59504 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

OFFICE OF MANAGEMENT AND

BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904

Cost Accounting Standards Board;

Accounting for the Costs of PostRetirement Benefit Plans Sponsored

by Government Contractors

AGENCY: Cost Accounting Standards

Board, Office of Federal Procurement

Policy, OMB.

ACTION: Advance notice of proposed

rulemaking.

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 postretirement 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 postretirement 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).

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59505

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.

2The average Projected Benefit Obligation

reported in the SFAS 87 footnotes was $7,170.6

million.

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 postretirement 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 postretirement 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 postretirement 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 postretirement benefit obligation.

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 postretirement benefit obligation is still

quite large.

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. Postretirement 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 postretirement 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 postretirement 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 postretirement 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

59506 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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, definedbenefit 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 ‘‘postretirement 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.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59507

3Throughout this preamble, the term ‘‘transition

obligation’’ is used to refer to either a transition

obligation or a transition asset.

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 postretirement 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 taxefficient 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 postretirement 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 postretirement 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-yougo cost method’’ by adding the phrase

‘‘or on behalf of’’ because postretirement 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 definedcontribution plans. For definedcontribution 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 definedbenefit 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

59508 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

4Hereafter, the accumulated post-retirement

benefit obligation for benefits that cannot be

forfeited is referred to as the ‘‘nonforfeitable postretirement benefit obligation.’’

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.)

assignable post-retirement benefit cost

could be a negative amount.

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.

(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 postretirement 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 marketrelated 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 postretirement 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.

(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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59509

6Throughout 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. 7The 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.

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 postretirement 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 postretirement benefit costs separately

computed (i.e., direct allocation) at the

segment level.

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

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 postretirement 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 preretirement 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 definedcontribution 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 definedcontribution 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

59510 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 postretirement 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 postretirement 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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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-asyou-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 postretirement 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 postretirement 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 socalled ‘‘homeless’’ inactives should be

explicitly excluded from the postretirement 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 payas-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 costbased 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.

59512 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 postretirement 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 postretirement 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 taxdeductibility 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 postretirement 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

59514 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

8As discussed elsewhere, the proposed Standard

does compare and limit the net periodic postretirement 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.

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

The proposed Standard does not

address the offsetting of a postretirement 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 postretirement 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 postretirement benefits could not easily be

avoided and therefore, a funding

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement benefits. The Board

considered a criterion for accrual

accounting based on the contractor’s

documented commitment to fund at

least the government segments’ postretirement benefit costs. But, after

reviewing the merits of assessing the

liability’s firmness using funding as

opposed to the terms of the postretirement 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 postretirement 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

59516 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 ‘‘taxcomplement’’ approach. Furthermore,

unlike pensions, the funding of postretirement 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 postretirement 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 postretirement benefit cost for a period

which is based on the firm liability for

benefits payable to vested and fullyeligible 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 postretirement 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.

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59517

9 Including the additional nonforfeitable postretirement benefit obligation accrued during the

year is analogous to, but more straight-forward than,

measuring and adding a nonforfeitable annual

service cost.

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 postretirement 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 postretirement 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 postretirement 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 postretirement benefit obligation include

nonforfeitable benefits that would be

earned during the year.9

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 singlepurpose, 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 postretirement benefit costs for future retirees

must be on an accrual basis. Since the postretirement 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 § 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 postretirement 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-YouGo Cost Method and Terminal Funding)

Comments: Many commenters

expressed their belief that cash basis

(pay-as-you-go) accounting is

appropriate whenever the postretirement 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

59518 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 PostRetirement 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 postretirement benefit costs. For definedbenefit 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 postretirement 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 PostRetirement 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 postretirement 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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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. Postretirement 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 spreadgain methods. Discussing why spreadgain 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 postretirement 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 postretirement 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.

59520 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

10The 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.

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 longterm 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 postretirement benefit obligations that are

attributable to a period of high health

care cost increases will be measured and

recognized as an actuarial loss.

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-asyou-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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 marketrelated 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 marketrelated 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 salaryrelated. 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 PostRetirement 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 postretirement 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 postretirement benefit cost.

The Board considered requiring that

post-retirement benefit costs always be

59522 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 taxadvantaged 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59523

11The 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).

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 postretirement benefit obligation measures

the firm or unavoidable liability.11

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

59524 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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-asYou-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 postretirement 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-asyou-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-yougo 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 nearterm 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 postretirement 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-asyou-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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 nonroutine 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 postretirement 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 postretirement benefit plan or take other

actions to reduce or eliminate benefits

attributable to prior service. While

acknowledging the limitation of taxadvantaged 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 ‘‘bestestimate,’’ 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 postretirement 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 postretirement 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–

59526 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 postretirement 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 postretirement 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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 postretirement 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. Marketrelated 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 postretirement benefit obligation in excess

of the nonforfeitable post-retirement

benefit obligation is the forfeitable postretirement 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 welldefined, 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

59528 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 postretirement 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 postretirement 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 postretirement 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 postretirement 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 marketrelated 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 postretirement 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 postretirement 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 postretirement benefits for which an

employee has become eligible, the postretirement benefit plan shall fail to meet

the criteria set forth in paragraph

(a)(1)(ii) of this section.

(iv) For defined-contribution postretirement 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 postretirement 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-asyou-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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement benefits of current and future

cost accounting periods.

(4) For defined-contribution plans

using accrual accounting, the postretirement 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 postretirement benefit obligation, if any.

(iv) The post-retirement benefit cost of

a cost accounting period is assignable

only if the unfunded accumulated postretirement 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 postretirement 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 postretirement 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 postretirement 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 postretirement benefit obligation and

valuations assets, except to the extent

the nonforfeitable post-retirement

benefit obligation and valuations assets

have been assumed by a successor-ininterest to the contracts of the closed

segment. To the extent that the

accumulated post-retirement benefit

obligation, nonforfeitable postretirement 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.

59530 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

(1) Post-retirement benefit costs shall

be determined separately for each postretirement 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 postretirement 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 postretirement benefit plan having

characteristics of both a defined-benefit

post-retirement plan and a definedcontribution 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 postretirement 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 definedcontribution 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 postretirement 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 postretirement 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 postretirement 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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 postretirement 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 postretirement 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 postretirement 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 postretirement benefit plan merger or postretirement 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 postretirement 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 postretirement 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 postretirement 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

59532 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 postretirement 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 postretirement benefit obligation based on

the ratio of the nonforfeitable postretirement 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 postretirement 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 postretirement 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).

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 postretirement 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 successorin-interest then:

(A) If the entire accumulated postretirement 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 postretirement 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 postretirement benefit plan costs on an

accrual basis. The denominator of such

fraction shall be the total postretirement 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 definedbenefit 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-asyou-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 definedbenefit 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

59534 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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 postretirement 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 definedbenefit 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 definedbenefit 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-asyou-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 postretirement 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 definedbenefit and a defined-contribution postretirement 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-asyou-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 definedcontribution 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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 postretirement 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 postretirement 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 postretirement 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 postretirement 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)

59536 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

Value as of

12/31

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 postretirement benefit obligation.)

Furthermore, the $12,000 of postretirement 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 postretirement 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).

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59537

(4) Contractor O sponsors a postretirement 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 postretirement 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-yougo 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 postretirement 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 definedbenefit 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 postretirement benefit plans meets the

criteria set forth at 9904.419–40(a)(1)

and the contractor uses accrual

accounting to separately calculate postretirement 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 postretirement 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

59538 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

Segment A Segment D

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 postretirement 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 postretirement benefit obligation.

(iii) Then, because 5% ($50,000 of

$1,000,000) of the nonforfeitable postretirement 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 postretirement 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 postretirement benefit obligation is

transferred to segment D in accordance

with 9904.419–50(c)(6)(viii)(C).

(v) The unfunded nonforfeitable postretirement 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

Before transfer Transfer to

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

Before transfer Transfer from

segment A After transfer

Accumulated post-retirement benefit obligation:

Retirees receiving benefits ............................................................................................. $225,000 .......................... $225,000

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59539

Segment D

Before transfer Transfer from

segment A After transfer

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

cost Home office Segment A Segment B1 Commercialsegments 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

59540 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

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

Totals Home office Segment A Segment B Commercial

segments

Allocation to Segments:

Separately calculated post-retirement benefit cost .......................... $200,000 $10,000 $60,000 $20,000 $110,000

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 postretirement 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

cost Home office Segment A Segment B Commercialsegments

Allocation to Segments:

Separately calculated post-retirement benefit cost .......................... $200,000 10,000 60,000 20,000 110,000

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

cost Home office Segment A Segment B Commercialsegments

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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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

Before

curtailment

Special termination benefitsCurtailment

gain

After

curtailment

Accumulated post-retirement benefit obligation ...................................... $(257,000) 1$(14,000) 2 $68,000 $(203,000)

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 cost ...................................... 5 (4,000) (14,000) 19,160 1,160

1 Increase in accumulated post-retirement benefit obligation attributable to the additional benefits granted under special termination provisions

of the post-retirement benefit plan. 2Gain due to decrease in accumulated post-retirement benefit obligation because terminated participants will not become eligible for full benefits.3Portion of unrecognized prior service cost associated with future years of service associated with terminated participants.

4Portion of unrecognized transition obligation associated with future years of service associated with terminated participants.

5The 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

Before

curtailment

Special termination benefitsCurtailment

gain

After

curtailment

Accumulated post-retirement benefit obligation ...................................... $257,000 $14,000 $(68,000) $203,000

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 obligation ...................... 184,000 14,000 (68,000) 130,000

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 loss ........................................ 14,000 14,000

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 test ........................................ Passes Passes Passes Passes

(2)(i) Assume that immediately after

the curtailment of benefits, Contractor

M in illustration 9904.419–60(e)(1)

purchases insurance from an noncaptive 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

59542 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

contractor determines the settlement

loss as follows:

SFAS 106 accounting as of December 31

Before settlement Settlement loss After 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.

2Portion 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

settlement Settlement loss After 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59543

Value as of

12/31

Nonforfeitable post-retirement benefit obligation ........................................................................................................................... 350,000

Actives—Not yet eligible for benefits ............................................................................................................................................. 400,000

Total ............................................................................................................................................................................................ 750,000

Valuation assets:

Fair value of plan assets1 .............................................................................................................................................................. (270,000)

Accumulated value of unfunded accruals ...................................................................................................................................... (150,000)

Accumulated value of prepayment credits2 ................................................................................................................................... ..........................

Total ............................................................................................................................................................................................ 420,000

Unfunded accumulated post-retirement benefit obligation ................................................................................................................ 330,000

Unfunded nonforfeitable post-retirement benefit obligation3 ............................................................................................................. (70,000)

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 postretirement 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 successorin-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

Before Original

contractor

Original

contractor

Successor

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

59544 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

After

Before Original

contractor

Original

contractor

Successor

contractor

Unfunded Nonforfeitable post-retirement benefit obligation 3 ................................................ (70,000) .......................... (70,000)

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 postretirement 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 postretirement 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 postretirement 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 postretirement 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 postretirement 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 postretirement benefits of Segment A for

government contract costing purposes is

summarized immediately before and

after the sale as follows:

Before After

Original

contractor

Original

contractor

Successor

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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 59545

Before After

Original

contractor

Original

contractor

Successor

contractor

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 postretirement 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 postretirement 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

participants

Home office

participants Totals

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. 2The 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.

59546 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

(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 postretirement 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 postretirement 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 postretirement 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 postretirement 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 payas-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 postretirement 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-yougo 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 postretirement 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 postretirement 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

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules 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-asyou-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-yougo 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

accounting

Contract cost

accounting

Accumulated post-retirement benefit obligation .............................................................................................. ($2,000,000 ($2,000,000)

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 obligation ............................................................................................ ............................ 1 600,000

Accrued post-retirement benefit cost ............................................................................................................... (600,000) ............................

1The 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 costbased 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

accounting

Contract cost

accounting

Accumulated post-retirement benefit obligation .............................................................................................. ($2,000,000 ($2,000,000)

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

59548 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Proposed Rules

SFAS 106

accounting

Contract cost

accounting

Accrued post-retirement benefit cost ............................................................................................................... (600,000) ............................

1The ‘‘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 postretirement 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