[Federal Register Volume 61, Number 184 (Friday, September 20, 1996)]
[Notices]
[Pages 49534-49550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24091]



[[Page 49533]]


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Part II





Office of Management and Budget





_______________________________________________________________________



Office of Federal Procurement Policy







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Cost Accounting Standards: Post-Retirement Benefit Plans Other Than 
Pension Plans Sponsored by Government Contractors; Notice

  Federal Register / Vol. 61, No. 184 / Friday, September 20, 1996 / 
Notices  

[[Page 49534]]



OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy


Cost Accounting Standard Relating to the Treatment of Costs of 
Post-Retirement Benefit Plans Other Than Pension Plans Sponsored by 
Government Contractors

ACTION: Notice.

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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting 
Standards Board (CASB), invites public comments concerning a Staff 
Discussion Paper on the treatment of costs of post-retirement benefit 
plans other than pension plans sponsored by Government contractors.

DATES: Comments must be in writing and must be received by December 19, 
1996.

ADDRESSES: Comments should be addressed to Eric Shipley, Project 
Director, Cost Accounting Standards Board, Office of Federal 
Procurement Policy, 725 17th Street, NW, Room 9001, Washington, D.C. 
20503. Attn: CASB Docket No. 96-02.

FOR FURTHER INFORMATION CONTACT: Eric Shipley, Project Director, 
(telephone: 410-786-6381) 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), 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.
    2. Promulgate an Advance Notice of Proposed Rulemaking.
    3. Promulgate a Notice of Proposed Rulemaking.
    4. Promulgate a Final Rule.
    This proposal is step one of the four-step process.

B. Background and Summary

    The Office of Federal Procurement Policy, Cost Accounting Standards 
Board, is releasing a Staff Discussion Paper on the treatment of the 
costs of post-retirement benefit plans other than pension plans under 
Government contracts. Section 26(g)(1) of the Office of Procurement 
Policy Act, 41 U.S.C. 422(g)(1), requires that the Board, prior to the 
promulgation of any new or revised Cost Accounting Standard, consult 
with interested persons concerning the advantages, disadvantages, and 
improvements anticipated in the pricing and administration of 
Government contracts as a result of the adoption of a proposed 
Standard. The purpose of the Staff Discussion Paper is to solicit 
public views with respect to the Board's consideration of the treatment 
of the costs of post-retirement benefit plans other than pension plans. 
This Staff Discussion Paper identifies 10 major topics, but respondents 
are welcome to identify and comment on any other issues they feel are 
important. This Staff Discussion Paper reflects research accomplished 
to date by the staff of the Cost Accounting Standards Board in the 
respective subject area, and is issued by the Board in accordance with 
the requirements of 41 U.S.C. 422(g)(1)(A).
    The Cost Accounting Standards Board has received numerous public 
comments recommending that it establish a case concerning the 
measurement, allocation and period assignment of the costs of post-
retirement benefit plans other than pension plans. These letters have 
come from Federal Government agencies, Government contractors, law 
firms, trade associations and other respondents. The Board has 
recognized the need to establish a case addressing post-retirement 
benefit issues. Accordingly, this Staff Discussion Paper was developed 
to identify the cost accounting issues related to post-retirement 
benefit plans.
    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 1979 when the Financial Accounting 
Standards Board (FASB) decided to examine the potential liabilities and 
costs of these plans. After seeking public comments through an exposure 
draft and a field test of a proposed standard, the FASB issued 
Statement No. 106 (SFAS 106) in December of 1990.
    SFAS 106 exposed the substantial unfunded liabilities associated 
with post-retirement benefit plans. The costs and liabilities of post-
retirement benefit plans often equal or exceed those of a company's 
pension plan. Over the last two decades, the growth rate of these costs 
and liabilities has exceeded general economic growth. During this same 
time period, some companies have looked for ways to either lower or 
control their post-retirement benefit liabilities by eliminating, 
curtailing, or otherwise limiting the benefit promise made to retirees. 
Companies have also been searching for tax-advantaged means of funding 
these liabilities. The efforts to limit, control, and fund post-
retirement benefit liabilities continue to evolve, but few standard 
practices or solutions have yet emerged.
    This Staff Discussion Paper identifies the following ten (10) major 
topics that the CASB staff believes should be considered in order for 
the Board to proceed with its rule-making process in this area. These 
topics as they relate to post-retirement benefit costs are:
    A. Applicability of generally accepted accounting principles and 
existing Cost Accounting Standards.
    B. Choice of accounting method or methods for measurement and 
period assignment.
    C. Validity of the liability as a prerequisite for accrual 
accounting.
    D. Choice of actuarial cost methods to measure and assign costs to 
periods for accrual accounting purposes.
    E. Assignment of unfunded actuarial liabilities to accounting 
periods for accrual accounting purposes.
    F. Actuarial considerations if accrual accounting is used.
    G. The need, if any, to substantiate accruals by funding.
    H. Cost determination for segments.
    I. Accounting for plan terminations, liability settlements, and 
benefit curtailments.
    J. Adjustments for segment closings.
    The balance of the Staff Discussion Paper comprises short 
discussions of each topic highlighted above. The CASB staff is 
requesting comments and information regarding these 10 major topics. 
The staff also invites comments and information on any other post-
retirement benefit issues which respondents believe should be 
considered. The staff continues to be especially appreciative of 
comments and suggestions that attempt to consider the concerns of all 
parties to the contracting process.

C. Public Comments

    Interested persons are invited to participate by submitting data, 
views or arguments with respect to this Staff Discussion Paper. All 
comments must be in writing and submitted to the

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address indicated in the ADDRESSES section.
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.

Accounting for the Cost of Post-Retirement Benefit Plans Other Than 
Pension Plans Sponsored by Government Contractors

    This staff discussion paper represents the results of research 
performed by the staff of the Cost Accounting Standards Board, and is 
issued by the Board in accordance with the requirements of 41 U.S.C. 
422(g)(1)(A). The statements contained herein do not necessarily 
represent the position of the Cost Accounting Standards Board.
    In response to the Cost Accounting Standards Board's continuing 
research, the Board has received a number of comments recommending that 
a case concerning the costs of post-retirement benefit plans other than 
pension plans under Government contracts be established. These letters 
have come from Federal Government agencies, Government contractors, law 
firms, trade associations and other respondents. In addition, a recent 
General Accounting Office report, Cost Accounting Standards Board--
Little Progress Made in Resolving Important Issues (GAO/AIMD-94-88), 
also commented on the need for a Standard in this area. The Board has 
recognized the need to establish a case addressing post-retirement 
benefit issues, but because of the similarities between post-retirement 
benefits 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, 61 FR 16534. At its February 24, 1995 meeting, 
the CAS Board directed the staff to begin preliminary work on a Staff 
Discussion Paper addressing the accounting treatment of costs of post-
retirement benefit plans.

Background

    Post-retirement benefit plans have existed for many years, 
sometimes as an adjunct to a company's pension plan, but generally they 
received little attention until 1979 when the Financial Accounting 
Standards Board (FASB) decided to examine the potential liabilities and 
costs of these plans. After seeking public comments on a proposed 
financial accounting standard through an exposure draft issued on 
February 14, 1989 and after an examination of the practical 
implications of the proposed standard through a study performed by 
Coopers and Lybrand, the FASB issued Statement No. 106 (SFAS 106) in 
December of 1990.
    Companies adopting SFAS 106 have disclosed substantial unfunded 
estimated liabilities associated with post-retirement benefit plans. 
The costs and liabilities of post-retirement benefit plans often not 
only equal or exceed those of a company's pension plan, but the growth 
rate of the liability for some post-retirement benefits exceeds that of 
general economic growth. Furthermore, the volatility of some of the 
rates and trends, coupled with the informality of many post-retirement 
benefit plans, mean there is a great degree of uncertainty in the 
estimates of the liabilities, especially the liability for retiree 
health care benefits.
    During the 1980s and early 1990s, some companies looked for ways to 
either lower or control their post-retirement benefit liabilities by 
eliminating, curtailing, or otherwise limiting the formal and informal 
post-retirement benefit arrangements made with employees and retirees. 
Companies have also been searching for tax-advantaged means of funding 
these liabilities. The efforts to limit, control, and fund post-
retirement benefit liabilities continue to evolve, but few standard 
practices or solutions have yet emerged.
    When the CAS Board undertook to write Standards for pension costs, 
a relatively mature body of standards and practice had already evolved. 
Pension plans had been around since the early 20th century and had 
exploded in prominence during World War II when pension benefits were 
granted in lieu of salary increases, which had been frozen as a part of 
the war effort. The American Institute of Certified Public Accountants 
began examining post-retirement benefits with Accounting Research 
Bulletin Number 47 (ARB 47) in 1956. ARB 47 was superseded by Opinion 
Number 8 of the Accounting Principles Board (APB 8) in 1966. APB 8 
addressed pension benefits and permitted a variety of accepted 
practices. Meanwhile, the economic and political environment of the 
1960s and 1970s led to the enactment of tax incentives to encourage the 
establishment and funding of pension plans. In 1974, the Employee 
Retirement Income Security Act (ERISA) was passed to protect pension 
plan participants against abuses that had developed, to enhance 
controls on tax-deductible contributions, and to establish a benefit 
guarantee buttressed by minimum funding requirements.
    In 1985, the FASB issued Statements 87 and 88 (SFAS 87 and SFAS 88) 
which replaced APB 8 with a more rigorous and standardized measurement 
of pension costs and liabilities intended to achieve fuller disclosure 
and better comparability of pension costs in financial statements. SFAS 
87 and 88 were able to build upon the accrual accounting concepts of 
APB 8.
    To complete the effort begun with ARB 47, the FASB then used 
concepts and principles from SFAS 87 and 88, where appropriate, to 
develop SFAS 106, ``Employers' Accounting for Postretirement Benefits 
other than Pensions''. SFAS 106 addresses non-pension post-retirement 
benefits and is intended to achieve fuller disclosure and better 
comparability of post-retirement benefit costs in financial statements. 
However, post-retirement benefits are often granted to an employee as 
an entitlement to a service, or reimbursement of the expenses of a 
service, so that the amount of benefit may not be determinable at 
retirement by either a formula or an account balance. Sometimes the 
promise is open-ended. Furthermore, the actual amount of benefits paid 
to or for an individual often depends upon that individual's morbidity 
after retirement rather than their service or salary during their years 
of employment. So, despite the similarities with pensions, the 
entitlement nature of many post-retirement benefits makes them very 
distinct from pension and other deferred compensation benefits.

Post-Retirement Benefits Defined

    SFAS 106 defines a post-retirement benefit as any benefit, other 
than retirement income, that is deferred until after retirement and 
promised by an employer in exchange for current service. For SFAS 106 
purposes, the post-retirement benefit promise arises from the written 
documents and established practices that comprise the ``substantive 
plan''. The most common forms of post-retirement benefits are retiree 
health care insurance 1 and retiree life insurance. Examples of 
other forms of post-retirement benefits are retiree discounts, legal 
services, adult day care, housing subsidies, and tuition assistance.
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    \1\ For purposes of this Staff Discussion Paper, the phrase 
``retiree health care insurance'' can include hospitalization, 
medical, dental, vision, and prescription drug benefits, as well as 
Medicare Part B premiums.
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    Like pensions, post-retirement benefits are paid to or on behalf of 
the employee after retirement. Post-retirement benefits also have 
attributes of employee insurance; e.g.,

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hospitalization, medical, dental, prescription drug, and death 
benefits, and deferred compensation, adult day care allowances, housing 
subsidies, legal services, and tuition assistance.2 It is 
important to bear in mind that post-retirement benefits share the 
attributes, issues, and problems of employee insurance and deferred 
compensation as well as pensions.
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    \2\  This Staff Discussion Paper addresses the accounting, that 
is, the measurement, assignment to periods, and allocation to cost 
objectives, of post-retirement benefit costs. This paper does not 
address the allowability of the costs for a particular category of 
post-retirement benefits.
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    Actuaries practicing in the field of post-retirement benefits 
indicate that about 80% of the liabilities are for health care 
benefits; i.e, medical, hospitalization, dental, vision, and 
prescription benefits, and about 19% are for life insurance. All other 
forms of post-retirement benefits only account for about 1% or 2% of 
the liability.

Accounting for Post-Retirement Benefits Under SFAS 106 and Related 
Standards

    SFAS 106 generally requires that the estimated liability for post-
retirement benefits be recognized on an accrual basis during the years 
of service prior to the date an employee is first eligible for 
benefits. The unit credit actuarial cost method is used to assign the 
estimated liability 3 to these years of employment as an annual 
expense. The portion of the liability assigned to periods prior to the 
initial date of adoption of SFAS 106 is called the ``Transition 
Obligation''. The ``Transition Obligation'' may be fully recognized in 
the period in which SFAS 106 is first adopted or may be amortized over 
the employees' average remaining years of service, but not more than 20 
years. Increases in the estimated liability due to plan amendments are 
always amortized over the employees' average remaining years of 
service. On the other hand, decreases in the estimated liability due to 
plan amendments are offset against any existing unrecognized prior 
service liability before being amortized. Experience gains and losses; 
i.e., the deviation of actual asset and liability values from amounts 
that were actuarially predicted as well as changes in the liability due 
to assumption changes, are recognized immediately. Only that portion of 
the gain or loss amount falling outside of a defined corridor is 
amortized over the employees' average remaining years of service.
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    \3\ The SFAS 87 and 106 references to period attribution are 
analogous to the concept of period assignment as used in the Cost 
Accounting Standards.
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    In addition to the FASB's actions, the Governmental Accounting 
Standards Board (GASB), which establishes accounting principles for 
State and local governments, and the National Association of Insurance 
Commissioners (NAIC), which sets forth statutory accounting principles 
for insurance companies, have recently issued accounting standards for 
post-retirement benefit costs. Generally these standards follow the 
concepts of SFAS 106, but with some important exceptions. Statement 12 
of the Government Accounting Standards Board (GASBS 12) requires that 
costs of advanced-funded post-retirement benefit plans be actuarially 
determined, but unlike SFAS 106, does not limit the choice of actuarial 
cost method. On the other hand, for purposes of statutory accounting by 
insurance companies, the measure of estimated liability only considers 
current retirees and those active employees who are currently vested or 
eligible for benefits. The annual service cost for statutory accounting 
only considers retirees, active employees eligible for benefits, and 
active employees who are or who may become vested during the year.
    These are relatively recent promulgations. The recognition of post-
retirement benefit plan costs does not have the framework, consistency 
of operational practice, nor history of funding that existed for 
pension plan costs when the CAS Board embarked on the pension project. 
Some believe that the budget deficits of the 1990s will preclude the 
creation of tax incentives to encourage the establishment and funding 
of post-retirement benefit plans. State and Federal legislators and 
policy makers are looking for ways to reduce or control the growth of 
retiree health care costs, including Medicare, through cost 
containment, managed care, and program re-design. The future of retiree 
health care costs, the largest and fastest growing category of post-
retirement benefit cost, is uncertain.

The Need To Address Post-Retirement Benefit Accounting Issues

    First, most Government contractors have now become subject to SFAS 
106 and are disclosing for financial reporting purposes large estimated 
liabilities for post-retirement benefits, similar in magnitude to those 
of pension liabilities. Second, the procuring agencies and contractors 
are already struggling with the sometimes conflicting goals of 
consistency between periods, uniformity between contractors, and the 
substantiation of costs.
    Finally, as some companies leave Government contracting as the 
defense industry downsizes, there is a question of the Government's 
responsibility for the large unfunded estimated liability for post-
retirement benefits earned by workers with a long history of service 
under prior Government contracts. These three factors convinced the 
Board that issues pertaining to cost accounting, i.e., measurement, 
allocation and period assignment, for post-retirement benefits should 
be explored and addressed.
    Therefore, through the issues raised in this Staff Discussion 
Paper, the Board is seeking information and comments regarding two 
central themes:
    (1) On what basis should the Government determine; that is, 
measure, assign, and allocate, post-retirement benefit plan costs to be 
included in the prices of negotiated Federal contracts?
    (2) To what degree, if any, should Government contract cost 
accounting of post-retirement benefit plan costs differ from generally 
accepted accounting principles?
    An additional general issue will be whether any resolution of these 
issues should be addressed through an Interpretation, an amendment to 
existing Standard(s), or, through a new Cost Accounting Standard. The 
staff is aware that both procuring agency and contractor 
representatives have urged caution to avoid adding any unnecessary 
accounting requirements to an intrinsically complex and technical 
subject.

Preliminary Research

    In developing this Staff Discussion Paper, the staff has 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. They were asked for assistance in identifying existing 
guidance and operational practices which should be explored. The staff 
would like to thank all the organizations and individuals who responded 
to the preliminary request for information. Their input and comments 
were very important in preparing this Staff Discussion Paper, which is 
the first step towards the possible promulgation of an Interpretation, 
an amendment to existing Standard(s), or a new Standard.
    Issues concerning financial and Government contract cost accounting 
for post-retirement benefits are topics which have been treated in some 
detail

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in accounting and actuarial literature. 4 The interplay between 
accountants and actuaries, which has produced issues that may affect 
cost accounting for post-retirement benefits, has also been discussed 
in accounting and actuarial literature. 5 To the extent that these 
articles have aided with the drafting of this paper, the staff would 
like to thank the authors.
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    \4\ For example, the article ``Post-Retirement Benefits: 
Accounting for and Recovering the Cost of Health Care for Retirees'' 
(Public Contract Law Journal, Vol. 24, No. 3, Spring 1995), written 
by Brian Mizoguchi, gives an excellent overview of the subject and 
associated cost accounting issues.
    \5\ For a discussion of the tension between the accounting and 
the actuarial professions concerning responsibility for the 
measurement of Post-retirement benefit liabilities, see ``Impact of 
the Actuarial Profession on Financial Reporting'' (Accounting 
Horizons, Vol. 9, No. 3, September 1995) by Timothy J. Fogarty and 
Julia Grant.
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Post-Retirement Benefit Issues

    This Staff Discussion Paper identifies ten (10) major topics for 
consideration by the Board during its deliberations of any 
Interpretations, amendments to existing Standards, or a new Standard. 
Respondents are encouraged to identify other topics that they believe 
the Board should consider. The topics as identified in this Staff 
Discussion Paper are:
    A. Applicability of generally accepted accounting principles and 
existing Cost Accounting Standards.
    B. Choice of accounting method or methods for measurement and 
period assignment.
    C. Validity of the liability as a prerequisite for accrual 
accounting.
    D. Choice of actuarial cost methods to measure and assign costs to 
periods for accrual accounting purposes.
    E. Assignment of unfunded actuarial liabilities to accounting 
periods for accrual accounting purposes.
    F. Actuarial considerations if accrual accounting is used.
    G. The need, if any, to substantiate accruals by funding.
    H. Cost determination for segments.
    I. Accounting for plan terminations, liability settlements, and 
benefit curtailments.
    J. Adjustments for segment closings.
    The balance of the Staff Discussion Paper comprises short 
discussions of each topic. Following the discussion of each topic, 
specific issues are identified. The staff is requesting comments and 
information regarding these issues. When responding to these issues, 
the staff would appreciate explanations of the reasoning that supports 
each comment. Where subparts of the issues are presented, the 
respondents are asked to address the main issue as well as each of the 
subparts. The staff invites comments and information on any other post-
retirement benefit issues that respondents believe should be 
considered.
    In writing this Staff Discussion Paper, the staff attempted to 
avoid any preconceptions or conclusions about the proper accounting 
treatment of post-retirement benefit plans for Government contract 
costing purposes. In particular, the staff has not presumed that either 
SFAS 106 or CAS 9904.412 should be the starting point. 6 In fact, 
one of the difficulties in addressing Government contract cost 
accounting for post-retirement benefits is that post-retirement 
benefits share attributes with pension, insurance, and deferred 
compensation plans. During its consideration, the Board may find that 
different types of post-retirement benefits may require different 
accounting treatments.
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    \6\  This paper addresses many issues similar to those 
considered in the March 30, 1995 amendments to CAS 9904.412 and 
9904.413. The fact that issues are raised in this Staff Discussion 
Paper on post-retirement benefit costs does not imply changes will 
be made to the pension Standards.
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    The CASB staff presumes that the readers of this Staff Discussion 
Paper are familiar with the provisions of CAS 9904.412, 9904.413, 
9904.415, and 9904.416, as well as the Federal Acquisition Regulation 
(FAR) provisions regarding the award and administration of CAS-covered 
contracts. In addition, a familiarity with the FAR cost principles, in 
particular, FAR 31.205-6(o), is presumed.
    In undertaking this project the Board is not constrained by nor 
confronted with conflicts in outside standards and practices as it was 
in the recent pension case. In this instance, except for the recent 
promulgations of the FASB, GASB, and the NAIC, there is a paucity of 
established common practice and efficient funding mechanisms, other 
than the use of pay-as-you-go financing, limited use of Voluntary 
Employee Benefit Association (VEBA) trusts, and some creative insurance 
products.
Topic A. Applicability of Generally Accepted Accounting Principles and 
Existing Cost Accounting Standards.
    It is unclear whether post-retirement benefits are, or should be, 
covered by any of the existing Cost Accounting Standards. Before taking 
any action to interpret, amend, or expand the Standards for post-
retirement benefit costs, the Board would have to determine that 
adequate guidance is not provided by generally accepted accounting 
principles for the measurement and assignment to periods and by 
existing Standards for allocation to intermediate and final cost 
objectives for Government contract cost accounting purposes. One 
possibility is for the Board to adopt or specify SFAS 106 as the 
accounting standard for post-retirement benefit costs. Or, the Board 
could adopt SFAS 106 but limit or modify any provisions or accounting 
treatments that may be inappropriate or inadequate for cost accounting.
    Although the primary benefits provided through post-retirement 
benefit plans are retiree health care and life insurance benefits, the 
FASB developed SFAS 106 on post-retirement benefits using the concepts 
and techniques of SFAS 87 and 88 on pensions. Thus, since one of the 
concepts adopted by the Board is to follow generally accepted 
accounting principles wherever practicable, CAS 9904.412 and 9904.413 
would seem to be the analogous Cost Accounting Standards to serve as 
the starting point for post-retirement benefit plans. However, the only 
specific reference to retiree insurance is found at CAS 9904.416-
50(a)(1)(v). At first, many in the procurement community expressed a 
belief that post-retirement benefits were another form of pension 
benefits and were therefore subject to CAS 9904.412 and 9904.413. In 
response to an inquiry from the Financial Executives Institute, the 
Administrator of the Office of Federal Procurement Policy (OFPP) and 
Chairman of the CASB, stated: ``[E]xisting CAS pension or insurance 
coverage does not appear to offer a basis for treating PRB costs. In 
fact, the post-retirement benefit nomenclature barely existed at the 
time of the earlier Board.'' 7 However, this statement represents 
guidance from the Administrator of OFPP and is not an official 
interpretation by the Board.
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    \7\  Letter dated November 25, 1991 from Dr. Allan V. Burman to 
Messrs. Fuqua and Hogg of the Aerospace Industries Association and 
the National Security Industrial Association, respectively.
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    The confusion increased as some individuals in the accounting 
profession expressed a belief that the CAS Board intentionally included 
post-retirement health care benefits in the pre-March 30, 1995 version 
of CAS 9904.412-50(a)(9) which stated: ``If a pension plan is 
supplemented by a separately-funded plan which provides retirement 
benefits to all of the participants in the basic plan, the two plans 
will be considered as a single plan for the purpose of this Standard.'' 
Others believe this clause was added to address the total pension 
benefit provided through the combination of a defined-benefit with a

[[Page 49538]]

defined-contribution plan, which were commonly referred to as ``floor-
offset plans'', or the combination of an ``excess benefit'' 
nonqualified plan with a qualified plan. Such combinations were 
specifically being addressed by ERISA. There is no evidence that post-
retirement health care benefits were a consideration in the mid-1970s 
when CAS 9904.412 and 9904.413 were originally promulgated. However, 
this language does raise the question of whether separate accounts 
within a qualified pension trust established for Internal Revenue Code 
(IRC) Sec. 401(h) health care benefits should be considered as 
providing an ancillary benefit that is an integral part of a pension 
plan that covers the same population.
    The first set of issues concerns how the case should evolve. Should 
Government contract cost accounting for post-retirement benefit plans 
be addressed through SFAS 106, a CASB Interpretation, an amendment(s) 
to an existing Standard(s), or by a new separate Standard? At a 
minimum, any consideration of amendments or additions to the Standards 
would seem to require a review of the CAS 9904.416 provisions regarding 
funded reserves for retirees.
    CAS 9904.416 generally does not distinguish between various types 
of insurance. However, there have been suggestions that employee 
benefit coverages; that is, life, health care, and disability 
insurance, should be separated from property, casualty, liability, and 
workers compensation insurance. 8 Such separation is reflected in 
the recent revisions to the CASB Disclosure Statement, DS-1. It may be 
appropriate for the Board to consider whether 9904.416 is too broad 
because it attempts to combine two similar, but unrelated, types of 
insurance. The life and health insurance industry, through which most 
employee benefits are provided, is governed by a separate set of state 
laws and is represented by a separate industry association and 
actuarial society from those of the property and casualty insurance 
industry. But, because dividing 9904.416 into two Standards could 
expand the scope of the instant case on post-retirement benefits, it 
may be more feasible to address only the provisions of CAS 9904.416 
relating to post-retirement benefits now and to identify the full 
review of CAS 9904.416 as a potential subject of a future CASB case.
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    \8\ Worker's compensation is a form of liability insurance that 
covers a contractor's legal responsibility for injury for which it 
is culpable.
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    Issue 1: Does GAAP provide adequate guidance for the measurement 
and period assignment of post-retirement benefits? Explain why or why 
not and discuss the pros and cons. 9
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    \9\ Throughout this Staff Discussion Paper, the staff requests 
that respondents explain the reasoning for their conclusions.
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    a. Does SFAS 106 provide sufficient guidance on the measurement and 
period assignment of post-retirement benefit costs for Federal contract 
costing purposes?
    b. Identify any provisions of SFAS 106 that may be adequate or 
inadequate for the measurement and assignment to periods of Government 
contract costs. Discuss in detail the modifications or limitations that 
may be necessary.
    c. Are there other financial accounting standards; e.g., GASBS 12 
or statutory accounting principles, that would provide more appropriate 
guidance on the measurement and period assignment of post-retirement 
benefit costs for Federal contract costing purposes?
    d. If GAAP is used for measurement and period assignment of post-
retirement benefits costs, do existing Cost Accounting Standards 
provide sufficient guidance on the allocation of such costs to Federal 
contracts?
    Issue 2: Should the Board issue an Interpretation specifying which 
elements of post-retirement benefit costs are addressed by existing CAS 
9904.412 and 9904.413 relating to pension plans, CAS 9904.415 relating 
to deferred compensation plans, and CAS 9904.416 relating to insurance?
    Issue 3: Should the Board establish specific accounting provisions 
for the various elements of post-retirement benefit costs by 
appropriately amending some or all of the four Standards that address 
employee benefits, i.e., CAS 9904.412, 9904.413, 9904.415, and 
9904.416?
    Issue 4: Should the Board address post-retirement benefits through 
a new, separate Standard?
    a. To what extent should a new Standard draw on language already 
found in CAS 9904.412, 9904.413, 9904.415, and 9904.416 to achieve 
consistency with the concepts, definitions, and accounting provisions 
of these four Standards?
    b. To what extent do the issues unique to post-retirement benefits 
require a different accounting treatment?
    Issue 5: As part of this case, should the Board amend CAS 9904.416 
to reflect the differences between life and health insurance and 
property and casualty insurance?
Topic B. Choice of Accounting Method or Methods for Measurement and 
Period Assignment
    The CASB pension Standards and insurance Standard permit costs to 
be assigned to cost accounting periods by use of any one of three 
methods; cash accounting, terminal funding, or accrual accounting. The 
less technically challenging CAS 9904.415 bases the cost of annual 
deferred compensation awards on a single method; i.e., the present 
value of the contractor's obligation for the award earned by that 
year's service. Because of its focus on comparability between financial 
statements, SFAS 106 mandates the use of accrual accounting based on a 
specific actuarial cost method.
    A primary consideration will be whether post-retirement benefits 
should be accounted for using a single accounting method or if, and 
when, alternative accounting methods would be appropriate. Any decision 
in this area must find a balance between three different goals; 
consistency in cost assignment between cost accounting periods, greater 
uniformity among contractors in measuring their program costs, and 
matching of cost to appropriate benefitting activities.
(i) Single versus multiple accounting methods
    As with pensions, post-retirement benefit costs could extend over a 
significant number of years, contracts, and programs. From this 
perspective, predictability that is based on consistency of cost 
assignment between cost accounting periods is desirable for forward-
pricing and program budgeting purposes. With possible reductions in 
government contracting due to Federal budget restraint and the 
reduction in the number of contractors due to mergers and acquisitions, 
the importance of a level playing field for competitive pricing through 
more uniformity in cost data determination among contractors has become 
even more pronounced. Furthermore, because so many contracts and 
programs are affected over the extended period of time during which 
post-retirement benefits are earned, the proper matching of costs to 
their benefitting activities is necessary for inter-program 
consistency.
    Several contractor representatives have noted that cash accounting 
would satisfy the Government's primary desire for funding. With cash 
accounting there is little question about the verifiability of the 
cost, but cost recognition is deferred until the latest possible 
moment. In most instances, the principle of matching cost with the

[[Page 49539]]

benefitting activities is clearly violated. Because a single cash 
payment in the current period represents both liability liquidation and 
cost recognition, there are no expenses for obtaining actuarial 
valuations and most other administrative expenses are minimal. However, 
the cost incurrence will be completely disconnected from the 
benefitting activity because of this delay. Cash accounting is most 
appropriate for obligations whose future payment is questionable or 
which are difficult to estimate or quantify within reasonable limits.
    With cash accounting there is a concern with the possible 
recognition of the Government's share of any future estimated liability 
not covered by current contract pricing. Many believe that Remington 
Arms 10 suggests that the Government has a responsibility for any 
unfunded post-retirement benefit liability in certain special 
contractual relationships, such as a Government-owned contractor 
operated (GOCO) facility. Some argue that in such cases the Government 
may have encouraged the use of cash accounting in the past because it 
benefitted from the resulting lower contract costs. If cash accounting 
is permitted or mandated for Government contract costing purposes, this 
issue may have to be addressed as part of any guidance on the final 
settlement of contract costs if the contracting relationship ends. This 
issue is discussed in more detail under Topic J.
---------------------------------------------------------------------------

    \10\  Army Contract Adjustment Board (ACAB) Decision No. 1238 
(1991).
---------------------------------------------------------------------------

    Terminal funding is an improvement over cash accounting in that 
cost recognition occurs somewhat closer to the incurrence of the cost. 
But, under terminal funding the pattern of cost assignment is very 
dependent upon the plan demographics and can produce very inconsistent 
results from period to period, even for plans with large populations. 
Moreover, terminal funding can be viewed as simply a subset of cash 
accounting in which the cash outlays occur in lump sums at retirement, 
rather than as periodic payments over the participants' retirement 
years. Terminal funding generally shares the advantages and 
disadvantages of cash accounting. However, the market for terminal 
funding in the area of retiree health care benefits is virtually non-
existent. To improve consistency between periods, many contractor and 
Government agency representatives believe that terminal funding, if 
used to account for post-retirement benefit costs, should be subject to 
an amortization requirement similar to the one at CAS 9904.416-
50(a)(1)(v)(C).
    Accrual accounting provides the best matching of costs to 
benefitting contracts and programs. Accrual accounting, properly 
implemented, also enhances consistency between contract periods, and 
thereby enhances predictability for forward-pricing purposes. However, 
accrual accounting is only appropriate when the obligation is valid; 
that is, reasonably expected to occur and can be reasonably 
estimated.11 Accrual accounting for post-retirement benefits would 
be based on expectations of long-delayed events and on actuarial 
estimates of obligations that may not be fully liquidated for years, if 
at all. And, there are significant administrative expenses associated 
with these actuarial estimates and the necessary record keeping.
---------------------------------------------------------------------------

    \11\  See Topic C for a discussion of the validity of post-
retirement benefit liabilities.
---------------------------------------------------------------------------

    On the other hand, as the retiree proportion of post-retirement 
benefit plans grows with the aging of the workforce and contractor 
downsizing, pay-as-you-go (cash accounting) costs will sooner or later 
exceed the accruals. Thus, from the perspective of a program manager, 
the costs of post-retirement benefit plans might be more manageable in 
the long run if accrual accounting is adopted now instead of facing 
escalating pay-as-you-go costs in later years when many expect 
procurement budget pressures to further increase.
    Very different results are produced by accrual accounting, cash 
accounting, and terminal funding, making it difficult to compare cost 
or price proposals from competing contractors if several methods are 
permitted for Government contract costing purposes. Besides the 
differences in cost for the current period, one contractor may realize 
lower costs from having adopted fully-funded accrual accounting earlier 
while another contractor may achieve lower costs by avoiding current 
accruals in favor of deferred cash payments. In such instances, there 
would be little uniformity in the cost recognition patterns over time.
    Contractor representatives who have shared information on how their 
individual companies treat post-retirement benefits, indicate that 
current contractor practices range from fully-funded accrual 
recognition to traditional cash accounting. They note that terminal 
funding is sometimes used for life insurance, but seldom or never for 
retiree health care benefits. A contractor's choice of accounting 
method is currently determined by many factors; such as, size of its 
Government business base, type(s) of benefit, industry practice, 
availability of tax-advantaged funding, and the type of covered 
employee population; e.g., union or non-union, production or 
management.
    Issue 6: Should cash accounting be permitted for post-retirement 
benefit costs of Government contractors?
    a. If so, should cash accounting be mandatory if the post-
retirement benefit plan is unfunded?
    b. Should cash accounting be mandatory if the post-retirement 
benefit liability is not reasonably predictable?
    Issue 7: Should terminal funding be permitted for post-retirement 
benefit costs of Government contractors?
    a. If so, should cost recognition be based on the terminal funding 
payment made during the period?
    b. Are there circumstances when the terminal funding payment should 
be subject to amortization for cost recognition purposes?
    c. Should the terminal funding payment always be subject to 
amortization for cost recognition purposes?
    Issue 8: Should accrual accounting be permitted for post-retirement 
benefit costs of Government contractors?
    a. Other than concern with the validity of the liability and the 
possible need for funding which are discussed as subsequent topics, are 
there certain criteria that must be met as a prerequisite for using 
accrual accounting?
    b. Should accrual accounting be mandatory if certain criteria are 
met? If so, describe the criteria.
    Issue 9: For uniformity between contractors, should measurement and 
assignment of post-retirement benefit costs to periods be restricted to 
a single accounting method? If so, identify that method.
    Issue 10: If different accounting methods may be used by different 
contractors, explain how and when each method should be used.
    (ii) Different accounting methods for different benefit types
    Although SFAS 106 treats all post-retirement benefits alike, the 
CAS Board may wish to consider whether different accounting methods may 
be appropriate for different types of benefits. Natural divisions seem 
to be health care insurance, life insurance, and ``other'' benefits 
(legal services, housing subsidies, adult day care). Similarly, the 
Board may wish to consider whether a contractor should be permitted to 
elect to use different accounting methods for different post-retirement 
benefit plans or for different benefits within the same plan.

[[Page 49540]]

    Contractor representatives and their actuaries have suggested that, 
because of the added administrative and actuarial expenses, the 
accounting treatment should not be separated by type of benefit. In 
fact, they believe that benefits other than health care insurance and 
life insurance are not sufficiently material to justify special 
treatment since they only comprise about 1% or 2% of total post-
retirement benefit costs.
    The Board will have to determine what constitutes a post-retirement 
benefit plan. Under SFAS 106, a ``substantive plan'' may comprise a 
formal plan document and trust agreement, an undocumented, but well 
established practice, or a mere reference of intent in an employee 
handbook. This definition of substantive plan is appropriate for the 
SFAS 106 purpose of disclosing to investors, shareholders, and lenders, 
an entity's potential liabilities. CAS 9904.412 and 9904.416 require 
the purpose of a trust fund or reserve for retiree benefits be set 
forth in writing as a precondition for accrual accounting. If the SFAS 
106 definition of a post-retirement benefit plan is determined to be 
inadequate for Government contract costing purposes, it may be 
desirable to require that the obligation be evidenced in writing as a 
precondition for the use of accrual accounting.
    Different contractors may provide similar benefit plans, but 
package the benefits differently. Consider the following illustration. 
Contractor X may have four formal documents covering all its employees; 
one each for retiree medical benefits, retiree dental coverage, retiree 
life insurance, and retiree discounts. Another contractor, Contractor 
Y, may provide combined retiree medical, dental, life, and discount 
benefits through two similar plans, each of which covers different 
employee populations; i.e, union and non-union employees. If different 
accounting methods are permitted for different benefits, could 
Contractor Y elect different accounting for its retiree health care and 
life benefits provided by the same ``plan'', or would such an election 
only be available to Contractor X?
    Even more problematic is when the same health care plan provides 
the same benefits to active employees and retirees. Some contractor 
representatives have expressed an interest in treating the two 
participant categories; i.e, active and retired, as separate plans. If 
permitted they would like to use cash accounting (based on premium 
payments) for current retired employees while using accrual accounting 
for the post-retirement benefits of the active population.
    Issue 11: Is the SFAS 106 description of a post-retirement benefit 
plan adequate for Government contract costing purposes?
    a. If not, please describe any modifications or restrictions to the 
SFAS 106 description that you believe are necessary.
    b. Is there an alternative definition that the Board should 
consider?
    Issue 12: Should different accounting methods for different types 
of post-retirement benefits be permitted when the benefits are provided 
by the same contractor?
    a. If multiple accounting methods are considered appropriate, 
should the permitted accounting method or methods be dependent on the 
type of post-retirement benefit provided by separate plans?
    b. If multiple accounting methods are considered appropriate, 
should different accounting methods be permitted for different benefits 
provided through the same plan?
    c. If multiple accounting methods are considered appropriate, 
should different accounting methods be permitted for different groups 
within the same plan population; e.g., union versus non-union, active 
employees versus retirees?
    Issue 13: Whether or not multiple accounting methods are considered 
appropriate, should an administratively less burdensome form of cost 
accounting be permitted for certain de minimis benefits; e.g., adult 
day care, legal assistance?
    a. Should cash accounting be permitted for de minimis benefits?
    b. Should de minimis benefits, whose payment does not involve life 
contingencies, be specifically subject to CAS 9904.415, deferred 
compensation rules?
    c. How should de minimis benefits be defined? Can that definition 
be readily related to the CAS materiality criteria in 9903.305?
Topic C. Validity of the Liability as a Prerequisite for Accrual 
Accounting
    In considering whether accrual accounting is appropriate for the 
measurement and period assignment of post-retirement benefit costs to 
contracts, the CAS Board will have to assess the validity of the 
estimated liability. A valid liability derives from an event which is 
expected to occur and the cost effect of which can be reasonably 
estimated. For purposes of this Staff Discussion Paper, a valid 
liability is distinguished from a contingent liability for events whose 
actual occurrence cannot be reasonably predicted or the cost effect 
cannot be reasonably estimated.
    As with pensions, use of any accrual accounting method for post-
retirement benefit plans could create an extended period of delay 
between cost recognition and benefit payment. This delay raises 
additional concerns about the validity of the liability. The 
conservative nature of GAAP leads it towards accrual accounting for not 
only contractual obligations, but also for informal, and possibly 
unenforceable, benefit promises. The FASB is concerned that to not 
disclose these liabilities would imply that no liability exists. 
Therefore, the question is whether the recognition criteria of SFAS 106 
are also applicable for accrual of the cost and the recognition of cost 
in the Government contracting environment?
    Furthermore, some companies have been actively amending, replacing, 
and eliminating retiree health care plans to contain or eliminate post-
retirement benefits costs. The possibility of a retiree health care 
benefit being greatly reduced or eliminated is much greater than that 
for pension benefits which fall under the protections of ERISA. Also, 
because there are limited tax-deductions available for funding post-
retirement health care benefits, some companies have been shifting 
costs to participants through higher deductibles, co-payments, and caps 
on employer-paid costs. Therefore, it seems that the validity of a 
liability for a benefit that can be significantly avoided by the 
unilateral action of a contractor could be questioned. The presumption 
that a post-retirement benefit plan will continue has less certainty 
than a comparable pension plan subject to ERISA.
    In addition to the documentation requirements similar to those 
found in CAS 9904.412 and 9904.416, there may be other criteria that 
should be met before post-retirement benefit costs can be accrued for 
Government contract cost accounting purposes. After retirement, 
defined-benefit pension costs are dependent only on investment results, 
mortality, and possibly a limited adjustment for general inflation. 
Retiree health care costs are dependent not only on investment results, 
mortality, and general inflation, but utilization, intensity, and 
medical inflation rates. Unforeseeable changes, which are not 
anticipated in the actuarial assumptions, such as future medical 
advances, changes in delivery systems, new diseases, and increasing 
health care provider competition will also affect future retiree health 
care costs. Health care actuarial assumptions; e.g., utilization, 
intensity, and medical

[[Page 49541]]

inflation rates, possess a much greater degree of uncertainty than the 
economic and mortality assumptions used for pension plans. An important 
issue concerns the degree of uncertainty that makes an event, or the 
quantification of the effects of an event, a contingency rather than a 
reasonable expectation.
    Retiree health care plans are often integrated with Medicare, so 
that after age 65, the benefit structure is that of a Medigap policy 
that covers costs not paid by Medicare. Coupled with the uncertainty of 
the assumptions, there are the widely disparate potentialities, over 
the long-term, for either a complete third-party assumption of company 
health care liabilities (e.g., a substantial increase in Medicare 
benefits), which would eliminate or reduce contractors' retiree health 
care costs, or, conversely, a revised Medicare program that would 
increase contractors' retiree health care costs. The CAS Board may have 
special concerns about the appropriateness of use of accrual accounting 
for retiree health care costs as opposed to retiree life and other 
benefits. Instead of valuing projected benefit levels, perhaps a 
liability measurement based on current, that is unprojected, benefit 
levels would be a more reliable, and therefore appropriate basis, for 
determining the valid liability to be recognized in the current cost 
accounting period. The effects of inflation on all benefits and the 
effect on health care benefits due to changes in utilization and 
intensity would have to be recognized in future periods as the cost 
effects emerge.
    Issue 14: Can post-retirement benefit liabilities be reasonably 
estimated; i.e., is there a valid liability, given the degree of 
uncertainty in projecting post-retirement benefit levels?
    Issue 15: Because of the uncertainties in projecting retiree health 
care benefits and trends, in particular long-term medical cost trends, 
should accrual accounting for post-retirement health care benefits only 
recognize current benefit levels?
    Issue 16: Because of the uncertainties about future reductions or 
other changes to the benefit promise, should accrual accounting for all 
post-retirement benefits only recognize current benefit levels?
    Issue 17: Should the validity of the liability be dependent on the 
formality of the post-retirement benefit plan?
    Issue 18: Are there other criteria that should be used to assess 
the validity of the post-retirement benefit liability?
Topic D. Choice of Actuarial Cost Methods To Measure and Assign Costs 
to Periods for Accrual Accounting Purposes
    The current CAS Board, like its predecessor, believes that 
generally accepted accounting principles should be used as a basis for 
determining contract costs for a valid liability whenever practicable. 
However, the Board has long recognized that GAAP concepts and methods 
must be scrutinized, and possibly modified if otherwise acceptable, to 
address the special needs of Government contracting because of its 
emphasis on predictability of cost allocations between cost accounting 
periods used for Government contracting purposes rather than the 
stressing of current period comparability between companies that seems 
to predominate financial accounting. In this case, one of the most 
crucial determinations is how the estimated liability for post-
retirement benefits is assigned to cost accounting periods. Period 
assignment is the foundation on which subsequent allocation to 
intermediate and final cost objectives is based.
    Many contractor and Government representatives have suggested that 
the Board adopt GAAP, as represented by SFAS 106, only adding 
safeguards truly needed to protect the Government's interests. Some 
believe pure SFAS 106 accrual accounting, augmented with explicit 
reversionary rights for the Government in case of an asset reversion, 
may be sufficient. However, this use of SFAS 106 presumes that post-
retirement benefits are analogous to pensions. This presumption appears 
to be reinforced by the prefatory section of SFAS 106 entitled, 
``Similarity to Pension Accounting'', in which the FASB specifically 
acknowledges that SFAS 106 is based on SFAS 87 and 88 pension 
accounting principles.
    CAS 9904.412 permits the use of any immediate-gain actuarial cost 
method to apportion, that is, assign, the pension liability over the 
employees' total years of service. The accrual pattern for a funded 
pension plan, disregarding any funding limitation, can either be a 
level amount in dollars or a level percentage of payroll; i.e., as 
determined under the Entry Age Normal (EAN) actuarial cost method, or 
can be generally increasing; i.e., as determined under the Accrued 
Benefit Cost Method (ABCM) or the Projected Unit Credit (PUC) actuarial 
cost method. CAS 9904.416 requires that the projected average loss; 
i.e., the annual accrual, for advanced-funded retiree insurance 
programs be actuarially determined and apportioned over the working 
lives of the active population. 12 The CASB staff questions 
whether contract cost determinations made under the projected average 
loss methodology constitute accrual accounting. The projected average 
loss method appears to be an actuarial smoothing technique applied to 
cash accounting, especially considering that refunds and credits are 
fully recognized when received.
---------------------------------------------------------------------------

    \12\ If the population predominantly comprises retirees, then 
the liability is apportioned over the average life expectancy of the 
population.
---------------------------------------------------------------------------

    For SFAS 87 pension accounting, the FASB mandated use of the unit 
credit family of methods (ABCM and PUC) because the period assignment 
is tied to the employment service by which benefits are incrementally 
earned. Often, entitlement to post-retirement benefits is not earned 
ratably, but occurs instantaneously when the employee meets an age and 
service eligibility requirement. In such cases, the even apportionment 
requirement of CAS 9904.416 might be more appropriate.
    Issue 19: If accrual accounting is used independent of SFAS 106, 
what actuarial method or methods should be used to assign the estimated 
liability to cost accounting periods?
    a. Should period assignment be limited to a single actuarial cost 
method?
    b. If the projected unit credit actuarial cost method is used, 
should period assignment follow the benefit formula attribution method 
or use ``project and prorate'' method? 13
---------------------------------------------------------------------------

    \13\ Under the ``project and prorate'' method, the projected 
liability at full eligibility age is apportioned over the employee's 
years of service without regard to how benefits are actually 
incrementally earned based on the benefit formula. Use of this 
method is most common in instances where the benefit is not ratably 
earned over years of employment.
---------------------------------------------------------------------------

    c. If the plan population is predominantly composed of retirees 
should costs be attributed to the future life expectancy of the retiree 
population?
    Issue 20: Is the projected average loss methodology of CAS 9904.416 
an appropriate actuarial cost method for accrual accounting?
    Issue 21: Are there other methods of period assignment that you 
believe should be considered?
E. Assignment of Unfunded Actuarial Liabilities to Accounting Periods 
for Accrual Accounting Purposes
    If accrual accounting is used, post-retirement benefit costs will 
be dependent on actuarial techniques and assumptions. Actuarial cost 
methods measure and assign portions of the total liability to past, 
current, and future

[[Page 49542]]

periods. When a post-retirement benefit plan is first established or 
accrual accounting first adopted, the portion of the total liability 
that the actuarial cost method assigns to prior years is identified as 
the initial actuarial liability, which is sometimes known as the past 
service liability. The portion of this liability that is not currently 
secured by assets is the initial unfunded liability. Portions of the 
total liability assigned to prior periods by the actuarial cost method 
can also arise from subsequent changes in the benefit design, actuarial 
cost method, and actuarial assumptions. 14 Actuarial practice 
typically reassigns these previously unrecognized past service 
liabilities to current and future periods through an amortization 
process.
---------------------------------------------------------------------------

    \14\ Changes in actuarial assumptions, actuarial cost method, or 
underlying benefit promise may also constitute a change in 
accounting practice, which is the subject of a separate CASB case 
currently under consideration.
---------------------------------------------------------------------------

(i) Initial Unfunded Liability
    SFAS 106, which considers the liability valid for financial 
accounting purposes, permits the initial unfunded liability, which is 
referred to as the ``Transition Obligation'', to be fully recognized in 
the period in which SFAS 106 is adopted, to be amortized over the 
average remaining years of service of the employees at the time of 
adoption. Many have noted that amortization would minimize the 
disruption of the forward-pricing and program budgeting processes by 
spreading the recognition of this large, and long-neglected, past 
service liability over many future years. Much of the large initial 
unfunded liability can be attributed to prior periods when there may 
have been very different levels of Government work performed by a 
contractor. In such instances, amortization over the remaining years of 
service would recognize the initial unfunded liability during future 
periods of lower, or possibly further changing, Government 
participation.
    Few contractors used accrual accounting to price their Federal 
contracts prior to the issuance of SFAS 106. Since most contractors 
ignored the liability for post-retirement benefits prior to the 
promulgation of SFAS 106, some believe that the Government has no 
responsibility for these liabilities that have appeared only when the 
prior practice of cash accounting was been abandoned. A practical issue 
will be whether to, and how to, identify the Government's share, if 
any, of the initial unfunded liability.
    CAS 9904.412 provides for the recognition of the initial unfunded 
liability, that is, the unfunded actuarial liability attributable to 
prior periods when a pension plan is first established, by providing 
that such initial unfunded liability will be reassigned to future 
periods through an amortization process. An alternative treatment of 
this initial unfunded liability would be to set it aside from other 
portions of the unfunded actuarial liability being recognized for 
Government contract costing purposes and treat it as a separate or 
``exceptional'' item. If this treatment were adopted, the period cost 
would comprise the normal cost or projected average loss, plus 
recognition of gains and losses, and prospective changes to the plan, 
actuarial assumptions, or actuarial cost method. This approach would 
permit the Government and a contractor to establish a short term 
relationship without having to adjust contract costs for liabilities 
and assets accumulated, but not recognized, during prior 
periods.15
---------------------------------------------------------------------------

    \15\  This discussion is focused on the recognition of prior 
period costs at the time a contractor first becomes subject to a 
Standard on post-retirement benefit costs. Topic J discusses the 
recognition of prior period costs at the time a contracting 
relationship ends.
---------------------------------------------------------------------------

    Issue 22: To what extent, if any, should the initial unfunded 
liability of post-retirement benefit plans be recognized for Government 
contract costing purposes?
    Issue 23: If the initial unfunded liability is recognized, should 
it be fully recognized in the cost accounting period when accrual 
accounting is adopted or should it be amortized? If amortized, what 
should the amortization period be?
    Issue 24: If the initial unfunded liability is recognized, should 
there be some consideration of historical Government participation 
levels in the allocation of the initial unfunded liability to current 
and future contracts?
    a. If yes, how should such a recognition be measured? Would 
permitting accrual accounting as an optional election rather than a 
mandated method affect your answer?
    b. Alternatively, to better match the amortization installments 
with the current level of Government contracting, should the SFAS 106 
amortization method of level principal payment and declining interest 
equivalents be used? What about using a shortened amortization period; 
e.g., 10 years.
    Issue 25: If the initial unfunded liability is not recognized, 
should accrual recognition be further limited to the normal cost plus 
recognition of experience gains and losses and assumption changes?
    Issue 26: Are there alternative accounting treatments that the 
Board should consider for the initial unfunded liability?
(ii) Changes in Unfunded Actuarial Liability Due to Experience Gains 
and Losses
    Actuarial assumptions are estimates of future conditions affecting 
costs. For post-retirement benefits, the assumptions include future 
trends affecting health care costs; e.g., medical cost inflation, 
utilization, and intensity, in addition to the events considered for 
pension costs. And, like pensions, actual experience will differ from 
actuarial expectations. GAAP, as expressed in SFAS 106, favors current 
period recognition of the experience gains and losses as they occur. 
The Cost Accounting Standards are divided on this subject. CAS 
9904.413, which is concerned with consistency between periods, requires 
that experience gains and losses be amortized over a 15 year period. 
CAS 9904.416-50(a)(1)(vi) would seem to require that experience gains 
and losses; i.e., the difference between estimated and actual refunds, 
dividends, and assessments, be recognized in the period that the 
difference is first known.
    In SFAS 106, the FASB limits the immediate recognition of gains and 
losses to a corridor, which is related to the benefit liability and the 
market value of any assets. Any gain or loss falling outside of the 
corridor is amortized over the employees' average remaining years of 
service. CAS 9904.413 requires that experience gains and losses be 
amortized over 15 years to dampen the volatility of annual market 
movements. For Government contract cost accounting of post-retirement 
benefit plans, it may be desirable to use a shorter amortization period 
so that the gain and loss recognition will be closer to the period when 
the gain or loss occurred. Concerns with predictability and forward-
pricing would seem to argue for amortization. The Board may have to 
seek a proper balance between early recognition and increased 
volatility.
    Issue 27: Should experience gains and losses be recognized in the 
period of occurrence?
    a. If yes, should the current period recognition be limited to a 
corridor? How should that corridor be defined?
    b. If generally no, is there some de minimis level of gain or loss 
that should be recognized in the current period?
    c. Are there certain recurrent gain or loss events that should be 
recognized immediately?

[[Page 49543]]

    Issue 28: Should experience gains and losses be amortized?
    a. Should a longer amortization period; e.g., 15 or 20 years, be 
used to enhance consistency between periods by dampening volatility?
    b. Should a shorter amortization period; e.g. 5 or 10 years, be 
used to keep recognition closer to the period in which the gain or loss 
occurred?
    c. Should the amortization period reflect the average remaining 
years of service for the plan's active population? What if retirees 
predominantly comprise the plan population?
    Issue 29: Are there other methods of recognizing experience gains 
and losses that should be considered?
(iii) Other Changes in Unfunded Actuarial Liability
    In addition to experience gains and losses, the treatment of all 
other changes in the liability must be addressed. The Board will have 
to specifically address the cost accounting for changes in the 
actuarial assumptions, the actuarial cost method, and the benefits or 
plan design.
    Because SFAS 106 promotes recognition of current conditions, the 
effects of actuarial assumption changes are included with the 
experience gain or loss. CAS 9904.412, which was modeled after APB 8 
and ERISA, treats changes in liability due to changes in actuarial 
assumptions separately from experience gains and losses. Under SFAS 
106, the choice of the discount rate is restricted in that it must fit 
certain criteria set forth in SFAS 106 as well as guidance from the 
Securities and Exchange Commission. The discount rate, and certain 
other actuarial assumptions, must reflect current conditions which are 
assumed to be beyond a contractor's control. Therefore, it is 
consistent to report the effects of changes to such assumptions as part 
of the experience gain and loss. Conversely, CAS 9904.412 requires that 
all actuarial assumptions reflect a contractor's long-term 
expectations. Because the timing and degree of assumption changes is 
generally under the control of the contractor, CAS 9904.412 does not 
consider the effects of such changes to be experience gains and losses 
from external forces 16.
---------------------------------------------------------------------------

    \16\ While a contractor can exercise certain freedom in 
determining its ``best estimate'' of future trends, other factors, 
such as historical trends, plan experience, industry trends, must be 
considered.
---------------------------------------------------------------------------

    SFAS 106 does not address changes in actuarial cost method because 
the cost method is mandated. If choice of actuarial cost method is 
permitted for cost accounting, the recognition of the effect of an 
actuarial cost method change on the liability estimate will have to be 
addressed. Also, for consistency, any change in actuarial cost method, 
if permitted, probably should be treated as an accounting practice 
change as it has been with pensions.
    Included in the CAS 9904.412 definition of actuarial cost method is 
the asset valuation method. Both SFAS 106 and CAS 9904.413 permit the 
use of actuarially determined asset values whereby single period 
investment experience volatility is smoothed through an asset valuation 
method. Such asset valuation methods typically amortize asset gains and 
losses over a five (5) year period. To maintain reasonable values, CAS 
9904.413 requires that the actuarial value of assets fall within a 
specified corridor related to market value. If asset smoothing 
techniques are not permitted, the CAS Board may wish to consider 
whether amortization of experience gains and losses over the somewhat 
extended 15 year period or average remaining years of service provides 
adequately for current asset values, or whether amortization of asset 
gains and losses over a shorter time frame; e.g., five years, should be 
permitted, or even mandated.
    As with experience gains and losses, SFAS 106 requires that 
increases in the estimated liability (losses) due to plan amendments 
are always amortized. On the other hand, decreases in the estimated 
liability (gains) due to plan amendments are offset against any 
existing unrecognized prior service liability before being amortized. 
Under CAS 9904.412, the effects of plan changes are amortized 
regardless of whether the liability increases or decreases. The Board 
will have to consider the proper cost accounting for changes in 
liability due to plan amendments.
    Finally, for situations where the CAS Board determines that 
amortization of the effect of a change is appropriate, the Board will 
have to consider the appropriate amortization period. CAS 9904.412 
permits a contractor to select, based on predetermined criteria, the 
amortization period. The amortization period can range from 10 to 30 
years and the criteria should consider materiality and the nature of 
the change. SFAS 106 specifies that the amortization period be equal to 
the employees' average remaining years of service. Factors the CAS 
Board may wish to consider are consistency between periods, uniformity 
between contractors, and the delay in the recognition of changes in the 
estimated liability.
    Issue 30: Should the effect of a change in actuarial assumptions be 
treated separately from experience gains and losses?
    Issue 31: Should the effect of a change in actuarial cost method, 
including the asset valuation method, be treated separately from 
experience gains and losses?
    Issue 32: Should the use of actuarially determined asset values be 
permitted for the recognition of some asset gains and losses that would 
otherwise be treated as an experience gain or loss?
    a. If yes, should the actuarially determined assets value be 
related to the market value of the assets? If so, how?
    b. What limits and criteria should apply to the actuarial 
determination of the asset values; e.g., time period over which these 
asset gains and losses are spread?
    c. Should the asset valuation method be considered to be part of 
the actuarial cost method?
    Issue 33: Should the effect of a change in benefits or plan design 
be treated separately from experience gains and losses?
    Issue 34: Should the amortization period for recognizing changes in 
the actuarial liability be specified?
    a. If yes, what should the specified amortization period be? Should 
the amortization period differ depending on the cause of the change in 
actuarial liability; e.g., emerging experience gain or loss, change in 
benefit or plan design, change in actuarial assumptions, change in 
actuarial cost method?
    b. Alternatively, should a contractor be permitted to select the 
amortization period?
    c. If a contractor may select the amortization period, what 
criteria, if any, should be imposed on that selection?
    d. If a contractor may select the amortization period, should the 
amortization period be fixed once selected? If the period is not fixed, 
how does one address changes in the amortization period?
Topic F. Actuarial Assumption Considerations if Accrual Accounting is 
Used
    The SFAS 106 criteria for selecting actuarial assumptions, some of 
which are based on current market conditions, can produce volatility 
which is counterproductive to consistency between periods, and 
therefore to predictability for forward pricing purposes. To enhance 
inter-period consistency, CAS 9904.412 requires that assumptions be 
based on long-term expectations. Likewise, under CAS 9904.416, 
projected average losses must

[[Page 49544]]

be actuarially determined on a long-term basis. Besides the concerns 
for consistency, post-retirement benefit plans probably will have to be 
based on long-term, ongoing commitments, in order for estimated 
liabilities to be considered valid.
    The pension Standards have always required that assumptions be 
based on long-term, best-estimate, expectations. The recent amendments 
to the pension Standards followed the lead set by SFAS 87 and ERISA by 
requiring that each assumption be individually identified and 
reasonable. The CAS pension and insurance Standards do not impose any 
requirements on the selection of assumptions beyond that of long-term 
reasonableness.17 The revised CASB Disclosure Statement, DS-1, 
asks contractors to ``describe the events or conditions for which 
significant actuarial assumptions are made for determining the cost 
accrual.'' The elicited information is not the current numeric values 
of the assumptions, but rather the accounting practice(s) used for 
determining these numeric values. Conversely, SFAS 87 and SFAS 106 set 
forth general guidance on the basis for selecting the discount rate. In 
CAS 9904.414, ``Cost of money as an element of the cost of facilities 
capital'', the Board requires that a contractor use ``interest rates 
specified by the Secretary of the Treasury pursuant to Pub. L. 92-41 
(85 Stat 97)''. CAS 9904.415 also requires that the present value of 
deferred compensation awards be valued using the Treasury rate.
---------------------------------------------------------------------------

    \17\ Except where a loss has occurred but payment is deferred. 
(See CAS 9904.416-50(a)(3)(ii)).
---------------------------------------------------------------------------

    There is ample precedent for the Board to consider mandating a 
specific interest rate.18 Furthermore, there has been limited 
funding of post-retirement benefit plans so that there are often little 
or no assets from which to derive meaningful historical rates of 
investment return or against which the reasonableness of the assumption 
can be gauged. Most of the assets, if any, will be accumulated from 
future contributions. There may be a need to set forth the basis for 
selecting the interest assumption or even mandate the use of a specific 
rate. If such a requirement is deemed desirable, the issue may be 
whether the basis for determining the rate or the rate itself should be 
prescribed. Possible candidates for a mandated rate could be the 
contractor's internal rate of return or the CAS 9904.414-50(b) Treasury 
rate. Another possibility is to reference a hypothetical bond portfolio 
similar to the SEC's requirement for SFAS 87 disclosures that the rate 
be based on a portfolio of bonds rated ``Aa'' or better.19
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    \18\ For purposes of this Staff Discussion Paper, terms such as 
``interest rate'', ``discount rate'', or ``investment earning rate'' 
are treated synonymously referring to the interest assumption, 
except where the context clearly indicates otherwise. The interest 
assumption is the rate used to reflect the time value of money in 
present value calculations.
    \19\ See SEC letter dated September 22, 1993 to Mr. Timothy S. 
Lucas of the FASB.
---------------------------------------------------------------------------

    Many other assumptions address the same contingencies as pension 
assumptions. Often the same employee population is covered by both the 
pension and the post-retirement benefit plan. It may be desirable to 
require that population assumptions about events and conditions that 
are common to both plans be the same, or at least consistent and 
reconcilable. Similarly, there are economic and non-population 
conditions and events, such as general inflation and plant closings, 
that apply equally to both types of plans. Again, there should be 
consistency between the assumptions used to measure pension costs and 
post-retirement benefit costs.
    Certain assumptions are unique to post-retirement benefit 
plans.20 This is particularly true of retiree health care 
benefits. One of the primary findings of the Coopers and Lybrand field 
test of the SFAS 106 exposure draft was the lack of statistically 
reliable benefit data. Most census data only identified the employee 
and did not include information on spouses, children, and other 
dependents. To further complicate matters, benefit payment records 
often did not identify whether the recipient was active or retired, the 
employee or the dependent, Medicare eligible or not. While the 
situation has greatly improved as companies have upgraded their data 
systems in response to SFAS 106, the newness of reliable databases 
combined with frequent changes in the benefit structure limit the 
usefulness of companies historical data for predicting future trends. 
However, unlike the interest assumption, the CASB staff is unaware of 
any alternative basis for projecting benefit payments.
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    \20\ See paragraph 5.5.2 of Actuarial Standard of Practice No. 
6, ``Measuring and Allocating Actuarial Present Values of Retiree 
Health Care and Death Benefits'', for a partial list of possible 
assumptions. As used in this statement, the term ``allocation'' 
refers to the process of assigning portions of the liability to 
accounting periods. Actuarial standards of practice do not address 
the allocation of costs to final cost objectives.
---------------------------------------------------------------------------

    A final consideration is the responsibilities of the actuary and 
the contractor. Since the actuary is not a party to the Government 
contract, CAS 9904.412 and 9904.413 have always imposed the 
responsibility for selection of actuarial assumptions on the 
contractor. The actuary is a paid consultant of the contractor. The 
contractor defines the scope of work and can thereby exercise 
significant control over the actuary's work product. Nevertheless, some 
have suggested that the actuary's post-retirement benefit cost and 
liability measurements be subject to generally accepted actuarial 
principles and practices as promulgated by the Actuarial Standards 
Board (ASB), an independent body within the American Academy of 
Actuaries. Thus, if a contractor instructs an actuary to value the 
post-retirement benefit plan with assumptions that the actuary believes 
are unreasonable, the actuary would have a professional obligation 
under ASB principles and practices to disclose that fact, although 
probably counter to the client's wishes.
    A difficulty may arise when a contractor's ``best estimate'' 
materially differs from his professional actuary's ``best estimate'', 
but falls within a range the actuary can accept. Legitimate differences 
in expectations concerning the future should not pose a problem. But, 
procuring officials and auditors have expressed concern that a 
contractor, rather than designating use of its ``best-estimate'' 
assumptions, has selected assumptions advantageous to maximizing cash 
flow or for creating artificially low costs to be used in competitive 
negotiations. This concern is greater with retiree health care benefit 
liabilities that can be more sensitive to minor changes in assumptions. 
The CASB staff notes that SFAS 106 and Actuarial Standard of Practice 
Number 6 both require a sensitivity analysis of the assumptions used 
for post-retirement benefit costs.
    Issue 35: Should actuarial assumptions for on-going post-retirement 
benefit plans be based on long-term, ``best-estimate'', expectations as 
they are for pensions?
    Issue 36: Should a change in the basis used to set actuarial 
assumptions be treated as a change in cost accounting practice?
    Issue 37: Should the Board require a certification that the 
actuary's selection of assumptions, measurement of the liability, and 
assignment of cost to periods are in compliance with generally accepted 
actuarial practices and principles as promulgated by the Actuarial 
Standards Board?
    Issue 38: Should the CAS Board require a sensitivity analysis of 
the assumptions?
    a. If yes, should there be specific pass/fail criteria?
    b. If no, what criteria, if any, should be used to evaluate the 
validity of an actuarial assumption?

[[Page 49545]]

Topic G. The need, if any, to Substantiate Accruals by Funding
    As with pension costs, there is an extended delay between the cost 
assignment of and the actual payment of the benefit liabilities. Unlike 
pensions, there is a greater degree of uncertainty in the estimation of 
the liability and there are fewer opportunities to prefund post-
retirement benefit costs on a tax-advantaged basis.
    Once the concern of what is a post-retirement benefit plan for cost 
accounting purposes is settled and criteria for accrual accounting are 
established, the Board will have to address an even more difficult 
topic--the need, if any, for a funding requirement. Post-retirement 
benefit plans are more comparable to nonqualified than to qualified 
pension plans, and therefore the Board may have to address many of the 
issues that arose in the pension case in the case of post-retirement 
benefit costs, as well. The Board's decisions in this area will have to 
be consistent or reconciled with the decisions regarding nonqualified 
pension plans.
(i) The Need To Substantiate
    Several contractor representatives have opined that no action on 
post-retirement benefits is preferable to a funding requirement and 
noted that they had been able to negotiate equitable agreements with 
Contracting Officers concerning accounting for post-retirement benefit 
costs. But such individual arrangements with contractors defeats the 
goal of uniformity. Another concern is the effect of a funding 
requirement on competition, since the ability to use tax-advantaged 
funding could vary greatly between contractors and because some 
contractors who have been funding their post-retirement benefits will 
have much lower costs.21 Many in the contracting community believe 
that post-retirement benefit liabilities are valid liabilities and 
therefore a funding requirement is not needed. They note that there 
would be substantial administrative expenses associated with 
establishing and maintaining a fund. They do concede it is reasonable 
to have an adjustment mechanism so that the Government can recover any 
prior period post-retirement benefit costs, which were priced into 
contracts, whenever a post-retirement benefit plan is terminated.
---------------------------------------------------------------------------

    \21\  The concern with contract cost difference due to cash 
accounting versus funded accruals is related to the topic of 
permitting multiple accounting methods previously discussed under 
Topic B.
---------------------------------------------------------------------------

    Many procuring agency representatives firmly believe that funding 
is still necessary to protect the Government's interest, especially 
given the dollar magnitude of post-retirement benefit plan costs, the 
degree of uncertainty, and, as with pensions, the extended delay 
between the employment service that creates the liability and the 
benefit payment that liquidates the liability. From an accounting point 
of view, the need to substantiate long-term liabilities applies to 
post-retirement benefits as much as it does to accrued pension costs 
under CAS 9904.412 and to prefunded retiree insurance costs under CAS 
9904.416. There is also the question of public policy that suggests to 
many a careful scrutiny of any funds advanced to contractors through 
accrual accounting of post-retirement benefit costs on an unrestricted 
basis.
    At first blush, it would appear that consistency with the pension 
Standards could be achieved using the tax-rate complementary funding 
requirement for nonqualified plans, which are most similar to post-
retirement benefits. However, some Government representatives are still 
not comfortable with the tax-rate complementary funding concept for 
nonqualified pension plans, but have accepted the notion because these 
nonqualified plan liabilities are still relatively small compared to 
those of qualified pension plans. They might find the tax-rate 
complementary funding approach difficult to accept for estimated 
liabilities of the magnitude associated with post-retirement benefits. 
Some actuaries with clients who are Government contractors observe that 
there has been little interest in using complementary funding for 
nonqualified pension plans. Many express a belief that complementary 
funding adds an element of complexity without utility.
    In addressing the funding issue, it may be advisable to avoid any 
direct connection to the Internal Revenue Code (IRC). Unlike pensions 
where the bulk of the liability is associated with qualified pension 
plans whose trusts are tax-exempt and whose contributions are tax-
deductible, the opportunities for tax-advantaged funding of post-
retirement benefit plans is essentially limited to VEBA trusts and IRC 
Sec. 401(h) separate accounts. Considering that the tax-advantages of 
non-union VEBA trusts were drastically reduced in the early 1980s and 
that the tax-advantages of qualified pension plans have been somewhat 
reduced, any funding requirement that is tied to the IRC would have to 
be flexible enough to handle possible future restrictions as tax policy 
changes. In fact, it remains arguable whether tax-consequences should 
be a concern in developing an accounting standard.
    Although at present there is only limited funding, if any, of post-
retirement benefit plans, any imposition of a funding requirement might 
consider the need for a limit on the accrual of post-retirement 
benefits similar to the CAS 9904.412 ``assignable cost limitation''. 
Such a limitation would prevent over-funding once fully adequate assets 
had been accumulated. And, to be consistent with the period assignment 
rules for pensions, any assigned cost, and associated interest, that 
was voluntarily not funded might be explicitly eliminated from contract 
costs in future periods. Likewise, funding in excess of the assigned 
cost might be carried forward, with interest, until needed in future 
years.
    Issue 39: Is funding necessary to substantiate accrual of costs for 
the estimated liability for post-retirement benefits? If so, what level 
of funding is necessary?
    Issue 40: Because assets are an integral part of cost measurement 
under most actuarial cost methods, how should the unfunded portion of 
the cost accrual be accounted for if funding for all or some portion of 
the accrued cost of a period is not required?
    Issue 41: Should a Standard addressing Government contract costing 
consider the tax consequences of its accounting rules? If so, should 
the Board consider tax-rate complementary funding similar to that in 
CAS 9904.412?
    Issue 42: Should there be an ``assignable cost limitation'' similar 
to that found in CAS 9904.412? Should such a limitation be defined 
differently for post-retirement benefit costs?
(ii) Funding Vehicles
    There are two types of VEBAs: union and non-union. The earnings of 
a union VEBA are tax-exempt, but the earnings of a non-union VEBA, like 
those of a ``rabbi'' trust, are subject to the unrelated business 
income tax (UBIT). For consistency with the amendments to the pension 
Standards, the Board may wish to consider treating UBIT taxes on the 
earnings of a non-union VEBA trust as an administrative expense of the 
fund.
    Another issue is which investment vehicles should be recognized as 
assets for funding purposes. Contractors and their actuaries report 
that use of Trust Owned Life Insurance (TOLI) arrangements and 
Corporate Owned Life Insurance (COLI) arrangements is rare for retiree 
health care benefits. They indicated that use of ``rabbi'' trusts for

[[Page 49546]]

post-retirement benefits was somewhat rare and only knew of one 
contractor who used a secular trust for post-retirement benefits. The 
use of IRC Sec. 401(h) accounts and VEBAs in combination are somewhat 
common. They did note that accruals for bargaining unit plans can often 
be fully funded using a union VEBA. And, the larger the Government 
business base, the more likely a contractor is to establish means of 
funding post-retirement benefit costs in order to use accrual 
accounting for contract pricing.
    Any consideration of post-retirement benefit investment vehicles 
should address the nature of IRC Sec. 401(h) accounts. ERISA permits a 
qualified pension plan to provide retiree health care insurance 
benefits through a tax-qualified trust provided that such benefits are 
ancillary to the basic retirement benefit and the contributions for 
401(h) health benefits are accounted for separately from other pension 
benefits. It is noteworthy that ERISA does not impose this separate 
accounting requirement for other ancillary benefits such as disability 
income and life insurance. Many have suggested that this separate 
accounting provision distinguishes post-retirement health care benefits 
from benefits that can be considered to be ``an integral part of the 
pension plan''. A decision may be desirable as to whether, for 
Government contract cost accounting purposes, an IRC Sec. 401(h) 
account is an integral part of a pension plan, and thereby subject to 
CAS 9904.412 and 9904.413, or is a form of post-retirement benefit plan 
asset subject to a Standard dealing with post-retirement benefits.
    For both CAS 9904.412 and 9904.416 purposes, the funding 
arrangement must be either in the form of a trusteed fund or a reserve 
maintained by an insurer. For consistency, any funding provision for 
post-retirement benefits probably should require that the assets be 
maintained either by a trustee in a fund or an insurer in a reserve 
established for the exclusive purpose of providing post-retirement 
benefits. Also, given the abuses that have occurred in some qualified 
pension trusts and the proprietary nature of insurance company 
calculations, it may be desirable to require that the investments have 
a definitely determinable fair or market value. Such a rule may not 
have to apply to an insurer's statutory reserve associated with a bona-
fide group or individual insurance contract subject to state insurance 
laws. The CAS 9904.416 provisions regarding captive insurers should 
also apply to a fund or reserve maintained or trusteed by an insurer.
    Issue 43: Identify types of trust arrangements; e.g., IRC 
Sec. 401(h) accounts, VEBAs, ``rabbi'' trusts, secular trusts, that 
should be considered? Is the Government's interest sufficiently 
protected by these trust arrangements?
    Issue 44: Identify what insurance arrangements; e.g., insurance 
reserves, separate investment accounts, COLIs, TOLIs, should be 
considered? Is the Government's interest sufficiently protected by 
these insurance arrangements?
    Issue 45: Should separate accounts established within a qualified 
pension trust for IRC Sec. 401(h) health benefits be considered the 
assets of a post-retirement benefit plan or the assets of an ancillary 
benefit that is an integral part of the pension plan.
    Issue 46: Can several types of funding arrangements be combined to 
form the assets of a post-retirement benefit plan? If so, is there a 
preference or priority order to the various types of funding?
(iii) Alternatives
    Given the limited availability of efficient funding vehicles that 
would sufficiently protect the Government's interest, the CASB staff 
believes that an alternative means of substantiating the cost should be 
explored. Although most alternatives will not be as secure as a 
trusteed fund, the avoidance of administrative expenses and burdens may 
be a compensating factor.
    One possibility would be to permit a very limited form of accrual 
accounting. This could be achieved by limiting or prohibiting 
projections of benefit growth in actuarial calculations. Considering 
the comments received by the CAS Board in response to the Staff 
Discussion Paper on ``Accounting for Unfunded Pension Costs'', 56 Fed. 
Reg. 27780, such an approach should recognize future vesting, 
especially since vesting often does not occur until full eligibility 
under many post-retirement benefit plans.
    The Board may decide to not provide for the recognition of the 
initial unfunded liability.22 If so, this may decrease annual 
costs sufficiently to mitigate the Government's interest in ensuring 
that the accrued costs are funded. This could be especially true if 
this treatment is coupled with a somewhat restrictive measure of the 
accrued cost.
---------------------------------------------------------------------------

    \22\ See Subtopic E(i).
---------------------------------------------------------------------------

    Another alternative may be to require that a contractor obtain a 
surety bond to protect the Government's reversionary interests in the 
case of a plan termination or segment closing. The CASB staff questions 
whether such bonds are or would be available. Furthermore, if a 
contractor's financial situation were to deteriorate, the contractor 
may not be able to maintain the bond or afford the necessary premium at 
the point in time when the Government's reversionary interest is most 
at risk.
    The alternatives set forth above are examples and are not intended 
to set any limits on alternative approaches. The staff encourages 
respondents to this Staff Discussion Paper to propose any other 
alternatives that they believe should be considered.
    Issue 47: Can restrictions be placed on the actuarial cost method 
that would obviate the need to substantiate the accrual through a 
funding requirement?
    a. Would the accrual recognition be sufficiently restricted by the 
use of the accrued benefit cost method?
    b. Would the accrual recognition be sufficiently restricted if only 
current, that is, unprojected, benefit levels are considered?
    c. Are there other actuarial cost method restrictions that should 
be considered as alternatives to a funding requirement?
    Issue 48: If the initial unfunded liability is not recognized, 
would the need to substantiate the accrual through a funding 
requirement be obviated?
    Issue 49: If all changes in actuarial liability are not recognized, 
except for experience gains and losses, would the need to substantiate 
the accrual through a funding requirement be obviated?
    Issue 50: Would the purchase of a surety bond or other third party 
guarantee adequately protect the Government's interests in lieu of a 
funding requirement? Identify the types of guarantees that may be 
available and appropriate.
    Issue 51: Are there other alternatives to a funding requirement 
that should be considered?
Topic H. Cost Determination for Segments
    Once decisions are made on how to measure and assign to periods the 
costs of post-retirement benefit plans, the staff believes a review is 
needed of how such costs are determined at segments prior to their 
ultimate allocation to final cost objectives. GAAP is not concerned 
with the intra-period allocation of costs to cost objectives, so any 
consideration of how post-retirement benefit costs are allocated to 
segments needs to be addressed. Furthermore, the plan population or 
experience of a segment may be substantially different from that of the 
post-retirement benefit plan as a whole. In such instances there may be 
a need to treat that segment separately

[[Page 49547]]

from the rest of the post-retirement benefit plan.
(i) Allocation of Post-Retirement Benefit Costs to Segments
    Post-retirement benefit plans may be established and costs 
accumulated at the corporate, home office, or segment level. Regardless 
of whether post-retirement benefits are viewed as pensions, deferred 
compensation, or insurance, if they are incurred at the home office 
level those costs would seem to be a central payment or accrual for CAS 
9904.403 purposes. Moreover, post-retirement benefit cost calculations 
are based on employee census data so that portions of the home office 
post-retirement benefit expense often can be readily associated with 
the employees of individual segments. The fundamental requirement found 
at CAS 9904.403-40(b)(4) and the illustration at 9904.403-60(c), both 
of which specifically address pension and insurance costs, seem to 
provide the basic guidance regarding how post-retirement benefit costs 
could be allocated to segments. It can also be argued, however, that 
following the concepts and principles found in CAS 9904.403-40(a)(1), 
post-retirement benefit costs should be directly allocated to segments 
on a bases that reflects the appropriate beneficial or causal 
relationships.
    The appropriate base used to allocate post-retirement benefit costs 
from the home office to segments may differ from that used for pensions 
or insurance. Post-retirement benefit costs often are not salary 
related and the allocation base used for pensions or other insurance 
may be inappropriate for post-retirement benefits. The CASB staff 
believes that special guidance, similar to that used for pensions found 
at CAS 9904.413-50(c)(1), may be needed to describe the appropriate 
base or bases for allocating post-retirement benefit costs to segments. 
Clearly any review of the allocation basis should consider both the 
accounting method used to measure and assign costs and the relationship 
of the benefits to the covered population. This review would have to 
consider how costs for a plan providing both flat benefit health care 
insurance and salary-related life insurance should be allocated. Note 
that this allocation question is similar to the one raised under Topic 
D concerning whether health care and life insurance benefits should be 
treated separately.
    Issue 52: Does CAS 9904.403 provide adequate guidance on the 
allocation of post-retirement benefit costs from home offices to 
segments?
    Issue 53: In addition to the current guidance in CAS 9904.403, is 
there a need for special guidance on the allocation of post-retirement 
benefit costs from home offices to segments?
    Issue 54: What allocation base(s) are appropriate for post-
retirement benefit costs?
    Issue 55: Should the allocation base vary by type of post-
retirement benefit; e.g., health care insurance, prescription drug 
programs 23, life insurance, retiree discounts?
---------------------------------------------------------------------------

    \23\ Prescription drug costs can represent a very significant 
portion of the costs of a health care insurance program. It may be 
appropriate to treat such coverage separately from other health care 
benefits.
---------------------------------------------------------------------------

    Issue 56: Does the accounting method; i.e., cash accounting, 
terminal funding, or accrual accounting, affect the selection of the 
appropriate allocation base?
(ii) Separate Calculation of Segment Post-Retirement Benefit Costs
    CAS 9904.413 and 9904.416 both require that segmented accounting 
24 may have to be used to isolate to a segment costs attributable 
to that segment only. For consistency with the CAS pension Standards, 
and more importantly, to follow the CAS 9904.403 concept of directly 
allocating costs to the greatest extent practicable, a similar 
provision may have to be made for post-retirement benefits. Therefore, 
it may be desirable to require that when the demographics, risk factors 
25, or experience of a segment are materially different from those 
of the post-retirement benefit plan as a whole, post-retirement benefit 
costs should be separately calculated, that is, measured, assigned, and 
allocated at the segment level. In such cases, a segment's accrual 
computations would also need to address the initial allocation of 
assets to a segment and the subsequent annual asset valuations. 
Certainly, if the population of a segment comprises the entire 
population of a post-retirement benefit plan, it would seem to be a 
basic requirement that costs be determined at the segment level. If 
other than accrual accounting is permitted, such a requirement may have 
to be extended so that cash accounting and terminally funded costs are 
directly charged to a segment based on the population that retired from 
that segment.
---------------------------------------------------------------------------

    \24\ As used in this Staff Discussion Paper, ``segmented 
accounting'' refers to the process of measuring, assigning to 
periods, and accumulating all or some elements of the cost at the 
segment level rather than at the home office level.
    \25\ There may be hazardous work performed at some Government 
segments that is not found in other Government and commercial 
segments.
---------------------------------------------------------------------------

    Issue 57: If the post-retirement benefit plan is established at the 
home office or corporate level, should post-retirement costs ever be 
separately calculated at the segment level?
    Issue 58: If the post-retirement benefit plan covers only the 
employees of a particular segment, should the costs of the plan 
attributable to that segment be calculated, that is, measured, 
assigned, and allocated at the segment rather than at the home office 
or corporate level?
    Issue 59: Should refunds and credits ever be accounted for at the 
segment level? If so, please describe the appropriate circumstances.
    Issue 60: Should experience gains and losses ever be accounted for 
at the segment level? If so, please describe the appropriate 
circumstances.
    Issue 61: Should segmented accounting be required if plan 
population or plan design factors affect one segment more or less than 
other segments? If so, please describe the factors that should be 
considered; e.g., mortality, morbidity, special benefit supplements, 
state insurance law.
    Issue 62: Should contractors be permitted to establish special 
segments for retired or other inactive plan participants?
    Issue 63: If funding is considered to be a prerequisite to accrual 
accounting, should the methods described in CAS 9904.413 be used to 
initially allocate assets to the segment and thereafter annually 
updated?
(iii) Funding of Government Segments Only
    Some have suggested that contractors be permitted to fund only the 
post-retirement costs of their segments performing work under 
Government contracts if the contractor uses segmented accounting. This 
would permit contractors with predominately commercial business to 
account for and operate their commercial segments as they determine 
best for that environment.
    Besides the concerns as to what constitutes a plan,26 a 
practical problem would be how to design a trust document that would 
reserve the assets for the exclusive use of only certain employees of a 
plan. Pension and trust law generally view the trust fund as providing 
assets for all participants of a plan. The CASB staff questions whether 
any trust and plan arrangements could be developed that would permit 
segmented accounting and funding, other than establishing and 
maintaining a separate plan and trust for the

[[Page 49548]]

segment. Operating separate plans and trusts could be administratively 
burdensome.
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    \26\  See subtopic B(ii) ``Different accounting methods for 
different benefit types''.
---------------------------------------------------------------------------

    In the preamble to the final rule on pension costing (61 FR 16534), 
the CAS Board, in permitting segmented funding of qualified pension 
plans, noted that while the assets of a plan are subject to the claims 
of all plan participants, the funding requirements and protections of 
ERISA would provide similar funding for all segments. However, the 
segmented funding option is not available to nonqualified pension plans 
because they lack the minimum funding requirements of ERISA. The 
funding of post-retirement benefit costs is an act that provides the 
plan participants with security and assurance that the deferred benefit 
will ultimately be paid. Many post-retirement benefit plans cover 
several segments so that all employees are eligible to earn the same 
benefit regardless of whether a particular segment performs Government 
work. However, the employees of segments performing Government work 
would have a greater level of security if only those segments are 
funded. Thus, there may be legal or employee relationship constraints 
on the establishment and funding of only those segments performing 
Government work.
    Whether a separate trust is established for a given segment, the 
funds in the trust would probably not be directly available to a 
contractor if the Government is ever due a credit or other refund. 
Therefore, as with pensions, any credit or adjustment would come from 
general corporate resources. This use of corporate funds would be 
offset by the trust assets which remain available for the funding of 
benefits. Thus, the trust cannot directly provide the funds for any 
adjustment covering the Government's rights. Nevertheless, it may be 
possible for segmented funding of a plan-wide trust to be evidenced by 
memorandum records and to use general corporate resources for the 
adjustment. Because the plan assets are retained in the trust fund, the 
subsequent recovery of these corporate funds would occur through lower 
future post-retirement benefit contributions. If the use of such 
memorandum records is adequate to protect the Government's interest, 
then separate trust arrangements may not be necessary.
    Others have pointed to CAS 9904.413-50(c)(9) and have suggested 
that contractors be permitted to establish separate retiree segments. 
Modeled after the insurance concept of a retired life reserve, a 
retiree segment can be a useful device whereby retirees are fully 
funded and removed from the active population that is performing work 
under Government contracts. Furthermore, if the CAS Board permits 
contractors to use different accounting methods for different plan 
populations, then permitting separate funding arrangements for those 
populations may be desirable. However, the concerns expressed above 
about segmented funding would apply to different funding provisions for 
different populations within the same plan.
    Issue 64: If funding is considered to be a prerequisite for accrual 
accounting, is it desirable to fund only those segments performing work 
under Government contracts?
    Issue 65: Can a trust arrangement be restricted so that only the 
benefits of plan participants of segments performing work under 
Government contracts are funded?
    Issue 66: Alternatively, could an arrangement be developed whereby 
segmented funding is evidenced using memorandum records within a trust 
established for the post-retirement plan as a whole? Would such 
memorandum records be adequate to protect the Government's interests?
    Issue 67: If separate funding is permitted, how should the assets 
attributable to employees transferring between funded and unfunded 
segments be treated?
Topic I. Accounting for Plan Terminations, Liability Settlements, and 
Benefit Curtailments
    Under paragraph 103 of SFAS 106, changes that a company voluntarily 
makes to its post-retirement benefit plan that can be viewed as an 
extraordinary event; e.g., plan terminations and benefit curtailments, 
should be dealt with separately from normal modifications to the design 
of an ongoing plan. Because the estimated liabilities of post-
retirement benefit plans can be dramatically affected by a variety of 
factors, the CAS Board may wish to consider if such changes require 
special treatment as some type of extraordinary event.
    Although court decisions have somewhat limited a company's ability 
to eliminate or reduce benefits, contractors can make substantial 
changes to the benefits or even terminate a plan. GAAP, as represented 
by SFAS 88, SFAS 106, and APB 30, views such major and infrequent 
changes to the liability as extraordinary events.27 These events; 
e.g., plan terminations and benefit curtailments, may require special 
treatment under certain conditions. CAS 9904.413-50(c)(12) and 
9904.416-50(a)(1)(vi) require that a credit be allocated in the current 
contract period based on the amount that reverts; that is, is refunded, 
from the trust fund or reserve. CAS 9904.413-50(c)(12) extends this 
requirement to the gain that occurs when a plan is frozen or benefits 
are curtailed.
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    \27\ The termination of a plan, and possibly a major benefit 
curtailment, is a change in the accounting basis for the cost 
accrual; that is, the assumption that the plan is an ongoing, 
permanent undertaking has been negated. The CAS Board uses the 
9904.413-50(c)(12) adjustment mechanism, rather than a reference to 
the CAS provision for accounting practice changes, because such an 
event is equated to the GAAP concept of an extraordinary event 
wherein the effect of the event on prior period costs must be fully 
recognized in the current period.
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    If benefits are curtailed or dramatically increased, as long as the 
contracting relationship continues and costs are computed for the plan, 
one possibility is to amortize the gain or loss as would be the case 
for other experience gains or losses or plan changes. This approach 
would cause the least disruption to the forward-pricing process. 
However, such gains and losses can be quite large. In an environment of 
a declining or an expanding defense business base, equity may be better 
served by either immediate recognition or accelerated amortization. Any 
proposed solution to large gains attributable to benefit curtailments 
must also address the treatment of large losses due to benefit 
improvements. Therefore, a company's post-retirement benefit liability 
that is tied to Medicare, will have to be adjusted as Medicare benefits 
change .
    Because large changes in post-retirement benefit liabilities may 
permanently reduce or increase the liability and costs of the post-
retirement benefit plan, it may be preferable to directly adjust 
contract costs and prices. Otherwise, if a contractor's fixed-price 
contract backlog was sufficiently great, the effect of a change which 
is attributable to prior period costs being over- or under-estimated 
because benefit changes could not be anticipated, may never be credited 
or debited to the Government.
    If a plan is terminated or frozen, then no further costs will be 
computed for that plan against which an amortization installment can be 
credited. As long as the contracting relationship continues, the 
amortization installment credits could be reflected in ongoing contract 
costs and prices. But, because there would be no further calculation of 
costs for that post-retirement benefit plan, a mechanism to effect the 
adjustment would have to be developed. If a replacement plan is 
established, such a mechanism would prevent duplicate charges from 
being made for the same

[[Page 49549]]

liability. Because there has been little funding of post-retirement 
benefit plans, the CAS Board is aware that an immediate period 
adjustment could result in a claim against the Government for a 
substantial unfunded actuarial liability.
    A third type of extraordinary event that may require special 
treatment is that of a plant closing or major layoff. Post-retirement 
benefits do not have the same vesting rights as pensions; i.e., 
benefits are often not vested until the participant is eligible to 
retire. From an actuarial perspective, there could be a large 
termination of employment gain when there is a plant closing or massive 
layoff. However, the CASB staff presumes that such events would usually 
coincide with a segment closing. Nevertheless, this presumption may 
have to be examined further.
    Finally, the CAS Board may wish to consider whether the gain or 
loss from a liability settlement should be treated separately from 
other asset gains and losses. Any special recognition or acceleration 
of amortizations would have to be balanced with the treatment of asset 
gains and losses and the treatment of terminal funding. In fact, since 
the majority of post-retirement benefit plans are currently unfunded or 
funded at minimal levels, these settlements are most analogous to 
terminally funding a previously unrecognized cost.
    Issue 68: Should there be special accounting treatment for the 
effects of the termination of a post-retirement benefit plan? Should 
the treatment methodology be dependent on whether assets revert to a 
contractor?
    Issue 69: Should there be special accounting treatment for the 
effects of a post-retirement benefit curtailment?
    Issue 70: Should there be special accounting treatment for the 
effects of the settlement of post-retirement benefit liabilities?
    Issue 71: Are there other non-recurring events that should be 
considered for special accounting treatment?
    Issue 72: What methodology; e.g., immediate recognition or 
accelerated amortization, should be used for the special accounting of 
these extraordinary events?
    a. Should the special accounting treatment differ depending on 
whether or not the contractual relationship with the Government 
continues?
    b. If the effect of the extraordinary event is treated as an 
actuarial gain or loss, should the amortization of the gain or loss be 
accelerated?
    c. Should the special accounting treatment apply if only one type 
of benefit is affected?
Topic J. Adjustments for Segment Closings
    In the event a contractor closes a segment, issues regarding how 
the Government should recognize such events arise. Further, the 
resolution of this issue may influence how a contractor converts its 
cost accounting practice for post-retirement benefits from a cash to an 
accrual basis. Also associated with the issue of any adjustment for 
segment closings is how the initial unfunded liability is treated.
    For pension costing purposes the CAS Board has defined what 
constitutes a segment closing (see CAS 9904.413). CAS 9904.413 has 
historically contained a provision requiring an immediate period 
adjustment of prior pension costs when a segment closing occurs. CAS 
9904.416 focuses on typical insurance costs where the practice is to 
determine costs based on the risk exposure for the upcoming period 
only. CAS 9904.416 does not provide specific guidance on the 
recognition of surplus assets accumulated through the advanced funding 
of retiree insurance when a segment closes.
    Any provision concerning treatment of post-retirement benefit costs 
when a segment closes will have to consider similar questions to those 
addressed in CAS 9904.413. These questions include: what constitutes a 
``segment closing''; what is the appropriate adjustment method; and how 
should the adjustment amount be measured. Any answers to these 
questions should be consistent or reconciled with CAS 9904.413-
50(c)(12).
    As previously discussed, there has been little or no funding of the 
large liabilities of post-retirement benefits. If the concept, which is 
found in the pension Standards, that segment closing adjustments should 
cover both over- and under-funded plans is applied in the case of post-
retirement benefits, it could immediately create large claims against 
the Government for unfunded post-retirement benefit liabilities 
previously not included in costs charged to or priced into contracts. 
Since neither contractors nor the Government sought the accrual of 
post-retirement benefit liabilities prior to the promulgation of SFAS 
106, there is a question as to the appropriate adjustment recognition 
for such unfunded post-retirement benefit liabilities when a segment 
closes. And, there is the practical question as to whether Federal 
agencies would have budget appropriations available to fully cover 
contractor claims for these large unfunded liabilities.
    Some may argue that to the extent the Government benefited by not 
recognizing the accrual of the liability and paid the lower costs that 
cash accounting produced, the Government bears some responsibility to 
see that funds are available to secure the benefits earned by long-term 
government contract employees. Acording to many, in Remington Arms, 
supra, the Government was held to a higher level of accountability than 
in many other contracting relationships because the Government was the 
owner and sole beneficiary of the operations at the GOCO. Furthermore, 
the special nature of a GOCO arrangement would have allowed the 
Government to influence the decision whether contract costs were 
recognized on a cash or accrual basis. In most other cases, where there 
has not been a long term special relationship and a contractor has made 
an independent financial decision to use cash accounting, many believe 
the Government has little, if any, responsibility for the unfunded 
post-retirement liability.
    If accrual accounting is mandated, a reasonable solution may be a 
transition rule that phases in the recognition of these historically 
neglected unfunded liabilities. The period of the phase-in should be 
developed in coordination with provisions for the recognition of the 
initial unfunded liability. Such a phase-in may provide a balance 
between the Government's responsibility for increased costs for a 
mandatory accounting change and a contractor's practice of not 
recognizing these costs on an accrual basis in the past. The need for 
special treatment of any unfunded liability derives from the cumulative 
nature of post-retirement benefit liabilities and distinguishes them 
from most other costs.
    If a contractor is permitted a choice of accounting methods and 
chooses cash accounting or terminal funding, many would argue that such 
an election would preclude the contractor from making any claims that 
the Government share in the unfunded actuarial liability when a segment 
closes. On the other hand, if accrual accounting is not permitted, the 
question then becomes what is the Government's responsibility, if any, 
for the lack of accrual recognition. However, it is difficult to 
imagine that accrual accounting for a valid liability would not be 
permitted. And if the liability was not found to be valid, that fact 
would seem to preclude any claim when a segment closes.
    Several contractor representatives have asked that the CAS Board

[[Page 49550]]

specifically provide that any adjustment charge for unfunded post-
retirement benefit liabilities may be used as an offset to any CAS 
9904.413-50(c)(12) adjustment credit for overfunded pension plans. The 
CASB staff believes that this is not necessary. When a segment closes, 
any adjustment amount measured for post-retirement benefit plans is to 
be reported to the parties for consideration when negotiating the 
overall settlement of costs and credits associated with the segment 
closing. The parties are expected to negotiate an agreement on the 
treatment of any post-retirement benefit segment closing adjustment and 
the CAS 9904.413-50(c)(12) pension adjustment that is equitable based 
on the facts and circumstances of the particular segment closing.
    Finally, if it is decided that an initial unfunded liability is to 
be excluded from Government contract cost recognition, then that 
portion of the assets and liabilities which existed when accrual 
recognition began should be adjusted for interest and excluded from any 
segment closing adjustment. A similar, but more complicated, exclusion 
would be needed if all past service liabilities are excluded from cost 
recognition. The CASB staff notes that such exclusions could limit the 
need for an adjustment to simply an accelerated, immediate period 
adjustment of outstanding experience gain and loss amortization 
installments. In fact, if the effect of the outstanding gain and loss 
adjustment does not meet the materiality criteria in CAS 9903.305, 
there may not be a need for a segment closing adjustment for post-
retirement benefits.
    Issue 73: Should there be a segment closing adjustment for post-
retirement benefit costs? Please explain. Is your answer dependent upon 
how the conversion, if any, from cash accounting to accrual accounting 
is handled?
    Issue 74: Except for GOCOs, what degree of responsibility does the 
Government have, if any, for a contractor's past practice of not 
accruing the costs for post-retirement benefit?
    Issue 75: If the Government does have some degree of 
responsibility, how should the Government recognize that 
responsibility?
    Issue 76: Independent of the Remington Arms decision, what degree 
of responsibility, if any, does the Government have, if any, for a 
GOCO's past practice of not accruing the costs for post-retirement 
benefit?
    a. How should the Government's responsibility in the case of a GOCO 
be recognized in any phase-in provision for a segment closing 
adjustment?
    b. Are there any other special contracting relationships that 
should be considered for similar treatment?
    Issue 77: If accrual accounting is permitted, but not mandated, 
would a contractor's election to use cash accounting or terminal 
funding preclude the use of accrual accounting to determine the 
adjustment for a segment closing?
    Issue 78: If accrual accounting is not permitted, does the required 
use of cash accounting or terminal funding preclude the use of accrual 
accounting to determine the adjustment for a segment closing?
    Issue 79: Should there be any explicit coordination between any 
segment closing adjustment provision for post-retirement benefit costs 
and the CAS 9904.413-50(c)(12) segment provision closing adjustment for 
pension costs?
    Issue 80: If accrual accounting is permitted, should the treatment 
of the initial unfunded liability and other elements of past service 
liability be coordinated with any segment closing adjustment provision? 
If there is no Government contract cost recognition of the initial 
unfunded liability, is a coordinated segment closing provision still 
needed?

[FR Doc. 96-24091 Filed 9-19-96; 8:45 am]
BILLING CODE 3110-01-P