[Federal Register Volume 73, Number 170 (Tuesday, September 2, 2008)]
[Proposed Rules]
[Pages 51261-51263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20255]



Office of Federal Procurement Policy

48 CFR Part 9904

Harmonization of Cost Accounting Standards 412 and 413 With the 
Pension Protection Act of 2006

ACTION: . Advance Notice of Proposed Rulemaking.


SUMMARY: The Office of Federal Procurement Policy, Cost Accounting 
Standards Board, invites public comments concerning an Advance Notice 
of Proposed Rulemaking on the harmonization of Cost Accounting 
Standards 412 and 413 with the Pension Protection Act of 2006.

DATES: Comments must be in writing and must be received by November 3, 

ADDRESSES: The full text of the Advance Notice of Proposed Rulemaking, 
including the Board's response to public comments on the Staff 
Discussion Paper and the draft proposed amendments to Cost Accounting 
Standards 412 and 413, is available at: http://www.whitehouse.gov/omb/procurement/casb/2008_anprm.pdf and http://www.regulations.gov.
    All comments to this Advance Notice of Proposed Rulemaking must be 
in writing. Due to delays in the receipt and processing of mail, 
respondents are strongly encouraged to submit comments electronically 
to ensure timely receipt. Electronic comments may be submitted in any 
one of three ways:
    1. Comments may be directly sent via http://www.regulations.gov--a 
Federal E-Government Web site that allows the public to find, review, 
and submit comments on documents that agencies have published in the 
Federal Register and that are open for comment. Simply type ``CAS 
Pension Harmonization ANPRM'' (without quotes) in the Comment or 
Submission search box, click Go, and follow the instructions for 
submitting comments;
    2. Comments may be included in an e-mail message sent to 
[email protected]. The comments may be submitted in the text of the e-
mail message or as an attachment; or
    3. Comments may also be submitted via facsimile to (202) 395-5105.

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    Be sure to include your name, title, organization, postal address, 
telephone number, and e-mail address in the text of your public comment 
and reference ``CAS Pension Harmonization ANPRM'' in the subject line. 
Comments received by the date specified above will be included as part 
of the official record.
    Please note that all public comments received will be available in 
their entirety at http://www.whitehouse.gov/omb/procurement/casb/index_public_comments.html and http://www.regulations.gov after the 
close of the comment period.

FOR FURTHER INFORMATION CONTACT: Eric Shipley, Project Director, Cost 
Accounting Standards Board (telephone: 410-786-6381).


A. Regulatory Process

    Rules, Regulations and Standards issued by the Cost Accounting 
Standards Board (Board) are codified at 48 CFR Chapter 99. The Office 
of Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the 
Board, prior to the establishment of any new or revised Cost Accounting 
Standard (CAS or Standard), complete a prescribed rulemaking process. 
The process generally consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of Government contracts as a result of the adoption of a 
proposed Standard.
    2. Promulgate an Advance Notice of Proposed Rulemaking.
    3. Promulgate a Notice of Proposed Rulemaking.
    4. Promulgate a Final Rule.

This Advance Notice of Proposed Rulemaking is step two of the four-step 

B. Background and Summary

    The Office of Federal Procurement Policy (OFPP), Cost Accounting 
Standards Board, is today releasing an Advance Notice of Proposed 
Rulemaking (ANPRM) on the harmonization of Cost Accounting Standards 
(CAS) 412 and 413 with the Pension Protection Act (PPA) of 2006 (Pub. 
L. 109-280, 120 Stat. 780). The Office of Procurement Policy Act, 41 
U.S.C. 422(g)(1), requires the Board to consult with interested persons 
concerning the advantages, disadvantages, and improvements anticipated 
in the pricing and administration of Government contracts as a result 
of the adoption of a proposed Standard prior to the promulgation of any 
new or revised CAS.
    The PPA amended the minimum funding requirements and tax-
deductibility of contributions to pension plans under the Employee 
Retirement Income Security Act of 1974 (ERISA). The PPA requires the 
Board to revise Standards 412 and 413 of the CAS to harmonize with the 
amended ERISA minimum required contribution not later than January 1, 
    On July 3, 2007, the Board published a Staff Discussion Paper (72 
FR 36508) in accordance with 41 U.S.C. 422(g) to solicit public views 
with respect to the Board's statutory requirement to ``harmonize'' CAS 
412 and 413 with the PPA. Differences between CAS 412 and 413 and the 
PPA, as well as issues associated with pension harmonization were 
identified in the Staff Discussion Paper (SDP). Respondents were 
invited to identify and comment on any issues related to pension 
harmonization that they felt were important. The SDP identified issues 
related to pension harmonization and did not necessarily represent the 
position of the Board.
    The SDP noted basic conceptual differences between the CAS and the 
PPA that affect all contracts and awards subject to CAS 412 and 413. 
The PPA utilizes a settlement or liquidation approach to value pension 
plan assets and liabilities, including the use of accrued benefit 
obligations and interest rates based on current corporate bond rates. 
On the other hand, CAS utilizes the going concern approach to plan 
asset and liability valuations, i.e., assumes the company (or in this 
case the pension plan and trust) will continue in business, and follows 
accrual accounting principles that incorporate long-term, going concern 
assumptions about future asset returns, future years of employees' 
service, and future salary increases. These assumptions about future 
events are absent from the settlement approach.
    The full text of the public comments to the SDP is available at: 
http://www.whitehouse.gov/omb/procurement/casb/index_public_comments.html under ``Combined Public Comments on the Staff Discussion 
Paper on the Harmonization of Cost Accounting Standards 412 and 413 
with the Pension Protection Act of 2006,'' and http://www.regulations.gov.
    The Board believes that the accounting for pension costs for 
contract costing purposes should continue to reflect the long-term 
nature of the pension plan for a going-concern. The Cost Accounting 
Standards are intended to provide cost data not only to determine the 
incurred cost for the current period, but also to provide consistent 
and reasonable cost data for forward-pricing contracts over the near 
future. Financial statement accounting, on the other hand, is intended 
to report the change in an entity's financial position and results of 
operations during the current period. ERISA does not prescribe a unique 
cost or expense for a period. The minimum required contribution rules 
of ERISA, as amended by the PPA, instead require that the plan achieves 
funding of its current settlement liability within a short period of 
time. On the other hand, the ERISA tax-deductible maximum contribution 
is based on the plan's long-term benefit levels plus a reserve against 
adverse experience. ERISA permits the entity a wide contribution range 
that allows the company to set long-term financial management decisions 
on the funding of the ongoing pension plan.
    The Board recognizes that contract cost accounting for a going 
concern must, nevertheless, address the risk associated with inadequate 
funding of a plan's settlement liability and therefore proposes 
implementation of a minimum liability based on the accrued benefits 
valued based on corporate bond rates. Furthermore, harmonization with 
the PPA minimum required contribution, which is based on the ERISA 
``funding target'' and ``target normal cost,'' will help alleviate the 
disparity in timing between ERISA's minimum funding requirements and 
recognition of such required funding in contract costing. Once 
harmonization is achieved, maintaining the going concern basis for 
contract costing allows contractors to set long-term funding goals that 
avoid undue cost/contribution volatility.
    The Board continues to believe that issues of benefit design, 
investment strategy, and financial management decisions for the pension 
plan fall under the contractor's purview. The Board also believes that 
the Cost Accounting Standards must remain sufficiently robust to 
accommodate evolving changes in financial statement reporting and 
theory as well as Congressional changes to ERISA.
    After considering the effects of accelerating recognition of 
actuarial gains and losses, the Board proposes changing the 
amortization period for gains and losses to a 10-year amortization 
period from its current 15-year period to provide more timely 
adjustment of plan experience while not introducing unmanageable 
volatility. This shorter amortization period also more closely follows 
the 7-year period

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required by ERISA to fully fund the plan's settlement liability.
    In assessing the potential for volatility that would adversely 
impact forward pricing, the Board noted that for pension plans that are 
close to being fully funded, the sudden and unpredictable elimination 
or emergence of significant pension costs has been problematic for many 
years. Accordingly, the Board proposes to revise the ``assignable cost 
limitation'' so that it does not apply until the actuarial value of 
assets equals or exceeds 125% of the actuarial accrued liability plus 
normal cost. In addition, the actuarial gains that give rise to surplus 
assets will be amortized over 10 years and will reduce the surplus in 
an orderly and timely fashion.
    The Board proposes a specific transition method for implementing 
harmonization. This transition method would apply to all contractors 
subject to CAS 412 and 413 through full CAS-coverage or Federal 
Procurement Regulation (FAR) Sec.  31.205-6(j). The proposed transition 
will phase-in revisions to the liability and normal cost measurement 
and to the amortization periods during the first 5 years as new 
contracts are priced and awarded so that the cost effects of 
harmonization are gradually recognized.
    The proposed transition phase-in lasts for a specific 5-year period 
that tracks the typical contracting cycle. More importantly, the 
proposed transition phase-in should provide at least partial 
harmonization relief for contractors with contracts that are exempt 
from CAS-Coverage. At the same time the proposed phase-in provisions 
are intended to make the possible cost increases due to harmonization 
more manageable for the procuring agencies.
    The draft proposed rule allows companies to use the same actuarial 
methods and valuation software for ERISA, financial statement and 
government contract costing purposes. Except for the interest rate, the 
same general set of actuarial assumptions can be used for all three 
purposes. This will allow agencies and government auditors to place 
reliance on data from ERISA and financial statement valuations, and 
allow contractors to avoid unnecessary actuarial effort and expense.

C. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this draft proposed rule, because this rule imposes no paperwork burden 
on offerors, affected contractors and subcontractors, or members of the 
public which requires the approval of OMB under 44 U.S.C. 3501, et seq. 
The records required by this draft proposed rule are those normally 
maintained by contractors who claim reimbursement of post-retirement 
benefit costs under government contracts.

D. Executive Order 12866 and the Regulatory Flexibility Act

    Because most contractors must measure and report their post-
retirement benefit liabilities and expenses in order to comply with the 
requirements of SFAS 106 for financial accounting purposes, the 
economic impact of this draft proposed rule on contractors and 
subcontractors is expected to be minor. As a result, the Board has 
determined that this draft proposed rule will not result in the 
promulgation of an ``economically significant rule'' under the 
provisions of Executive Order 12866, and that a regulatory impact 
analysis will not be required. Furthermore, this draft proposed rule 
does not have a significant effect on a substantial number of small 
entities because small businesses are exempt from the application of 
the Cost Accounting Standards. Therefore, this draft proposed rule does 
not require a regulatory flexibility analysis under the Regulatory 
Flexibility Act of 1980.

Paul A. Denett,
Chairperson, Cost Accounting Standards Board.
[FR Doc. E8-20255 Filed 8-29-08; 8:45 am]