[Federal Register Volume 64, Number 32 (Thursday, February 18, 1999)]
[Notices]
[Pages 8141-8143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X99-10218]


=======================================================================
-----------------------------------------------------------------------

OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy


Cost Accounting Standards Board; Notice

AGENCY: Cost Accounting Standards Board, Officer of Federal Procurement 
Policy, OMB.

ACTION: None.

-----------------------------------------------------------------------

SUMMARY: The Cost Accounting Standards Board (CASB) hereby extends an 
invitation for interested parties to provide comments on the following 
letter sent to organizations that responded to the Staff Discussion 
Paper (61 FR 49533, 9/20/96) on the treatment of the costs under 
government contracts for post-retirement benefit (PRB) plans. While a 
consensus emerged on many of the issues, the topics relating to the 
validity (compellability) of the post-retirement benefit obligation as 
a prerequisite for use of accrual accounting and the need, if any, to 
substantiate accruals by funding, engendered forceful, diverse, and 
often irreconcilable arguments. To promote a fuller dialogue and 
understanding of the issues before the Board, the Board is asking 
individuals to consider and comment on the opposing viewpoints 
discussed in the letter and to possibly expand on their own comments, 
if any.

DATES: Comments must be in writing, including an electronic copy of 
your comments in WordPerfect 6.1 or ASCII format, and must be received 
by March 15, 1999.

ADDRESSES: Comments should be addressed to the Cost Accounting 
Standards Board, Office of Federal Procurement Policy, 725 17th Street, 
NW, Room 9013, Washington, D.C. 20503. Attn: CASB Docket No. 96-02.

FOR FURTHER INFORMATION CONTACT: Rein Abel, Director of Research, Cost

[[Page 8142]]

Accounting Standards Board (telephone: 202-395-3254).

Richard C. Loeb,
Executive Secretary; Cost Accounting Standards Board.

Executive Office of the President, Office of Management and Budget, 
Washington, D.C. 20503

January 12, 1999.

Cost Accounting Standards Board

Subject: Costs of Post-Retirement Benefit Plans, CASB Docket No. 96-02.

To Members of the Government contracting community:

    Your organization responded to the Staff Discussion Paper (61 Fed. 
Reg. 49533; 9/20/96) of the treatment of the costs under government 
contracts for post-retirement benefit (PRB) plans. While a consensus 
emerged on many of the issues, the topics relating to the validity 
(compellability) of the post-retirement benefit obligation as a 
prerequisite for accrual accounting (Topic C) and the need, if any, to 
substantiate accruals by funding (Topic G) engendered forceful, 
diverse, and often irreconcilable arguments. To promote a fuller 
dialogue and understanding of the issues before the Board, is asking 
you to consider and comment on the opposing viewpoints discussed in 
this letter and to possibly expand on your own comments. The Board 
intends to widely distribute this letter and to invite other interested 
parties to also provide comments on these topics.
    The Board is considering the adoption of Financial Accounting 
Standards Board Statement 106 (SFAS 106), ``Employer's Accounting for 
Postretirement Benefits Other Than Pensions,'' as the basis for the 
measurement of post-retirement benefit costs and assignment of those 
costs to cost accounting periods. Under SFAS 106, it is the 
``substantive plan'' that creates a liability warranting its 
recognition for financial statement purposes. However, corporations 
often downplay the firmness of this liability in the footnotes to their 
financial statements. For instance, General Motors (GM) repetitively 
included reservations about the nature of these liabilities in its 
Financial Statements, e.g., Note 5 of GM's 1993 Financial Statement 
stated:

    The Corporation has disclosed in the financial statements 
certain amounts associated with estimated future post retirement 
benefits other than pensions and characterized such amounts as 
`accumulated post retirement benefit obligations', `liabilities', or 
`obligations.' Notwithstanding the recording of such amounts and the 
use of these terms, the Corporation does not admit or otherwise 
acknowledge that such amounts or existing post retirement benefit 
plans of the Corporation (other than pensions) represent legally 
enforceable liabilities of the Corporation.

    The perception, particularly among Government commenters, the any 
PRB liability recognized in the financial statements might be a 
``soft'' liability has led to proposals that funding should be used as 
a tool in validating these liabilities.
Requiring Funding To Substantiate the Post-Retirement Benefit Cost 
Accrual
    In Standards previously promulgated by the CAS Board dealing with 
pension and insurance costs, the applicable Standards required that 
pension and retiree insurance costs be funded. Therefore, it could be 
argued that to maintain consistency with the promulgations of the 
original CAS Board and amendments promulgated by the current Board, the 
Board will have to consider funding as a prerequisite for the use of 
accrual accounting for the costs of post-retirement benefit costs.
    Industry representatives have pointed out the difference between 
the basis for the funding requirements in the pension Standards and the 
basis for a potential funding requirement under the post-retirement 
benefits case. The Aerospace Industries Association made the point as 
follows:

    Public policy, as articulated in the tax code, has long 
encouraged pension plan sponsors to fund their programs at an 
adequate level. While industry does not agree that funding has any 
place in the Cost Accounting Standards, the addition of a funding 
requirement in the recent changes to CAS 412, as well as explicit 
recognition of tax deductible limits, did not create tension between 
public policies as expressed in the Internal Revenue Code and the 
Cost Accounting Standards.
    In contrast, however, Congress has intentionally discouraged 
prefunding of post-retirement medical benefits. It would be 
inconsistent for the Cost Accounting Standards Board to in essence 
force contractors to fund these post-retirement benefit costs.

    In general, industry commenters argued against any funding 
requirement. The following comments made by General Electric capture 
the essence of the industry arguments:

    The CASB and staff need to recognize that funding, per se, does 
not prove or disprove the validity of the PRB liability. The Staff 
Discussion Paper appears to have a bias toward funding. Although 
funding may be an important business consideration, the Board needs 
to first address the appropriate accounting method absent the 
``funding'' issue. There are many reasons for funding or not funding 
a PRB liability but these reasons generally deal with cash flow 
consequences and income tax considerations. The Board needs to focus 
on the proper method of measuring, assigning and allocating PRB 
costs based on the existence of the liability rather than on the 
existence of funding. Funding is an allowability issue which is 
already addressed in FAR 31.205-6(o).

    Boeing also expressed the belief that funding does not necessarily 
substantiate the liability, but suggested that more restrictive 
measures of the accrual or cash accounting be used where the 
contractual rights to a benefit are lacking. Boeing commented that:

    The Government's concern is that accrual accounting will result 
in reimbursing a contractor for costs the contractor has not 
expended. This concern should not structure proper accounting. 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 American Bar Association (ABA) noted, for financial accounting 
purposes, the threshold for recognition is met by a probability that an 
obligation exists. But rather than suggesting the use of more 
restrictive accounting or actuarial methods, the American Bar 
Association (ABA) indicated there are situations when the funding of 
the annual accrual can serve a legitimate purpose. The ABA wrote:

    * * * Certainly, the FASB considered this issue and determined 
that some estimate of future expenditures was preferable to no 
estimate at all.
* * * * *
    Require funding of PRB costs only if payment cannot be 
compelled, or if research discloses a significant incidence of 
contractors, defaulting on PRB obligations. The Discussion Paper 
asks whether funding should be required to ``substantiate'' accrued 
PRB costs. We believe that a valid accrual does not need to be 
``substantiated'' through funding for accounting purposes. This 
principle applies to pension costs as well as to PRBs. Funding 
requirements are, at bottom, a matter of procurement policy and not 
a cost accounting.
    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 National Defense Industrial Association also acknowledged that 
funding could be one means to

[[Page 8143]]

substantiate (validate) the obligation when it commented.

    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. Once an obligation to pay is established, there are two 
limitations the CASB needs to establish. The first is delineating 
the methods for arriving at a reasonable estimate of the cost of the 
liability. The second task is to provide for subsequent period 
adjustments as circumstances change. 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.

    On the other hand, the comments from the Office of the Under 
Secretary of Defense for Acquisition and Technology (OUSD) articulate 
the concern of some members of the Government procurement community 
that any potential risk that the liability may 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.
CAS Board Concerns Currently Under Consideration:
    The CAS Board's concern is that SFAS 106 recognition of the 
obligation for the ``substantive plan'' is inappropriate for Government 
contract cost accounting. In fact, the Board is concerned that the mere 
existence of a written description of the plan does not ensure that 
there is a contractual and enforceable, that is, compellable, 
obligation to pay the promised benefit.
    The Board is particularly concerned about he eventual settlement of 
(i.e., disbursement for) the liability accrued for post-retirement 
benefit costs. Under SFAS 106, there is an intentional and notable lack 
of this concern in that there is no control over (i) an entity's having 
accrued post-retirement benefit costs for any number of years under its 
extant substantive post-retirement benefit plan, (ii) then subsequently 
abrogating the plan in whole or in part, and (iii) recognizing a 
``gain'' on the reversal of the prior accruals. Indeed, pre- and post- 
SFAS 106, there have been instances of companies taking just such 
actions. Comparing the case of post-retirement benefit costs to that of 
pensions this respect is even more instructive in that pensions have 
funding (and vesting) requirements imposed by other authorities (e.g., 
the Internal Revenue Code, the Employee Retirement Income Security Act) 
which bolster the notion that the cost accrued for pensions will lead 
to an actual disbursement in the future. Despite this collateral 
support for pension accrual, the Board included a funding requirement 
in its rules for both qualified and nonqualified pension plans. As it 
deliberates on the issue of post-retirement benefit costs, a natural 
extension of its funding requirement for pension costs would be to 
incorporate a similar requirement for post-retirement benefit costs.
Request for Additional Comments and Rationale
    To ensure all facts of this issue are fully considered from all 
perspectives, the Board would like interested parties that oppose or 
question the establishment of a funding requirement to suggest 
alternatives to funding which would provide similar or equivalent 
support for the compellability of the post-retirement benefit 
obligation as that which is provided by a funding requirement. In 
addition, if you believe that accrual of post-retirement benefit costs 
solely in accordance with SFAS 106 criteria, without any further 
validation of the ensuing liability, is an adequate method for 
recognizing PRD costs for contract costing purposes, then the Board 
request that you provide arguments for accepting the ``substantive 
plan'' as the basis for contract cost measurement.
    Conversely, for those that believe that there is no realistic 
alternative to a funding requirement, the Board asks that you set forth 
the arguments in favor of funding.
Submission of Comments
    Comments regarding this request should be addressed to the Cost 
Accounting Standards Board, Office of Federal Procurement Policy, 725 
17th Street, N.W., Room 9001, Washington, D.C. 20503, Attn: CASB Docket 
No. 96-02. It is requested that your comments be provided no later than 
March 15, 1999 in order to receive full consideration. Please include 
an electronic copy of your comments in Word Perfect 6.1 or ASCII 
format.
    For further information, please contact Rein Abel, Director of 
Research, Cost Accounting Standards Board (telephone: 202-395-3254).

        Sincerely,
Richard C. Lomb,
Executive Secretary.
[FR Dos. 99-3955 Filed 2-17-99; 8:45 am]
BILLING CODE 3110-01-M