting, then cash basis
accounting is the only appropriate cost accounting method. However,
this proposed Standard requires that if the plan does meet the proposed
criteria for accrual accounting, then the contractor must use accrual
accounting.
The Board agrees that terminal funding is not a generally
acceptable accounting method and may introduce excessive volatility
into costs. This proposal does not permit contractors to use the
terminal funding method, although the transition provisions permit a
contractor who has an established practice of using terminal funding to
continue such practice.
As discussed later, if the plan fails the criteria for accrual
accounting, the Board believes it is inappropriate to recognize any
unfunded liability that may exist when a segment closes.
7. Accounting for the Funding of Post-Retirement Benefit Plans
Comment: The commenters generally agreed that any portion of the
accrued cost for the period that is not funded should be accounted for
in some manner. The commenters suggested that the provisions of CAS
9904.412 regarding unfunded accruals could serve as appropriate
guidance. The NDIA suggested that some restrictions might be placed on
the interest equivalent used to update the accumulated value of the
unfunded accruals. The OUSD recommended that the accumulated value of
the unfunded accruals be reduced appropriately when post-retirement
benefits are paid.
Response: The Board agrees with these comments. For plans using the
pay-as-you-go cost method, funding is accomplished by payments made
directly to the participant or else to a third party to provide service
or insurance for the participant. The cost of defined-contribution
plans using accrual accounting is measured by the net distribution to
individual participant accounts of the amount deposited to the funding
agency or paid to cover the administrative expenses of the plan.
Interest expenses or other costs of borrowing are excluded from post-
retirement benefit costs. For defined-benefit plans using accrual
accounting, deposits to the funding agencies plus benefits paid to or
on behalf of participants comprise the funding. When accrual accounting
is used, the Board believes that contractors who pay benefits directly
from corporate resources should be accorded the same treatment as
contractors who would make a deposit to a funding agency and then
almost immediately use that funded deposit to pay benefits.
Depending on its financial management decisions, a contractor's
actual funding may be more or less than its assigned post-retirement
benefit cost, therefore the proposed measurement and assignment section
includes provisions to account for unfunded accruals and prepayment
credits. The Board proposes that any portion of the period accrual that
is not funded shall be accounted for and accumulated with interest as
an accumulated value of unfunded accruals. Generally the accumulated
value of unfunded accruals would be treated the same as a plan asset.
This proposed Standard specifically provides that prepayment
credits are not allocated to segments until used to fund the post-
retirement benefit cost in a future period. When a portion of the
prepayment credit is used to fund post-retirement benefit cost, that
portion will be allocated as part of the total funding for that cost
accounting period. This means that the paragraph 9904.419-40(b)(5)(iii)
balance tests would not include the prepayment credit when applied at
the segment level.
Consistent with the pension Standard, CAS 9904.413, a contractor
may choose to allocate funding to those segments, including home
offices, that allocate costs to contracts subject to this Standard
before allocating any funding to other segments. This proposed
provision gives contractors flexibility to comply with any funding
requirement that might be imposed by procurement allowability rules.
Post-retirement benefit plans, like nonqualified pension plans, are not
subject to plan-wide minimum funding requirements so that funding the
Government segments first could create a situation where those segments
are fully funded while the commercial segments are unfunded. The Board
is concerned that because all participants generally would have a claim
to any assets of the plan, the Government could, in fact, be
subsidizing the obligations of commercial operations and therefore
funding must then be applied to those segments once the Government
segment(s) is funded. Note that in Illustration 9904.419-60(d)(6), the
contribution in excess of the minimum required to fund the cost of the
Government segments was allocated toward the funding of the commercial
segments rather than as a prepayment credit for the Government
segments.
If the criteria for accrual accounting are satisfied, this proposed
Standard provides that the full post-retirement benefit cost be
allocated to segments based on either a separate calculation of costs
or general allocation using an appropriate base, e.g., headcount or
salaries, etc. Once the post-retirement benefit cost is allocated to
segments and intermediate home offices, this proposal provides that the
cost be allocated to intermediate and final cost objectives in the same
manner as other personal service compensation costs of that segment or
home office.
8. Accounting for the Assets of Post-Retirement Benefit Plans
Comment: Both Government and industry respondents found IRC Section
401(h) accounts within a qualified pension trust, VEBA trusts, and
secular trusts to be acceptable trust arrangements. Industry
respondents believed that ``rabbi'' trusts would be acceptable funding
agencies for post-retirement benefit plans just as they are acceptable
for nonqualified pension plans under CAS 9904.412. The AIA advised the
Board that ``any Standards should permit the use of these and other new
arrangements as they emerge.'' Government respondents expressed their
belief that any trust arrangement must not be subject to the claims of
creditors and therefore objected to ``rabbi'' trusts. The DOD IG
stated:
CAS 9904.416.50(a)(1)(v)(B) requires that there be no right of
recovery from a trust by the trustor as long as any active or
retired participant in the program remains alive unless the
interests of such remaining participants are satisfied through
reinsurance or otherwise. This provision has served to adequately
restrain contractors from attempting to cost contingent liabilities
in current costing periods.
Some industry respondents believed there was no accounting
difference between treating IRC Section 401(h) separate accounts as the
assets of a post-retirement benefit plan or the assets of an ancillary
benefit that is an integral part of the pension plan. On the other
hand, the OUSD said:
Separate 401(h) accounts should be considered part of the post-
retirement benefit plan assets because the assets are segregated in
a trust and they are restricted by the IRC to be used solely for
post-retirement benefits. This is consistent with the description of
post-retirement benefit plan assets contained in paragraph 63 of
SFAS 106.
Commenters noted many insurance arrangements, e.g., restricted
insurance reserves, separate investment accounts, trust owned life
insurance (TOLI) arrangements, that might qualify as funding agencies.
While they agreed that all insurance arrangement should be considered,
they also agreed that access to the assets must be restricted. In this
regard, the commenters
[[Page 59519]]
expressed a belief that a corporate owned life insurance (COLI)
arrangement should not be considered a funding vehicle because a COLI
is an unrestricted investment of the company and not the post-
retirement benefit plan. The Government respondents believe insurance
arrangements must be subject to the same criteria as trusts. The OUSD
echoed their concern about ``rabbi'' trusts and stated, ``Insurance
arrangements should be permitted to the extent the assets are protected
from general creditors and cannot be used at the contractor's
discretion.''
The commenters agreed that several funding agencies could be
combined to form the assets of a post-retirement benefit plan. No one
believed that any particular type of funding agency should be given
preference or priority.
Response: This proposed Standard on post-retirement benefit costs
adopts the CAS 9904.412 definition of funding agency. Any investment
vehicle or arrangement and any insurance product or reserve that
satisfies that definition can be recognized as an asset of the post-
retirement benefit plan. Several individual arrangements, such as a
VEBA trust, a TOLI arrangement, and an IRC section 401(h) subaccount
could be aggregated together to form the plan assets. The Board
expresses no preference for one arrangement over another.
The Board is not concerned about the use of ``rabbi'' trusts. If a
``rabbi'' trust meets the funding agency definition, the plan
participants' and beneficiaries' rights are superior to that of the
contractor. Because the procuring agencies are responsible for ensuring
that their contractors are financially viable, the Board does not
perceive any undue risk to the Government that should affect this
proposed accounting Standard.
9. Measurement and Assignment Under the Accrual Accounting Method
Comment: The commenters were in general agreement that accrual
accounting is the most desirable accounting method for determining the
costs of post-retirement benefit plans that meet the criteria for
establishing a firm liability. They uniformly observed that accrual
accounting affords the best matching of post-retirement benefit costs
with the contract activity.
None of the commenters favored limiting the measurement and period
assignment of post-retirement costs to a single accounting method. In
addition to the firmness of the liability, the commenters expressed
their belief that the choice of the appropriate cost accounting method
would depend on the nature of the post-retirement benefit plan, the
financial management of the plan, and factors affecting a particular
industry and employee population. As AIA observed:
CAS consistency and uniformity is referring to identical
treatment under like circumstances. In this area, it is highly
unlikely there will be like circumstance. Contractors are different,
plans are different, IRS rules are changing and the health care
environment is extremely dynamic. A ``one size fits all'' uniformity
is not appropriate for measuring, assigning or allocating this type
of cost.
Similarly, TRW stated:
Due to the different characteristics of post-retirement benefit
obligations (for example, the magnitude of the obligation or the
ability to fund in a tax-effective manner), a contractor should be
free to determine which method is most appropriate.
Response: The Board generally agrees that accrual accounting does
provide the best matching of costs associated with a firm liability
with contract activities. Therefore, for a post-retirement benefit plan
that meets the criteria set-forth in this proposed Standard the
contractor must use accrual accounting. Post-retirement benefit plans
that do not meet the proposed criteria must use cash basis accounting.
10. Actuarial Cost Methods and Assumptions
Comment: Looking to SFAS 106 as the primary model, some respondents
have implicitly advocated the use of a single method; that is, the unit
credit cost method. Other commenters, concerned with matching costing
and funding to the greatest degree possible, advised the Board to
permit any generally accepted actuarial cost method, including spread-
gain methods. Discussing why spread-gain methods should be permitted,
TRW suggested:
Spread-gain methods should be allowed because they frequently
are the basis for determining deductible contributions to 401(k)
[Sic] accounts and VEBAs. If only immediate gain methods are
permitted, many contractors will find it difficult if not
impossible, to match permitted funding with the expense accrual.
Echoing TRW's comment, the AIA recommended ``flexibility to follow tax
rules is critical if funding is to be a prerequisite for cost
allowability.'' The AIA went on to suggest that ``changes in the
techniques used from one year to the next should not be treated as
accounting changes.''
Respondents also commented that the Board should consider
addressing actuarial assumptions, especially those used for discount
rates and medical cost inflation rates. They were concerned that the
SFAS 106 emphasis on current period results, rather than long-term
expectations, would cause volatility in annual costs. Several
commenters recommended that the assumptions be subject to the same
``best-estimate,'' long-range expectation criteria as the actuarial
assumptions used for pension costs. The ABA was adamant that the Board
should ``refrain from mandating actuarial assumptions.'' None of the
commenters felt that any certification by the plan's actuary or any
sensitivity analysis was necessary.
Some commenters held the view that changes in actuarial assumptions
should not be treated as a change in cost accounting practice. Other
commenters stated that if the basis for actuarial assumptions is
changed, rather than the numeric values of assumptions themselves, such
changes would appear to meet the criteria of CAS 9903.302 as a change
to a cost accounting practice. One commenter added that the Standards
need not include guidance already provided for in the regulations.
Response: As part of its acceptance of SFAS 106 for the measurement
of post-retirement benefit obligations and costs, the Board accepts the
SFAS 106 provisions regarding actuarial assumptions. The Board does
remain somewhat concerned that currently post-retirement benefit plans
are generally unfunded or significantly underfunded. Furthermore, there
are no insurance products available to settle the liability for health
care benefits. Therefore assumptions regarding expected discount rates
cannot be based on the results of actual fund yields nor are there any
insurance contracts from which discount rates can be extracted.
The Board notes that the amended CAS 9904.412 prohibits the use of
spread-gain methods. Furthermore, when CAS 9904.412 was promulgated,
the original Board was concerned that spread-gain methods did not
separately identify gains and losses and explicitly imposed a form of
assignable cost limitation on costs determined under a spread-gain
actuarial cost method.
The Board concurs that post-retirement benefit costs are not
sufficiently distinct from pensions and insurance to warrant any
special actuarial certification. The Board also notes that when an
actuary performs a post-retirement benefit valuation or advises
contractors concerning their plans, the actuary is personally subject
to the professional standards promulgated by Actuarial Standards Board.
The Board has concluded that no special certification requirements are
necessary.
[[Page 59520]]
The Board proposes to expand the provisions of CAS 9904.416 that
require the accrual cost of prefunded retiree insurance plans be
``actuarially determined'' and move these provisions to this proposed
Standard. By accepting SFAS 106 as the basis for the actuarial
determination of the accrual accounting costs for defined-benefit post-
retirement plans, the Board is accepting the unit credit actuarial cost
method as described in SFAS 106. The proposed Standard does not
preclude the contractor from using a spread-gain actuarial cost method
to determine the annual contribution to a tax-qualified funding agency,
but the contract cost determination is limited to the unit credit cost
method as described in SFAS 106.
What constitutes a change in cost accounting practice should be
determined in accordance with the provisions of CAS 9903.302. Those
provisions describe cost accounting practices as ``* * * any disclosed
or established accounting method or technique which is used for
allocation of cost to cost objectives, assignment of cost to cost
accounting periods, or measurement of cost.'' Additional guidance
regarding the disclosure of cost accounting practices applicable to
post-retirement benefit plans is provided in Part VII of the Disclosure
Statement (Form CASB DS-1 (Rev 2/96)). The DS-1 guidance makes clear
that any disclosure only applies to the basis for setting and updating
significant actuarial assumptions. Such disclosure does not apply to
the current numerical values of the actuarial assumptions which may
change in response to experience. On the other hand, a change in the
basis used for determining actuarial assumptions would constitute a
change in cost accounting practice that should be addressed on a case-
by-case basis under the provisions of CAS 9903.302. Additional
provisions in this proposed Standard are not deemed necessary.
The Board proposes to place a restriction on the health care trend
rate assumption. The proposed limit is implemented by imposing a cap on
the health care trend rate equal to the long-term expected rate of
return. Of all the actuarial assumptions, the health care trend rate is
one of the most volatile and difficult to estimate. Moreover, many
economists and other experts do not believe that health care
expenditure can continue to increase as a percentage of Gross Domestic
Product. Therefore, the Board believes that this restriction will not
only reduce volatility, but will introduce a long-term reasonability
\10\ limit on this problematic assumption. The Board does note that
increases in the projected and accumulated post-retirement benefit
obligations that are attributable to a period of high health care cost
increases will be measured and recognized as an actuarial loss.
---------------------------------------------------------------------------
\10\ The Board has generally accepted the SFAS 106 guidance on
actuarial assumptions which places more emphasis on current
conditions rather than long-term expectations. However, in this
instance, placing a long-term expectation on the health care trend
rate which can exert such a leveraging effect on post-retirement
benefit costs seems appropriate.
---------------------------------------------------------------------------
11. Accounting for the Transition Obligation
Comment: Both industry and Government commenters agreed that if a
firm liability exists, then the transition obligation portion of the
total liability is a firm liability and should be included in any
accrual accounting provisions promulgated by the Board. The commenters
noted that both the original and amended CAS 9904.412 identify the
initial unfunded liability, which is analogous to the SFAS 106
transition obligation, as one of the portions of unfunded actuarial
liability to be recognized and amortized. Similarly, CAS 9904.416
recognized and amortized the actuarial present value of benefits for
employees already retired when contractors switched from the pay-as-
you-go cost method to the terminal funding method. The commenters
generally agreed that immediate recognition of the transition
obligation would be disruptive to contract cost accounting. The
commenters recommended that the transition obligation be amortized over
either a period of 10 to 30 years as required by CAS 9904.412 or else
over the average future working lives of the participants as required
by SFAS 106.
One commenter argued for some mechanism to reflect the contractor's
historical level of cost-based contracts as a means of achieving equity
for both parties if there had been a major increase or decrease in the
contractor's cost-based Government work over the last ten (10) years.
Another commenter suggested that the contractor and the cognizant
Federal agency official should be given the latitude to negotiate such
an equitable arrangement. Other commenters opined that attempting to
reflect past levels of Government participation in costs assigned to
future periods would be exceedingly complicated and would impose an
administrative burden for both parties.
Response: Consistent with the conceptual approaches of CAS
9904.412, SFAS 87 and SFAS 106, the Board agrees that if the post-
retirement benefit plan meets the criteria for accrual accounting, the
transition obligation should be recognized in accordance with SFAS 106.
However, immediate recognition of the transition obligation, as
permitted by SFAS 106, would be unmanageable and disruptive to the
budgeting process for cost type contracts and the forward-pricing
process for negotiated fixed price contracts. The Board proposes to
limit recognition of the transition obligation to the delayed
recognition method of paragraphs 112 and 113 of SFAS 106.
Neither CAS 9904.412 nor CAS 9904.416 includes any provision to
reflect past levels of Government contracting prior to the initial
recognition of the prior service liability. Furthermore, the Board
views the granting of prior service benefits, which creates the
transition obligation, as an inducement or compensation for current and
future employment. Accordingly the transition obligation component is
to be allocated to the final cost objectives of the period in the same
manner as the other five post-retirement benefit components.
12. Accounting for Annual Gains and Losses
Comment: The commenters generally recommended that annual gains and
losses (also referred to as experience gains and losses) should be
amortized. Industry representatives preferred the gain and loss
provisions of SFAS 106, while the Government representatives preferred
the 15-year amortization period used in CAS 9904.413 and CAS 9904.416.
The commenters agreed that immaterial gains and losses could be
recognized immediately.
Response: As with the other components of post-retirement benefit
costs, determination of the annual gain and loss component will follow
the provisions of SFAS 106. However, the annual gain and loss measures
the experience of a specific cost accounting period and the Board
believes that it is inappropriate to inordinately delay contract cost
recognition. Therefore, the proposed Standard requires that the full
amount of the annual (experience) gain and loss for a cost accounting
period be amortized, not just the portion in excess of the corridor
established by SFAS 106. The proposed Standard permits the full current
period recognition of any immaterial annual gain and loss. Once the
contractor has established its policy for recognizing annual gains and
losses, the proposed Standard requires the contractor to consistently
follow that amortization policy in the future as part of its cost
accounting practice. Similar
[[Page 59521]]
to the provisions of paragraph 9904.412-50(a)(3), the established
policy regarding the recognition of annual gains and losses can be
dependent upon the size and nature of the gain or loss.
13. Recognition of Other Changes in the Accumulated Post-Retirement
Benefit Obligation
Comment: Industry representatives recommended that any gain or loss
due to a change in actuarial assumptions or a change in actuarial cost
method need not be separately recognized from other causes of the
annual gain or loss in accordance with SFAS 106, while the Government
representatives suggested the gain and loss amortization rules of CAS
9904.412 should be followed. Similar recommendations were made
regarding a change in the benefit provisions of the post-retirement
benefit plan.
The commenters agreed that the SFAS 106 market-related value of
assets should be used to determine the annual gain or loss. They noted
that the market-related value of assets, like the somewhat analogous
actuarial value of assets for pensions, helps smooth gains and losses
from period to period. The commenters also acknowledged that the
actuarial cost method, including the method of determining the market-
related value of assets, is part of the contractor's cost accounting
practice.
Response: Gains and losses due to changes in the actuarial
assumptions, the actuarial cost method, or the benefit provisions of
the plan are to be determined in accordance with SFAS 106. The Board
notes that although the actuarial cost method is prescribed by SFAS
106, substantive changes in the manner in which the actuarial cost
method is applied, such as a change in the attribution pattern or in
the method of determining the market-related value of assets, would
constitute a change in cost accounting practice.
The annual gain and loss includes the effect of actual experience
deviating from expected changes in assets and demographics. Under SFAS
106 and this proposed Standard, this component also includes the
effects of changes in actuarial assumptions. The Board notes that in
CAS 9904.412 the cost effects of changes in actuarial assumptions are
determined and amortized separately from the effects of annual
experience. This higher level of visibility allows the contractor and
the Government to assess the continuing reasonableness of the
assumptions in the aggregate. However, because the Board proposes to
accept and rely on the assumptions used for SFAS 106, this higher
visibility would not seem to serve any function in this proposed
Standard and no separate identification of the effect of a change in
actuarial assumptions is required.
14. Allocation of Post-Retirement Benefit Costs to Segments
Comment: Industry respondents generally expressed a belief that CAS
9904.403 provides sufficient guidance on allocating post-retirement
benefit costs to segments. Government respondents suggested that
allocation guidance similar to that contained in paragraph 9904.413-
50(c)(1) might be needed. The commenters agreed that the allocation
method would not necessarily be dependent on the accounting method
employed. They did acknowledge that the causal-beneficial relationship
between the employees of a segment and the benefits provided to those
employees by the post-retirement benefit plan should be a factor in
determining the proper allocation basis.
Response: The Board agrees and this proposed Standard on post-
retirement benefit costs contains provisions analogous to those found
in CAS 9904.413. The Board believes that the guidance provided in this
proposed Standard regarding the allocation of post-retirement benefits
costs to segments is compatible with the allocation process applicable
to central payments or accruals as outlined in paragraph 9904.403-
40(b)(4). The Board notes that post-retirement health care costs often
will be appropriately allocated on a head-count basis as opposed to
most pension costs which are related to benefits that are salary-
related. The Board proposes that the costs of plans using the pay-as-
you-go cost method be allocated to segments and home offices having
participants and beneficiaries eligible to receive benefits so that the
cost is allocated to the segments where the benefits had been earned,
i.e., a new start-up commercial segment will not absorb costs of
participants who had retired from a historically Government segment.
The Board concluded that consistent with its decision to accept the
measurement and assignment provisions of SFAS 106 and to permit
contractors to use the data produced for financial accounting purposes,
this proposal will in some instances permit a contractor to apply a
general allocation of the total plan cost to segments in spite of the
inherent, but immaterial, inaccuracy.
15. Separate Calculation of Post-Retirement Costs of Segments
Comment: The respondents generally agreed that separate computation
of cost at the segment level should be required whenever demographic,
benefit, or experience differences cause material differences in the
post-retirement benefit cost of the segment. Government respondents
pointed out that such guidance is already a part of the pension and
insurance standards, notably at paragraphs 9904.413-50(c)(2) and
9904.416-50(b)(1) and (2). Texas Instruments observed:
Differences in demographics or other factors may support a
separate calculation of post-retirement costs at the segment level.
In addition, such a segmented approach may be useful in recognizing
acquired groups of employees as well as variations in union
contracts, benefit levels, etc. In many cases, however, continued
use of composite methodology would remain appropriate.
Although separate computations by corporate division are fairly
commonplace, the commenters supported requiring separate computation
only when the post-retirement benefit cost for a segment would be
materially affected. AIA made the point as follows:
``We also feel that the following excerpt from the prefatory
comments to the old CAS 413 remains appropriate:
`The Board believes that, in most cases, it will be obvious to
the contracting parties whether the presence of one or more of these
conditions for a segment will materially affect the pension cost for
that segment * * * The Board emphasizes that separate calculations
are not routinely required, even though no two segments are likely
to be identical with respect to the actuarial factors set forth in
the Standard.' ''
The respondents did support the creation of special segments for
retired or other inactive plan participants. They suggested that
paragraph 9904.413-50(c)(9) would serve as an appropriate model. AIA
noted that ``this method, which has been present in CAS 413 for nearly
20 years, has been of considerable aid in facilitating allocation of
pension cost.''
Response: The Board generally agrees. The proposed Standard adopts
the separate calculation requirements of CAS 9904.413. Looking to CAS
9904.413 for consistency and guidance, the proposed Standard does
require separate computations whenever certain conditions exist or
certain events occur that can be expected to cause a material
difference between a general allocation and a separate calculation of
post-retirement benefit cost.
The Board considered requiring that post-retirement benefit costs
always be
[[Page 59522]]
individually calculated for each segment. There would have been an
exemption permitting costs to be determined for the plan as a whole and
then allocated across the segments if such composite computation and
general allocation did not produce materially different results as
compared to the cost separately calculated for the segment. When CAS
9904.413 was written in the 1970's, actuarial valuations involved
extensive and expensive manual computations. Now that actuaries use
high-speed computers to do the basic annual valuation computations, it
is standard practice for an employer to have valuation results produced
for subgroups of employees by division or subsidiary, often using
differing sets of assumptions by location when warranted. The primary
advantage of separately calculating post-retirement benefit costs would
be achieving the most accurate determination of the benefit obligation
and cost for the particular employees of a segment. However, the Board
found no material advantage to requiring separate calculations if there
were no material effect on contract cost determination.
The Board also considered a general requirement that costs be
separately calculated whenever such a separate calculation would yield
a materially different result from a general allocation of costs. But
this requirement could cause a contractor to produce the separate
calculation in order to assess if a material difference would occur.
Therefore, the Board found no particular advantage to such a
requirement.
This proposed Standard does not provide for nor permit the use of
inactive segments. Instead, consistent with the general concept that
costs associated with retired and terminated employees should be
regarded as a general cost of doing business, each nonactive
participant must be assigned to the appropriate segment, an
intermediate home office, or corporate home office.
When the pension Standard, CAS 9904.413, was developed, a common
practice for pension plans funded or operated through insurance company
products, such as, deposit administration contracts or immediate
participation guarantee contracts, was to either purchase annuities as
participants retired or to move the participants to a separate account
or ``retired life reserve'' which effectively annuitized the
participants' benefits. To alleviate the administrative expense
associated with tracking retirees by the segment from which they
retired, CAS 9904.413 emulated this concept of a retired life reserve
by permitting retirees, and other terminated participants, to be
transferred to an inactive segment. The advent of computer-based
participant data systems has eliminated most of the administrative work
associated with tracking plan participants and such a provision is no
longer needed. The Board also is aware that the creation of a non-
operational segment is contrary to the 9904.403-30(a) definition of a
``segment'' and has frequently caused confusion for contractors and
auditors.
16. Accounting for the Assets Allocated to Segments
Comment: Industry commenters generally expressed that if funding
were to be required, then the Board should include a provision allowing
Government segments to be funded first. They noted that with the lack
of tax-advantaged funding, such a provision might enable a contractor
to fully fund the portion of post-retirement benefit cost allocated to
Government segments. The NDIA noted, ``if contractors could recover
through Government contracts funds set aside for post-retirement
benefits, there would be some incentive to fund.'' The AIA felt such a
provision was of particular importance to a contractor who performed
primarily commercial work. The AIA wrote: ``In addition, if contractors
that are primarily commercial are not permitted to fund only their
segments performing government work, those contractors will be placed
at a relative disadvantage compared to contractors that are devoted
exclusively to government contracting.'' The DOD IG concurred stating:
For the benefit of covered employees, it is most desirable to
fund all segments. However, for contract costing purposes, it is
acceptable to fund only those segments performing work under
Government contracts.
Generally industry respondents opined that memorandum records could
provide sufficient evidence of such segmented funding. The DOD IG
cautioned:
Our experience in reviewing CAS 9904.413-50(c)(7) records on
business combinations is that memorandum records are adequate only
if they are subject to close scrutiny and complete audits by the
Government.
Many respondents believed that trust and plan documents could be
drafted so that the Government and commercial segments could be
effectively covered by separate plans. But they were concerned that
such legal separation of the segments would require extra effort, could
create employee relations problems, and might run afoul of
nondiscrimination rules.
Concerning transfers between funded and unfunded segments, the
respondents generally agreed that rules could be drafted, but it might
be extremely difficult to draft rules that would be equitable and would
not be overly complicated. The OUSD suggested that instead of
transferring assets and liabilities with participants, ``any liability
resulting from prior service should remain with the segment from which
the employee is transferred.''
The commenters also believed that the methods of CAS 9904.413
regarding the initial allocation of assets to the segment and the
subsequent annual update would provide ample guidance for post-
retirement benefits plans.
Response: The proposed Standard adopts the CAS 9904.413 provisions
regarding the initial allocation and subsequent update of assets for
contractors that use accrual accounting and separately calculate post-
retirement benefit cost for segments.
While the proposed Standard does not impose a funding requirement,
this proposal permits contractors to fulfill any funding requirement
that might continue to be imposed by procurement regulations regarding
allowability for only those segments and home offices that allocate
costs to Government contracts. This provision will enable many, if not
most, contractors to align the funding of their post-retirement benefit
costs with the segments that generate income from cost-based Government
contracts.
Commercial segments that are not funded would record a memorandum
record and account for their costs as an accumulated value of unfunded
accruals. When plan participants transfer between segments, this
accumulated value of unfunded accruals would be treated the same as
plan assets. The requirement to separately account for the assets of
each segment will enable this provision to function in a fairly simple
and straightforward manner.
The Board also proposes explicit guidance on how assets and
liabilities are treated when segments are split or combined. Regarding
transfers, the Board believes that the unamortized portion of an
employee's accumulated post-retirement benefit obligation is
compensation for future service and should follow the employee.
Accordingly, the proposed Standard provides that plan assets, the
accumulated value of unfunded accruals, and the accumulated value of
prepayment credits shall be transferred
[[Page 59523]]
in proportion to the employee's accumulated post-retirement benefit
obligation.
17. Accounting for Curtailments, Settlements, and Special Termination
Benefits
Comment: Industry commenters generally agreed that because a
benefit curtailment or liability settlement does not disrupt the
contractual relationship between the parties, there was no need for a
special immediate period adjustment. Most commenters felt that
curtailments and settlements should be accounted for as gains or
losses.
The OUSD expressed a belief that accounting treatment similar to
that contained in paragraph 9904.413-50(c)(12) should be provided for
the effects of a post-retirement benefit curtailment, liability
settlement, or plan termination whenever accrual accounting had been
used. The OUSD also recommended that the unamortized portion of the
initial unfunded liability, i.e., the transition obligation, be
excluded from the determination of the adjustment. Like industry, the
OUSD believed that the Board should permit the plan termination or
benefit curtailment adjustment to be amortized if the contractual
relationship continued.
Industry commenters expressed their belief that the Government can
protect its interests when a post-retirement benefit plan is terminated
through provisions similar to the pension plan terminations or segment
closing adjustments of CAS 9904.413. They believe that such a provision
could provide the Government adequate protection so that a funding
prerequisite for accrual accounting might not be necessary. And, they
stressed that the Government should recognize its responsibility in
regard to underfunded plans. As the NDIA explained:
Industry commenters generally emphasized that the Government has
a responsibility to share in any underfunding as well as any surplus
when accrual accounting had been used. Some industry commenters
indicated a belief that the Government should share in the
underfunding of post-retirement benefit plans that had been
accounted for using the pay-as-you-go cost method.
Both industry and Government respondents agreed that the
contracting parties are in the best situation to determine whether the
adjustment should be effected in the cost accounting period when the
plan termination occurs or amortized over several periods with an
interest adjustment. Some commenters opined that the option to spread
the adjustment should reflect whether or not there is a continuing
contractual relationship. The OUSD felt that the choice to immediately
adjust or amortize should be at the Government's option. Similarly, TRW
believes that the cognizant Federal agency official is in the best
position to determine whether immediate adjustment or amortization is
appropriate.
Response: The Board proposes that any benefit curtailment,
liability settlement, or special termination benefit gain (or loss) be
measured and first used to offset against unrecognized losses (or
gains) in accordance with SFAS 106. While SFAS 106 would then recognize
any remaining gain or loss as current period income or expense, the
proposed Standard provides that the residual gain or loss be amortized
over 10 years as long as the contractual relationship continues. If the
segment is closed, any unamortized portion of any curtailment,
settlement, or special termination benefit gain or loss is subsumed in
the segment closing adjustment.
In this proposed Standard, the Board is presuming that the
possibility of any inequity because of a change in the level of
government contracting over the ten year amortization period is an
acceptable risk when compared to the disruption that would be caused by
a repricing of contracts. An additional inequity might occur because
the effect of the curtailment, settlement, or termination benefits
would not be reflected in currently priced cost-based fixed price
contracts during the first few periods of the ten year amortization
period. As this case has progressed, the Board's concern about not
repricing has increased because of the magnitude of the recent benefit
curtailments of some post-retirement benefit plans.
The Board believes that since SFAS 106 requires full current period
recognition of curtailments, settlements, and termination benefits
gains and losses, it is appropriate to accelerate the normal 15-year
amortization period used for annual gains and losses to 10 years for
any unrecognized curtailment, settlement, or special termination gain
or loss.
If a plan is terminated, much of the unrecognized transition
obligation and prior service cost, including any prior service cost
from recent plan amendments and benefit improvements, will be
eliminated by the coincident benefit curtailment, particularly the
post-retirement benefit obligation attributable to nonvested benefits.
Accordingly, unlike the pension Standard, the proposed Standard does
not include a 60-month phase-in of plan amendments. Any remaining
unamortized prior service cost and transition obligation would continue
to serve as an inducement or compensation, albeit diminished, for
future service.
18. Segment Closing Adjustment for Defined-Benefit Plans Using Accrual
Accounting
Comment: Industry commenters expressed the view that the Government
can protect its interests when a segment is closed through an
adjustment similar to that found at paragraph 9904.413-50(c)(12).
Industry commenters emphasized the Government's responsibility to share
in any underfunding as well as in any surplus. The OUSD agreed that
provisions similar to those found at paragraph 9904.413-50(c)(12)
regarding pensions would be appropriate to address segment closings
when the accrual accounting method had been employed.
Response: The proposed segment closing provisions are similar to
the CAS 9904.413 segment closing provisions. This proposed Standard
explicitly states that internal reorganizations do not constitute a
segment closing. The proposed Standard measures an amount to be
immediately recognized by an adjustment to contracts. However, this
proposal provides that the contracting parties can determine the
details on how the actual adjustment will be effected based upon the
size of the adjustment and the contracting circumstances.
The Board proposes to measure the segment closing adjustment as the
difference between the nonforfeitable post-retirement benefit
obligation and the accumulated value of plan assets and unfunded
accruals. These measures may result in either a credit or a charge to
the Government. As previously discussed, the nonforfeitable post-
retirement benefit obligation measures the firm or unavoidable
liability.\11\
---------------------------------------------------------------------------
\11\ The actuarial liability determined under the accrued
benefit cost method which is used to determine the paragraph
9904.412-50(c)(12) segment closing for pensions is analogous to the
nonforfeitable post-retirement benefit obligation in that it
measures the firm liability for benefits earned by participants as
of the date of the event (segment closing).
---------------------------------------------------------------------------
There has been some confusion about the CAS 9904.413 segment
closing provisions when a segment is sold to a successor-in-interest
and assets and liabilities are transferred from the seller to the
buyer. The concept articulated in CAS 9904.413 and followed in this
proposed Standard is that no adjustment is necessary to the extent that
the contract cost accounting for the benefits
[[Page 59524]]
continues unaltered. This proposed Standard makes it clear that the
contract cost accounting records used to determine the segment closing
adjustment when there is a sale to a successor-in-interest are the same
records that have been used up to the point of sale. The proposed
Standard also describes how a segment's assets and liabilities shall be
divided when part of the segment's liability is retained or the segment
is otherwise split or merged as part of the sale, transfer, or other
reorganization.
19. Segment Closing Under the Pay-as-You-Go Cost Method
Comment: Some industry respondents stated that regardless of
whether the Cost Accounting Standards did or did not permit a
contractor to use accrual accounting, the prior period post-retirement
benefit costs were incurred to produce goods and services for the
Government. They believed that any decision to not recognize the
unfunded accumulated post-retirement benefit obligation would be a
procurement allowability decision and not a cost accounting decision.
Other industry commenters argued that the Remington Arms decision (Army
Contract Adjustment Board (ACAB) Decision No. 1238 (1991)) made it
clear that whenever the Government had benefitted from the contractor's
use of the pay-as-you-go cost method in the past, the Government should
bear responsibility for its share of the unfunded accumulated benefit
obligation as a matter of equity and fairness. Texas Instruments did
note that the Remington Arms case was based on the fact that the
Government not only benefitted, but was complicit in the contractor's
decision to use the pay-as-you-go cost method. SDP Technologies
expanded the concept of complicity to include the Government's arguable
influence on companies and segments that perform primarily Government
work.
The Remington Arms case properly established the basic policy,
i.e., the Government has a special responsibility when it is the
sole beneficiary of a company's operations. The responsibility is
not limited to GOCO facilities but applies equally to situations
where companies have been dedicated to supplying the Government,
particularly under single source contracts where the Government has
a substantial influence on which costs can be recovered.
In response to the Staff Discussion Paper issue on using a phase-in
approach for Government responsibility for the unfunded post-retirement
benefit obligation when a contractor had used the pay-as-you-go cost
method in the past, the AIA made an argument for considering a phase-
out of the Government's responsibility.
``In the near-term, a segment closing adjustment should apply to
all situations. Industry's use of pay-as-you-go accounting has
yielded considerable savings to the Government over the years;
considering the unfunded amounts as an adjustment to previously
determined postretirement benefit costs is highly appropriate, as it
merely puts the Government in the same position it would have been
in had accrual accounting been used in past years.''
* * * * *
``Over the long-run, however, there is a valid question as to
whether or not contractors that account for their postretirement
benefits cost on a pay-as-you-go basis should be entitled to a
segment closing adjustment. By using pay-as-you-go accounting, these
contractors will be relatively more competitive than other
contractors that use accrual accounting (assuming that all else is
equal, which is rarely true). Thus, the pay-as-you-go basis
contractors might win contracts in the near-term due to their lower
prices but might ultimately bill the same amount to the Government.
This result hardly seems fair.
``To avoid this situation, the CAS Board could require
contractors to make an election between pay-as-you-go accounting and
accrual accounting with the explicit understanding that those
contractors selecting pay-as-you-go accounting would not be able to
claim a future segment closing adjustment. In this manner, decisions
can be made by contractor management with a full understanding of
the ultimate implications.''
Government respondents did not feel the Government should bear any
responsibility for the unfunded accumulated post-retirement benefit
obligation when the contractor had been using the pay-as-you-go cost
method in the past. The DOD IG pointed out that ``the CASB-1 discloses
the accounting practice under which the Government and contractor
mutually agree to do business and the Government was not in any
position to force the contractor to fund any PRBs.'' The OUSD commented
that because Government regulations have permitted contractors to
choose between accrual and cash basis accounting for such costs, the
Government has no responsibility for the contractor's unilateral
business decision.
Response: The segment closing adjustment measured under this
proposal does not provide for the recognition of any accumulated post-
retirement benefit obligation or nonforfeitable post-retirement benefit
obligation for contractors that are required to use the pay-as-you-go
cost method because their plan fails to meet the criteria for accrual
accounting. For contractors that do use accrual accounting, this
proposal measures the adjustment using the nonforfeitable post-
retirement benefit obligation. While the contractor had the ability to
use any appropriate accounting method, including accrual accounting,
the general practice was to use the pay-as-you-go cost method prior to
the adoption of SFAS 106. Once this proposed Standard becomes
applicable, the contractor will be required to methodically assign and
allocate the costs associated with its transition obligation to
Government contracts for post-retirement benefit plans that meet the
criteria for accrual accounting.
The Board understands that under the pay-as-you-go (cash basis
accounting) cost method the Government may have received some benefit
from lower contract costs in the past. However, the contractor may have
benefitted from achieving a more competitive price by electing to use
cash basis accounting. Furthermore, to impose the full responsibility
on the Government for costs not accrued under cost-based contracts
ignores the fact that both contractors and the accounting profession at
large were content to use the pay-as-you-go cost method in the past.
The Board finds no accounting justification for imposing a current
period cost adjustment which arises from the contractor's previous
decision to use cash basis accounting or terminal funding. The Board
does note that a legal question, not an accounting question, of equity
may be involved in the very special situation of GOCO facilities, such
as that addressed in the Remington Arms decision, where the Government
was found to be involved in the selection of the accounting method.
20. Determination of the Government's Share of the Segment Closing
Adjustment
Comment: In its comments, the NDIA discusses how extraordinary
events and segment closings require recognition in the financial
results of operations for an accounting period and how the same type of
adjustments might be appropriate for Government contract cost
accounting purposes. The ABA agreed that a segment closing adjustment
would be appropriate but expressed concern about how the Government's
share is determined and effected when they wrote:
* * * In our earlier submission we counseled against reopening
the prices of fixed price type contracts, or cost type contracts in
years that are closed. Limiting the adjustment mechanism to costs
only is consistent with sound procurement policy
[[Page 59525]]
and will secure to the government and the contractor equally the
benefit of their bargain. Moreover, the OFPP Act Amendments of 1988
do not provide the CAS Board with authority to adjust contract
prices, other than the equitable adjustment mechanism for cost
accounting practice changes or noncompliances that result in
increased costs to the government. See Public Law 100-679, section
26(h)(1), 41 U.S.C. 422(h)(1). For this reason, we believe that CAS
413-50(c)(12), as amended March 30, 1995, is subject to challenge as
exceeding the Board's statutory authority
Response: The Board proposes that this Standard, like CAS 9904.413,
consider all prior cost-based contracts that become subject to this
proposed Standard when determining the Government's share of any over-
or under-funding of the past post-retirement benefit costs. The
proposed Standard does not reopen any contracts nor adjust any prior
period costs, but instead captures the Government's share of the gain
or loss amounts that would have been excluded from or included in the
prior period cost accruals used to price contracts had the segment
closing been anticipated.
The Board notes that in addition to paragraph 9904.413-50(c)(12)
regarding pensions, the original Board recognized the need for
exceptional accounting treatment when an usually large or non-routine
depreciation gain or loss occurs. Paragraph 9904.409-50(j)(3) provides:
The contracting parties may account for gains and losses arising
from mass or extraordinary dispositions in a manner which will
result in treatment equitable to all parties.
F. Additional Public Comments
Interested persons are invited to participate by submitting data,
views or arguments with respect to this ANPRM. All comments must be in
writing and submitted to the address indicated in the ADDRESSES
section.
When reviewing this proposed Cost Accounting Standard, the Board
asks that respondents consider and provide comments regarding the
questions discussed below. When responding, commenters are asked to
discuss the basis for their conclusions.
1. Definition of Nonforfeitable
The Board notes that under many post-retirement benefit plans,
employees are often not granted a vested right to post-retirement
benefits until they attain retirement or full eligibility age. The
proposed definition of the term ``nonforfeitable,'' similar to that in
the pension Standard, includes an exception for benefits forfeited
because an employee terminates employment prior to attaining
eligibility for benefits. Given the extended delay in attaining
eligibility rights to a post-retirement benefit under most plans, the
Board is interested in any comments regarding the appropriateness of
this exception for post-retirement benefit costs.
2. Recognition of Post-Retirement Benefit Costs
(a) Alternative or additional criteria for determining what creates
a firm liability: As discussed in subsection F.3, the Board believes
that the SFAS 106 recognition of the obligation for the ``substantive
plan'' is inappropriate for Government contract cost accounting. In
fact, the Board has included a limitation on the annual cost accrual
because of its concern that the existence of a written description of
the plan which is communicated to the plan participants may not ensure
that there is a contractual and enforceable, that is, compellable,
obligation to pay the promised benefits. The Board is interested in any
alternative or additional criteria that might serve to ascertain the
firmness of the post-retirement benefit liability.
(b) Firmness of the liability and the role of funding: The Board
realizes that many contractors will desire to retain the right to
terminate their post-retirement benefit plan or take other actions to
reduce or eliminate benefits attributable to prior service. While
acknowledging the limitation of tax-advantaged funding vehicles for
retiree health benefits, the Board asks respondents to this proposed
Standard to consider whether funding could provide an appropriate and
effective alternative or whether additional criteria should be
considered.
3. Measurement and Assignment of Post-Retirement Benefit Costs
(a) Actuarial assumptions: The Board remains concerned that the
volatility of health care trends, coupled with the SFAS 106 emphasis on
current market conditions, could create an unacceptable degree of
uncertainty in the estimates of the liability for future post-
retirement benefits, especially for retiree health care benefits. This
volatility or uncertainty could adversely affect the forward pricing
process which relies on CAS compliant cost data. The Board invites
further comments regarding whether actuarial assumptions used for
contract costing purposes should each be based on ``best-estimate,''
long-term expectations rather than relying on the SFAS 106 guidance.
The Board also asks that contractors, actuaries, or Government
officials submit any historical data they may have regarding the
volatility of post-retirement benefit costs.
(b) Reporting on sources of annual gains and losses: As discussed
under subsections F.12 and F.13, greater visibility of cost
measurements may be obtained by requiring that annual gains and losses
be reported by source, that is, separate identification of gains and
losses from asset performance, population and demographic changes,
assumption changes, and cost method changes. The Board asks for
comments on whether visibility and oversight would be enhanced by a
disclosure of each such portion of the annual gain or loss.
(c) Amortization of gains and losses: The Board notes that the
proposed rule requires full recognition of gains and losses on an
amortized basis. This differs from SFAS 106 which requires amortization
of cumulative gains and losses that exceed a corridor of the greater of
10% of the projected post-retirement benefit obligation or the fair
value of assets. SFAS 106 does permit full recognition of gains and
losses on an amortized basis. This proposed provision is intended to
keep cost recognition more closely associated with the accounting
period in which the gain or loss occurred. The Board would be
interested in views regarding the use of the SFAS 106 amortization
corridor for Government contract costing purposes.
(d) Limiting medical inflation assumption: The Board seeks comments
concerning whether a limit should be placed on the health care trend
rate. Commenters are asked to consider what limit, e.g., the long-term
expected rate of return, the Treasury rate, is appropriate for
Government contract costing purposes. The Board is also interested in
any information concerning the degree of volatility and uncertainty in
the medical inflation assumption.
(e) Terminal funding method: Notwithstanding the Board's response
in E.6 that terminal funding is an unacceptable cost method under GAAP,
the Board would like comments regarding how prevalent the use of the
terminal funding method is among contractors. Commenters should also
address whether a contractor should be permitted to elect to use the
terminal funding method either at the time this proposed rule would
first be applicable or even be permitted to later elect to use the
terminal funding method.
(f) Amortization of lump sum settlements and single premium
payments: For plans accounted for under the pay-as-you-go cost method,
the proposed Standard is consistent with subparagraph 9904.412-
[[Page 59526]]
40(b)(3)(iii) and paragraph 9904.412-50(b)(1). The proposed Standard
requires that when a portion of the liability is liquidated prior to
the periods in which benefit payments are expected to occur, such lump
sum settlement or single premium payment shall be amortized. The Board
further notes that such amortization is consistent with paragraph 52 of
SFAS 106 requiring that costs of plans primarily attributable to
retirees shall be attributed to the future life-expectancy of the
retirees. Commenters are asked to provide any rationale for recognizing
these single period settlements on an immediate basis rather than an
amortized basis, especially if the contractor has not been using
terminal funding for its post-retirement benefit plan.
(g) Long-term expected rate of return: The Board favored using the
interest rate as determined by the Secretary of the Treasury pursuant
to Public Law 92-41, 85 Stat. 97. to measure the interest equivalent on
the accumulated value of unfunded accruals and accumulated value of
prepayment credits. The Board is interested in comments regarding the
appropriateness of the Treasury rate and whether commenters believe
some other rate may be more appropriate.
4. Allocation of Post-Retirement Benefit Costs to Segments
(a) Criteria for separate calculation of post-retirement benefit
costs: This proposal includes similar criteria to that found in CAS
9904.413 for determining when separate calculations are necessary. The
Board seeks comments regarding whether there are additional conditions
or events that may materially affect the determination of post-
retirement benefit costs at the segment level which should require a
separate calculation of post-retirement benefit costs for a segment.
(b) Separate calculation as the only measurement for segment costs:
Because of the availability of computers and the availability of
sophisticated actuarial valuation software, requiring separately
calculated costs by segment no longer imposes the administrative burden
that it would have in 1977. The Board asks for comments regarding a
requirement that costs always be separately calculated for segments
unless it can be reasonably demonstrated that a general allocation
would provide materially similar results.
5. Allocation to Intermediate and Final Cost Objectives
Because the determination of certain adjustments will require an
assessment of the Government's historical participation in post-
retirement benefit costs, the Board considered including a record-
keeping requirement regarding allocations of post-retirement benefit
costs to contracts subject to this Standard. The Board is interested in
whether contractor or Government representatives have experience or
concerns about the necessary data being readily available regarding the
Government's historical participation absent such a requirement.
6. Adjustments for Curtailments, Settlements, and Special Termination
Benefits
The Board would appreciate any comments regarding any alternatives
to the proposed ten-year amortization period that should be considered.
7. Adjustments for Segment Closings
(a) Government's responsibility for future salary increases and
health care trends: The preamble to the March 30, 1995 amendments to
CAS 9904.413 noted that existing and past Government contracts of the
closed segment neither cause nor benefit from future salary increases.
The Board is interested in any comments regarding whether the effect of
such future salary levels should be excluded from the determination of
a segment closing adjustment for post-retirement benefit costs.
(b) Previous use of the pay-as-you-go cost method: As proposed,
this Standard would provide for the recognition of the unfunded
nonforfeitable post-retirement benefit obligation for contractors using
accrual accounting that had been using the pay-as-you-go cost method
before this Standard was applicable. The Board seeks any comments
regarding whether there should be a phase-in of such recognition.
(c) ``Homeless'' inactives retained by a seller: After a segment is
sold, the seller may retain ``inactive'' plan participants that were
formerly associated with the sold segment. Consequently, the seller
(transferor) can no longer allocate accrued post-retirement benefit
costs generated by these inactive participants to the sold segment for
allocation to that segment's intermediate and final cost objectives.
Accordingly, the Board considered allocating the assets to the inactive
participants retained by the seller (transferor) before any assets are
allocated to the active participants who go to the buyer (transferee).
The Board is interested if there is any rationale for giving inactive
participants such preferential funding when a segment is sold or
ownership is otherwise transferred.
(d) Recognition of retained liability: The Board is aware that some
hold the belief that when a segment is sold or ownership is otherwise
transferred, the selling price or transfer agreement explicitly or
implicitly reflects compensation to the seller for any future post-
retirement benefit obligations retained by the seller. Conversely, the
belief holds that there is an implicit credit to the buyer for any
post-retirement benefit obligations assumed by the buyer. Based on this
belief, it has been suggested that Government contractors utilizing the
pay-as-you-go method to account for post-retirement benefit costs
should separately identify any retained participants of the disposed
segment. In such cases, the post-retirement benefit payments made for
these inactive participants would not be included/recognized, after the
sale or transfer, as allocable costs with respect to the seller's
ongoing cost-based Government contracts.
The Board has not included such a provision in the Standard being
proposed today, but is interested in any data or information that
commenters can provide on alternative treatments of the liability and
future payments for retained participants, for Government contract
costing purposes in connection with a sale or ownership transfer.
8. Illustrations
The Board is interested in comments regarding whether displaying
the accumulated post-retirement benefit obligation routinely as a
debit, except when illustrating SFAS 106 disclosures, creates
confusion.
List of Subjects in 48 CFR 9904
Government Procurement, Cost Accounting Standards.
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.
It is proposed to amend part 9904 as follows:
PART 9904--COST ACCOUNTING STANDARDS
1. The authority citation for Part 9904 continues to read as
follows:
Authority: Public Law 100-679, 102 Stat 4056, 41 U.S.C. 422.
2. Section 9904.416-50 is amended by revising paragraph (a)(1)(v)
to read as follows:
9904.416-50 Techniques for application.
(a) * * *
(1) * * *
(v) If an objective of an insurance program is to provide insurance
[[Page 59527]]
coverage on retired persons, then such program is subject to Cost
Accounting Standard 9904.419 except as provided in 9904.419-40(b)(2).
* * * * *
9904.416-60 [Amended]
3. Section 9904.416-60 is amended by removing and reserving
paragraphs (c), (d) and (e).
4. Sections 9904.419, 9904.419-20, 9904.419-30, 9904.419-40,
9904.419-50, 9904.419-60, 9904.419-62, 9904.419-63, 9904.419-64 are
added to read as set forth below.
5. Section 9904.419-10 and 9904.419-61 are added and reserved to
read as follows:
9904.419 Cost accounting standard for measurement, assignment,
allocation, and adjustment of post-retirement benefit cost.
9904.419-10 [Reserved]
9904.419-20 Purpose.
(a) The purpose of this Standard is to provide criteria for
measuring the costs of post-retirement benefit plans, assigning the
measured costs to cost accounting periods, and allocating the assigned
costs to segments of an organization. This Standard also provides the
basis on which segments shall allocate assigned post-retirement benefit
costs to their intermediate and final cost objectives. The provisions
of this Cost Accounting Standard should enhance uniformity and
consistency in accounting for post-retirement benefit costs and thereby
increase the probability that those costs are allocated to segments and
to cost objectives within segments in a uniform and consistent manner.
(b) This Standard provides for the adjustment of post-retirement
benefit costs for the effect of a curtailment of a post-retirement
benefit plan, a settlement of a post-retirement benefit obligation, a
granting of termination benefits, a termination of a post-retirement
benefit plan, or a segment closing.
(c) This Standard is applicable to the cost of all post-retirement
benefit plans except for costs of pension plans and deferred
compensation which are covered in other Cost Accounting Standards.
9904.419-30 Definitions.
(a) The following are definitions of terms which are prominent in
this Standard. Other terms defined elsewhere in this chapter 99 shall
have the meaning ascribed to them in those definitions unless paragraph
(b) or (c) of this subsection requires otherwise.
(1) Accumulated value of unfunded accruals means the value, as of
the measurement date, of post-retirement benefit costs that have been
accrued but not funded, adjusted for imputed earnings and for benefits
paid by the contractor.
(2) Business unit means any segment of an organization, or an
entire business organization which is not divided into segments.
(3) Captive insurer means an insurance company that does business
primarily with related entities. Related entities include, but are not
limited to, companies that are owned by or under the control of the
contractor, including affiliates, parents, subsidiaries, or controlling
entities.
(4) Fair value means the amount that a plan could reasonably expect
to receive for an investment in a current sale between a willing buyer
and a willing seller, that is, other than a forced or liquidation sale.
(5) Funded post-retirement benefit cost means the portion of post-
retirement benefit cost for a current or prior cost accounting period
that has been paid to a funding agency.
(6) Market-related value of plan assets means a balance used to
calculate the expected return on plan assets. Market-related value can
be either fair value or a calculated value that recognizes changes in
fair value in a systematic and rational manner over not more than five
years. Different methods of calculating market-related value may be
used for different classes of plan assets, but the manner of
determining market-related value shall be applied consistently from
year to year for each class of plan asset.
(7) Nonforfeitable post-retirement benefit obligation means the
accumulated post-retirement benefit obligation for benefits, or that
portion of benefits, for which the participant's eligibility to receive
a present or future post-retirement benefit is no longer contingent on
remaining in the service of the employer or attaining a specified age.
The excess, if any, of the nonforfeitable post-retirement benefit
obligation, including benefit eligibility as of the last day of the
plan year, over the valuation assets is the unfunded nonforfeitable
post-retirement benefit obligation. Any accumulated post-retirement
benefit obligation in excess of the nonforfeitable post-retirement
benefit obligation is the forfeitable post-retirement benefit
obligation.
(8) Pension plan means a deferred compensation plan established and
maintained by one or more employers to provide systematically for the
payment of benefits to plan participants after their retirement,
provided that the benefits are paid for life or are payable for life at
the option of the employees. Additional benefits such as permanent and
total disability and death payments, and survivorship payments to
beneficiaries of deceased employees may be an integral part of a
pension plan.
(9) Post-retirement benefit plan means an arrangement that is
mutually understood by an employer and its employees, whereby an
employer undertakes to provide its employees with post-retirement
benefits after they retire in exchange for their services over a
specified period of time, upon attaining a specified age while in
service, or a combination of both. A post-retirement benefit plan may
be written or it may be implied by a well-defined, although perhaps
unwritten, practice of paying post-retirement benefits or by oral
representations made to current or former employees.
(10) Post-retirement benefit plan participant means any employee or
former employee of an employer, or any member or former member of an
employee organization, who is or may become eligible to receive a
benefit from a post-retirement benefit plan which covers employees of
such employer or members of such organization who have satisfied the
plan's participation requirements, or whose beneficiaries are receiving
or may be eligible to receive any such benefit. A participant whose
employment status with the employer has not been terminated is an
active post-retirement benefit plan participant.
(11) Post-retirement benefit plan termination means an event in
which the post-retirement benefit plan ceases to exist and all benefits
are settled by the purchase of insurance contracts or by other means.
The plan may or may not be replaced by another plan.
(12) Post-retirement benefits means all forms of benefits, other
than retirement income, provided by an employer to retirees. Those
benefits may be defined in terms of specified benefits, such as health
care, tuition assistance, or legal services, that are provided to
retirees as the need for those benefits arises, such as certain health
care benefits, or they may be defined in terms of monetary amounts that
become payable on the occurrence of a specified event, such as life
insurance benefits not provided through a pension plan. Benefits
provided in whole or in part by funds that are separately accounted for
within the trust fund of a qualified pension plan shall be considered
post-retirement benefits subject to this Standard.
(13) Segment means one of two or more divisions, product
departments, plants, or other subdivisions of an organization reporting
directly to a home office, usually identified with responsibility for
profit and/or
[[Page 59528]]
producing a product or service. The term includes Government-owned
contractor-operated (GOCO) facilities, and joint ventures and
subsidiaries (domestic and foreign) in which the organization has a
majority ownership. The term also includes those joint ventures and
subsidiaries (domestic and foreign) in which the organization has less
than a majority ownership, but over which it exercises control.
(14) Successor-in-interest means an entity that assumes all
obligations under the government contract or contracts of a contractor
through a novation agreement. A novation agreement is one that is
executed by a contractor (transferor), a successor-in-interest
(transferee), and the Government, by which the transferor guarantees
performance of the contract, the transferee assumes all obligations
under the contract, and the Government recognizes the transfer of the
contract and related assets.
(15) Unfunded accumulated post-retirement benefit obligation means
the accumulated post-retirement benefit obligation in excess of the
valuation assets. The excess of the valuation assets over the
accumulated post-retirement benefit obligation is an actuarial post-
retirement benefit surplus and is treated as a negative unfunded
accumulated post-retirement benefit obligation.
(16) Valuation assets means the total value of assets used to
determine post-retirement benefit cost. Valuation assets are the sum of
the fair value of assets plus the accumulated value of unfunded
accruals reduced by the accumulated value of prepayment credits.
(b) The following modifications of terms defined elsewhere in this
Chapter 99 are applicable to this Standard:
(1) Actuarial cost method means a technique which uses assumptions
to measure the present value of future post-retirement benefits and
post-retirement benefit plan administrative expenses, and which assigns
the cost of such benefits and expenses to cost accounting periods. The
actuarial cost method includes the asset valuation method used to
determine the market-related value of plan assets.
(2) Funding agency means an organization or individual which
provides facilities to receive and accumulate assets to be used either
for the payment of benefits under a post-retirement benefit plan, or
for the purchase of such benefits, provided such accumulated assets
form a part of a post-retirement benefit plan established for the
exclusive benefit of the plan participants and their beneficiaries.
(3) Nonforfeitable means a right to a post-retirement benefit,
either immediate or deferred, which arises from an employee's service,
which is unconditional, and which is legally enforceable against the
post-retirement benefit plan or the contractor. Rights to benefits that
do not satisfy this definition are considered forfeitable. A right to a
post-retirement benefit is not considered forfeitable solely because it
may be affected by the employee's or beneficiary's death or disability.
Nor is a right considered forfeitable because it can be affected by the
unilateral actions of the employee.
(4) Pay-as-you-go cost method means a method of recognizing post-
retirement benefit cost only when post-retirement benefits are paid to
or on behalf of retired employees or their beneficiaries.
(5) Prepayment credit means the amount funded in excess of the
post-retirement benefit cost assigned to a cost accounting period that
is carried forward for future recognition.
(ii) The accumulated value of prepayment credits means the value,
as of the measurement date, of the prepayment credits adjusted for
imputed earnings and decreased for amounts used to fund post-retirement
benefit costs or obligations, whether assignable or not.
(6) Segment closing means that a segment or business unit has been
sold or ownership has been otherwise transferred, discontinued
operations, or discontinued doing or actively seeking Government
business under contracts subject to this Standard. Segment mergers or
splits within the contractor's operations shall not be considered a
segment closing for purposes of this Standard.
(c) Other terms used prominently in this Standard have the same
meanings as in Statement of Financial Accounting Standards No. 106
``Employers'' Accounting for Post-retirement Benefits Other Than
Pensions' (SFAS 106), including subsequent amendments.
9904.419-40 Fundamental requirements.
(a) Recognition of post-retirement benefit costs. The commitment to
provide post-retirement benefits in future periods shall be evidenced
by a post-retirement benefit plan.
(1) The cost of a post-retirement benefit plan shall be accounted
for using accrual accounting provided that:
(i) The right to a post-retirement benefit is communicated in
writing to the participants, including notice of the right to legally
enforce payment of such benefit.
(ii) The participant has an irrevocable right to any portion of a
benefit for which the participant has attained eligibility.
(iii) If the contractor reserves rights to terminate or otherwise
cancel, eliminate, or reduce the rights of employees to any portion of
post-retirement benefits for which an employee has become eligible, the
post-retirement benefit plan shall fail to meet the criteria set forth
in paragraph (a)(1)(ii) of this section.
(iv) For defined-contribution post-retirement plans, the cost for a
cost accounting period is the contribution required by the written
provisions of the post-retirement benefit plan.
(v) For defined-benefit post-retirement plans, the cost for a cost
accounting period is actuarially determined based upon the written
provisions of the post-retirement benefit plan.
(2) The cost of any post-retirement benefit plan that fails to meet
the criteria set forth in 9904.419-40(a)(1) shall be accounted for
using the pay-as-you-go cost method.
(b) Measurement and assignment of post-retirement benefit cost.
(1) Except for costs assigned to future periods by 9904.419-
40(b)(5)(iii), the amount of post-retirement benefit cost determined
for a cost accounting period is assignable only to that period.
(2) To the extent that insurance contracts are purchased during the
period to cover post-retirement benefits attributed to service in the
current period:
(i) The cost of those benefits shall be accounted for in accordance
with Cost Accounting Standard 9904.416, Accounting for Insurance Costs.
(ii) However, if the insurance is purchased from a captive insurer,
the post-retirement benefit cost shall be determined in accordance with
this Standard.
(iii) The costs of benefits attributed to current service in excess
of benefits provided by such insurance contracts purchased during the
current period shall be accounted for according to the provisions of
this Standard applicable to plans not involving insurance contracts.
(iv) For purposes of 9904.419-40(b)(3)(ii) and 9904.419-
50(e)(2)(i), the cost of purchasing contracts to irrevocably settle all
obligations for post-retirement benefit obligations to a plan
participant or participants shall be treated the same as any other
settlement payment.
(3) For plans accounted for under the pay-as-you-go cost method,
the components of post-retirement benefit cost for a cost accounting
period are the contractor's share of:
(i) The net amount paid to or on behalf of retired employees or
their
[[Page 59529]]
beneficiaries for post-retirement benefits incurred during that period,
and
(ii) An amortization installment, including an interest equivalent
on the unamortized settlement amount, attributable to the net amount
paid to irrevocably settle an obligation for post-retirement benefits
of current and future cost accounting periods.
(4) For defined-contribution plans using accrual accounting, the
post-retirement benefit cost for a cost accounting period is the net
contribution required to be made to participants' accounts for that
period, after taking into account dividends and other credits, where
applicable.
(5) For defined-benefit plans using accrual accounting:
(i) The components of post-retirement benefit cost for a cost
accounting period are:
(A) Service cost,
(B) Interest cost,
(C) Actual return on the fair value of plan assets, adjusted for
interest equivalents on the accumulated value of unfunded accruals or
prepayment credits,
(D) Amortization of unrecognized prior service cost, if any,
(E) The amortization of the unrecognized gain or loss as provided
for in this Standard, and
(F) Amortization of any unrecognized transition obligation or
asset.
(ii) The post-retirement benefit cost of a cost accounting period
shall be determined by use of the same methods, assumptions, and asset
values used for financial reporting purposes in accordance with SFAS
106, as amended, unless specified otherwise in this Standard.
(iii) The post-retirement benefit costs assigned to a period shall
not exceed the assignable post-retirement benefit cost limitation. Any
amount in excess of the assignable post-retirement benefit cost
limitation shall be recognized in future periods as an actuarial loss
in accordance with 9904.419-50(b)(2)(vii). The assignable post-
retirement benefit cost limitation is measured as the sum of:
(A) The amount of benefits paid by the contractor for the cost
accounting period, and,
(B) The unfunded nonforfeitable post-retirement benefit obligation,
if any.
(iv) The post-retirement benefit cost of a cost accounting period
is assignable only if the unfunded accumulated post-retirement benefit
obligation equals the sum of the unrecognized net gain or loss
(including any unrecognized amount determined in accordance with
9904.419-50(e)(2)(i)), unrecognized prior service cost, and the
unrecognized transition obligation or transition asset.
(c) Post-retirement benefit cost of segments.
(1) Post-retirement benefit costs shall be directly or indirectly
allocated to each segment having participants identified with the post-
retirement benefit plan who generate cost under the cost accounting
method in use. If a post-retirement benefit plan has plan participants
in a home office, the home office shall be treated as a segment for
purposes of allocating the cost of the post-retirement benefit plan.
(2) A separate calculation (direct allocation) of post-retirement
benefit costs for a segment is required when any of the conditions set
forth in 9904.419-50(c)(2) is present. When such conditions are not
present, indirect allocations may be made by calculating a composite
post-retirement benefit cost for two or more segments and allocating
this cost to these segments.
(3) For defined-benefit plans using accrual accounting:
(i) Except where use of a different assumption or assumptions is
required by 9904.419-50(c)(2)(iii), the same assumptions shall be used
for all segments covered by a plan.
(ii) Contractors shall separately account for the assets and
accumulated value of unfunded accruals of each segment whenever post-
retirement benefit costs are separately calculated for the segment.
(d) Allocation of post-retirement benefit cost to cost objectives.
The post-retirement benefit costs for a segment are allocable to that
segment's intermediate and final cost objectives.
(e) Adjustments for curtailments, settlements, and termination
benefits. In the event that a contractor curtails a post-retirement
benefit plan, settles a post-retirement benefit obligation, or grants
termination benefits:
(1) For plans accounted for under the pay-as-you-go cost method, no
adjustment attributable to previously determined post-retirement
benefit costs is permitted to be recorded. Existing contract prices or
costs shall not be adjusted.
(2) For defined-contribution plans using accrual accounting, if the
post-retirement benefit plan is terminated or the right to earn future
vesting or retirement eligibility service is curtailed, the contractor
must separately determine the financial effect of such event and record
an adjustment for each affected segment. The adjustment shall be
amortized over the current and future periods. Existing contract prices
or costs shall not be adjusted.
(3) For defined-benefit plans using accrual accounting, the
contractor must separately recognize the financial effect of such event
by recording an adjustment for each affected segment. The adjustment
shall be amortized over the current and future periods. Existing
contract prices or costs shall not be adjusted.
(f) Adjustments for segment closings. If a segment is closed, the
contractor shall determine the effect of such segment closing on the
post-retirement benefit costs of each affected segment.
(1) For plans accounted for under the pay-as-you-go cost method, no
segment closing adjustment attributable to previously determined post-
retirement benefit costs is permitted.
(2) For defined-contribution plans using accrual accounting, the
contractor shall determine a segment closing amount which represents an
adjustment to previously determined post-retirement benefit costs that
were recognized as incurred costs at the closed segment. The recorded
amount shall give full recognition to any unrecognized portion of any
credit for plan termination or curtailment of vesting or retirement
eligibility service. Recovery or payment of the Government's share of
such amount shall be made as an adjustment to contract price or cost or
by other suitable techniques.
(3) For defined-benefit plans using accrual accounting, the
contractor shall determine a segment closing amount which represents an
adjustment to previously determined post-retirement benefit costs that
were recognized as incurred costs at the closed segment. The recorded
amount shall give full recognition to the nonforfeitable post-
retirement benefit obligation and valuations assets, except to the
extent the nonforfeitable post-retirement benefit obligation and
valuations assets have been assumed by a successor-in-interest to the
contracts of the closed segment. To the extent that the accumulated
post-retirement benefit obligation, nonforfeitable post-retirement
benefit obligation, valuations assets and associated unrecognized
amounts have been so transferred, the effect of such transfer will be
recognized in future accounting periods by the successor-in-interest.
Recovery or payment of the Government's share of the segment closing
amount shall be made as an adjustment to contract price or cost or by
other suitable techniques.
9904.419-50 Techniques for Application.
(a) Recognition of post-retirement benefit costs.
[[Page 59530]]
(1) Post-retirement benefit costs shall be determined separately
for each post-retirement benefit plan by applying the provisions of
this Standard to each such plan. Post-retirement benefit costs may be
determined on an aggregate basis for two or more separate plans if
those plans use the same cost accounting method, that is, accrual
accounting or the pay-as-you-go method, and either:
(i) Those plans provide different benefits to the same group of
plan participants, or
(ii) Those plans provide benefits that are similar in definition
and amount to different groups of plan participants.
(2) If a post-retirement benefit plan provides two or more
separately identifiable categories of benefits, e.g., healthcare
benefits and life insurance benefits, the contractor may treat each
benefit as a separately identifiable post-retirement benefit plan. The
costs of each such post-retirement benefit plan may be separately
determined and accounted for.
(3) If a post-retirement benefit plan provides benefits to two or
more mutually exclusive classes of plan participants, e.g., those
eligible for retirement before a specified date and those eligible
after such date, the contractor may treat each such mutually exclusive
class as a separately identifiable post-retirement benefit plan. The
costs of post-retirement benefit plan may be separately determined and
accounted for.
(4) If the substance of a post-retirement benefit plan having
characteristics of both a defined-benefit post-retirement plan and a
defined-contribution post-retirement plan is to provide a defined
benefit, the costs of such plan shall be determined and accounted for
in accordance with the provisions of this Standard applicable to
defined-benefit post-retirement plans. Conversely, if the substance of
a post-retirement benefit plan having characteristics of both a
defined-benefit plan and a defined-contribution plan is to provide
benefits determined by defined contributions, the costs of such plan
shall be determined and accounted for in accordance with the provisions
of this Standard applicable to defined-contribution post-retirement
plans.
(5) A multiemployer post-retirement benefit plan established
pursuant to the terms of a collective bargaining agreement shall be
considered to be a defined-contribution post-retirement plan for
purposes of this Standard.
(6) A post-retirement benefit plan applicable to a Federally-funded
Research and Development Center (FFRDC) that is part of a State post-
retirement benefit plan shall be considered to be a defined-
contribution post-retirement plan for purposes of this Standard.
(7) Post-retirement benefits provided in whole or in part by funds
that are separately accounted for within the trust fund of a qualified
pension plan shall be accounted for as post-retirement benefits subject
to this Standard.
(b) Measurement and assignment of post-retirement benefit cost.
(1) For plans accounted for under the pay-as-you-go cost method,
any amount paid to irrevocably settle an obligation for post-retirement
benefits payable in current and future cost accounting periods shall be
amortized over a period of fifteen years in equal annual installments.
Such amortization shall include an interest equivalent each period
equal to the rate determined by the Secretary of the Treasury pursuant
to Public Law 92-41, 85 Stat. 97 at the time of the settlement. If the
amount paid to settle the obligation is not material, the full amount
of the settlement may be assigned to the current period.
(2) For plans using accrual accounting:
(i) Post-retirement benefit cost shall be determined based on
current active and inactive plan participants. This provision shall not
preclude use of an assumption concerning future reemployments.
(ii) Post-retirement benefit cost shall be determined based on the
written provisions of the post-retirement benefit plan. This shall not
preclude contractors from making salary projections for plans whose
benefits are based on salaries and wages, nor from considering benefit
revisions for plans which provide that such revisions must be made.
(iii) The assumed health care trend rate may not exceed the assumed
expected long-term rate of return on plan assets. If no assumption is
made concerning the expected long-term rate of return on plan assets,
the health care trend rate assumption shall not exceed the interest
rate as determined by the Secretary of the Treasury pursuant to Public
Law 92-41, 85 Stat. 97.
(iv) The actual return on the fair value of plan assets component
of post-retirement benefit cost shall be increased by an interest
equivalent on the accumulated value of unfunded accruals determined
using the interest rate as determined by the Secretary of the Treasury
pursuant to Public Law 92-41, 85 Stat. 97.
(v) The actual return on the fair value of plan assets component of
post-retirement benefit cost shall be decreased by an interest
equivalent on the accumulated value of prepayment credits determined
using the interest rate as determined by the Secretary of the Treasury
pursuant to Public Law 92-41, 85 Stat. 97.
(vi) The fair value and market-related value of plan assets shall
not be adjusted for any fee, reserve charge, or other investment charge
for withdrawals from or termination of an investment or insurance
contract, trust agreement, or other funding arrangement, unless such
fee is determined in an arm's length transaction, and actually is
incurred and paid.
(vii) The gain or loss component of post-retirement benefit cost
(excluding plan asset gains and losses not yet reflected in the market-
related value of plan assets) that is determined for a cost accounting
period shall be recognized as follows:
(A) The contractor shall amortize each gain or loss over the
average remaining service period of active plan participants. If all or
almost all of a plan's participants are inactive, the average remaining
life expectancy of the inactive participants shall be used instead of
the average remaining service period. If the gain or loss is not
material, the entire gain or loss may be included as a component of the
current or ensuing period's post-retirement benefit cost.
(B) Except as provided in 9904.419-50(e)(2)(i), the contractor
shall establish and consistently follow a policy for amortizing gains
and losses. Any amortization policy shall include criteria for
selecting specific amortization periods and may give consideration to
factors such as the size and nature of the gain or loss. Once the
amortization period for a gain or loss is selected, the amortization
process shall continue to completion unless full recognition is
required by 9904.419-50(f)(3)(i).
(viii) Any tax assessed pursuant to a law or regulation because of
excess, inadequate, or delayed funding of a post-retirement benefit
plan shall be excluded from the assigned post-retirement benefit cost
and from the tax expense reflected in the actual return on the fair
value of plan assets component of post-retirement benefit costs.
(c) Post-retirement benefit cost of segments.
(1) Contractors who calculate a composite post-retirement benefit
cost covering plan participants in two or more segments shall allocate
such composite costs to segments as follows:
(i) For plans accounted for under the pay-as-you-go cost method,
the contractor shall allocate post-retirement benefit costs to a
segment to the extent that such costs can be identified with
[[Page 59531]]
that segment. Any post-retirement benefit costs remaining after such
allocation shall be categorized as a residual expense of the home
office or home offices most immediately identified with the post-
retirement benefit plan. The allocation of post-retirement benefit
costs shall give consideration to any refund, rebate, or other credit,
that is disproportionately attributable to individual segments.
(ii) For plans using accrual accounting, contractors shall
indirectly allocate or separately calculate post-retirement benefit
costs for each segment having active or inactive participants of the
post-retirement benefit plan. Any allocation base selected shall be
representative of the factors used to calculate the post-retirement
benefit cost, such as headcount or salary.
(2) For plans using accrual accounting, post-retirement benefit
costs shall be separately calculated for a segment (including an
aggregation of segments) whenever any of the following conditions exist
for that segment, provided that such condition(s) materially affect the
amount of post-retirement benefit cost allocated to the segment:
(i) The cost of benefits, level of benefits, eligibility for
benefits, or plan demographics are materially different for the segment
than for the average of all segments; or
(ii) There is a refund, credit, or other gain or loss from one or
more sources that is disproportionately attributable to the segment. If
such refund, credit, gain or loss is expected to be non-recurring,
separate calculations are not required unless required by other
conditions of this paragraph. In that case, there shall be a special
direct allocation of only the non-recurring amount which shall be
accounted for and amortized at the segment level.
(iii) For defined-benefit plans, any appropriate assumption or
assumptions are materially different for the segment than for the
average of all segments.
(iv) For defined-benefit plans, a contractor follows a practice of
funding post-retirement benefit costs disproportionately for segments
subject to this Standard.
(v) For defined-benefit plans,
(A) If the post-retirement benefit plan for a segment becomes
merged with the plan of another segment, or the post-retirement benefit
plan is divided into two or more post-retirement benefit plans, and in
either case,
(B) The ratios of valuation assets to the accumulated post-
retirement benefit obligation for each of the merged or separated plans
are materially different from one another after applying the benefits
in effect after the post-retirement benefit plan merger or post-
retirement benefit plan division.
(3) For plans using accrual accounting, notwithstanding the
provisions of paragraph (c)(2) of this subsection, contractors may
elect to calculate post-retirement benefit costs separately for each
segment having participants in a post-retirement benefit plan.
(4) For segments whose post-retirement benefit costs are calculated
separately pursuant to paragraphs (c)(2) or (3) of this subsection,
such calculations shall be prospective only; post-retirement benefit
costs shall not be redetermined for prior years.
(5) Funding of post-retirement benefit cost for a cost accounting
period shall be considered to have taken place within such period if it
is accomplished by the corporate tax filing date for such period,
including any permissible extensions thereto.
(6) For defined-benefit plans using accrual accounting, whenever
pension cost for a segment is calculated separately pursuant to
paragraphs (c)(2) or (3) of this subsection:
(i) When post-retirement benefit costs are first separately
calculated for a segment, there shall be an initial allocation of a
share in the undivided fair value of plan assets and the undivided
accumulated value of unfunded accruals to segments. This division shall
be made in accordance with 9904.419-50(c)(6)(viii) based upon the
nonforfeitable post-retirement benefit obligation and nonforfeitable
post-retirement benefit obligation, except as otherwise provided for in
this subparagraph. Prior to this initial allocation of assets, the
accumulated value of prepayment credits, if any, shall be deducted from
the undivided fair value of plan assets and separately identified.
(A) If a contractor has separately identified the fair value of
plan assets in accordance with 9904.419-64(f), such fair value of plan
assets and all other values previously allocated to those segments as
of the date of such determination shall not be changed.
(B) If a contractor has been determining the accrual for post-
retirement benefit costs on a composite basis and allocating such costs
to segments, the initial allocation of the valuation assets shall
reflect such prior cost determinations and allocations made pursuant to
this Standard. If the necessary data are readily determinable, the fair
value of plan assets to be allocated to each segment shall be the
amount contributed by, or on behalf of, the segment, increased by
income received on such assets, and decreased by benefits and expenses
paid from such assets.
(C) If the necessary data are not readily determinable for certain
prior periods, the fair value of plan assets net of any separately
identified accumulated value of prepayment credits shall be allocated
to segments based on the ratio of the accumulated post-retirement
benefit obligation of each segment to that of the plan as a whole. The
accumulated value of unfunded accruals shall be allocated to segments
in the same proportions as such net fair value of plan assets.
(D) Thereafter, the fair value of plan assets allocable to each
segment shall be brought forward as described in paragraph (c)(6)(iii)
of this subsection. The accumulated value of unfunded accruals
allocated to each segment shall be brought forward in accordance with
paragraph (c)(6)(v) of this subsection and the definition at 9904.419-
30(a)(1).
(ii) When post-retirement benefit costs are first separately
calculated for a segment, there shall be an initial allocation of the
undivided values of unrecognized prior service cost, unrecognized
transition obligation, and unrecognized gains and losses (including any
gains or losses from curtailments, settlements, or granting termination
benefits). Such values shall be allocated to the segment based on the
ratio of the unfunded accumulated post-retirement benefit obligation of
the segment to that of the plan as a whole. These unrecognized amounts
shall be brought forward in accordance with the separately calculated
post-retirement benefit cost of the segment.
(iii) After the initial allocation of the fair value of plan
assets, the contractor shall maintain a record of the portion of
subsequent contributions, income, benefit payments, and expenses
attributable to segments and paid from the plan assets.
(A) Amounts deposited to a funding agency shall be apportioned to
segments in proportion to the post-retirement benefit costs allocated
to or separately calculated for the individual segments. However, if a
contractor consistently follows a practice of separately calculating
post-retirement benefit costs for segments, the contractor may first
apportion amounts funded to segments in proportion to the post-
retirement benefit cost of such segments subject to this Standard. Any
portion of the amount deposited remaining after apportioning funding to
segments whose costs are subject to this Standard, shall then be
apportioned to other segments. No prepayment credit shall be
[[Page 59532]]
measured until the post-retirement benefit cost of all segments is
funded.
(B) Income and expenses shall include a portion of any investment
gains and losses attributable to the plan assets. Income and expenses
attributable to plan assets shall be allocated to segments in the same
proportion that the average value of plan assets allocated to each
segment bears to the average value of total plan assets for the period
for which income and expenses are being allocated.
(iv) Once the fair value of plan assets has been determined for
segments in accordance with paragraphs (c)(6)(i) or (iii) of this
subsection each year, the market-related value of plan assets shall be
allocated to each segment in the same proportion as the fair value of
plan assets.
(v) Any portion of post-retirement benefit cost of a segment for a
cost accounting period that is not funded within such period shall be
accounted for as an unfunded accrual and carried forward to future
accounting periods. The contractor may elect to fund portions of, and
thereby reduce, the accumulated value of unfunded accruals. Such
funding shall not be recognized for purposes of paragraph (c)(5) of
this subsection.
(vi) Amounts funded in excess of the total post-retirement benefit
cost of a segment for a cost accounting period shall be accounted for
as a prepayment credit and carried forward to future accounting
periods. The accumulated value of prepayment credits shall be reduced
for portions of the accumulated value of prepayment credits used to
fund post-retirement benefit costs or to fund portions of the
accumulated value of unfunded accruals.
(vii) Any benefit payments to or on behalf of a segment's plan
participants which are made by the contractor from a source other than
the plan assets shall be treated as funding in accordance with
paragraph (c)(5) of this subsection. The accumulated value of unfunded
accruals shall be reduced by any such benefit payments that exceed the
assigned post-retirement benefit cost for cost accounting period.
(viii) (A) If plan participants transfer among segments or if a
segment is split into two or more segments, the contractor shall
transfer fair value of plan assets, accumulated value of unfunded
accruals, and accumulated value of prepayment credits as follows:
(1) The contractor shall first allocate fair value of plan assets,
accumulated value of unfunded accruals, and accumulated value of
prepayment credits to the nonforfeitable post-retirement benefit
obligation based on the ratio of the nonforfeitable post-retirement
benefit obligation to the valuation assets. Such ratio shall not exceed
one (1). Allocate any remaining fair value of plan assets, accumulated
value of unfunded accruals, and accumulated value of prepayment credits
to the forfeitable post-retirement benefit obligation.
(2) The contractor shall then transfer fair value of plan assets,
accumulated value of unfunded accruals, and accumulated value of
prepayment credits allocated to the nonforfeitable post-retirement
benefit obligation in proportion to the nonforfeitable post-retirement
benefit obligation transferred.
(3) Finally, the contractor shall transfer fair value of plan
assets, accumulated value of unfunded accruals, and accumulated value
of prepayment credits allocated to the forfeitable post-retirement
benefit obligation in proportion to the forfeitable post-retirement
benefit obligation transferred.
(B) In addition, a portion of each unrecognized prior service cost,
unrecognized transition obligation, and unrecognized gain or loss
(including any gains or losses from curtailments, settlements, or
granting termination benefits) shall be transferred in proportion to
the unfunded accumulated post-retirement obligation transferred. The
contractor may follow a consistent practice which deems that all
transfers occur at the end of the period. The undivided market-related
value of plan assets shall be allocated in proportion to the fair value
of plan assets of each segment after the transfer. Contractors need not
transfer assets and other values if the net amount of transfers is
immaterial.
(d) Allocation of post-retirement benefit cost to cost objectives.
The allocation of post-retirement benefit cost of segments to
intermediate and final cost objectives shall be made in accordance with
applicable Standards.
(e) Adjustments for curtailments, settlements, and termination
benefits.
(1) For defined-contribution plans using accrual accounting, in the
event a contractor terminates a post-retirement benefit plan or
curtails vesting or retirement eligibility service, then the contractor
shall determine the amount of nonvested account balances subject to
forfeiture. Such amount shall be determined as of the date of such plan
termination or curtailment of vesting or retirement eligibility
service. The amount of the credit shall be amortized and assigned over
a period of ten (10) years beginning with the period in which the event
occurs.
(2) For defined-benefit plans using accrual accounting:
(i) In the event a contractor curtails a post-retirement benefit
plan, settles a post-retirement benefit obligation, or grants
termination benefits, then the contractor shall measure the gain or
loss caused by such event separately from the annual gain or loss
determined for purposes of 9904.419-50(b)(2)(vii). In measuring such
amount, the contractor shall apply the methods and techniques
prescribed in SFAS 106. Any such gain or loss remaining after
offsetting any portion of unrecognized prior service costs, prior gains
and losses, or transition obligation shall be amortized and assigned
over a period of ten (10) years beginning with the period in which the
event occurs.
(ii) If a post-retirement benefit plan is terminated, the
contracting parties may agree to establish a single plan termination
amount by aggregating the net sum of any unrecognized gain or loss
adjustments for curtailments, settlements, or granting of termination
benefits determined in accordance with this subsection plus any
remaining unrecognized net gain or loss determined in accordance with
9904.419-50(b)(2)(vii). Such plan termination amount shall be amortized
and assigned over a period of ten (10) years beginning with the period
in which the plan termination occurred.
(iii) If the contractor has not already allocated the fair value of
plan assets and other relevant values to the segment, such an
allocation shall be made in accordance with the requirements of
9904.419-50(c)(6)(i) and (ii).
(f) Adjustments for segment closings. If a segment is closed, the
contractor shall determine a segment closing amount which represents an
adjustment to previously determined post-retirement benefit costs as
follows:
(1) For plans accounted for under the pay-as-you-go cost method:
(i) The contractor shall not adjust previously determined post-
retirement benefit costs. Contract price or cost adjustments are not
permitted.
(ii) If the segment discontinues operations, is sold, or ownership
is otherwise transferred, all remaining inactive plan participants
shall be transferred to the closed segment's immediate home office.
(2) For defined-contribution plans using accrual accounting, the
segment closing amount shall be measured as the unrecognized portion of
the plan termination or curtailment of vesting or retirement
eligibility service credit determined in accordance with 9904.419-
50(e)(1).
[[Page 59533]]
(3) For defined-benefit plans using accrual accounting:
(i) The segment closing amount shall be measured as the difference
between the nonforfeitable post-retirement benefit obligation and the
valuation assets.
(ii) The contractor's methods and assumptions used to determine the
segment closing amount shall be consistent with those used in the
measurement of post-retirement benefit costs prior to the segment
closing.
(iii) If the segment discontinues operations, all remaining
inactive plan participants shall be transferred to the closed segment's
immediate home office, along with the accumulated post-retirement
benefit obligation, fair value of plan assets and all other values
attributable to such transferred inactive participants.
(iv) If the segment is sold, or ownership is otherwise transferred,
and the contractor retains some or all of the accumulated post-
retirement benefit obligation, the fair value of plan assets and all
other values shall be split between the contractor and the buyer in
accordance with 9904.419-50(c)(6)(viii) based upon the accumulated
post-retirement benefit obligation retained by the contractor and the
balance of the accumulated post-retirement benefit obligation which is
transferred to the buyer. The accumulated post-retirement benefit
obligation, fair value of plan assets and all other values retained by
the contractor shall be transferred to the closed segment's immediate
home office.
(v) If the segment is sold or ownership is otherwise transferred
and such sale or transfer of ownership is to a successor-in-interest
then:
(A) If the entire accumulated post-retirement benefit obligation,
fair value of plan assets, accumulated value of unfunded accruals, and
accumulated value of prepayment credits are transferred to the
successor contractor, there shall be no adjustment to previously
determined post-retirement benefit costs.
(B) If the contractor retains some or all of the accumulated post-
retirement benefit obligation, the accumulated post-retirement benefit
obligation and all other values shall be allocated between the
contractor and the successor-in-interest in accordance with paragraph
(f)(3)(iv) of this section. The segment closing amount shall be
determined based on such retained values.
(C) The contractor's methods and assumptions are deemed to be
adopted by the successor-in-interest so that the effect of the
segment's transferred assets and liabilities is carried forward and
recognized in the accounting for post-retirement benefit cost at the
successor contractor. Any changes in methods or assumptions shall be
deemed to occur immediately after such transfer.
(vi) Once determined, any adjustment credit shall be first used to
reduce the accumulated value of unfunded accruals. After the
accumulated value of unfunded accruals has been reduced, any remaining
adjustment amount shall be accounted for as a prepayment credit. Any
adjustment charge shall be accounted for as an unfunded accrual to the
extent that funds are not added to the fair value of assets.
(4) The Government's share of the segment closing amount (charge or
credit) shall be the product of the total segment closing amount
determined in accordance with paragraphs (f)(2) or (3) of this
subsection and a fraction. The numerator of such fraction shall be the
sum of the post-retirement benefit plan costs allocated to all
contracts and subcontracts (including Foreign Military Sales) subject
to this Standard during a period of years representative of the
Government's participation in the post-retirement benefit plan costs on
an accrual basis. The denominator of such fraction shall be the total
post-retirement benefit plan costs assigned to cost accounting periods
during the same period. The contracting parties shall recognize the
Government's share of the segment closing amount that is applicable to
the segment's contracts that are subject to this Standard by adjusting
contract prices, target costs or cost ceilings, or, by any other
suitable technique acceptable to the cognizant Federal agency official.
(5) For purposes of this subsection and paragraph (e) of this
section, if the date of the event is not readily determinable, or if
its use can result in an inequitable calculation, the contracting
parties shall agree on an appropriate date.
9904.419-60 Illustrations.
These illustrations presume that the contractor's post-retirement
benefit plan, cost methods, and actuarial assumptions meet the
requirements of this Standard except as noted in the particular
illustration.
(a) Recognition of post-retirement benefit costs.
(1) The written terms of Contractor A's defined-contribution post-
retirement plan require that the contractor make contributions of a
specified percentage of each employee's base salary to individual
accounts held by an organization that satisfies the 9904.419-30(b)(2)
definition of a funding agency. Upon retirement each employee's
accumulated account balance is annuitized and used to pay a portion of
the annual premium on the retiree's ``Medigap'' health insurance policy
purchased from an non-captive insurance carrier. Pursuant to 9904.419-
40(a)(1)(iv), the contractor determines the cost of its defined-
contribution plan for each cost accounting period as the sum of the
required net contributions deposited into the individual participants'
accounts held by the funding agency.
(2) Contractor B sponsors a defined-benefit retiree health plan
which historically has been amended every three (3) years to increase
the amounts of the annual deductible and copayment. This post-
retirement benefit plan meets the criteria for accrual accounting set
forth in 9904.419-40(a)(1). Pursuant to 9904.419-40(a)(1)(v), the
contractor must actuarially determine the cost of its post-retirement
benefit plan for the current period based upon the deductible and
copayment amounts specified in the current written plan document.
Pursuant to 9904.419-50(b)(2)(ii), the actuarial gain attributable to
any future amendment increasing the deductible and copayment can not be
recognized until such amendment is adopted.
(3) Contractor C has historically paid a percentage of the health
insurance premiums for its retirees. Each year the contractor has
renewed its intent to continue this program for the upcoming year in a
letter to its retirees. Although active employees are occasionally
informally told of this program, especially as they prepare to retire,
the program is not mentioned in the employee handbook nor any other
employee communication. However, the letter was not sent to all plan
participants, did not include a notice of the right to legally enforce
payment of the benefit, and did not provide an irrevocable right to the
benefit once participants had attained eligibility. In accordance with
9904.419-40(a)(2), the cost of this post-retirement health plan must be
accounted for using the pay-as-you-go cost method because the criteria
set forth at 9904.419-40(a)(1)(i) and (ii) were not met.
(4) Contractor D sponsors a retiree life insurance program that
provides a death benefit equal to 35% of an employee's final earnings,
subject to a minimum death benefit of $10,000. This defined-benefit
post-retirement plan meets the criteria set forth in 9904.419-40(a)(1).
The contractor pays an annual premium to an non-captive insurer to
provide a $10,000 participating life insurance
[[Page 59534]]
policy for all employees at retirement. Pursuant to 9904.416-
50(a)(1)(i) of Cost Accounting Standard 9904.416, the contractor's
established practice is to adjust the annual insurance premium for any
refunds, dividends, additional assessments, or other credits or
charges, in the cost accounting period in which such credit or charge
is received or receivable. The cost for the projected benefit that
exceeds $10,000 must be accounted for as a defined-benefit plan using
accrual accounting in accordance with 9904.419-40(b)(2)(iii). Pursuant
to 9904.419-40(b)(2), the cost for a cost accounting period is the
premium paid to provide the basic $10,000 death benefit, adjusted in
accordance to 9904.416-50(a)(1)(i), plus the annual amount determined
in accordance with the accrual accounting provisions of this Standard
relating to defined-benefit post-retirement benefit plans. If the
insurance had been obtained from a captive insurer as defined by
9904.419-30(a)(3), the entire cost of the plan would have been subject
to this Standard in accordance with 9904.419-40(b)(2)(ii).
(5) Contractor E sponsors two post-retirement benefit plans which
each have a separate plan document. One plan provides retiree health
benefits for all employees of the contractor. The other plan provides
retiree dental and vision benefits for the same employees. Neither plan
meets the criteria specified at 9904.419-40(a)(1) and therefore, are
required to be accounted for using the pay-as-you-go method in
accordance with 9904.419-50(a)(2). Pursuant to 9904.419-50(a)(1)(i),
the contractor may elect to determine the cost of the two plans on an
aggregate basis.
(6) Contractor F sponsors two defined-benefit post-retirement plans
which each have a separate plan document. One plan provides health
benefits to all retired salaried employees. The other plan provides the
same health benefits to all retired bargaining unit employees. Because
both plans satisfy the criteria of 9904.419-50(a)(1), both are required
to use accrual accounting. Pursuant to 9904.419-50(a)(1)(ii), the
contractor may elect to determine the cost of the two plans on an
aggregate basis.
(7) Contractor G sponsors a single post-retirement benefit plan
that provides health benefits and life insurance benefits. The
contractor has retained the right to terminate the health benefits for
all but those employees who are retired or have attained eligibility
for benefits. The contractor pays level annual premiums to an non-
captive insurance carrier designed to provide paid-up participating
life insurance contracts by the time an employee reaches retirement and
the employees have an irrevocable right to the current value of the
insurance contracts. The contractor's established practice is to adjust
the annual participating insurance premium by the amount of estimated
refunds and dividends in accordance with 9904.416-50(a)(1)(vi) of Cost
Accounting Standard 9904.416, and therefore such adjusted level annual
premiums satisfy the requirements of 9904.419-40(b)(2)(i). Because the
plan satisfies the criteria set forth at 9904.419-40(a)(1), the
contractor must account for the cost of the benefits not provided
through insurance contracts using accrual accounting as required by
9904.419-50(b)(2)(iii). Alternatively, 9904.419-40(a)(2) permits the
contractor to separately identify and account for the cost of the life
insurance benefit as if it were a separate post-retirement benefit
plan.
(8) Contractor H has a single defined-benefit post-retirement plan.
The plan provides one set of benefits to retirees and employees who
were eligible to retire on or before December 31, 1995 (the ``protected
group''). Under the terms of the post-retirement benefit plan, the
contractor has no right to reduce these benefits. Employees eligible
for retirement on or after January 1, 1996 are provided a less generous
set of benefits and the contractor retains the right to terminate the
plan or reduce benefits even after eligibility is attained. Because the
plan does not fully satisfy the criteria set forth at 9904.419-
40(a)(1), the pay-as-you-go method must be used to account for the cost
of the plan. Pursuant to 9904.419-50(a)(3), the contractor may identify
the benefits provided to the two groups as being provided by separate
post-retirement benefit plans. In that case, because the costs for the
``protected group'' plan meet the requirements of 9904.419-40(a)(1),
the ``protected group'' plan must be actuarially determined and
accounted for using accrual accounting. In accordance with 9904.419-
40(a)(2), the contractor must account for the benefits of the plan for
the post-1995 retirees using the pay-as-you-go cost method because that
separately identified plan fails the criteria of 9904.419-40(a)(1).
(9) Contractor I sponsors a post-retirement benefit plan that
provides a life insurance benefit of two-times final salary for all
employees. The program also provides that the contractor will deposit
1% of each employee's pay into individual accounts held by a funding
agency. At retirement, the accumulated value of the individual account
is used to purchase a paid-up life insurance policy. If the funds in
the individual account is insufficient to purchase the full life
insurance benefit, the contractor pays the additional cost directly
from general corporate resources. This program has features of both a
defined-benefit and a defined-contribution post-retirement plan. Since
the substance of the plan is to provide a defined-benefit life
insurance of two-times final salary, then pursuant to 9904.419-
50(a)(4), the annual cost must be determined in accordance with the
provisions of this Standard relating to defined-benefit post-retirement
plans.
(b) Measurement and assignment of post-retirement benefit cost.
(1) Contractor J uses the pay-as-you-go cost method to determine
the cost of its retiree life insurance program. During the current
period, the contractor paid $200,000 in death benefits directly to the
named beneficiaries of deceased plan participants which is the pay-as-
you-go cost for current benefits in accordance with 9904.419-
40(b)(3)(i). On the first day of the current period, the contractor
also paid $180,000 in premiums to purchase paid-up insurance policies
from an non-captive insurer for certain employees as they retired
during the current year. The prevailing rate determined by the
Secretary of the Treasury pursuant to Public Law 92-41, 85 Stat. 97 for
the current period is 7.25%. Pursuant to 9904.419-40(b)(2)(iv) and
9904.419-40(b)(3)(ii) and 9904.419-50(b)(1), the contractor determines
the current period cost of the paid-up insurance policies as $18,719,
which is the annual amount required to amortize the $180,000 in fifteen
(15) equal annual payments at 7.25%. The contractor determines the
total cost for the current period as $218,719 ($200,000 + $18,719).
(2) Contractor K sponsors a defined-contribution post-retirement
plan which satisfies the criteria set forth at 9904.419-40(a)(1). The
plan is funded through a dedicated trust that qualifies as a funding
agency. The plan document provides that each year the contractor will
credit to the individual accounts of the plan participants an amount
equal to 5% of each employee's base salary less that employee's share
of any nonvested account balances forfeited by terminating employees.
The annual contribution amount so determined constitutes the post-
retirement benefit cost in accordance with 9904.419-40(b)(4). Any
amount not funded by a deposit to the funding agency must be identified
as an unfunded accrual in accordance with 9904.419-50(c)(6)(v).
(3) Conversely, assume that the plan sponsored by Contractor K in
illustration 9904.419-60(b)(2) fails the
[[Page 59535]]
criteria set-forth at 9904.419-40(a)(1). Also assume that the
contractor maintains memorandum records of the participants' account
balances, rather than fund this defined-contribution plan. At
retirement the contractor pays the employees the value of account
balances recorded in these memorandum records as a lump sum settlement
of the account balance. In this case the contractor shall use the pay-
as-you-go cost method in accordance with 9904.419-40(a)(2). In
accordance with 9904.419-40(b)(3), the cost shall be based upon the
lump sum settlements paid to the plan participants and amortized in
accordance with 9904.419-40(b)(3)(ii). If prior to becoming subject to
this Standard, the contractor had accounted for the costs of its post-
retirement benefit plan using terminal funding, the contractor could
continue to use terminal funding as its cost accounting practice as
permitted by 9904.419-64(d). In that case, no amortization would be
required.
(4) Contractor L sponsors a post-retirement benefit plan for its
collective bargaining employees which satisfy the requirements of
9904.419-40(a)(1). The contractor uses the projected unit credit
actuarial cost method and a discount rate of 7.5% to determine the net
periodic post-retirement benefit cost for SFAS 106 purposes, and
therefore, 9904.419-50(a)(1)(i) requires that the contractor use the
projected unit credit actuarial cost method and 7.5% discount rate
assumption for contract cost accounting purposes. The contractor funds
the plan through a combination of an Internal Revenue Code (IRC)
section 401(h) account, whose assets are separately accounted for
within a qualified defined-benefit pension trust, plus an IRC section
501(c)(9) voluntary employee benefit trust, otherwise known as a VEBA.
The contractor determines the annual deposit for the IRC 401(h) account
using the aggregate actuarial cost method, and for the VEBA using the
projected unit credit actuarial cost method. Both of these deposit
determinations are based on an assumption of 7% for the discount rate.
The deposits to the IRC 401(h) account and the VEBA are used to
determine the funded portion of the post-retirement benefit cost for
purposes of 9904.419-50(c)(5), but not the contract cost. To the extent
that the deposits in any cost accounting period differ from the post-
retirement benefit cost determined pursuant to this Standard, the
shortfall or excess shall be identified as either an unfunded accrual
or a prepayment credit in accordance with 9904.419-50(c)(6)(v) and
(vi), respectively.
(5)(i) The actuarial valuation report prepared for SFAS 106
purposes gives the following information reconciling the funded status
of the defined-benefit post-retirement plan sponsored by Contractor M:
------------------------------------------------------------------------
Value as of 12/
31
------------------------------------------------------------------------
Accumulated post-retirement benefit obligation......... ($257,000)
Fair value of plan assets.............................. 69,000
----------------
Funded status.......................................... (188,000)
Unrecognized net gain.................................. (44,000)
Unrecognized prior service cost........................ 33,000
Unrecognized transition obligation..................... 195,000
----------------
Net pre-paid (accrued) post-retirement benefit cost.... (4,000)
================
------------------------------------------------------------------------
(ii) The terms of the plans satisfy the requirements of 9904.419-
40(a)(1). Three years ago the contractor did not fund all of its
assigned post-retirement benefit cost for the period and has separately
identified and maintained an accumulated value of unfunded accruals
which is currently valued at $6,000 in accordance with definition
9904.419-30(a)(1) and 9904.419-50(c)(6)(v). Two years ago, the
contractor funded an amount greater than its assigned post-retirement
benefit cost for the period and has separately identified and accounted
for the excess as the accumulated value of prepayment credits which is
currently valued at $2,000 in accordance with definition 9904.419-
30(b)(5) and 9904.419-50(c)(6)(vi). During all other years the
contractor exactly funded its post-retirement benefit cost. In
accordance with the definition at 9904.419-30(a)(15), the contractor
determines the unfunded accumulated post-retirement benefit obligation
for contract cost accounting purposes as $184,000, which is the
$257,000 accumulated post-retirement benefit obligation less the sum of
$69,000 of fair value of plan assets and $6,000 of accumulated unfunded
accruals plus the $2,000 accumulated value of prepayment credits. The
contractor determines that the sum of the unrecognized net gain,
unrecognized prior service cost and unrecognized transition obligation
is $184,000 ($(44,000) + $33,000 + $195,000). Pursuant to 9904.419-
40(b)(5)(iv), the cost determined for the current period is assignable
to the period because the unfunded accumulated post-retirement benefit
obligation equals the sum of the unrecognized amounts as shown below:
------------------------------------------------------------------------
Value as of 12/
31
------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits........................ $82,000
Actives--Currently eligible for benefits........... 19,000
----------------
Nonforfeitable post-retirement benefit obligation.. 101,000
Actives--Not yet eligible for benefits............. 156,000
----------------
Total.......................................... 257,000
Valuation Assets:
Fair value of plan assets.......................... (69,000)
[[Page 59536]]
Accumulated value of unfunded accruals............. (6,000)
Accumulated value of prepayment credits............ 2,000
----------------
Total.......................................... (73,000)
----------------
Unfunded accumulated post-retirement benefit obligation 184,000
================
Unrecognized net gain.................................. (44,000)
Unrecognized prior service cost........................ 33,000
Unrecognized transition obligation..................... 195,000
----------------
Sum of unrecognized amounts............................ 184,000
================
Result of 9904.419-40(b)(5)(iv) balance test........... Passes
------------------------------------------------------------------------
(6) Contractor M in illustration 9904.419-60(b)(5) determines that
during the following year the actual return on the fair value of plan
assets of $69,000 is $7,200 for SFAS 106 purposes. The current interest
rate determined by the Secretary of the Treasury pursuant to Public Law
92-41, 85 Stat. 97 is 9.5%. Pursuant to 9904.419-50(b)(2)(iv), the
contractor increases the $7,200 actual return on the fair value of plan
assets by the interest imputed on the accumulated value of unfunded
accruals which is 9.5% of $6,000 or $570. Pursuant to 9904.419-
50(b)(2)(v), the contractor reduces the actual return on the fair value
of plan assets by the interest imputed on the accumulated value of
prepayment credits which is 9.5% of $2,000 or $190. For contract cost
purposes, the contractor determines the actual return on the fair value
of plan assets as $7,580 ($7,200 + $570-$190).
(7) Assume that Contractor M in Illustration 9904.419-60(b)(5)
determines that the sum of the components of post-retirement benefit
cost, as described in 9904.419-40(b)(5), is $55,000. The contractor
also pays $15,000 for benefits incurred by current retirees during the
period which can be considered funding in accordance with 9904.419-
50(c)(6)(vii). Furthermore, as shown in Illustration 9904.419-60(b)(5),
the nonforfeitable post-retirement benefit obligation, as defined at
9904.419-30(a)(7), is $101,000. Therefore, the unfunded nonforfeitable
post-retirement benefit obligation is $28,000 (nonforfeitable post-
retirement benefit obligation of $101,000 minus valuation assets of
$73,000.) In accordance with 9904.419-40(b)(5)(iii) the amount of post-
retirement benefit cost assignable to the current period is limited to
$43,000 ($15,000 benefit payments plus $28,000 unfunded post-retirement
benefit obligation.) Furthermore, the $12,000 of post-retirement
benefit cost that is not assignable to the current period ($55,000-
43,000) shall be recognized in future periods as an experience loss.
(8) Assume that Contractor M in illustration 9904.419-60(b)(7)
makes a deposit of $26,000 into a dedicated trust fund that satisfies
the definition of a funding agency found at 9904.419-30(b)(2). Section
9904.419-50(c)(6)(vi) permits the $2,000 accumulated value of
prepayment credits to be applied toward the $43,000 cost so that the
full current period cost is funded for purposes of 9904.419-0(c)(6)(v).
Therefore, the total amount available towards funding the cost assigned
to the current period is $43,000 ($26,000 deposit + $15,000 benefit
payments + $2,000 prepayment credit). The accumulated value of
prepayment credits must be reduced by the amount applied towards the
current year's cost in accordance with 9904.419-50(c)(6)(v) and
definition 9904.419-30(b)(3).
(9) If in illustration 9904.419-60(b)(7), Contractor M had only
deposited $23,000 into the dedicated trust fund, the total amount
available towards funding the cost assigned to the current period would
be $40,000 ($23,000 + $15,000 + $2,000). The accumulated value of
unfunded accruals would increase by $3,000 to $9,000 in accordance with
9904.419-50(c)(6)(v) and definition 9904.419-30(a)(1).
(10) If in illustration 9904.419-60(b)(7), Contractor M had
deposited $28,750 into the dedicated trust fund, the total amount
available towards funding the cost assigned to the current period would
be $45,750 ($28,750 + $15,000 + $2,000). The accumulated value of
prepayment credits would increase by a net of $750 ($2,750 excess
funding less $2,000 prepayment used) to $2,750 in accordance with
9904.419-50(c)(6)(vi)and definition 9904.419-30(b)(5).
(c) Post-retirement benefit cost of segments.
(1) Contractor N sponsors a retiree medical plan that covers
employees who retired before January 1, 1997. All active employees and
subsequent retirees are covered in a separate post-retirement benefit
plan. The contractor determines the costs of the pre-1997 plan using
the pay-as-you-go cost method. The plan covers retired participants
from 12 segments. The contractor maintains a record of how many years
each retiree worked in each segment which is used to allocate the total
cost to segments. This method is acceptable under 9904.419-50(c)(1)(i).
(2) Contractor N in illustration 9904.419-60(c)(1) maintains a
record of the segment where each retiree was last employed and, in
accordance with 9904.419-50(c)(1)(i), uses these records to allocate
the total post-retirement benefit cost to segments. Assume that two of
the twelve segments associated with current retirees ceased to exist
because the segments either discontinued operations or were abandoned.
Pursuant to 9904.419-50(f)(1)(ii), the inactive participants of the two
defunct segments have been moved to their immediate home office to
which the segment had reported. The cost associated with these inactive
participants must be allocated to the immediate home office for those
segments and then allocated as a residual cost of that home office
following the methodology of Cost Accounting Standard 9904.403.
(3) Assume Contractor N's in illustration 9904.419-60(c)(2) merges
together two of the 12 segments. After the merger, the contractor uses
the combined records of the two segments and treats the retirees as if
they were last employed in the newly merged segment. And, in accordance
with 9904.419-50(c)(1)(i), uses these records to allocate the total
post-retirement benefit cost to segments. This method is acceptable
under 9904.419-50(c)(1)(i).
[[Page 59537]]
(4) Contractor O sponsors a post-retirement benefit plan providing
medical and life insurance benefits for its active employees. The
accrual accounting cost of the medical benefit is actuarially
determined by each participant's age and gender. The actuarially
determined cost of the life insurance benefit is based upon the
employee's expected final salary and age group. As permitted by
9904.419-50(a)(2), the contractor determines the costs of the medical
and life benefits as if they were provided through two separate plans.
Pursuant to 9904.419-40(c)(1), each home office that has plan
participants is treated as a segment. None of the conditions set forth
in 9904.419-50(c)(2) exists so the contractor calculates a composite
post-retirement benefit cost for each benefit. In accordance with
9904.419-40(c)(2), the contractor indirectly allocates the costs of
each benefit to segments. In accordance with 9904.419-50(c)(1)(ii), the
cost of the medical benefit is allocated using the number of active
plan participants in each segment, including home offices. The cost of
the life insurance benefit, which is dependent upon each participant's
final salary, is allocated to each segment, including home offices,
using the salaries of active plan participants.
(5) Contractor P uses the pay-as-you-go cost method for its post-
retirement medical program for employees of several segments each of
which is in a different state. While the benefits are similar, the
payments vary significantly by type of contract and geographical
region. Pursuant to 9904.419-50(c)(1)(i) the contractor must allocate
the post-retirement benefit cost for each segment based upon the
benefit payments that are identifiable with each of the segments.
Furthermore, any material gain or loss attributable to the plan
participants of a particular segment, must also be directly allocated
to that segment only in accordance with 9904.419-50(c)(1)(i).
(6) Contractor Q uses accrual accounting to calculate the composite
costs for each of two different defined-benefit plans. Only one of the
two plans covers the employees of any one segment. Pursuant to
9904.419-40(c)(1), the composite cost of each distinct plan is
allocated only to those segments having participants in that plan. In
the past Plan I has covered the employees of Segment G. As part of an
internal reorganization, the post-retirement benefit plans were amended
so that benefits for employees of Segment G will now be provided
through Plan II. For government contract cost accounting purposes, the
assets that move with Segment G from Plan I to Plan II are the assets
initially allocated to Segment G in accordance with 9904.419-
50(c)(6)(i). The ratio of accumulated post-retirement benefit
obligation to the valuation assets, as defined at 9904.419-30(a)(16),
for segment G is X%, which materially differs from such ratio for the
other segments covered by Plan II. In accordance with 9904.419-
50(c)(2)(v), the contractor will have to begin separately calculating
post-retirement benefit costs for Segment G. The contractor may
continue to determine post-retirement benefit costs for the original
Plan II segments in the aggregate as long as none of the conditions of
9904.419-50(c)(2) exists for any of these segments.
(7) Assume Contractor R has five segments directed by one home
office. One segment, Segment A, does a majority (85%) of its work under
Government contracts. Segment B provides support services to the other
four segments. The other three segments, Segments C, D, and E perform
only commercial-type work. The post-retirement benefit plans meets the
criteria set forth at 9904.419-40(a)(1) and the contractor uses accrual
accounting to separately calculate post-retirement benefit costs for
the home office and each of the five segments in accordance with
9904.419-40(c)(1) and 9904.419-50(c)(1)(ii). Pursuant to 9904.419-
50(c)(6)(iii)(A), the contractor may ascribe funding to the costs
allocated to the home office, Segment A, and Segment B before ascribing
any funding to the three commercial segments. The separate accounting
records of each segment which are maintained in accordance with
9904.419-50(c)(6)(iii) must reflect that the funding was first
apportioned to the home office, Segment A and Segment B which allocate
post-retirement benefit costs to contracts subject to this Standard.
(8)(i) Contractor R in Illustration 9904.419-60(c)(7) transfers 50
active plan participants in its defined-benefit plan from Segment A to
Segment D as part of adjusting its staffing to match its workload. The
accumulated post-retirement benefit obligation for these 50
participants is $250,000 of which $50,000 is attributable to active
participants who are fully eligible for benefits and $200,000 is
attributable to active participants who are not currently eligible for
benefits. The segment accounting for Segments A and D immediately
before the transfer is:
----------------------------------------------------------------------------------------------------------------
Segment A Segment D
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits............................................... $750,000 225,000
Actives--Currently eligible............................................... 250,000 175,000
---------------------------------
Nonforfeitable post-retirement benefit obligation......................... 1,000,000 400,000
Actives--Not yet eligible................................................. 2,000,000 1,600,000
---------------------------------
Total................................................................. 3,000,000 2,000,000
Valuation Assets:
Fair value of plan assets 1............................................... (1,000,000)
Accumulated value of unfunded accruals.................................... (200,000) (750,000)
Accumulated value of prepayment credits 2.................................
---------------------------------
Total................................................................. (1,200,000) (750,000)
Unfunded accumulated post-retirement benefit obligation....................... 1,800,000 1,250,000
=================================
Unrecognized transition obligation............................................ 2,000,000 1,400,000
Unrecognized prior service cost............................................... 100,000 50,000
Unrecognized (gain) or loss................................................... (300,000) (200,000)
---------------------------------
Sum of unrecognized amounts................................................... 1,800,000 1,250,000
=================================
[[Page 59538]]
Results of 9904.419-40(b)(5)(iv) balance test................................. Passes Passes
----------------------------------------------------------------------------------------------------------------
1 In accordance with 9904.419-50(c)(6)(i), the fair value of plan assets allocated to segments excludes the
accumulated value of prepayment credits.
2 In accordance with 9904.419-50(c)(6)(i), the accumulated value of prepayment credits were separately
identified and were not allocated to segments.
(ii) The contractor must first allocate fair value of plan assets,
accumulated value of unfunded accruals, and accumulated value of
prepayment credits to the nonforfeitable post-retirement benefit
obligation in accordance with 9904.419-50(c)(6)(viii)(A). The ratio of
the nonforfeitable post-retirement benefit obligation to the sum of the
fair value of plan assets, accumulated value of unfunded accruals, and
accumulated value of prepayment credits is 0.833333 ($1,000,000 divided
by $1,200,000). Therefore the contractor allocates $833,333 (83.3333%
of $1,000,000) of the fair value of plan assets, $166,667 (83.3333% of
$200,000) of accumulated value of unfunded accruals. (In accordance
9904.419-50(c)(6)(i), the accumulated value of prepayment credits were
separately identified and were not allocated to segments.) The balance
of the fair value of plan assets ($166,667) and accumulated value of
unfunded accruals ($33,333) are allocated to the forfeitable post-
retirement benefit obligation.
(iii) Then, because 5% ($50,000 of $1,000,000) of the
nonforfeitable post-retirement benefit obligation was transferred to
Segment D, the contractor transfers $41,667 (5% of $833,333) of the
fair value of plan assets and $8,333 (5% of $166,667) of accumulated
value of unfunded accruals allocated to the nonforfeitable post-
retirement benefit obligation to Segment D in accordance with 9904.419-
50(c)(6)(viii)(B).
(iv) Finally, because 10% ($200,000 of $2,000,000) of the
forfeitable post-retirement benefit obligation was transferred to
Segment D, $16,667 (10% of $166,667) of the fair value of plan assets
and $3,333 (10% of $33,333) of accumulated value of unfunded accruals
allocated to the forfeitable post-retirement benefit obligation is
transferred to segment D in accordance with 9904.419-50(c)(6)(viii)(C).
(v) The unfunded nonforfeitable post-retirement benefit obligation
transferred to Segment D is $180,000, which is 10% of the original
unfunded accumulated post-retirement benefit obligation for Segment A.
The contractor transfers 10% of the unrecognized transition obligation,
unrecognized prior service cost, and unrecognized gains and losses from
Segment A to Segment D in accordance with 9904.419-50(c)(6)(viii).
(vi) The segment accounting for Segment A for the transfer is shown
below:
----------------------------------------------------------------------------------------------------------------
Segment A
--------------------------------------------------
Transfer to
Before transfer segment D After transfer
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits.............................. $750,000 ............... $750,000
Actives--Currently eligible.............................. 250,000 $(50,000) 200,000
--------------------------------------------------
Nonforfeitable post-retirement benefit obligation........ 1,000,000 (50,000) 950,000
Actives--Not yet eligible................................ 2,000,000 (200,000) 1,800,000
--------------------------------------------------
Total................................................ 3,000,000 (250,000) 2,750,000
Valuation Assets:
Fair value of plan assets................................ (1,000,000) 58,334 (941,666)
Accumulated value of unfunded accruals................... (200,000) 11,666 (188,334)
Accumulated value prepayment credits..................... ............... ............... ...............
--------------------------------------------------
Total................................................ (1,200,000) 70,000 (1,130,000)
Unfunded accumulated post-retirement benefit obligation...... 1,800,000 (180,000) 1,620,000
==================================================
Unrecognized transition obligation........................... 2,000,000 (200,000) 1,800,000
Unrecognized prior service cost.............................. 100,000 (10,000) 90,000
Unrecognized (gain) or loss.................................. (300,000) 30,000 (270,000)
--------------------------------------------------
Sum of unrecognized amounts.................................. 1,800,000 (180,000) 1,620,000
==================================================
Results of 9904.419-40(b)(5)(iv) balance test................ Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
(vii) And the segment accounting for Segment D for the transfer is:
----------------------------------------------------------------------------------------------------------------
Segment D
--------------------------------------------------
Transfer from
Before transfer segment A After transfer
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits.............................. $225,000 ............... $225,000
[[Page 59539]]
Actives--Currently eligible.............................. 175,000 $50,000 225,000
--------------------------------------------------
Nonforfeitable post-retirement benefit obligation........ 400,000 50,000 450,000
Actives--Not yet eligible................................ 1,600,000 200,000 1,800,000
--------------------------------------------------
Total................................................ 2,000,000 250,000 2,250,000
Valuation Assets:
Fair value of plan assets................................ ............... (58,334) (58,334)
Accumulated value of unfunded accruals................... (750,000) (11,666) (761,666)
Accumulated value prepayment credits..................... ............... ............... ...............
--------------------------------------------------
Total................................................ (750,000) (70,000) (820,000)
Unfunded accumulated post-retirement benefit obligation...... 1,250,000 180,000 1,430,000
==================================================
Unrecognized transition obligation........................... 1,400,000 200,000 1,600,000
Unrecognized prior service cost.............................. 50,000 10,000 60,000
Unrecognized (gain) or loss.................................. (200,000) (30,000) (230,000)
--------------------------------------------------
Sum of unrecognized amounts.................................. 1,250,000 180,000 1,430,000
==================================================
Results of 9904.419-40(b)(5)(iv) balance test................ Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
(viii) The $180,000 increase in the unfunded accumulated post-
retirement benefit obligation for Segment D will be reflected in future
post-retirement benefits costs of Segment D through the increases in
the unrecognized portions of transition obligation, prior to service
costs, and gains and losses.
(9) Assume that the post-retirement benefit plan of Contractor R in
illustration 9904.419-60(c)(8) that covers employees of Segment A and D
provides more generous benefits to employees of Segment D. Accordingly,
the contractor separately calculates post-retirement benefit costs for
each segment pursuant to 9904.419-50(c)(2)(i) and 9904.419-
40(c)(3)(ii). After the 50 plan participants are transferred from
Segment A to Segment D, these employees are then eligible for the more
generous benefits afforded to employees of Segment D. Based on the
benefits of Segment A, the accumulated post-retirement benefit
obligation for the 50 participants was $250,000. The accumulated post-
retirement benefit obligation for these employees will be $283,000
based on the benefits for Segment D. After completing the transfer of
accumulated post-retirement benefit obligation, fair value of plan
assets and other values as shown in illustration 9904.419-60(c)(8) in
accordance with 9904.419-50(c)(6)(viii), the contractor shall recognize
the $33,000 increase in the accumulated post-retirement benefit
obligation as an experience loss for Segment D. This experience loss
shall be assigned to cost accounting periods in accordance with
9904.419-50(b)(2)(vii).
(10) Contractor S calculates a composite post-retirement benefit
cost of $200,000 for its defined-benefit plan for the current cost
accounting period, which the contractor then allocates to segments. The
plan's benefit is not related to salary and the actuarial valuation of
the post-retirement benefit liability is performed on a per-capita
basis. Segment A contains 30% of all the active and inactive plan
participants of the post-retirement benefit plan, and therefore Segment
A is allocated $60,000 of the cost pursuant to 9904.419-50(c)(1)(ii).
The $60,000 of post-retirement benefit cost allocated to Segment A is
allocable to the intermediate and final cost objectives of Segment A
pursuant to 9904.419-40(d). The allocation to segments is summarized as
follows:
----------------------------------------------------------------------------------------------------------------
Allocation of composite cost
----------------------------------------------------------------
Composite Commercial
cost Home office Segment A Segment B 1 segments 2
----------------------------------------------------------------------------------------------------------------
Plan Participants:
Actives.................................... 1,794 90 535 181 988
206 10 65 19 112
----------------------------------------------------------------
Inactives.................................. 2,000 100 600 200 1,100
================================================================
Total..................................
Allocation to Segments:
Assigned post-retirement benefit cost...... $200,000 $10,000 $60,000 $20,000 $110,000
Contribution............................... 200,000 10,000 60,000 20,000 110,000
Unfunded Accrual........................... ........... ........... ........... ........... ...........
----------------------------------------------------------------------------------------------------------------
(11) Assume that Contractor S in illustration 9904.419-60(c)(10)
separately calculates post-retirement benefit costs for each segment
which total $200,000 for plan as a whole for the current period. The
separately calculated cost is $10,000 for the Home Office, $60,000 for
Segment A, and $20,000 for Segment B. Pursuant to 9904.419-
50(c)(6)(iii)(A), the contractor follows its established practice and
funds $90,000 which is the total cost for
[[Page 59540]]
the home office and two segments that allocate costs to contracts
subject to this Standard. The contractor funds none of the assigned
post-retirement benefit cost separately computed for the commercial
segments. In this case, the $90,000 of funded post-retirement benefit
cost is allocated to the Home Office, Segment A, and Segment B. Because
no funding was allocated to the commercial segments, an unfunded
accrual of $110,000 shall be identified as the unfunded portion of
post-retirement benefit costs allocated to the commercial segments in
accordance with 9904.419-50(c)(6)(v). The allocation to segments is
summarized as follows:
----------------------------------------------------------------------------------------------------------------
Allocation separately calculated costs
----------------------------------------------------------------
Commercial
Totals Home office Segment A Segment B segments
----------------------------------------------------------------------------------------------------------------
Allocation to Segments:
Separately calculated post-retirement $200,000 $10,000 $60,000 $20,000 $110,000
benefit cost..............................
less: Contribution......................... 90,000 10,000 60,000 20,000 ...........
----------------------------------------------------------------
$110,000 ........... ........... ........... 110,000
============= ============
Unfunded accrual........................... ........... ........... ........... ........... ...........
----------------------------------------------------------------------------------------------------------------
(12) Assume that Contractor S in illustration 9904.419-60(c)(11)
funds only $81,000 which is less than the separately calculated post-
retirement benefit costs for the Home Office, Segment A, and Segment B.
Pursuant to 9904.419-50(c)(6)(iii)(A), the contractor follows its
established practice and proportionately allocates the $81,000 to only
these three segments that allocate costs to contracts subject to this
Standard. No funding is allocated to the commercial segments. The
$81,000 is identified as the funded portion of post-retirement benefit
cost for the Home Office, Segment A, and Segment B. An unfunded accrual
of $9,000 is established in accordance with 9904.419-50(c)(6)(v) and
allocated to these three segments. The allocation to segments is
summarized as follows:
----------------------------------------------------------------------------------------------------------------
Allocation of separately calculated costs
----------------------------------------------------------------
Composite Commercial
cost Home office Segment A Segment B segments
----------------------------------------------------------------------------------------------------------------
Allocation to Segments:
Separately calculated post-retirement $200,000 10,000 60,000 20,000 110,000
benefit cost..............................
81,000 9,000 54,000 18,000
----------------------------------------------------------------
less: Contribution......................... 119,000 1,000 6,000 2,000 110,000
================================================================
Unfunded accrual
----------------------------------------------------------------------------------------------------------------
(13) Assume that Contractor S in illustration 9904.419-60(c)(11)
funds $108,000, which is more than the separately calculated post-
retirement benefit costs for the Home Office, Segment A, and Segment B.
Pursuant to 9904.419-50(c)(6)(iii)(A), the contractor follows its
established practice and first allocates $90,000 of the funding to the
three segments that allocate costs to contracts subject to this
Standard. The contractor then allocates the remaining $18,000 of
funding to the commercial segments. The $92,000 unfunded portion of
post-retirement benefit cost separately calculated for the commercial
segments shall be identified as an unfunded accrual of $92,000 must be
established in accordance with 9904.419-50(c)(6)(v). The allocation to
segments is summarized as follows:
----------------------------------------------------------------------------------------------------------------
Allocation of separately calculated costs
----------------------------------------------------------------
Composite Commercial
cost Home office Segment A Segment B segments
----------------------------------------------------------------------------------------------------------------
Allocation to Segments:
Net post-retirement benefit cost........... $200,000 $10,000 $60,000 $20,000 $110,000
108,000 10,000 60,000 20,000 18,000
----------------------------------------------------------------
less: Contribution......................... 92,000 0 0 0 92,000
================================================================
Unfunded accrual...........................
----------------------------------------------------------------------------------------------------------------
(d) Allocation of post-retirement benefit cost to cost objectives.
[Reserved]
(e) Adjustments for curtailments, settlements, and termination
benefits.
(1)(i) Assume that Contractor M in illustration 9904.419-60(b)(5)
announces that it will reduce its
[[Page 59541]]
operations by terminating a significant number of employees at the end
of the current period. Pursuant to SFAS 106, the contractor recognizes
that a curtailment of benefits has occurred because the termination of
the employees causes a reduction in the remaining years of expected
service associated with those terminating employees. The termination of
employees also causes a reduction in the accumulated post-retirement
benefit obligation because some of the terminated plan participants
will not accrue the future service necessary for benefits eligibility.
Also assume that because of the work-force reduction, a certain class
of the terminated employees becomes eligible for special termination
benefits which increase the accumulated post-retirement benefit
obligation by $14,000. For SFAS 106 purposes the contractor determines
the special termination benefit loss and the curtailment gain as
follows:
----------------------------------------------------------------------------------------------------------------
SFAS 106 accounting as of December 31
-------------------------------------------------------------------
Special
Before termination Curtailment After
curtailment benefits gain curtailment
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit $(257,000) 1$(14,000) 2 $68,000 $(203,000)
obligation.................................
Fair value of plan assets................... 69,000 69,000
-------------------------------------------------------------------
Funded status............................... (188,000) (14,000) 68,000 (134,000)
Unrecognized net gain....................... (44,000) (44,000)
Unrecognized prior service cost............. 33,000 3 (5,940) 27,060
Unrecognized transition obligation.......... 195,000 4 (42,900) 152,100
Pre-paid (accrued) post-retirement benefit 5 (4,000) (14,000) 19,160 1,160
cost.......................................
-------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
1 Increase in accumulated post-retirement benefit obligation attributable to the additional benefits granted
under special termination provisions of the post-retirement benefit plan.
2 Gain due to decrease in accumulated post-retirement benefit obligation because terminated participants will
not become eligible for full benefits.
3 Portion of unrecognized prior service cost associated with future years of service associated with terminated
participants.
4 Portion of unrecognized transition obligation associated with future years of service associated with
terminated participants.
5 The accrued post-retirement cost equals the net of an accumulated value of unfunded accruals of $(6,000) and
an accumulated value of prepayment credits of $2,000.
Pursuant to SFAS 106, the $14,000 for granting special termination
would be recognized as an expense of the current period. For contract
costing purposes, the $14,000 must be amortized over a period of 10
years in accordance with 9904.419-50(e)(2)(i). The curtailment gain for
contract costing purposes is $19,160, which is the remaining amount of
the curtailment gain not offset against unrecognized prior service cost
and unrecognized transition obligation using SFAS 106 methodology, in
accordance with 9904.419-50(e)(2)(i). For SFAS 106 purposes, the
$19,160 curtailment gain would be recognized as income for the current
period. For contract cost purposes, the $19,160 curtailment gain must
be amortized over a period of 10 years in accordance with 9904.419-
50(e)(2)(i).
(iii) After considering the effects of the special termination
benefit loss and the curtailment gain, the contractor demonstrates that
its accounting for post-retirement benefit costs is still in balance as
required by 9904.419-40(b)(5)(iv) as follows:
----------------------------------------------------------------------------------------------------------------
Contract cost accounting as of December 31
-------------------------------------------------------------------
Special
Before termination Curtailment After
curtailment benefits gain curtailment
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit $257,000 $14,000 $(68,000) $203,000
obligation.................................
Fair value of plan assets................... (69,000) (69,000)
Accumulated value of unfunded accruals...... (6,000) (6,000)
-------------------------------------------------------------------
Accumulated value of prepayment credits..... 2,000 2,000
-------------------------------------------------------------------
Unfunded accumulated post-retirement benefit 184,000 14,000 (68,000) 130,000
obligation.................................
Unrecognized net gain....................... (44,000) (44,000)
Unrecognized prior service cost............. 33,000 (5,940) 27,060
Unrecognized transition obligation.......... 195,000 (42,900) 152,100
Unrecognized special termination benefit 14,000 14,000
loss.......................................
-------------------------------------------------------------------
Unrecognized curtailment gain............... (19,160) (19,160)
-------------------------------------------------------------------
Sum of unrecognized amounts................. 184,000 14,000 (68,000) 130,000
Results of 9904.419-40(b)(5)(iv) balance Passes Passes Passes Passes
test.......................................
----------------------------------------------------------------------------------------------------------------
(2)(i) Assume that immediately after the curtailment of benefits,
Contractor M in illustration 9904.419-60(e)(1) purchases insurance from
an non-captive insurer at a price of $58,000 to unconditionally settle
its obligation for certain post-retirement benefits. The purchase of
this insurance reduces the accumulated post-retirement benefit
obligation by $50,000 measured using the contractor's established
methods and assumptions. Pursuant to SFAS 106, the contractor
recognizes that a loss from the settlement of benefits has occurred.
For SFAS 106 purposes the
[[Page 59542]]
contractor determines the settlement loss as follows:
----------------------------------------------------------------------------------------------------------------
SFAS 106 accounting as of December 31
--------------------------------------------------
Before After
settlement Settlement loss settlement
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation............... $(203,000) $50,000 $(153,000)
Fair value of plan assets.................................... 69,000 (58,000) 11,000
Funded Status................................................ (134,000) \1\ (8,000) (142,000)
Unrecognized net gain........................................ (44,000) \2\ 10,837 (33,163)
Unrecognized prior service cost.............................. 27,060 ............... 27,060
Unrecognized transition obligation........................... 152,100 \3\(10,837) 141,263
--------------------------------------------------
Pre-paid (accrued) post-retirement benefit cost.............. 1,160 (8,000) (6,840)
----------------------------------------------------------------------------------------------------------------
\1\ Loss due to cost of settlement in excess of accumulated post-retirement benefit obligation.
\2\ Portion of unrecognized transition obligation eliminated by settlement.
\3\ Loss due to immediate recognition of a portion of the unrecognized transition obligation.
(ii) Pursuant to 9904.419-50(e)(2)(i), the settlement loss for
contract costing purposes is $8,000 using SFAS 106 methodology. For
SFAS 106 purposes, the contractor recognizes a current period expense
of $8,000 for the settlement loss. For contract cost purposes, the
$8,000 settlement loss must be amortized over the next 10 years in
accordance with 9904.419-50(e)(2)(i).
(iii) After considering the effects of the settlement, the
contractor demonstrates that its accounting for post-retirement benefit
costs is still in balance as required by 9904.419-40(b)(5)(iv) as
follows:
----------------------------------------------------------------------------------------------------------------
Contract cost accounting as of December 31
--------------------------------------------------
Before After
settlement Settlement loss settlement
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation............... $203,000 $(50,000) $153,000
Fair value of plan assets.................................... (69,000) 58,000 (11,000)
Accumulated value of unfunded accruals....................... (6,000) ............... (6,000)
Accumulated value of prepayment credits...................... 2,000 ............... 2,000
--------------------------------------------------
Unfunded accumulated post-retirement benefit obligation...... 130,000 8,000 138,000
==================================================
Unrecognized prior net gain.................................. (44,000) 10,837 (33,163)
Unrecognized prior service cost.............................. 27,060 ............... 27,060
Unrecognized transition obligation........................... 152,100 (10,837) 141,263
Unrecognized special termination benefit loss................ 14,000 ............... 14,000
Unrecognized curtailment gain................................ (19,160) ............... (19,160)
Unrecognized settlement loss................................. ............... 8,000 8,000
--------------------------------------------------
Sum of unrecognized amounts.................................. 130,000 8,000 138,000
==================================================
Results of 9904.419-40(b)(5)(iv) balance test................ Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
(3) Assume that as part of the work force reduction by Contractor M
in illustration 9904.419-60(e)(1), a disproportionate share of the
employee terminations is attributable to one of its segments. In that
case, the contractor must determine the termination benefit loss
separately for each segment in accordance with 9904.419-50(c)(2)(i) and
9904.419-50(c)(2)(ii). On the other hand, if the effect is evenly
dispersed across some, but not all, of the segments, the contractor may
determine the termination benefit loss for the affected segments in the
aggregate and allocate the loss among the affected segments by use of
an appropriate base such as the number of employees terminated in each
segment as part of the workforce reduction.
(f) Adjustments for segment closings.
(1) (i) Contractor T has been performing Government contracts
subject to this Standard. Upon completion of its current Government
contracts, the contractor does not actively seek nor receive any new
Government contracts subject to this Standard and therefore a segment
closing, as defined by 9904.419-30(b)(6)(iii), has occurred. The
accounting of the liabilities and assets for the post-retirement
benefits of Segment A for government contract costing purposes
immediately before the segment closing is summarized as follows:
------------------------------------------------------------------------
Value as of 12/
31
------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits.......................... $250,000
Actives--Currently eligible for benefits............. 100,00
----------------
[[Page 59543]]
Nonforfeitable post-retirement benefit obligation.... 350,000
Actives--Not yet eligible for benefits............... 400,000
----------------
Total.............................................. 750,000
Valuation assets:
Fair value of plan assets\1\......................... (270,000)
Accumulated value of unfunded accruals............... (150,000)
Accumulated value of prepayment credits\2\........... ...............
----------------
Total.............................................. 420,000
Unfunded accumulated post-retirement benefit obligation 330,000
================
Unfunded nonforfeitable post-retirement benefit (70,000)
obligation\3\.........................................
================
Unrecognized net gain.................................. (150,000)
Unrecognized prior service cost........................ 405,000
Unrecognized transition obligation..................... 75,000
----------------
Sum of unrecognized amounts............................ 330,000
================
Result of 9904.419-40(b)(5)(iv) balance test........... Passes
------------------------------------------------------------------------
\1\ In accordance with 9904.419-50(c)(6)(i), the fair value of plan
assets allocated to segments exclude the accumulated value of
prepayment credits.
\2\ In accordance with 9904.419-50(c)(6)(i), the accumulated value of
prepayment credits were separately identified and were not allocated
to segments.
\3\ Nonforfeitable post-retirement benefit obligation of $350,000 less
valuation assets of $420,000.
(ii) The contractor must fully recognize a segment closing credit
of $70,000, which is measured as the difference of the nonforfeitable
post-retirement benefit obligation ($350,000) and the valuation assets
($420,000). The segment closing adjustment credit of $70,000 represents
an adjustment to previously determined post-retirement benefit costs in
accordance with 9904.419-50(f)(3)(i). The Government's share of the
$70,000 must be effected by adjusting contract prices, target costs, or
cost ceilings, or by any other suitable technique in accordance with
9904.419-50(f)(4). One way the adjustment could be effected is by a
check or other funds transfer from the contractor to the Government.
(2) If Contractor T in illustration 9904.419-60(f)(1) discontinues
its operations at Segment W and abandons the facility, a segment
closing as defined by 9904.419-30(b)(6)(ii) has occurred.
Alternatively, if the operations of Segment W continue but the facility
is sold to a third party who is not a successor-in-interest, then a
segment closing as defined by 9904.419-30(b)(6)(i) has occurred. In
either case, the government's share of the $70,000 credit shall be
determined, as outlined in illustration 9904.419-60(f)(1), and credited
to the government in accordance with 9904.419-50(f)(4).
(3) Assume that Contractor T in Illustration 9904.419-60(f)(1)
sells Segment A to Contractor U, who is a successor-in-interest in the
segment's government contracts through a novation agreement of the
segment's government contracts. A segment closing as defined by
9904.419-30(b)(6)(i) has occurred. The entire accumulated post-
retirement benefit obligation of $750,000 for both active and retired
plan participants and all other post-retirement benefit plan values are
transferred to the successor-in-interest as part of a sales agreement.
Pursuant to 9904.419-50(f)(3)(v)(A), no segment closing adjustment is
required. The accounting of the liabilities and assets for the post-
retirement benefits of Segment A for government contract costing
purposes is summarized immediately before and after the sale as
follows:
----------------------------------------------------------------------------------------------------------------
After
----------------------------------------------------------------------------------------------------------------
Original Original Successor
Before contractor contractor contractor
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits.............................. $250,000 ............... $250,000
Actives--Currently eligible............................. 100,000 ............... 100,000
--------------------------------------------------
Nonforfeitable post-retirement benefit obligation........ 350,000 ............... 350,000
Actives--Not yet eligible............................... 400,000 ............... 400,000
--------------------------------------------------
Total................................................ 750,000 ............... 750,000
Valuation assets:
Fair value of plan assets \1\............................ (270,000) ............... (270,000)
Accumulated value of unfunded accruals................... (150,000) ............... (150,000)
Accumulated value of prepayment credits \2\.............. ............... ............... ...............
--------------------------------------------------
Total................................................ (420,000) ............... (420,000)
Unfunded accumulated post-retirement benefit obligation...... 330,000 ............... 330,000
==================================================
[[Page 59544]]
Unfunded Nonforfeitable post-retirement benefit obligation (70,000) ............... (70,000)
\3\.........................................................
==================================================
Unrecognized transition obligation........................... (150,000) ............... (150,000)
Unrecognized prior service cost.............................. 405,000 ............... 405,000
Unrecognized (gain) or loss................................. 75,000 ............... 75,000
--------------------------------------------------
Sum of unrecognized amounts.................................. 330,000 ............... 330,000
==================================================
Results of 9904.419-40(b)(5)(iv) balance test................ Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
\1\ In accordance with 9904.419-50(c)(6)(i), the fair value of plan assets allocated to segments exclude the
accumulated value of prepayment credits.
\2\ In accordance with 9904.419-50(c)(6)(i), the accumulated value of prepayment credits were separately
identified and were not allocated to segments.
\3\ Nonforfeitable post-retirement benefit obligation of $350,000 less valuation assets of $420,000.
(4) (i) Assume that Contractor V transfers only the accumulated
post-retirement benefit obligation of $500,000 attributable to active
plan participants to Contractor W, the successor-in-interest. The
contractor retains the accumulated post-retirement benefit obligation
of $250,000 for the retired participants. Pursuant to 9904.419-
50(f)(3)(iv) and 9904.419-50(f)(3)(v)(B), the contractor transfers a
portion of the fair value of plan assets, accumulated value of unfunded
accruals, and accumulated value of prepayment credits to the successor
contractor in accordance with 9904.419-50(c)(6)(viii).
(ii) Because the sum of the fair value of plan assets and
accumulated value of unfunded accruals is less than the nonforfeitable
post-retirement benefit obligation, the full amount of the fair value
of plan assets and accumulated value of unfunded accruals is allocated
to the nonforfeitable post-retirement benefit obligation. (Note that
the accumulated value of prepayment credits is $0.) There is no
remaining balance of fair value of plan assets and accumulated value of
unfunded accruals to be allocated to the forfeitable post-retirement
benefit obligation.
(iii) The contractor transferred 28.5714% ($100,000
$350,000) of the nonforfeitable post-retirement benefit obligation to
the successor contractor and therefore transfers to the successor
contractor 28.5714% of the fair value of plan assets ($25,714) and
accumulated value of unfunded accruals ($35,714) allocated to the
nonforfeitable post-retirement benefit obligation.
(iv) Although the entire forfeitable post-retirement benefit
obligation was transferred to the successor contractor, no fair value
of plan assets nor accumulated value of unfunded accruals were
allocated to the forfeitable post-retirement benefit obligation.
Therefore no additional fair value of plan assets nor accumulated value
of unfunded accruals is transferred to the successor contractor.
(v) The unfunded accumulated post-retirement benefit obligation
transferred to the successor contractor is $438,572, which is 81.9761%
($438,572 $535,000) of the original unfunded accumulated post-
retirement benefit obligation. According, the contractor transfers
81.9761% of the unrecognized transition obligation, unrecognized prior
service cost, and unrecognized gains and losses to the successor
contractor.
(vi)(A) The accounting of the obligations and assets for the post-
retirement benefits of Segment A for government contract costing
purposes is summarized immediately before and after the sale as
follows:
----------------------------------------------------------------------------------------------------------------
Before After
-----------------------------------------------
Original Original Successor
contractor contractor contractor
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits................................. $250,000 $250,000 ..............
Actives--Currently eligible................................. 100,000 .............. $100,000
-----------------------------------------------
Nonforfeitable post-retirement benefit obligation........... 350,000 250,000 100,000
Actives--Not yet eligible................................... 400,000 .............. 400,000
-----------------------------------------------
Total................................................... 750,000 250,000 500,000
Valuation assets:
Fair value of plan assets 1................................. (90,000) (64,286) (25,714)
Accumulated value of unfunded accruals...................... (125,000) 89,286) 35,714)
Accumulated value of prepayment credits \2\................. .............. .............. ..............
-----------------------------------------------
Total................................................... (215,000) 153,572 (61,428)
Unfunded accumulated post-retirement benefit obligation......... 535,000 96,428 438,572
===============================================
Unfunded Nonforfeitable post-retirement benefit obligation \3\.. 135,000 96,428 38,572
===============================================
Unrecognized transition obligation.............................. (50,000) (9,012) (40,988)
Unrecognized prior service cost................................. 410,000 73,898 336,102
Unrecognized (gain) or loss..................................... 175,000 31,542 143,458
-----------------------------------------------
[[Page 59545]]
Sum of unrecognized amounts..................................... 535,000 96,428 438,572
===============================================
Results of 9904.419-40(b)(5)(iv) balance test................... Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
1 In accordance with 9904.419-50(c)(6)(i), the fair value of plan assets allocated to segments excludes the
accumulated value of prepayment credits.
2 In accordance with 9904.419-50(c)(6)(i), the accumulated value of prepayment credits were separately
identified and were not allocated to segments.
3 In the ``Before'' column, this is the nonforfeitable post-retirement benefit obligation of $350,000 less
valuation assets of $215,000. Amounts shown under ``After'' columns were similarly derived.
(B) The contractor then determines a segment closing adjustment
charge of $96,428, which is measured as the difference of the
nonforfeitable post-retirement benefit obligation of $250,000 and
$153,572, which is the sum of the fair value of assets ($64,286) and
the accumulated value of unfunded accruals ($89,286) less any
accumulated value of prepayment credits ($0.) The segment closing
adjustment charge of $96,428 represents an adjustment to previously
determined post-retirement benefit costs in accordance with 9904.419-
50(f)(3)(i). The Government's share of the $96,428 must be effected by
adjusting contract prices, target costs, or cost ceilings, or by any
other suitable technique in accordance with 9904.419-50(f)(4). One way
the adjustment could be effected is by a check or other funds transfer
from the Government to the contractor. The contractor must also reflect
that segment closing adjustment has been effected by increasing the
accumulated value of unfunded accruals by $96,428 in accordance with
9904.419-50(f)(3)(vi).
(5) Contractor W in illustration 9904.419-60(f)(4), after
completing the transfer to the successor-in-interest, transfers the
retained retired participants, and the retained accumulated post-
retirement benefit obligation, fair value of plan assets, and all other
values attributable to the retained retired participants, to the closed
segment's former home office in accordance with 9904.419-50(f)(3)(iii).
For government contract costing purposes, the accumulated post-
retirement benefit obligation, fair value of plan assets, and all other
values attributable to the retained inactive (retired) participants are
combined with the records of the home office as follows:
----------------------------------------------------------------------------------------------------------------
Home office
-----------------------------------------------
Retained
retired Home office Totals
participants participants
----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees receiving benefits................................. $250,000 $100,000 $350,000
Actives--Currently eligible................................. .............. 235,000 235,000
-----------------------------------------------
Nonforfeitable post-retirement benefit obligation........... 250,000 335,000 585,000
Actives--Not yet eligible................................... .............. 410,000 410,000
-----------------------------------------------
Total................................................... 250,000 745,000 995,000
Valuation assets:
Fair value of plan assets 1................................. (64,286) (268,000) (332,286)
Accumulated value of unfunded accruals 2.................... (185,714) (151,000) (336,714)
Accumulated value of prepayment credits \3\................. .............. .............. ..............
-----------------------------------------------
Total................................................... (250,000) (419,000) (669,000)
Unfunded accumulated post-retirement benefit obligation......... .............. 326,000 326,000
-----------------------------------------------
Unfunded Nonforfeitable post-retirement benefit obligation 4.... .............. (84,000) (84,000)
===============================================
Unrecognized transition obligation 5............................ .............. (147,000) (147,000)
Unrecognized prior service cost 6............................... .............. 396,000 396,000
Unrecognized (gain) or loss 7................................... .............. 77,000 77,000
-----------------------------------------------
Sum of unrecognized amounts..................................... .............. 326,000 326,000
===============================================
Results of 9904.419-40(b)(5)(iv) balance test................... Passes Passes Passes
----------------------------------------------------------------------------------------------------------------
1 In accordance with subparagraph 9904.419-50(c)(6)(i), the fair value of plan assets allocated to segments
excludes the accumulated value of prepayment credits.
2 The segment closing adjustment charge is effected by increasing the accumulated value of unfunded accruals of
$89,286 by the segment closing adjustment of $96,428 in accordance with subparagraph 9904.419-50(f)(3)(vi).
3 In accordance with 9904.419-50(c)(6)(i), the accumulated value of prepayment credits were separately
identified and were not allocated to segments.
4 In the ``Home Office Participants'' column, this is the nonforfeitable post-retirement benefit obligation of
$335,000 less valuation assets of $419,000. Amounts shown under ``Retained Retired Participants'' and
``Total'' columns were similarly derived.
5 Unrecognized gains and losses for the retained participants have already been fully recognized by the segment
closing adjustment.
6 Unrecognized transition obligation for the retained participants have already been fully recognized by the
segment closing adjustment.
7 Unrecognized past service cost for the retained participants have already been fully recognized by the segment
closing adjustment.
[[Page 59546]]
(6) Contractor X, after acquiring Segment A as successor-in-
interest to Contractor T in illustration 9904.419-60(f)(4), decreases
the discount rate assumption from 8.5% to 8.0% to match the discount
rate assumption used for its other post-retirement benefit plans. This
decrease in the assumed discount rate causes the accumulated post-
retirement benefit obligation to increase by $43,000 from $500,000 to
$543,000. In accordance with 9904.419-50(f)(3)(v)(C), the $43,000
actuarial loss attributable to the change in the discount rate
assumption is recognized by the successor contractor immediately after
the acquisition of the segment. An annual gain or loss component of the
successor-in-interest's post-retirement benefit cost shall be
recognized in accordance with 9904.419-50(b)(2)(vi). There is no other
adjustment in the values and records used by the original contractor
for government contract costing purposes.
9904.419-61 Interpretation. [Reserved]
9904.419-62 Exemptions.
None for this Standard.
9904.419-63 Effective date.
(a) This Standard is effective as of [90 days after date of
publication of the 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.
9904.419-64 Transition method.
(a) General. In complying with this Standard 9904.419, contractors
must follow the equitable principle that post-retirement benefit costs
which have been previously provided for, shall not be redundantly
provided for under this Standard. Conversely, post-retirement benefit
costs that have not previously been provided for, shall be provided for
in accordance with this Standard. The method, or methods, employed to
achieve an equitable transition shall be consistent with the provisions
of this Standard and shall be approved by the cognizant Federal agency
official.
(b) Change to pay-as-you-go method. If a contractor, who for
Government contracting purposes had accounted for costs of a defined-
benefit post-retirement plan on an accrual basis prior to the date this
Standard becomes applicable, changes to the pay-as-you-go cost method,
the contractor shall account for any unfunded post-retirement benefit
costs of prior periods by establishing an accumulated value of unfunded
accruals in accordance with 9904.419-50(c)(6)(v). Post-retirement
benefit costs calculated under the pay-as-you-go cost method shall be
charged against any fair value of plan assets and such accumulated
value of unfunded accruals before any post-retirement benefit costs may
be allocated to intermediate or final cost objectives.
(c) Change to accrual accounting. If a contractor, who for
Government contracting purposes had accounted for the costs of a
defined-benefit post-retirement plan using the pay-as-you-go cost
method prior to the date this Standard becomes applicable, changes to
accrual accounting, the contractor shall account for any portion of
prior post-retirement benefit costs that are not included in the
unrecognized prior service costs, unrecognized gains and losses, or
unrecognized transition obligation when this Standard is first
applicable to the contractor. Such prior post-retirement benefit costs
shall be accounted for as either a supplemental transition obligation
or as part of a ``fresh start'' transition obligation, and shall be
amortized as specified in paragraph (c)(3) of this subsection:
(1) For each period subsequent to adoption of accrual accounting
for SFAS 106, but prior to the date this Standard becomes applicable to
the contractor, that the contractor used the pay-as-you-go cost method
for Government contracting purposes, the contractor shall establish a
supplemental transition obligation. This supplemental transition
obligation shall be the accumulated value of such prior post-retirement
benefit cost accruals minus the costs determined using the pay-as-you-
go cost method. The net result shall be increased at the interest rate
as determined by the Secretary of the Treasury pursuant to Public Law
92-41, 85 Stat. 97 during such periods. The supplemental transition
obligation shall be subject to the same accounting treatment under this
Standard as the transition obligation; or,
(2) Alternatively, if for every period subsequent to adoption of
accrual accounting for SFAS 106, but prior to the date this Standard
becomes applicable to the contractor, the contractor had used the pay-
as-you-go cost method for Government contracting purposes, the
contractor may adopt a ``fresh start'' determination of the transition
obligation as of the first valuation date after this Standard becomes
applicable. In this case, the transition obligation shall equal the
accumulated post-retirement benefit obligation less the fair value of
plan assets. If the contractor elects to use the ``fresh start''
method, any unrecognized prior service costs or unrecognized gains and
losses are subsumed into such redetermined transition obligation.
(3) The supplemental transition obligation or the ``fresh start''
redetermined transition obligation shall be amortized on a straight-
line basis over the average remaining service period of active plan
participants, except that if all or almost all of the plan participants
are inactive, the employer shall use the average remaining life
expectancy period of those plan participants.
(d) Terminal funding. If a contractor has established, disclosed,
and consistently followed a practice of determining and accounting for
post-retirement benefit costs in accordance with the terminal funding
provisions of 9904.416-50(a)(1)(v)(C), the contractor may continue that
practice. Terminal funding shall be treated in the same manner as the
pay-as-you-go cost method except that the amortization provisions of
9904.419-40(b)(3)(ii) and 9904.419-50(b)(1) shall not apply.
(e) Certain inactive participants. If at the time the contractor
first becomes subject to this Standard, the contractor cannot associate
some of its inactive plan participants with existing segments (because
the segment has been sold, the segment no longer exists, or the
necessary data are not readily available), the contractor shall
associate such inactive plan participants with the appropriate
corporate home office, intermediate home office, or segment in
accordance with the contractor's previous cost accounting practice used
for Government contract accounting.
(f) Prior segment accounting. If prior to the time a contractor is
required to use this Standard, the contractor has been calculating
post-retirement benefit cost for contract cost purposes using the same
accrual accounting methods used for SFAS 106, then:
(1) For a contractor that has been calculating post-retirement
benefit cost separately for individual segments, the fair value of plan
assets and all other values previously allocated to those segments
shall not be changed, or
(2) For a contractor that has been determining the accrual for
post-retirement benefit costs on a composite basis and allocating such
costs to segments, if an initial allocation of the fair value of plan
assets is required by 9904.419-50(c)(6)(i), such initial allocation
shall reflect such prior cost determinations and allocations. If the
necessary data are readily determinable, the fair value of plan assets
to be allocated to each segment shall be the amount contributed by, or
on behalf of, the segment, increased by income received on such assets,
and decreased
[[Page 59547]]
by benefits and expenses paid from such assets. If the data are not
readily determinable for certain prior periods, the contractor shall
follow the initial asset allocation provisions of 9904.419-
50(c)(6)(i)(C) as of the earliest date such data is available.
(g) Transition illustrations. Unless otherwise noted, paragraphs
(g)(1) through (6) of this subsection address post-retirement benefit
costs and transition amounts determined for the first cost accounting
period beginning on or after the date this Standard becomes applicable
to a contractor. For purposes of these illustrations an expected long-
term rate of return of 8% is presumed to be in effect for all periods.
The contractors identified for purposes of these illustrations are
unrelated to the contractors identified for illustration purposes in
9904.419-60.
(1) Since December 31, 1993 Contractor A has calculated, assigned,
and allocated post-retirement benefit costs to its cost-based
negotiated Government contracts on an accrual basis. In determining the
unfunded accruals for these prior periods pursuant to 9904.419-
50(c)(6)(v), the only funding the contractor can recognize is for
benefit payments in accordance with 9904.419-50(c)(6)(vii). The value
of these past unfunded accruals, increased for interest and decreased
for benefits paid by the contractor, is equal to $2 million as of the
beginning of the current period. Assume that the contractor must begin
using the pay-as-you-go cost method, because the plan fails to meet the
criteria set forth at 9904.419-40(a)(1), to account for current and
future post-retirement benefit costs. Plan participants receive
$500,000 in benefits on the last day of the current period. Using the
transition method of paragraph (b) of this section to ensure prior
costs are not redundantly provided for, the contractor shall establish
an accumulated value of unfunded accruals of $2 million. Since the $2
million is sufficient to provide for the current benefit payments, no
post-retirement benefit costs can be allocated to this period. The
accumulated value of unfunded accruals shall be carried forward to the
next period by adding $160,000 (8% x $2 million) of imputed interest,
and subtracting the $500,000 of benefit payments made by the
contractor. The accumulated value of unfunded accruals for the next
period equals $1,660,000 ($2 million + $160,000 - $500,000).
(2) Prior to becoming subject to this Standard, Contractor B has
accounted for its defined-benefit post-retirement plan which meets the
requirements of 9904.419-40(a)(1) using the pay-as-you-go cost method
for government contract costing purposes. For the first period the
contractor becomes subject to this Standard, the contractor must begin
to accrue the costs of its post-retirement benefit plan as specified in
this Standard. Pursuant to 9904.419-64(c)(1), the contractor may
identify any post-retirement benefit cost accruals which have
previously been unrecognized in the costs allocated to its cost-based
negotiated Government contracts as a supplemental transition
obligation.
(i) A comparison of the contractor's SFAS 106 accounting with its
contract cost accounting as of the date the contractor first becomes
subject to this Standard is as follows:
------------------------------------------------------------------------
SFAS 106 Contract cost
accounting accounting
------------------------------------------------------------------------
Accumulated post-retirement benefit ($2,000,000 ($2,000,000)
obligation.........................
Fair value of plan assets........... ................ ................
-----------------------------------
Funded status....................... (2,000,000) (2,000,000)
Unrecognized net gain............... (196,000) (196,000)
Unrecognized prior service cost..... 38,600 38,600
Unrecognized transition obligation.. 1,557,000 1,557,000
Unrecognized supplemental transition ................ \1\ 600,000
obligation.........................
-----------------------------------
Accrued post-retirement benefit cost (600,000) ................
===================================
------------------------------------------------------------------------
\1\ The supplemental transition obligation is amortized over 17 years
which is the average remaining service period of active plan
participants of this post-retirement benefit plan.
(ii) Note that if the contractor had cost-based negotiated
Government contracts only for some of the prior periods since adopting
SFAS 106 for financial statement purposes, only prior accruals for
those periods when it did have such contracts can be used to establish
the initial amount of the supplemental transition obligation in
accordance with 9904.419-64(c)(1).
(3) Assume that Contractor B in illustration 9904.419-64(g)(2) had
cost-based negotiated Government contracts for every period since
adopting SFAS 106 and had used the pay-as-you-go cost method. The
contractor could elect to redetermine the transition obligation using
the so-called ``fresh start'' alternative in accordance with 9904.419-
64(c)(2).
(i) In this case, a comparison of the contractor's SFAS 106
accounting with its contract cost accounting as of the date the
contractor first becomes subject to this Standard is as follows:
------------------------------------------------------------------------
SFAS 106 Contract cost
accounting accounting
------------------------------------------------------------------------
Accumulated post-retirement benefit ($2,000,000 ($2,000,000)
obligation.........................
Fair value of plan assets........... ................ ................
-----------------------------------
Funded status....................... (2,000,000) (2,000,000)
Unrecognized net gain............... (196,000) n/a
Unrecognized prior service cost..... 38,600 n/a
Unrecognized transition obligation.. 1,557,000 \1\ 2,000,000
-----------------------------------
[[Page 59548]]
Accrued post-retirement benefit cost (600,000) ................
===================================
------------------------------------------------------------------------
\1\ The ``fresh-start'' transition obligation is amortized over 17 years
which is the average remaining service period of active plan
participants of this post-retirement benefit plan.
(ii) Note that if the contractor did not have cost-based negotiated
Government contracts for all prior periods since adopting SFAS 106 for
financial statement purposes, the contractor could not have elected to
use the ``fresh start'' approach of 9904.419-64(c)(2). Also note that
the $2 million fresh start transition obligation equals the sum of the
SFAS 106 $38,600 unrecognized prior service cost, $1,557,400
unrecognized transition obligation, and the $600,000 accrued post-
retirement benefit cost less the $196,000 unrecognized net gain.
(4) Since 1983, Contractor C has had an established practice of
terminal funding for determining the costs of its post-retirement
benefit plan in accordance with 9904.416-50(a)(1)(v)(C). During the
first period the contractor is subject to this Standard, the contractor
pays a $235,000 net single premium for non-participating insurance
contracts to irrevocably settle its obligation to provide life
insurance for its retiring plan participants. Pursuant to paragraph (d)
of this section, the contractor may continue its established practice
of terminal funding and assign the entire $235,000 lump sum settlement
payment as the post-retirement benefit cost for the period. Conversely,
if the contractor had not established terminal funding as its cost
accounting practice prior to becoming subject to this Standard, the
$235,000 single premium payment would have to be amortized over a
period of 15 years for purposes of assigning the cost to periods in
accordance with 9904.419-40(b)(3)(ii) and 9904.419-50(b)(1).
(5) When Contractor D became subject to this Standard, the
contractor reviewed its personnel and benefits records to determine in
which segment each inactive plan participant was last employed. Of the
contractor's 600 inactive plan participants, 98 had been employed in
and retired from a commercial segment under Division A that had been
shut down and abandoned several years before. There were another 23
inactive plan participants who could not be associated with an existing
segment because their employment and benefit records did not provide
sufficient information. Pursuant to paragraph (e) of this section,
after the contractor associated the remaining 479 inactive participants
with existing segments, the 98 who were employed in the segment that
had been discontinued were associated with the home office for Division
A. Likewise, the contractor associated the other 23 inactives, who
could not be associated with any segment, with the corporate home
office. Alternatively, if the contractor had an established practice of
associating the costs all inactive plan participants no longer
associated with operational segments to the corporate home office, the
contractor could continue that established practice in accordance with
paragraph (e) of this section.
(6) Since 1993, Contractor E has measured and assigned post-
retirement benefit costs in accordance with SFAS 106 for both financial
accounting and contract cost accounting purposes. The contractor
elected to amortize the transition obligation using the delayed
recognition provisions of paragraphs 112 and 113 of SFAS 106. Since
1993, the contractor has funded its assigned post-retirement benefit
costs in accordance with relevant Federal regulations. The post-
retirement benefit cost was measured for the corporation as a whole and
allocated to segments in accordance with Cost Accounting Standard
9904.403. Funding agency records and actuarial valuation reports are
available for all years. However, reliable records of benefit payments
by segment are available only for 1995 and later years. Pursuant to
paragraph (f)(2) of this section, the contractor shall initially
allocate a share of the undivided fair value of plan assets to each of
its segments based on the accumulated post-retirement benefit
obligation of each segment starting in 1995 in accordance with
9904.419-50(c)(6)(i)(C). The fair value of plan assets of each segment
shall then be brought forward based on contributions, benefit payments,
and investment earnings and expenses in accordance with 9904.419-
50(c)(6)(i)(D).
[FR Doc. 00-24801 Filed 10-4-00; 8:45 am]
BILLING CODE 3110-01-P