[Federal Register Volume 75, Number 89 (Monday, May 10, 2010)]
[Proposed Rules]
[Pages 25981-26024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9783]



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Part III





Office of Management and Budget





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Office of Federal Procurement Policy



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48 CFR Part 9904



Cost Accounting Standards: Harmonization of Cost Accounting Standards 
412 and 413 With the Pension Protection Act of 2006; Proposed Rule

Federal Register / Vol. 75 , No. 89 / Monday, May 10, 2010 / Proposed 
Rules

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


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

AGENCY: Office of Management and Budget (OMB), Office of Federal 
Procurement Policy (OFPP), Cost Accounting Standards Board (Board).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards Board (Board), invites public comments concerning 
the harmonization of Cost Accounting Standards 412 and 413 with the 
Pension Protection Act (PPA) of 2006. The PPA amended the minimum 
funding requirements for defined benefit pension plans. The PPA 
required the Board to harmonize with PPA the CAS applicable to the 
Government reimbursement of the contractor's pension costs. The Board 
has proposed several changes to harmonize CAS with PPA, including the 
recognition of a ``minimum actuarial liability'' consistent with the 
PPA minimum required contribution. The proposed CAS changes will lessen 
the difference between the amount of pension cost reimbursable to the 
contractor in accordance with CAS and the amount of pension 
contribution required to be made by the contractor as the plan sponsor 
by PPA.

DATES: Comments must be in writing and must be received by the July 9, 
2010.

ADDRESSES: All comments to this Notice of Proposed Rulemaking (NPRM) 
must be in writing. You may submit your comments via U.S mail. However, 
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:
     Federal eRulemaking Portal: 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 NPRM'' (without 
quotes) in the Comment or Submission search box, click Go, and follow 
the instructions for submitting comments.
     E-mail: 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;
     Facsimile: Comments may also be submitted via facsimile to 
(202) 395-5105; or
     Mail: If you must submit your responses via regular mail, 
please mail them to: Office of Federal Procurement Policy, 725 17th 
Street, NW., Room 9013, Washington, DC 20503, Attn: Raymond J. M. Wong. 
Be aware that due to the screening of U.S. mail to this office, there 
will be several weeks delay in the receipt of mail. Respondents are 
strongly encouraged to submit responses electronically to ensure timely 
receipt.
    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 NPRM'' 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/casb_index_public_comments/ and http://www.regulations.gov after the close of the comment 
period.
    For the convenience of the public, a copy of the proposed 
amendments to Cost Accounting Standards 412 and 413 shown in a ``line-
in/line-out'' format is available at: http://www.whitehouse.gov/omb/procurement_casb_index_fedreg/ and http://www.regulations.gov.

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

SUPPLEMENTARY INFORMATION:

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, the Staff Discussion Paper (SDP).
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    This NPRM is step three of the four-step process.

B. Background and Summary

    The Office of Federal Procurement Policy (OFPP), Cost Accounting 
Standards Board, is today releasing a Notice of Proposed Rulemaking 
(NPRM) 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 for, and the tax-
deductibility of contributions to, defined benefit pension plans under 
the Employee Retirement Income Security Act of 1974 (ERISA). Section 
106 of the PPA requires the Board to revise Standards 412 and 413 of 
the CAS to harmonize with the amended ERISA minimum required 
contribution.
    In addition to the proposed changes for harmonization, the Board 
has proposed several technical corrections to cross references and 
minor inconsistencies in the current rule. These technical corrections 
are not intended to change the meaning or provisions of CAS 412 and 413 
as currently published. The technical corrections for CAS 412 are being 
made to paragraphs 9904.412-30(a)(1) and (9), paragraphs 9904.412-
50(c)(1), (2) and (5), and paragraph 9904.412-60(c)(13). In CAS 413, 
the technical corrections are being made to paragraph 9904.413-
30(a)(1), subsection 9904.413-40(c), and paragraphs 9904.413-
50(c)(1)(i) and 9904.413-60(c)(12).

Prior Promulgations

    On July 3, 2007, the Board published a Staff Discussion Paper (SDP) 
(72 FR 36508) 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 SDP. 
Respondents were invited to

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identify and comment on any issues related to pension harmonization 
that they felt were important. The SDP reflected research accomplished 
to date by the staff of the Board, and was issued by the Board in 
accordance with the requirements of 41 U.S.C. 422(g). 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 employee 
service, and future salary increases. These assumptions about future 
events are absent from the settlement approach utilized by PPA.
    On September 2, 2008, the Board published the Advance Notice of 
Proposed Rulemaking (ANPRM) (73 FR 51261) to solicit public views with 
respect to the Board's statutory requirement to ``harmonize'' CAS 412 
and 413 with the PPA. Respondents were invited to comment on the 
general approach to harmonization and the proposed amendments to CAS 
412 and 413. The ANPRM reflected public comments in response to the SDP 
and research accomplished to date by the staff of the Board, and was 
issued by the Board in accordance with the requirements of 41 U.S.C. 
422(g).
    Because of the complexity and technical nature of the proposed 
changes, many respondents asked that the Board extend the comment 
period to permit submission of additional or supplemental public 
comments. On November 26, 2008, the Board published a notice extending 
the comment period for the ANPRM (73 FR 72086).
    The ANPRM proposed nine general changes to CAS 412 and 413 that 
were intended to harmonize the CAS with the PPA minimum required 
contributions while controlling cost volatility between periods. The 
primary changes proposed by the ANPRM were the recognition of a 
``minimum actuarial liability,'' special recognition of ``mandatory 
prepayment credits,'' an accelerated gain and loss amortization, and a 
revision of the assignable cost limitation. Other proposed changes 
addressed the PPA's mandatory cessation of benefit accruals for 
severely underfunded plans, the projection of flat dollar benefits, 
recognition of accrued contribution values on a discounted basis, and 
interest on prepayments credits and prior period unfunded pension 
costs. The final category of proposed changes provided for a phased-in 
transition of the amendments to mitigate the initial increase in 
contract price.

Public Comments

    The Board received 17 public comments and 2 supplemental public 
comments to the ANPRM, including the extension period. These comments 
came from contractors, industry associations, Federal agencies, and the 
actuarial profession. The Board appreciates the efforts of all parties 
that submitted comments, and found their depth and breadth to be very 
informative. A brief summary of the comments follows in Section C--
Public Comments to the ANPRM.
    The NPRM reflects public comments in response to the ANPRM, as well 
as to research accomplished to date by the staff of the Board in the 
respective subject areas, and is issued by the Board in accordance with 
the requirements of 41 U.S.C. 422(g).

Conclusions

    The Board continues to believe that the accounting for pension 
costs for Government contract costing purposes should reflect the long-
term nature of the pension plan for a going concern. As discussed in 
the ANPRM, 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 the 
forward-pricing of Government 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 relatively 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 a wide contribution range that allows 
the company to establish 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 address the risks to both the contractor and the 
Government that are associated with inadequate funding of a plan's 
settlement liability. The NPRM therefore proposes implementation of a 
minimum actuarial liability and minimum normal cost that is based on 
currently accrued benefits that have been valued using corporate bond 
rates. Furthermore, recognition of the minimum actuarial liability and 
normal cost that are consistent with the basis for the ERISA ``funding 
target'' and ``target normal cost,'' will alleviate the disparity 
between the CAS assigned cost and ERISA's minimum required 
contribution. Once harmonization is achieved, maintaining the going 
concern basis for contract costing allows contractors to set long-term 
funding goals that avoid undue cost or contribution volatility.
    The Board agrees with the public comments that since the general 
approach to harmonization is tied to the minimum actuarial liability, 
the recognition proposed in the ANPRM for post harmonization 
``mandatory'' prepayment credits was unnecessary and overly complex. In 
reviewing the proposed treatment of mandatory prepayments, the Board 
noted that because the normal cost and actuarial accrued liability have 
been harmonized with the minimum actuarial liability and minimum normal 
cost, providing for supplemental recognition of the mandatory 
prepayment credits would overstate the appropriate period cost. The 
NPRM does not include any special recognition of mandatory prepayment 
credits.
    The Board continues to believe that issues of benefit design, 
investment strategy, and financial management of 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 accounting theory and reporting as well 
as Congressional changes to ERISA.
    After considering the effects of accelerating the recognition of 
actuarial gains and losses and to provide more timely adjustment of 
plan experience without introducing unmanageable volatility, the NPRM 
proposes changing the amortization period for gains and losses to a 10-
year amortization period from its current 15-year period. This shorter 
amortization period more closely follows the 7-year period

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required by ERISA to fully fund the plan's settlement liability.
    The Board believes the 10-year minimum amortization period, 
including the required amortization of any change in unfunded actuarial 
liability due to switching from the actuarial accrued liability to the 
minimum actuarial liability, or from the minimum actuarial liability 
back to the actuarial accrued liability, provides sufficient smoothing 
of costs to reduce volatility. Therefore, the NPRM does not include any 
assignable cost limitation buffer. Under the NPRM, once the assignable 
cost limitation is exceeded, the assigned pension cost continues to be 
limited to zero.
    The Board proposes a specific transition method for implementing 
harmonization and moderating its cost effects. The proposed 5-year 
transition method will phase-in the recognition of any adjustment of 
the actuarial accrued liability and normal cost. This transition method 
would apply to all contractors subject to CAS 412 and 413.

Benefits

    The proposed rule of this NPRM harmonizes the disparity between the 
PPA minimum contribution requirements and Government contract costing. 
The proposed rule should provide relief for the contractors' concerns 
with indefinite delays in recovery of cash expenditures while 
mitigating the expected pension cost increases that will impact 
Government and contractor budgets. The proposed rule should also reduce 
cost volatility between periods and thereby enhance the budgeting and 
forward pricing process. This will assist in meeting the uniformity and 
consistency requirements described in the Board's Statement of 
Objectives, Policies and Concepts (57 FR 31036), July 13, 1992).
    The NPRM allows companies to use the same actuarial methods and 
valuation software for ERISA, financial statements, 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 Government agencies and auditors to place 
reliance on data from ERISA and financial statement valuations while 
allowing contractors to avoid unnecessary actuarial effort and expense.

Goals for Harmonization

    This proposed rule is based upon the following goals for achieving 
pension harmonization and transition that the Board established in the 
ANPRM and reaffirms in this NPRM:
(1) Harmonization Goals
    (a) Minimal changes to CAS 412 and 413.
    (b) No direct adoption of ERISA as amended by the PPA, to avoid any 
change to contract cost accounting without prior CAS Board approval 
since Congress will amend ERISA in the future.
    (c) Preserve matching of costs with causal/beneficial activities 
over the long-term.
    (d) Mitigate volatility (enhance predictably).
    (e) Make ``user-friendly'' changes (avoid complexity to the degree 
possible).
(2) Goals for Transition to Harmonization
    (a) Minimize undue immediate impact on contract prices and budgets.
    (b) Transition should work for contractors with either CAS or FAR 
covered contracts.

Summary Description of Proposed Standard

    The primary proposed harmonization provisions are self-contained 
within the ``CAS Harmonization Rule'' at 9904.412-50(b)(7). This 
structure eliminates the need to revise many long-standing provisions 
and clearly identifies the special accounting required for 
harmonization. Proposed revisions to other provisions are necessary to 
harmonization and mitigate volatility. This proposed rule makes general 
changes to CAS 412 and 413 that are intended to harmonize the CAS with 
the PPA minimum required contributions while controlling cost 
volatility between periods. These general changes are:
    (1) Recognition of a ``minimum actuarial liability.'' CAS 412 and 
413 continue to measure the actuarial accrued liability and normal cost 
based on long-term, ``best-estimate'' actuarial assumptions, projected 
benefits, and the contractor's established immediate gain actuarial 
cost method. However, in order to ensure that the measured costs 
recognize the settlement liability and normal cost as minimum values, 
the proposed rule requires that the measured pension cost must be re-
determined using the minimum actuarial liability and minimum normal 
cost if the criteria of all three (3) ``triggers'' set forth in the CAS 
Harmonization Rule are met.
    (i) If the minimum required amount exceeds the pension cost 
measured without regard to the minimum liability and minimum normal 
cost, then the contractor must determine which total period liability, 
i.e., actuarial liability plus normal cost, must be used;
    (ii) If the sum of the minimum actuarial liability plus the minimum 
normal cost measured on a settlement basis exceeds the sum of actuarial 
accrued liability plus normal cost measured on a long-term basis, then 
the contractor must re-measure the pension cost for the period using 
the minimum actuarial liability and minimum normal cost; and
    (iii) If pension cost re-measured using the minimum actuarial 
liability and minimum normal cost exceeds the pension cost originally 
measured using the actuarial accrued liability and normal cost, then 
the re-measured pension cost is used for the assignment and allocation 
of pension costs for the period. Furthermore, the minimum actuarial 
liability and minimum normal costs are used for all purposes of 
measurement, assignment, and allocation under CAS 412.
    The minimum actuarial liability definition is consistent with the 
PPA funding target and the Statement of Financial Accounting Standard 
No. 87 (FAS 87) ``accumulated benefit obligation.'' The minimum normal 
cost is similarly defined to be consistent with the FAS 87 service cost 
(without salary projection) and the PPA target normal cost.
    The proposed rule does not require a change to the contractor's 
actuarial cost method used to compute pension costs for CAS 412 and 413 
purposes. Therefore, any change in actuarial cost method, including a 
change in asset valuation method, would be a ``voluntary'' change in 
cost accounting practice and must comply with the provisions of CAS 412 
and 413.
    (2) Accelerated Gain and Loss Amortization. The proposed rule 
accelerates the assignment of actuarial gains and losses by decreasing 
the amortization period from fifteen to ten years. This accelerated 
assignment will reduce the delay in cost recognition and is consistent 
with the shortest amortization period permitted for other portions of 
the unfunded actuarial liability (or actuarial surplus).
    (3) Revision of the Assignable Cost Limitation. The proposed rule 
does not change the basic definition of the assignable cost limitation 
and continues to limit the assignable cost to zero if assets exceed the 
actuarial accrued liability and normal cost. Under the proposed rule, 
the actuarial accrued liability and normal cost used to determine the 
assignable cost limitation are adjusted for the minimum values if 
applicable.
    (4) Mandatory Cessation of Benefit Accruals. This proposed rule 
will exempt any curtailment of benefit

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accrual required by ERISA from immediate adjustment under CAS 413-
50(c)(12). Voluntary benefit curtailments will remain subject to 
immediate adjustment under CAS 413-50(c)(12). A new subparagraph has 
been added to CAS 413-50(c)(12) that addresses the accounting for the 
benefit curtailment or other segment closing adjustment in subsequent 
periods.
    (5) Projection of Flat Dollar Benefits. The proposed amendments 
will allow the projection of increases in specific dollar benefits 
granted under collective bargaining agreements. The recognition of such 
increases will place reliance on criteria issued by the Internal 
Revenue Service (IRS). As with salary projections, the rule will 
discontinue projection of these specific dollar benefit increases upon 
segment closing, which uses the accrued benefit cost method to measure 
the liability.
    (6) Asset Values and Present Value of Contributions. For 
nonqualified defined benefit plans, the proposed rule discounts 
contributions at the long-term interest assumption from the date paid, 
even if made after the end of the year. For qualified defined benefit 
plans, this proposed rule would accept the present value of accrued 
contributions and the market value (fair value) of assets recognized 
for ERISA purposes. Using the ERISA recognition of accrued 
contributions in determining the market value of assets will avoid 
unexpected anomalies between ERISA and the CAS, as well as support 
compliance and audit efforts. The market and actuarial values of assets 
should include the present value of accrued contributions.
    (7) Interest on Prepayments Credits. Funding more than the assigned 
pension cost is often a financial management decision made by the 
contractor, although funding decisions must consider the minimum 
funding requirements of ERISA. Since all monies deposited into the 
funding agency share equally in the fund's investment results, the 
prepayment is allocated a share of the investment earnings and 
administrative expenses on the same basis as separately identified 
segment assets. This recognition ensures that any investment gain or 
loss attributable to the assets accumulated by prepayments does not 
affect the gains and losses of the plan or any segments. The decision 
or requirement to deposit funds in excess of the assigned cost should 
have a neutral impact on Government contract costing.
    (8) Interest on Unfunded Pension Costs. Funding less than the 
assigned pension cost is a financial management decision made by the 
contractor. The unfunded cost cannot be reassigned to current or future 
periods and must be separately identified and tracked in accordance 
with 9904.412-50(a)(2). Because there are no assets associated with 
these unfunded accruals, the Board believes that these amounts should 
not create any investment gain or loss. The proposed rule reaffirms 
that the accumulated value of unfunded accruals is adjusted at the 
long-term interest assumption and clarifies that the settlement 
interest rate based on corporate bond yields does not apply.
    (9) Required Amortization of Change in Unfunded Actuarial Liability 
due to Recognition of Minimum Actuarial Liability Mitigates Initial 
Increase in Contract Price. The proposed rule explicitly requires that 
the actuarial gain or loss, due to any difference between the expected 
and actual unfunded actuarial liability caused by the recognition of 
the minimum actuarial liability, be amortized over a 10-year period 
along with actuarial gain or losses from all other sources. This 
amortization process will limit the immediate effect on pension costs 
when the Harmonization Rule becomes applicable and thereby mitigates 
the impact on existing contracts subject to these Standards.
    There are two other important features included in this proposed 
rule.
    (1) Transition Phase-In of Minimum Actuarial Liability and Minimum 
Normal Cost Mitigates Initial Increase in Contract Price. To allow time 
for agency budgets to manage the possible increase in Government 
contract costs and to mitigate the impact on existing contracts for 
both the Government and contractors, the changes to CAS 412 and 413 are 
phased-in over a 5-year period that approximates the typical 
contracting cycle. The proposed phase-in allows the cost impact of this 
draft proposal to be gradually recognized in the pricing of CAS-covered 
and FAR contracts alike. Any adjustment to the actuarial accrued 
liability and normal cost based on recognition of the minimum actuarial 
liability and minimum normal cost will be phased in over a 5-year 
period at 20% per year, i.e., 20% of the difference will be recognized 
the first year, 40% the next year, then 60%, 80%, and finally 100% 
beginning in the fifth year. The phase-in of the minimum actuarial 
liability also applies to segment closing adjustments.
    (2) Extended Illustrations. Many existing illustrations have been 
updated to reflect the proposed changes to CAS 412 and 413. To assist 
the contractor with understanding how this proposed rule would 
function, extensive examples have been included in a new Section 
9904.412-60.1, Illustrations--CAS Harmonization Rule. This section 
presents a series of illustrations showing the measurement, assignment 
and allocation of pension cost for a contractor with an under-funded 
segment, followed by another series of illustrations showing the 
measurement, assignment and allocation of pension cost for a contractor 
with an over-funded segment. The actuarial gain and loss recognition of 
changes between the long-term liability and the settlement liability 
bases are illustrated in 9904.412-60.1(h). This structural format 
differs from the format for 9904.412-60.
    The Board realizes that these examples are longer than the typical 
example in the Standards, but believes that providing comprehensive 
examples covering the process from measurement to assignment and then 
allocation will demonstrate how the proposed harmonization is 
integrated into the existing rule.

C. Public Comments to the Advance Notice of Proposed Rulemaking

    The full text of the public comments to the ANPRM is available at: 
http://www.whitehouse.gov/omb/casb_index_public_comments/ and http://www.regulations.gov.

Summary of Public Comments

    The public comments included a broad range of views on how to 
harmonize CAS with the PPA. At one extreme, one commenter believed that 
the Board should do nothing as the existing CAS rules are already 
harmonized with the PPA. At the other extreme, others believed that CAS 
412 and 413 should be amended to adopt the actuarial assumptions and 
measurement techniques used to determine the PPA minimum required 
contribution. In any case, there was overall consensus that any 
amendments to CAS 412 and 413 should apply to all contractors with 
Government contracts subject to CAS 412 and 413.
    Most of the public comments expressed concern that the disparity 
between CAS and the PPA has the potential to cause extreme cash flow 
problems for some Government contractors. Many commenters believed that 
the ERISA minimum required contribution must be recognized in contract 
costing on a timely basis. Industry and professional groups generally 
agreed that Section 106 of the PPA requires CAS 412 and 413 to be 
revised to harmonize with the PPA minimum required contribution. 
However, there were varying views on how to best accomplish that goal. 
Many commenters suggested that the Board

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seize the opportunity offered by harmonization to bring the CAS rules 
more in line with the evolving views of financial statement disclosure 
of pension obligations, minimum funding adequacy to protect the plan 
participants and the Pension Benefit Guarantee Corporation (PBGC), and 
financial economics regarding the appropriate use of corporate 
resources and shareholder equity. Rather than merely amend the existing 
rules, the public comments suggested that a fresh look should be taken 
by the Board to balance and reconcile the competing interests of 
stakeholders and the intent of the various statutes.
    Others argued that there is no mandate for the Board to address any 
issue beyond the PPA minimum required contribution. These commenters 
believed that any other issues should be addressed by the Board in a 
separate case. There was no consensus on how far the Board should go 
beyond the requirement to merely harmonize CAS with the PPA minimum 
required contribution, e.g., should the Board also consider the PPA's 
revisions to the maximum tax deductible limits.
    For the most part, industry comments supported adoption of the PPA 
minimum funding provisions including the provisions related to ``at-
risk'' plans. They believe that directly adopting the PPA minimum 
funding provisions will preserve the equitable principle of the CAS 
whereby neither contractors nor Government receives an unfair 
advantage. They expressed concern that if the Board does not fully 
adopt the PPA minimum funding provisions, the Government will have an 
unfair advantage because the PPA compels the contractors to incur a 
higher cost than they can allocate to Government contracts and recover 
currently, thus, creating negative corporate cash flow. They noted that 
although the prepayment provision in the current CAS is meant to 
mitigate this situation, the cost methodology under the PPA is so 
radically different that the prepayment provision in CAS 412 has 
negligible impact in providing timely relief to the contractor from 
this negative cash flow.
    The views of one Federal agency on harmonization differed from 
those of industry and opined that no revision to CAS was necessary to 
harmonize with the PPA. This commenter argued that: (i) Harmony is 
already achieved through prepayments credits; (ii) adopting the PPA 
funding rules will run counter to uniform and consistent accounting; 
(iii) adopting the PPA requirements weakens the causal/beneficial 
relationship between the cost and cost objective; and, (iv) adopting 
the PPA requirements will increase cost volatility. The commenter 
expressed its belief that the purposes of the PPA, which are to better 
secure pension benefits and promote solvency of the pension plan, are 
different than the purposes of CAS. They also believed that since CAS 
does not undermine the purposes of the PPA the two are already in 
harmony.
    This summary of the comments and responses form part of the Board's 
public record in promulgating this case and are intended to enhance the 
public's understanding of the Board's deliberations concerning Pension 
Harmonization.
Abbreviations
    Throughout the public comments there are the following commonly 
used abbreviations:

     AAL--Actuarial Accrued Liability, usually used to denote 
the liability measured using long-term assumptions;
     ACL--Assignable Cost Limitation;
     ERISA--The Employees' Retirement Security Income Act of 
1974, as amended to date;
     MAL--Minimum Actuarial Liability, usually used to denote 
the liability measured using interest based on current period 
settlement rates;
     MNC--Minimum Normal Cost, usually used to denote the 
normal cost measured using interest based on current period settlement 
rates;
     MPC--Mandatory Prepayment Credit, which was a term used in 
the ANPRM;
     MRC--Minimum Required Contribution, which is the 
contribution necessary to satisfy the minimum funding requirement of 
ERISA for continued plan qualification; and
     NC--Normal Cost, usually used to denote the normal cost 
measured using long-term assumptions.
Responses to Specific Comments
    Topic A: Proposed Approach to Harmonization. The principle elements 
for harmonization that were proposed in the ANPRM are:
    a. Continuance of the development of the CAS assigned pension cost 
on a long-term, going concern basis;
    b. Implementation of a minimum liability ``floor'' based on the 
plan's current settlement liability in the computation of the assigned 
cost for a period;
    c. Acceleration of the gain and loss amortization from 15 to 10 
years;
    d. Recognition of established patterns of increasing flat dollar 
benefits;
    e. Adjusting prepayment credits based on the rate of return on 
assets; and
    f. Exemption of mandated benefit curtailments.
    Comments: The majority of commenters found that the ANPRM presented 
a fair and reasonable approach to harmonization. The commenters 
submitted many detailed comments on improvements to specific provisions 
as well as some additional provisions they believed might be useful. 
Some commenters remarked that the extensive explanation of the 
reasoning behind the Board's approach to harmonization enhanced their 
understanding of the ANPRM.
    As one commenter wrote:

    We appreciate the effort put forth by the CAS Board and Staff to 
study the issues and publish this ANPRM. The task of harmonization 
is challenging and technically complicated. The harmonization of CAS 
needs to respect the cash contribution requirements mandated by the 
PPA, but it should be done in a way that best allows both 
contractors and the government to budget for that cost and for the 
contractors to recover that cost. The ANPRM provides an excellent 
framework for developing revisions to the CAS in order to satisfy 
the requirements for harmonization with PPA. However, we believe 
that there are several areas where changes to the ANPRM would offer 
significant improvement toward meeting the objective of 
harmonization.

    Another public comment read:

    We commend the CAS Board for addressing the complex issues 
concerning harmonizing pension costs under the CAS 412/413 
requirements with the minimum funding requirements under the Pension 
Protection Act (PPA) of 2006. We believe the ANPRM reflects an 
excellent approach for addressing these important issues.

    Commenting on the proposed approach and preamble explanation, a 
commenter remarked:

    Although the ANPRM does not establish as much commonality 
between the building blocks underlying the CAS cost and ERISA 
minimum funding requirements as we would have preferred, the 
explanation of the Board's reasoning was quite helpful. In our view, 
the ANPRM provides a reasonable framework for the necessary 
revisions to CAS 412 and 413.

    Response: The majority of commenters found that the ANPRM presented 
a fair and reasonable approach to harmonization, and therefore this 
NPRM is being proposed based upon the general concepts of the ANPRM. In 
drafting this NPRM the Board has considered many detailed suggestions 
concerning improvements to specific provisions and additional 
provisions as submitted by the commenters. Because of the technical 
nature of this proposed rule, the Board is again providing explanations 
of the reasoning for any changes from the ANPRM.
    The Board discussed the move towards fair value accounting by 
generally accepted accounting

[[Page 25987]]

principles (GAAP) and ERISA versus the CAS goal of accounting on long-
term, ``going concern'' basis. The Board reaffirmed its desire to 
retain the ``going concern'' basis and use long-term expectations to 
value pension liabilities--this recognizes the long-term relationship 
between the Government and most contractors. The long-term, ``going 
concern'' basis serves to dampen volatility and thereby enhances 
forward pricing--a function that is unique to the CAS.
    The Board also believes that the minimum liability approach is the 
highest extent of change which is academically/theoretically defensible 
and consistent with the Board's Statement of Objectives, Principles and 
Concepts.
    Topic B: Supports Comments Submitted by AIA/NDIA, Some Have 
Supplemental Comments.
    Comments: Seven (7) of the contractors submitting comments also 
stated that they support the comments submitted by industry 
associations. Several of these commenters also stated their comments 
augmented the industry associations.
    Response: The Board has given full attention to the comments 
submitted by AIA/NDIA because of their general support by other 
commenters, and because their very detailed comments and proposed 
revisions reflect thoughtfulness and appreciation for the special 
concerns of contract cost accounting.
    Topic C: General Comments on Differences between CAS, GAAP and 
ERISA (PPA). The SDP and ANPRM discussed the similarities and 
distinctions between the goals and measurement criteria of CAS, GAAP 
and ERISA. The unique purpose and goal of the CAS was determinative of 
the Board's proposed harmonization approach.
    Comments: Several Commenters noted that ERISA, as amended by the 
PPA, is intended to promote adequate funding of the currently accrued 
pension benefit and set reasonable limits on tax deductibility. These 
commenters remarked that the PPA minimum contribution is designed to 
fully fund the current settlement liability of a plan within 7 years in 
order to protect the participants' accrued benefit and to limit risk to 
the PBGC.
    As one commenter explained:

    The PPA was enacted, in part, as a response to the failure of 
companies with severely underfunded qualified defined benefit 
pension plans (``pension plans''), even though companies had 
typically contributed at least the minimum amount required under the 
Internal Revenue Service (``IRS'') rules. PPA was designed to ensure 
that corporations would fund towards liabilities measured on more of 
a settlement basis over a 7-year period, so that plans would be less 
likely to be severely underfunded.

    They remarked that GAAP has adopted fair value accounting, also 
known as ``mark-to-market'' accounting. The purpose of GAAP is to 
disclose the current period pension expense based on the current 
period's environment, including the volatility associated with a 
changing environment. Another primary concern of GAAP is disclosing the 
risk associated with the funding of the current settlement liability to 
users of financial statement.
    Two commenters reminded the Board that the purpose of CAS is (i) 
consistency between periods and (ii) uniformity between contractors. 
Unlike ERISA and GAAP, CAS is concerned with the cost data used to 
price contracts over multiple periods. The CAS continues to be 
concerned with the Government's participation in the funding of the 
long-term pension liability via a continuing relationship (going 
concern) with the contractor.
    One of these commenters felt that use of the PPA and GAAP interest 
assumption and cost method used to determine the liability and normal 
cost for CAS measurements would enhance uniformity between contractors. 
This commenter also believes that 10-year amortization of gains and 
losses and the amortization of mandatory prepayment credits would 
sufficiently mitigate any excessive volatility and therefore not harm 
consistency between periods. Finally, this commenter suggested that 
adoption of the PPA interest assumption and cost method would alleviate 
the need to have the complex mandatory prepayment reconciliation rules. 
Moreover, if the CAS values were based on fair value accounting used by 
ERISA and GAAP, the Government would be able to place reliance on 
measurements that were subject to independent review.
    As this commenter articulated these concerns:

    The proposed rule relies on the same fundamental approach for 
measuring pension liabilities that has been in effect since the CAS 
pension rules were first adopted in 1975. The CAS allows a 
contractor to choose between several actuarial cost methods and 
requires that the discount rate represent the expected long-term 
rate of return on plan assets. Although the CAS measurement basis 
was once consistent with the methods and assumptions in common use, 
this is no longer the case. In 1985, the Financial Accounting 
Standards (FAS) were modified to require that pension costs for 
financial reporting purposes be calculated using the projected unit 
credit (PUC) cost method and a discount rate that reflects the rates 
of return currently available on high-quality corporate bonds of 
appropriate duration. In 2006, the Employee Retirement Income 
Security Act (ERISA) was amended by the PPA to require the use of 
durational discount rates that are determined in a manner consistent 
with the FAS. The PPA also requires all plans to use the unit credit 
cost method (PUC without projection) to determine minimum funding, 
and the PUC method to determine the maximum tax deductible 
contribution.
    These are material conflicts with the CASB objectives. We see no 
way to resolve the conflicts except to modify the CAS to require 
pension liabilities to be determined in a manner consistent with the 
measurements used for both ERISA and financial reporting. 
Specifically, the CAS should require the use of (i) the PUC cost 
method, and (ii) a discount rate that reflects the rates of return 
currently available on high-quality corporate bonds of appropriate 
duration. These changes would also improve consistency between 
contractors, a primary objective of the CAS.

    Response: The goal of the ANPRM was to maintain predictability for 
cost measurement and period assignment while providing for 
reconciliation, i.e., recovery of required contributions within a 
reasonable timeframe. The divergence of GAAP and ERISA from CAS is 
primarily due to the adoption of ``mark-to-market'' cost measurement, 
which can be disruptive to the contract costing/pricing process.
    The Board remains cognizant of the following key distinctions 
between ERISA, GAAP and CAS regarding funding of the pension cost:
     ERISA's minimum funding is concerned with the funding of 
the current settlement liability.
     GAAP is not concerned with funding, but rather with the 
disclosure of the results of operations in the current market 
environment.
     CAS continues to be concerned with the Government's 
participation in the funding of the long-term pension liability via a 
continuing (going concern) relationship with the contractor. CAS 412 
and 413 are used to develop data for forward pricing over multiple 
years, and is not just concerned with the current environment.
    The Board wishes to retain the contractor's flexibility to choose 
the actuarial cost method it deems most appropriate for its unique 
pension plan. While the CAS permits the use of any immediate gain cost 
method, most contractors already use the projected unit cost method, 
which is required by ERISA and GAAP and compliant with CAS 9904.412-
40(b)(1). As long as the current CAS permits the use of methods 
required by the PPA there is no reason to revise the CAS to be more 
restrictive. Furthermore, the Board notes that for

[[Page 25988]]

CAS purposes a contractor may use the same actuarial cost method and 
assumptions, except for the long-term interest assumption, as used to 
value a plan under PPA that is not ``At Risk.'' (With the passage of 
the PPA, ERISA no longer computes liabilities and normal costs using 
long-term interest assumptions.)
    The Board believes that the proposed 10-year amortization of the 
gains and losses will sufficiently harmonize CAS with the PPA while 
provide acceptable smoothing of costs between most periods. The Board 
notes that the plunge in stock market values in the latter half of 2008 
demonstrates how quickly things can change between periods, but remains 
confident that the aberrant market losses for 2008 and early 2009 will 
be adequately smoothed using 10 versus 15 years.
    Topic D: Tension between Verifiability and Predictability.
    Comments: One commenter also raised the issue of verifiability, 
writing:

    In 1992, the CASB released a Statement of Objectives, Policies, 
and Concepts, which cites two primary goals for cost accounting 
standards: (i) Consistency between contractors, and (ii) consistency 
over time for an individual contractor. It also sets forth other 
important criteria to be taken into consideration. Verifiability is 
described as a key goal for any cost accounting standard, as is a 
reasonable balance between a standard's costs and benefits. We 
believe that the liability measurement basis under the proposed rule 
severely conflicts with these goals.

    This commenter was concerned that verifiability of the liability 
and cost data might be compromised or lost since the GAAP expense and 
ERISA contributions are no longer based on a long-term, ``going 
concern'' concept. This commenter also was concerned with the added 
expense of producing such numbers and the potential for disputes. This 
commenter stated:

    The pension liabilities used to develop contract costs must be 
verifiable. If the data used for contract costs are not reconcilable 
with the data used for other reporting purposes, the information 
will be open to bias and manipulation.
    Similarly, if the pension liabilities determined in accordance 
with the CAS are inconsistent with those used for other purposes, 
there will be no alternative source from which to obtain this 
information. We have encountered many situations in which a 
contractor was not aware of the requirement to compute a special 
cost for contract reimbursement or did not maintain the CAS 
information required for audit or segment closing calculation. In 
these cases, ERISA reports or financial statements were used to 
obtain the necessary liability information, and the CAS computations 
could be reconstructed. The data required under the proposed rule 
are obsolete for other reporting purposes and will not be available 
if the calculations required under the CAS are not performed, or if 
the documentation is not retained. It will be difficult or 
impossible to develop reliable estimates from existing sources of 
data.

    This commenter was also concerned that actuaries of medium-sized 
contractors may not be sufficiently familiar with the CAS rules, and 
some of the younger practitioners may not be that familiar with the 
concepts of long-term measurement methods. On occasion, the plan's 
actuary may not be aware that his client has Government contracts and 
therefore the required valuation data may not be produced.
    Conversely, another commenter was receptive to use of the fair 
market accounting liability as a minimum liability, but was concerned 
that introduction of the current liability minimum might cause the CAS 
to diverge from its long-standing goal of ``predictability.'' This 
commenter wrote:

    Because the proposed rule contains many technical and actuarial 
provisions, I am concerned that the basic purpose of CAS, which 
differs from those of other accounting standards and rules, may be 
lost in the details.

    This commenter said that the Board should not lose sight of 
predictability (consistency between periods). Focusing on uniformity 
between contractors, which is a concern of GAAP, might come at the 
expense of predictability and harm the pricing function. This commenter 
opines:

    The CAS has been, and I agree the CAS should continue to be, 
concerned with predictably (minimal volatility) across cost 
accounting periods to support the estimating, accumulating and 
reporting of costs for flexibly and fixed price contracts. Fair 
value accounting of the liability (also called ``mark-to-market'' 
accounting) may be appropriate for financial disclosure purposes 
under GAAP, but is inappropriate and disruptive of the contract 
costing function. Likewise, ERISA's mandates and limits for current 
period funding are inappropriate for cost predictability and 
stability across periods.
    I fully support the following goals for pension harmonization as 
stated in the paragraph entitled ``(1) Harmonization Goals'' of the 
Board's ANPRM:
    (b) No direct adoption of the Employee Retirement Income 
Security Act of 1974, (ERISA) as amended by the Pension Protection 
Act (PPA), to avoid any change to contract cost accounting without 
prior CAS Board approval since it is quite likely that Congress will 
amend ERISA in the future.
    (c) Preserve matching of costs with causal/beneficial activities 
over the long-term.
    (e) Mitigate volatility (enhance predictably).

    This commenter also remarked that balancing the tension between 
ERISA and the CAS has long been a concern of the Board, writing as 
follows:

    Harmonization is not a new subject to the CAS Board. Even in the 
early 1990s the matching of ERISA funding and contract cost accruals 
was of concern to the staff. The SDP continues:
    The costing and pricing of Government contracts also requires a 
systematic scheme for accruing pension cost that precludes the 
arbitrary assignment of costs to one fiscal period rather than 
another to gain a pricing advantage. The Government also has 
sensitivity to the inclusion of unfunded pension costs in contract 
prices. Conversely, the staff's research revealed one instance of a 
contractor who, due to the shortened amortization periods now 
contained in the Tax Code, faced minimum ERISA funding requirements 
in excess of the CAS 412 pension cost and, thus could not be 
reimbursed. That particular contractor felt, understandably, that 
allowability ought to be tied to funding under the Tax Code. 
Obviously, given the current tax law climate regarding full funding, 
complete realization of all of these goals is not achievable. In the 
staff's opinion, the goals of predictable and systematic accrual 
outrank that of funding. However, funding still remains an important 
consideration.

    Response: The Board recognizes that there is a tension between the 
benefits of verifiability, i.e., reliance on outside audited data, and 
predictability, i.e., stability or at least minimized volatility. Most 
of the commenters expressed positive opinions concerning the general 
approach of the ANPRM and do not seem overly concerned with the 
verifiability issue. Verifiability is always an audit issue and will 
remain a consideration as the Board proceeds.
    Contractors are required to provide adequate documentation to 
support all cost submissions, including pension costs. Furthermore, the 
American Academy of Actuaries' ``Qualification Standards for Actuaries 
Issuing Statements of Actuarial Opinion in the United States'' 
expressly requires actuaries to be professionally qualified and adhere 
to CAS 412 and 413--Actuarial communications and opinions regarding CAS 
412 and 413 are recognized as ``Statements of Actuarial Opinion.'' 
Paragraph 3.3.3 of Actuarial Standards of Practice No. 41 requires 
actuaries to provide information that is sufficient for another 
actuary, qualified in the same practice area, to make an objective 
appraisal of the reasonableness of the actuary's work as presented in 
the actuary's report.
    As discussed above, since a contractor may use for CAS the same 
actuarial cost method and assumptions, except for the long-term 
interest assumption, as used for valuing a plan under PPA that is not 
``At Risk,'' there is a commonality to the values measured for CAS and 
PPA. There will some additional effort expended since the contractor 
and its

[[Page 25989]]

actuary will have to reconcile the liability and normal cost measured 
under different interest rates. However demonstrating the difference 
caused by the change of a single variable should not impose an undue 
burden or expense.
    Topic E: CAS 412.40(b)(3)(ii) Harmonization Rule's Minimum 
Actuarial Liability Interest Rate Assumption.
    Comments: Most commenters asked that the rule clearly identify the 
allowable basis for the interest rate used to measure the MAL. Some 
asked that a particular basis for the rate be stated or permitted, 
i.e., PPA or FAS 87as a ``safe harbor''. PPA allows some leeway and 
therefore one commenter said that it was not clear as to the date the 
current bond rate would be measured. Others believed that the MAL 
should be based on a long-term assumed rate for corporate bonds, 
instead of the current PPA rate, in order to reduce volatility and 
enhance forward pricing.
    One commenter asked that the rule permit the use of a single 
interest rate for the plan rather than separate rates by PPA segment or 
full yield curve. Another commenter asked that the Board provide 
examples illustrating selection and use of the interest rate.
    The following captures the theme of many comments submitted:

    * * * First, our comments regard the Interest Rate used for the 
Minimum Actuarial Liability (MAL) and Minimum Normal Cost (MNC). We 
believe the flexibility provided by using ``the contractors' best 
estimate'' for selecting the source of the interest rate used in the 
calculation of the MAL and MNC is desirable to achieve a meaningful 
measure of the resulting pension cost for each contractor. However, 
we have concerns that the criteria for the acceptable rates as 
written are sufficiently unclear as to create a significant exposure 
for interpretive disagreements. For example, we believe that the 
ANPRM criteria as written allows for the use of a very short term 
rate or a very long term rate, since either may reflect the rate at 
which pension benefits could be effectively settled at a current or 
future period, respectively. We encourage the CAS Board to adopt the 
industry recommendation of inserting two new sentences after the 
first sentence in CAS 412-40(b)(3)(ii) to read, ``Acceptable 
interest rates selected by the contractor are those used for the PPA 
funding target, FASB 87 discount rate, long term bond rate, or 
another such reasonable measure. A contractor shall select and 
consistently follow a policy for the source of the interest rate 
used for the calculation of the minimum actuarial liability and 
minimum normal cost.''

    There was some concern expressed about the volatility between 
periods caused the use of current corporate bond rates. As commenter 
noted:

    History shows that the FAS discount rate leads to volatile 
pension expense as the discount rate changes from one measurement 
date to the next. Exhibit A provides a monthly history of the 
Citigroup Pension Liability Index from January 31, 1985 through 
September 30, 2008. The Citigroup Pension Liability Index is a good 
proxy for the FAS discount rate. To illustrate how dramatically the 
index can change over a 12-month period, note that between May 31, 
2002 and May 31, 2003, the Index dropped by 172 basis points. Using 
general actuarial rules of thumb, this drop would translate to a 22% 
increase in liability and a 41% increase in normal cost.
    The interest assumption used for liabilities for determining 
minimum funding requirements under the PPA is based on high-quality 
corporate bonds, but PPA allows the plan sponsor the option to use a 
24-month average of rates vs. a one month average.

    Another commenter discussed the advantage of using an average bond 
rate, writing:

    This result is not consistent with the fundamental desire to 
strive for predictability of cost in the government contracting 
arena. The impact that unforeseen changes in cost can have on fixed 
price contracts is obvious, but even unexpected cost increases on 
flexibly priced business can place a strain on government budgets. 
It is important to try to mitigate the potential pitfalls that might 
create inequitable financial results for either the government or 
the contractors.
    The ANPRM maintains the concept of the actuarial accrued 
liability (AAL) that is calculated using an interest rate that 
represents the average long-term expected return on the pension 
trust fund. This reflects the CAS Board's view of pension funding as 
a long-term proposition. The ANPRM states that CAS 412 and 413 are 
concerned with long-term pension funding and minimizing volatility 
to enhance predictability. Since the new MAL is based on spot bond 
rates it will experience more volatility from year to year than the 
AAL. We believe that the addition of the MAL to the CAS calculations 
is an important change that is very much needed. However instead of 
measuring the MAL using spot bond rates each year, we feel very 
strongly that it is important to allow contractors to have an option 
to calculate the MAL using an expected long-term average bond rate. 
This would allow contractors to use an interest assumption that 
would not need to be changed each year, and would very significantly 
reduce the volatility of the MAL and greatly improve predictability 
of the pension cost. The MAL interest assumption would only need to 
be changed if it was determined that average future bond yields over 
a long-term horizon were expected to be materially different from 
the current MAL assumption. For example, if long-term bond rates 
were expected to fluctuate between 5.5% and 6.5% in the future, then 
a valid assumption for the expected average future rate might be 
6.0%. So this concept would hold some similarities to the interest 
rate used for calculating the AAL. The main difference is that the 
AAL interest rate represents the average expected long-term future 
return on the investment portfolio, whereas the MAL interest rate 
would represent the average expected future long-term yield on high-
quality corporate bonds. There should obviously be some correlation 
between the MAL interest rate and the AAL interest rate, so the two 
different rates should be determined on a consistent basis.

    Several commenters suggested that the rule expressly permit use of 
a long-term rate to improve predictability & reduce volatility. The 
following is typical of this suggestion:

    * * * However, because of the extreme volatility which could 
result from changes in market interest rates, [we] believes the CAS 
Board should explicitly take the position either in the standard or 
the preamble to the final publication, that contractors are 
permitted to calculate the minimum actuarial liability using a long-
term expectation of high-quality bond yields, moving averages of 
reasonable durations beyond 24 months (a period described elsewhere 
in the proposed rule) or other techniques which enhance 
predictability.

    Response: The ANPRM sets forth a conceptual description of the 
settlement rate which would include the corporate bond yield rate 
required by the PPA. Furthermore, the PPA permits several elections 
concerning the yield rate, i.e., full or segmented yield curve, current 
or average yield curve, yield curve as of the valuation date or any of 
the 4 prior months. The Board agrees that a ``safe harbor'' should be 
included for clarity and to avoid disputes. The Board also believes 
that the election of the specific basis for the settlement interest 
rate is part of the contractor's cost accounting practice. Accordingly, 
the proposed rule at 9904.412-50(b)(7)(iv)(B) provides:

    The contractor may elect to use the same rate or set of rates, 
for investment grade corporate bonds of similar duration to the 
pension benefits, as published or defined by the Government for 
ERISA purposes. The contractor's cost accounting practice includes 
any election to use a specific table or set of such rates and must 
be consistently followed.

    The Board reaffirms its belief that the recognition of the more 
conservative assumptions required for plans whose funding ratio falls 
below a specific threshold, such as plans deemed ``at risk'' under the 
PPA, is inappropriate for the purposes of contract costing. The 
proposed rule requires that all other actuarial assumptions continue to 
be based on the contractor's long-term, best-estimate assumptions. 
(9904.412-50(b)(7)(iii)(B)) (Note that the DS-1, Part VII asks for the 
basis for selection of assumptions rather than the current numeric 
value.)
    Topic F: Recognition of Minimum Actuarial Liability and Minimum 
Normal Cost.
    Comments: One commenter was concerned with the added complexity

[[Page 25990]]

from introduction of the minimum actuarial liability and minimum normal 
cost into the development of the assignable pension cost as follows:

    While the ability to have contractors determine their CAS 
assignable costs based on liabilities reflecting the yields on high-
quality corporate bonds is a significant relief for the negative 
cash flow issue faced by government contractors, the process for 
introducing the MAL into the development of the CAS Assignable Costs 
will result in additional complexity in the calculations.

    Several commenters were concerned that the assigned cost would 
occasionally be larger than necessary under the ANPRM. They believed 
that the assigned cost based on the adjusted liability would be 
excessive if the unadjusted assigned cost already exceeded the PPA 
minimum contribution. Some commenters recommended that the assigned 
pension cost be adjusted based upon a revised assigned pension cost 
only if the PPA minimum required contribution, without reduction for 
any credit balances, exceeds the assigned cost as measured on a long-
term basis. As one commenter explained:

    There can be situations where the CAS assignable cost developed 
without regard to the MAL would be larger than the PPA funding 
requirement. Regardless of this situation, under the ANPRM, if the 
MAL is higher than the regular AAL, the liabilities and normal costs 
will be adjusted to reflect the MAL and the MNC. This adjustment 
will result in even higher CAS assignable costs

    This commenter suggested an alternative approach as follows:

    Instead of applying minimums to the liabilities and normal costs 
used in the calculation of the CAS assignable cost, we present the 
following alternative (which we shall refer to as the ``Minimum CAS 
Cost'' alternative) for consideration and further study. We believe 
this alternative addresses the Board's goals of minimizing changes 
to CAS 412 and 413 and avoiding complexity as much as possible, 
while addressing the difference between CAS assignable costs and PPA 
minimum required contributions.
    We believe this alternative will lead to less volatile CAS 
assignable costs compared to the ANPRM. In Attachment II, we compare 
results under this approach and under the ANPRM for a hypothetical 
sample. We recommend further study of this approach.
    Under this alternative, the CAS assignable cost will be the 
greater of (a) and (b) below:
    (a) The Regular CAS Cost, which is the CAS cost determined 
without regard to the CAS Harmonization Rule (i.e., as determined 
under the current CAS 412 but with a 10-year amortization of gains/
losses as proposed under the ANPRM),
    (b) the Minimum CAS Cost which is equal to
    (i) the Minimum Normal Cost; plus
    (ii) a 10-year amortization of the unfunded MAL at transition; 
plus
    (iii) a 10-year amortization of each year's increase or decrease 
in the unamortized unfunded MAL, where the unfunded MAL is equal to 
the difference between the Minimum Actuarial Liability and the CAS 
assets net of prepayment credits.
    Thus, under this alternative, we impose a ``minimum CAS cost'' 
(i.e., item b above) instead of minimum liabilities and normal 
costs. This will avoid the dramatic changes in CAS assignable costs 
that occur due to the switching between the regular AAL/NC and MAL/
MNC.

    Another commenter recommending this approach wrote:

    As currently proposed, the MAL adjustment is only applied (or 
``triggered'') when the MAL exceeds the AAL. When this occurs, the 
AAL is adjusted, as well as the NC. We recommend that in order to 
reduce cost volatility the Board consider a ``cost based'' trigger 
instead. The cost trigger would adjust for the difference between 
the MAL and AAL, and their associated normal costs, if: [the MAL 
less AAL amortized over 10 years] plus [the MNC less NC] exceeds $0.

    The commenter also was concerned about the effect of inactive 
segments, writing:

    One other issue exists with the proposed liability based MAL 
trigger. An inequity can result in the application of the 
requirements at the segment level, especially when a contractor has 
an inactive segment.

    This commenter continues and compares the results of the method 
proposed in the ANPRM and a ``cost based'' trigger (identified as Plan 
1 and Plan 2) and comments on the results as follows:

    The liability trigger results in different costs for Plan 1 and 
Plan 2 while the cost trigger results in the same cost for both 
plans. Accordingly, a cost based trigger would treat contractors 
with and without inactive segments more equitably. In addition, a 
cost based trigger harmonizes with PPA better than a liability 
trigger since it is more likely to produce plan level CAS costs 
closer to PPA minimum contributions.

    Regardless of whether a ``trigger'' approach is used, there was 
consensus that the comparison should be based on total liability for 
the period rather than separately testing the actuarial liability (also 
known as past service liability) and normal cost (incremental liability 
for the current period). These commenters suggested comparing the sum 
of the actuarial accrued liability plus the normal cost to the sum of 
the minimum actuarial liability and the minimum normal cost. One 
commenter illustrated the problem of comparing the liability and normal 
cost separately as follows:

    The ANPRM proposes, at section 412-40(b)(3)(i), that the 
actuarial accrued liability (AAL) be adjusted when ``the minimum 
actuarial liability exceeds the actuarial accrued liability.'' 
Consider the following example:


----------------------------------------------------------------------------------------------------------------
                                                                Liability        Normal Cost          Total
----------------------------------------------------------------------------------------------------------------
AAL assumptions...........................................              $100               $10              $110
MAL assumptions...........................................                95                20               115
----------------------------------------------------------------------------------------------------------------


    Based on the ANPRM, the MAL assumptions would not be used for 
this year because the MAL of $95 is less than the AAL of $100. 
However, because the $115 sum of the MAL and the minimum normal cost 
exceeds the corresponding amount of $110 on an AAL basis--which thus 
indicates that the appropriate end-of-year theoretical funding goal 
should be $115--the Board's intent would seem to be better 
implemented if the test at 412-40(b)(3)(i) was based upon the 
liabilities plus the normal costs for the year. This could be 
accomplished by modifying the relevant language to read: ``* * * the 
minimum actuarial liability (including minimum normal cost) exceeds 
the actuarial accrued liability (including normal cost).''

    On the other hand, one commenter noted that while a settlement 
liability is generally inappropriate as a basis for measuring the 
contract pension cost, such recognition of the settlement liability as 
a minimum liability is an important element of harmonization and 
provides better alignment for segment closing measurements.

    While I am opposed to a fair value accounting as an accounting 
basis for the CAS, I also agree with the Board's proposal to subject 
the liability measurement to a settlement liability minimum.
    I agree with this approach primarily because recognizing such a 
minimum liability measurement will not only achieve harmonization, 
but will better align the liability measured for period costing with 
the liability basis for segment closing adjustments and thereby 
increase predictability. * * *

    Another public comment countered, arguing that the proposed ANPRM 
is based on a ``hybrid approach,'' rather than a ``going concern'' 
approach and might not be appropriate given the Board's stated goals.

    The proposed revisions to CAS 412 and 413 change the fundamental 
cost accounting

[[Page 25991]]

approach used to measure and assign pension cost. The current CAS 
412 and 413 measure and assign pension cost using the ``contractor's 
best estimates of anticipated experience under the plan, taking into 
account past experience and reasonable expectations of pension plan 
performance.'' The supplementary information in ANPR refers to the 
current rules as the ``going concern approach.''
    The ANPR retains the ``going concern approach'' to measure the 
minimum amount of pension cost for a given accounting period. 
However, the ANPR requires an adjustment to the ``going concern'' 
amounts when either the cost of settling the pension obligation or 
the PPA minimum funding amount is higher than the ``going concern'' 
amount. The ANPR refers to cost of settling the pension obligation 
as the ``settlement or liquidation approach.''
    The ANPR is therefore a hybrid of these two fundamentally 
different accounting approaches. As a result, we anticipate that 
applying the ANPR will both increase the complexity of the 
contractor's yearly actuarial calculation of pension cost and the 
amount of pension cost on Government contracts.

    Finally, if the minimum actuarial liability is used as a minimum 
liability basis, two commenters felt that the rule should record 
changes in basis for the liability (AAL vs. MAL) between years as part 
of the gain or loss amortization base. Recommending that the change 
from actuarial accrued liability to the minimum actuarial liability 
basis and vice-versa as an actuarial loss or gain, respectively, one 
commenter wrote:

    If the measurement basis is modified to reflect current bond 
rates, we suggest that the rules provide that any change in 
liability attributable to interest rates will be treated as a gain 
or loss for cost purposes.

    This commenter also suggested that the Board consider adopting the 
PPA gain and loss approach that adjusts the new unamortized balance and 
keeps the amortization installment unchanged.

    Prior to the PPA, it was standard practice to recalculate 
amortization payments if there was a change in the applicable 
interest rate. The PPA introduced a new methodology whereby the 
amortization amounts remain unchanged, and the difference in the 
present values is included in a new amortization base established as 
of the date of the change. For CAS purposes, this difference could 
be included in the gain and loss base. This method supports the 
objectives of the CASB because it is easier to apply and reduces the 
volatility associated with interest rate changes. We therefore 
recommend that the CAS adopt this approach or allow it as an option 
without the need for advance approval.

    And finally, a commenter asked whether the gain and loss 
amortization charges reflect the MAL's current settlement interest rate 
or the long-term return on investment interest rate when the minimum 
liability applied.

    If the MAL applies and the plan is setting up an amortization 
base for either a plan change or an assumption change, should the 
amortization base be set up reflecting liabilities on the same basis 
as the MAL or on the same basis as the regular AAL.

    This commenter continued:

    If the MAL applies, should amortization charges reflect the 
long-term interest rate or the MAL interest rate?

    Response: The concept of the ANPRM was to recognize the 
contractor's potential obligation for payment of the settlement 
liability, which is the PPA funding target, as a minimum in the 
computation of the assigned cost. Many commenters to the SDP believed 
that adopting the PPA liability and normal cost would in and of itself 
provide sufficient harmonization. The amortization of the mandatory 
prepayment credits (discussed later) was added to the ANPRM to 
guarantee that the contractor would recover all of its required 
contributions within a reasonable time period.
    As discussed in the ANPRM preamble, the Board continues to believe 
that contract cost accounting should continue to be based on the going 
concern basis. The Board also believes that recognition of the full 
valid liability for the pension plan must consider the risk associated 
with using the current settlement liability, especially during periods 
of unusually low corporate bond rates. Therefore, the NPRM retains the 
minimum actuarial liability as a ``floor.'' The Board observes that 
during periods of low corporate bond rates the recognition of the 
minimum actuarial liability and minimum normal cost will harmonize the 
CAS with the measurement of the PPA minimum required contribution with 
only a slight lag in recognition due to differences in amortization 
periods (7 years vs. 10 years). In all other periods, the long-term 
going concern approach will ensure that annual funding towards the 
ultimate liability will continue to ensure that sufficient assets are 
accumulated to protect the participants' benefits.
    The Board takes special notice of the comments recommending that 
the cost not be adjusted if the assigned cost equals or exceeds the PPA 
minimum required contribution--otherwise the CAS would impose a funding 
requirement above both the long-term assigned cost computation and 
ERISA minimum funding contribution. This NPRM proposes the use of a 3-
step ``trigger,'' as described under ``Recognition of a ``minimum 
actuarial liability'' in the summary of the proposed rule. The 3-step 
trigger uses criteria for recognizing the minimum actuarial liability 
that is based on a comparison of the assigned pension cost measured on 
a long-term basis with the ERISA minimum required contribution measured 
on a settlement basis for a ``non-at-risk'' plan. If the minimum 
required contribution exceeds the cost measured by CAS for the period, 
the minimum liability and minimum normal cost adjustments will be 
determined, and the contract cost for the period will be re-determined 
based on the minimum actuarial liability and minimum normal cost. 
Finally, the pension cost for the period is measured as the greater of 
the total pension cost measured using the long-term liability and 
normal cost or the minimum actuarial liability and minimum normal cost.
    The Board understands the appeal of recognizing additional 
contributions made as permitted by IRC Section 436 to improve the 
funding of a severely underfunded plan. However, the Board disagrees 
with the suggestion to recognize any additional contribution made to 
avoid the restrictions imposed by Section 436 of the IRC. The Board 
believes that recognition of such additional contributions is 
inappropriate for contract costing purposes because it would increase 
the volatility of costs between periods, reduce consistency between 
periods, and lessen comparability between contractors. Predictability 
would be diminished because the funding level can be affected by sudden 
changes in asset or liability values. Also, these additional 
contributions are permitted by the PPA, but are not required. 
Recognizing these contributions would subject contract costing to the 
financial management and employee relations decisions of contractors, 
which is distinctly different from proposing a rule that does not 
restrict a contractor's financial management decision-making. If the 
CAS would recognize such additional contributions, it might reduce the 
disincentive for funding the additional amount and eventually passing 
the unfunded liability on to the PBGC. However, it is not the purpose 
of the CAS to protect contractors from choices involving moral hazard.
    The preamble to the ANPRM made it clear that the change from 
actuarial accrued liability to the minimum liability or vice-versa was 
proposed to be treated as an experience gain or loss, which would be 
amortized based on the long-term interest rate. For clarity the NPRM 
explicitly requires that any change in the unfunded actuarial liability 
due to the minimum actuarial liability be included as part of the 
actuarial gain or loss measured for the

[[Page 25992]]

period and amortized over 10-years based on the long-term interest 
assumption.
    Frequent changes in the interest rates used for amortization 
purposes would introduce volatility and deviate from the Board 
objective of cost recognition on a long-term basis. Under the PPA, the 
gain or loss due to a change in interest rate is captured in the new 
amortization base and installment. The new installment is measured as 
the unfunded liability (shortfall) less the present value of the 
existing amortization installment based on the new interest rate. The 
rule proposed in this NPRM does not change the way in which 
amortization installments are measured. The long-term interest rate is 
used to measure amortization installments and unamortized balances. The 
Board would be interested in any analysis concerning the increase or 
reduction of volatility if amortization installment amounts are not 
changed once established and the effect of any interest rate change 
measured as an actuarial gain or loss.
    Topic G: Computation of Minimum Required Amount.
    Many commenters believed that the Minimum Required Amount should be 
measured without regard for any ERISA prefunding balances. Some 
commenters presented illustrations of how requiring a reduction to the 
minimum required amount for the prefunding balance would be inequitable 
to contractors who believe it is prudent to fund more than the bare 
minimum.

    First, we understand that the intention of the ANPRM approach is 
to limit the pension costs recovered to the contractors' cash 
contributions to trusts that have been required to either fund a CAS 
pension liability or to fund a PPA minimum required contribution for 
ERISA. Thus, for Government contracting, the cash outlays the 
contractor has been required to make by PPA are recoverable, while 
those cash outlays made wholly at the discretion of the contractor 
are not recoverable until such time as they are no longer 
discretionary (e.g., they are used to fund CAS pension cost or 
minimum funding requirements). We believe this approach to limit 
cost recovery is fair and equitable and support this concept. 
Fairness and equity might not prevail in some instances if 
discretionary amounts were immediately recoverable as contractor 
could influence from one accounting period to the next the amount of 
pension cost simply by its funding patterns. In addition, we believe 
this treatment intends to yield consistent cost recovery for 
contractors with the same funding requirements but different funding 
patterns over time. However, during our data modeling, we discovered 
that as currently written, the ANPRM can result in inequitable and 
inconsistent cost treatment for contractors with the same funding 
requirements but different funding patterns over time (refer to 
Illustration 1 in attachment). We believe this to be an unintended 
consequence that may be corrected with two revisions to the ANPRM.

    One commenter believed that the definition proposed at 
9904.412.30(a)(18) should include additional contributions for severely 
underfunded plans.

    Additional contributions made to avoid benefit limitations 
should be treated as a minimum required contribution for purposes of 
computing mandatory prepayment credits. These contributions are not 
added to the prefunding balance and may not be used to meet minimum 
funding requirements for the current year or for any future period. 
However, they will serve to reduce the minimum required contribution 
determined for future periods and the mandatory prepayment credits 
potentially available. Under the proposed standard, special 
contributions to avoid benefit limitations in excess of the 
assignable costs will be treated as voluntary prepayments and this 
may significantly delay reimbursement of those costs. This rule may 
therefore discourage or penalize contractors with severely 
underfunded plans from making additional contributions to avoid 
benefit restrictions.

    Response: The Board has reviewed the potential inequities that 
might arise if the minimum required amount is reduced for prefunding 
credits. The Board agrees with the commenters and believes that the 
appropriate comparison for determining when the assigned cost should be 
adjusted for a minimum liability should be based on comparison of the 
CAS assigned pension cost to the ERISA minimum required amount before 
any reduction for CAS prepayments or ERISA prefunding balances, 
including carry-over balances. This approach is consistent with the 
Board's desire to allow the contractor latitude in the financial 
management of its pension plan.
    As discussed in the response to the previous topic, the Board 
believes that recognition of additional contributions made to avoid 
benefit restrictions are voluntary and could increase volatility. The 
NPRM does not include recognition of these contributions in the 
measurement of the minimum required amount.
    Topic H: Special Accounting for Mandatory Prepayment Credits.
    Comments: Two commenters believed that the special recognition of 
mandatory prepayment credits creates excess pension expense given other 
proposed rule harmonization features. One of the commenters believed 
that the rules relating to mandatory prepayment credits were overly 
complex and unnecessary.

    We recommend that the CAS Board not adopt the proposed provision 
for annual amortizations of mandatory prepayment credits. We believe 
that the proposed mandatory prepayment credit provision, which is 
intended to provide an additional relief for a ``negative cash 
flow'' that the contractor may experience in early years, is 
superfluous and unnecessary, and is difficult to ensure compliance. 
In our opinion, harmonization of the CAS with the PPA has been 
achieved sufficiently in the ANPRM that recognizes the PPA 
liability, reduction in the amortization period for gains and 
losses, and increase in the assignable cost limitation.
    As elaborated below, we believe that the accounting 
recordkeeping required for the proposed mandatory prepayment credits 
is unduly complex, burdensome, and unnecessary to achieving 
harmonization. Current CAS recognizes prepayment credits without 
distinguishing voluntary from mandatory prepayment credits. 
Moreover, the proposed creation of a mandatory prepayment account 
requires separate identification, accumulation, amortization, 
interest accrual, and other adjustment of mandatory prepayment 
credits for each year. This process will increase administrative 
costs, be prone to error, and be very difficult to validate the 
accuracy and compliance during audit. In our view, harmony with 
funding differences already exists in the current CAS provision for 
prepayment credits that will increase in value at the valuation rate 
of return for funding of future pension costs.
* * * * *
    We fully agree with this comment that the ANPRM's recognition of 
the PPA liability, which is determined by using its required 
interest rate and mortality assumptions, will substantially close 
the differences between CAS and PPA cost determinations. All other 
differences would be minor. Accordingly, we believe that the ANPRM's 
recognition of the PPA liability alone would accomplish the 
Congressional mandate for the CAS Board to harmonize the CAS with 
the PPA. Since the interest rates of corporate bonds are typically 
less than long-term expected investment rates-of-return of a 
diversified, bond and equity portfolio as espoused by CAS, the 
``harmonized'' minimum actuarial liability will generally be greater 
than the CAS-computed actuarial accrued liability. This larger 
liability will result in a larger unfunded actuarial liability 
which, in turn, will measure and assign greater pension cost 
allocable to Government contracts. Recognition of greater pension 
costs creates greater funding of the pension plan that will provide 
the funding level required for settling pension obligations under 
the plan.

    Many other commenters advised the Board to revise provisions on 
amortization of mandatory prepayment credits to simplify the rule and 
to better coordinate rules for prefunding balances with the PPA. One of 
these commenters agreed that the proposed rule was too complex and 
suggested an approach to simplify the accounting for mandatory 
prepayments:

    The proposed rule requires mandatory prepayment charges to be 
recalculated if the

[[Page 25993]]

balance is reduced by an amount in excess of the computed charge. We 
believe that this requirement is overly complex and prefer an 
approach that simply reduces the amortization period to reflect any 
excess payments. The PPA methodology for interest rate changes 
described in the preceding paragraph should also be permitted for 
amortization of mandatory prepayment balances. These changes will 
not only simplify the calculations but also improve the 
predictability of costs.

    There were several comments concerning the interest rate used to 
update mandatory and voluntary prepayment credits. Most commenters 
believed that the mandatory and voluntary prepayment accounts should be 
updated using the same interest rate. They suggested that the rate 
should be the actual rate of return on assets used to update ERISA 
prefunding balances. One of the commenters stated:

    The proposed CAS 412-50(a)(ii)(B) states that ``the value of the 
voluntary prepayment account shall be adjusted for interest at the 
actual investment return rate * * *.'' To avoid possible conflicts, 
the regulations should more clearly describe how the ``actual 
investment return rate'' is to be determined and whether that rate 
should apply to contributions that generate voluntary prepayment 
credits during the plan year.

    Another one of these commenters opined that the prepayments, once 
updated based on the actual rate of return, must be subtracted from the 
market value of assets before measuring the smoothed, actuarial value 
of the assets. The commenter believed this requirement should be 
included in the rule and explained:

    The rationale for crediting an actual rate of return to 
prepayment balances is valid. However, if asset smoothing is used, 
prepayment balances must first be subtracted from plan assets in 
order to prevent unexpected results. The final standard should 
therefore specify that asset smoothing is to be applied to the 
assets after reduction for voluntary prepayment balances. This 
change in methodology should not require advance approval.

    One commenter was particularly concerned with the interest rate 
used to update the mandatory and voluntary prepayment credits and 
wrote:

    First, on item 2, ``Mandatory Prepayment Credits,'' the actual 
net rate of return on investments should be used to adjust the value 
of and the accumulated value of mandatory prepayment credits. The 
ANPRM states, ``Because neither the mandatory nor voluntary 
prepayment credits have been allocated to segments or cost 
objectives, these prepayments continue to be unallocated assets and 
will be excluded from the asset value used to measure the pension 
cost.'' Although prepayment credits are unallocated assets, the 
ANPRM language overlooks the fact that the current use of the long-
term interest assumption rate to value prepayment credits has 
historically impacted the measurement of pension cost. Because the 
gains and losses attributable to prepayment credits do not accrue 
against the prepayment credits, they are credited or charged against 
the assets, thereby leveraging the impact of the gain or loss on the 
measurement of pension costs. Therefore, for prepayment credits to 
have no impact on the measurement of pension costs, they must be 
valued at the actual net rate of return on investments.

    A commenter argued that government contractors for whom the 
percentage of their government contracting business is 90% or greater 
should be permitted to choose to claim reimbursement of the mandatory 
prepayment credit immediately when incurred.

    We suggest, that for government contractors for whom the 
percentage of their government contracting business is 90% or 
greater, that they can choose to claim reimbursement of the 
mandatory prepayment credit immediately when incurred. Because they 
derive the vast majority of their income from government 
reimbursement, we believe that the delayed reimbursement of required 
cash contributions may create a difficult financing situation for 
these contractors.

    Three commenters asked the Board to clarify that any mandatory 
prepayment charges are assigned to the period and allocated separately 
from and in addition to the assignable cost. Two of these commenters 
believed that the NRPM should not assign and allocate a mandatory 
prepayment charge in addition to the normally assigned pension cost, 
especially of the minimum liability concept was retained.

    * * * In addition, when comparing the minimum required funding 
amount under ERISA with the CAS assignable cost for purposes of 
determining mandatory prepayment credits, it would be helpful to 
clarify that the CAS assignable cost does not include any mandatory 
prepayment charges assigned to the period.

    Several commenters believed that the proposed record-keeping for 
mandatory prepayment credits is unduly complex and burdensome. There 
were many other comments expressing concerns or making detailed 
recommendations on how to improve or simplify proposed special 
accounting for mandatory prepayments. These recommendations included 
suggestions such as converting any voluntary prepayment credits used to 
fund the PPA minimum contribution to mandatory prepayment credits and 
establishing a level 5-year payment when the mandatory prepayment is 
created and maintaining that amount until the mandatory prepayment is 
fully adjusted.
    The public comments also were concerned with the accounting for 
mandatory prepayment credits at the segment level. As one of these 
commenters suggested, the rules should be expanded to address how 
mandatory prepayment charges are apportioned among segments:

    Special consideration is required when addressing the treatment 
of prepayment charges and credits in situations in which a plan 
maintains more than one segment. The proposed rules suggest that 
such apportionment is done in a manner similar to how the maximum 
deductible contribution is allocated. However, this approach does 
not work very well primarily because the maximum deductible 
contribution imposes a limit on the otherwise assignable cost, while 
the prepayment charges represent an addition to the otherwise 
assignable cost. Furthermore, while the maximum deductible 
contribution is primarily related to annual costs, the prepayment 
charges are generated through the underfunding of some segments. 
Accordingly, we believe that the apportionment of the prepayment 
charges is more appropriately related to funding levels. While such 
underfunding is often associated with higher annual costs, there is 
a much stronger relationship to funding levels.
    However, before addressing this further, we think that the CAS 
Board needs to clarify that the voluntary and the mandatory 
prepayment accounts be maintained separately and not be apportioned 
to individual segments. This request is based on our understanding 
that the intention is for apportioning to occur when these accounts 
are allocated as part of the assignable cost. The remainder of our 
comments concerning the distribution of prepayment charges among 
segments is predicated on this understanding.

    Response: The Board agrees with the commenters that the prepayment 
amortization rules proposed in the ANPRM are unduly complex and 
burdensome. The Board believes that imposing a settlement-based, 
minimum liability on the measurement of the pension cost for the period 
will provide sufficient harmonization with the PPA. The NPRM retains 
the current recognition of prepayment credits and does not distinguish 
between mandatory and voluntary prepayments.
    The concept presented in the ANPRM was intended to apply the 
mandatory prepayments as quickly as possible to promote timely recovery 
of the minimum contributions and lessen the short term cash flow 
concerns of the contractor. Furthermore, the addition amortization of 
the mandatory prepayment credits would measure and assign pension cost 
in excess of that necessary to recognize the normal cost plus 
amortization of the unfunded actuarial liability.
    Amortizing the mandatory prepayment credits essentially achieves a 
rolling average of the difference between the assigned cost and the 
contractor's cash contribution. In considering the possible approaches 
to

[[Page 25994]]

harmonization for the NPRM, the Board discussed the possibility of 
replacing the current cost accrual rules and the proposed recognition 
of the minimum actuarial liability with some mechanism to smooth the 
cash contributions over a 3 or 5-year period. However, such an approach 
would conflict with the Board's goal of basing pension costs on long-
term accrual costs and thereby achieve better matching of costs with 
the activities of an ongoing concern.
    This NPRM does not include any provisions to identify or account 
for mandatory prepayment credits. Nonetheless, the Board appreciates 
all the suggestions concerning improving the mandatory prepayment 
provisions.
    Topic I: Assignable Cost Limitation (ACL) Requires Modification.
    Comments: Most commenters were receptive to the proposal revising 
the assignable cost limitation and many submitted suggestions 
concerning clarification of the methodology for calculating the 
assignable cost limitation.
    One commenter believed that the revision of the assignable cost 
limitation was important for improving predictability for forward 
pricing.

    The impact of the ERISA full funding limitation, and more 
recently the CAS 412 Assignable Cost Limitation, has presented long-
standing predictability problems for forward pricing. I am pleased 
the Board is addressing this problem, which has always been a 
predictability problem. This problem was first addressed in the 
Staff Discussion Paper (SDP) entitled ``Fully Funded Pension 
Plans.'' 56 FR 41151, August 19, 1991. In that Paper, the staff 
wrote:

    Government contract policymakers also have their own set of 
special needs, some involving the rhythms peculiar to the pricing of 
Government contracts, and others involving matters of public policy. 
It seems obvious, that in the pension area, aggregate pension costs 
included in prices must reasonably and accurately track accruals for 
pension costs on the books for Government contract costing purposes. 
In other words, booked pension costs need to be sufficiently 
predictable so that forward pricing rates for fixed price contracts 
are not based upon pension cost levels different from those 
ultimately accrued for the period of contract performance. That has 
not been happening in many instances when a fully funded status has 
been reached unexpectedly. Thus, in a number of instances, where 
estimated pension costs used for negotiating fixed price contracts 
include a significant element of pension cost, the subsequent 
achievement of full funding status served to eliminate pension costs 
altogether for the period of contract performance.

    This commenter continued:

    Based on the present ANPRM, the effect of predictability, or the 
lack thereof, on forward pricing remains a concern to the Board. In 
response to ``11 Assignable Cost Limitation,'' the Board 
explains:

    The Board has reviewed the effect of the assignable cost 
limitation on cost assignment, especially the effect on 
predictability. Government agencies and contractors have both found 
that the abrupt and substantive change in pension cost as a plan 
goes above or below the current assignable cost limitation gives an 
unintended windfall to one party or another with respect to fixed 
price contracts. These abrupt and substantive changes also wreak 
havoc on program budgeting for flexibly-priced contracts. Currently, 
once assets equal or exceed the actuarial accrued liability and 
normal cost, the pension costs drop to zero and the Government's 
recovery of the surplus can be indefinitely delayed. When assets are 
lower than the liability and normal cost, the reverse occurs and the 
contract may never be able to recover substantial incurred pension 
costs that were never priced.

    Conversely, another commenter expressed the belief that the 25% 
buffer was inappropriate and could allow excessive pension costs.

    We do not think that the ACL should be raised to 125% of the 
AAL, plus the normal cost. * * * We are finding that the 125% 
threshold is unlikely to be reached, which may lead to excessive CAS 
expense. What happens is that there are no mechanics to wipe out the 
existing bases. On the other hand, under PPA, a plan is expected to 
be ``fully funded'' in 7 years. In reality, under most contractors' 
investment policy, it would be anticipated that there would be 
investment gains further reducing the PPA required funding in the 
long run, while CAS expense continues to grow under the ANPRM model.

    Several commenters requested clarification concerning which 
components of the assignable cost limitation were to be increased by 
25%. As one commenter expressed their concern:

    Section 9904.412-30(a)(9) defines the Assignable Cost Limitation 
(ACL) to be ``the excess, if any, of 125 percent of the actuarial 
accrued liability, without regard to the minimum actuarial 
liability, plus the current normal cost over the actuarial value of 
the assets of the pension plan.''
    It is unclear whether the 125 percent factor applies only to the 
AL, or to the Normal Cost and Actuarial Value of Asset as well. In 
other words, it would be helpful if clarification is provided 
regarding which of the following the ANPRM intends to be the ACL 
definition:
    (a) 125% x AL, plus NC minus Assets
    (b) 125% x (AL plus NC), minus Assets
    (c) 125% x (AL plus NC minus Assets)
    We believe (b) above is appropriate. The new ACL definition--
which reflects the 125% factor--would allow for sufficient surplus 
assets that would make CAS assignable costs less volatile compared 
to the current definition.

    Some commenters believe that the assignable cost limitation must 
also recognize the minimum actuarial liability and minimum normal cost 
to be consistent with computation of the pension cost. Furthermore, 
harmonization must reflect the settlement liability that is the funding 
goal of the PPA minimum required contribution.

    It is our understanding that multiplying the AAL by 125% in 
determining the ACL is intended to add a cushion based on long-term 
funding. We also understand that multiplying the greater of the AAL 
and the MAL by 125% could, in some situations, result in a cushion 
that might be inappropriate from a policy perspective. At the same 
time, however, we feel that it would be inappropriate from a 
theoretical perspective for the ACL to limit costs in a manner that 
would preclude full funding on a settlement basis. Accordingly, we 
recommend that the ACL be calculated using liabilities/normal costs 
equal to the greater of (a) 125% of the AAL plus 100% of the normal 
cost and (b) 100% of the MAL plus 100% of the minimum normal cost.

    Another commenter explained:

    The second area with which we have a concern is the new 
assignable cost limit (ACL) calculation. While we appreciate the 
intent of the CAS Board to revise this calculation to reduce the 
frequency with which plans enter and exit full funding and impact 
pension costs significantly as a result, we do not believe the ANPRM 
achieves the desired result nor is aligned with the overarching 
purpose of this limitation. First, we understand the purpose of the 
ACL is to prevent an excessive buildup of CAS assets that have 
funded CAS pension cost. Since pension costs calculated under the 
ANPRM are based on the greater of the AAL or MAL, it follows that if 
the ACL is to prevent a buildup of assets that have funded pension 
costs, it too should consider both the AAL and the MAL. We recognize 
consideration of the MAL would allow for a higher level of assets, 
but we believe this is acceptable given that the ANPRM provides for 
a higher pension cost as well. If the ACL considers only the AAL, as 
the ANPRM is written, we do not believe that the calculation is 
aligned with its intended purpose.
    We worked with [an actuarial firm] to support us in gathering 
contractor data estimates to develop a practical assessment of the 
materiality of the liabilities and normal costs anticipated to 
consider the effects on ACL results. A total of 13 contractors 
participated in this survey. Eleven of the survey participants are 
in the top 100 Department of Defense contractors for 2007. Of the 
top 100 contractors, many do not have defined benefit pension plans. 
Based on a data survey (refer to Illustration 3) and modeling by 
[the actuarial firm], it is the normal cost that will drive the 
pension cost going forward and accordingly should be more 
determinative in the ACL calculation to provide for the desired 
result of reducing the frequency of plans entering and exiting full 
funding. For these reasons, we recommend revising the calculation of 
the ACL to include the greater of 125% of the AAL or 100% of the MAL 
as measured at the end of the year when the respective normal costs 
would be part of each liability measure. We have provided 
recommended language for this

[[Page 25995]]

revision in the attachment in the section labeled CAS 412-30(a)(9).

    Another commenter endorsed the 25% buffer but argued that the 
assignable cost limitation should not consider the minimum actuarial 
liability and minimum normal cost. As one commenter expressed their 
argument:

    To limit the amount of the pension cost charged to Government 
contracts, the ANPRM provides a limitation to the amount of annual 
pension costs. The limit is ``125 percent of the actuarial accrued 
liability, without regard to the minimum actuarial liability, plus 
the current normal cost over the actuarial value of the assets.'' We 
agree with this limitation because it affords some protection 
against the volatility caused by using the ``settlement or 
liquidation approach.''

    In response to the ANPRM question as to whether amortization should 
continue unabated or be deemed fully amortized upon reaching or 
exceeding the assignable cost limitation, one commenter opined:

    The supplementary information with the ANPRM also asked for 
comments on whether volatility might be better controlled if 
amortization bases always continue unabated even if the assets 
exceed the ACL limitation. We believe that allowing the amortization 
bases to continue unabated could introduce undesirable problems, for 
example where amortization bases are for negative amounts. We 
recommend that this concept of unabated bases not be pursued.

    Response: The proposed rule does not change the basic definition of 
the assignable cost limitation and continues to limit the assignable 
cost to zero if assets exceed the actuarial accrued liability and 
normal cost. However, under this NPRM the actuarial accrued liability 
and normal cost shall be revalued as the minimum actuarial liability 
and minimum normal cost if the proposed criteria of 9904.412-50(b)(7) 
are met.
    The Board shares the commenters' concerns regarding the volatility 
caused by the abrupt impact of the assignable cost limitation when 
assets equal or exceed the liability plus the normal cost. While 
predictability might be improved if pension costs continue to be 
measured and assigned as the funding level (assets compared to the 
liability plus normal cost) nears and then rises above and falls below 
100%, the Board continues to have concerns with the accumulation of 
excess assets. Recognition of the minimum actuarial liability and 
minimum normal cost will decrease the circumstances when a contractor 
would face having to make a contribution to satisfy ERISA but not have 
an assignable pension cost for contract accounting purposes. If the 
assets exceed both the long-term liability and normal cost, and also 
the minimum actuarial liability and minimum normal cost, then there is 
no valid cost liability to be funded in the current period.
    The Board believes the 10-year minimum amortization period for 
gains and losses and any liability increase due to the minimum 
actuarial liability provide sufficient smoothing of costs. Therefore, 
the NPRM does not include any assignable cost limitation buffer. Under 
the NPRM, once the revised assignable cost limitation is exceeded, the 
assigned pension cost continues to be limited to zero.
    Topic J: Miscellaneous Topics.
    (1) Comment--Funding Hierarchy: One commenter recommended that the 
contributions in excess of the minimum required contribution and 
voluntary prepayments be eliminated from the proposed ``Funding 
Hierarchy''. This commenter wrote:

    ANPRM section 412-50(a)(4) contains the following hierarchy of 
pension funding:
    1. Current contributions up to the minimum required funding 
amount;
    2. Mandatory prepayment credits;
    3. Voluntary prepayment credits; and
    4. Current contributions in excess of the minimum required 
funding amount.
    Although we have no particular concern with this hierarchical 
approach, and we understand the need for a hierarchy with regard to 
mandatory prepayment credits, we do have a concern with the required 
order of items 3. and 4. Specifically, given the lack of explanation 
in the ANPRM, and past experience at one Government agency, we are 
concerned that CASB may be attempting to eliminate--with no 
discussion--quarterly interest adjustments that have long been 
considered allowable costs on contracts with the DoD and other 
agencies.
* * * * *
    To resolve this problem, we recommend that the funding hierarchy 
be limited to the first two elements listed above. Alternatively, we 
recommend that CAS 412 state explicitly that interest based on 
presumed funding in accordance with the schedule contained in the 
FAR shall be considered to be a component of pension cost. Under 
this scenario, however, we note that a number of changes to CAS 412/
413 would be required that would be unrelated to harmonization.

    Response: The application of current and prior contributions was an 
important component of the special treatment of mandatory prepayments 
credits. Since the NPRM does not provide for special treatment of 
mandatory prepayment credits, the previously proposed funding hierarchy 
is no longer necessary for the measurement, assignment, and allocation 
of pension costs. The Board notes that the allowability of pension 
costs and any associated interest is not addressed by the CAS. Issues 
of allowability fall within the purview of Part 31 of the Federal 
Acquisition Regulations (FAR).
    (2) Comment--Future Salary Increases: One commenter urged the Board 
to continue recognition of future salary increases in order to promote 
full costing and to dampen volatility.

    I applaud the Board for looking beyond mere coordination with 
the ERISA minimum required contribution and consideration of the 
effect of salary projections on the stability of costs across 
periods. Under 8b--Salary Projections'' the Board states:
    ``The Board believes that the measurement of the actuarial 
accrued liability and normal cost should continue to permit 
recognition of expected future salary increases. Such recognition is 
consistent with a long-term, going concern basis for the liability 
measurement. Since the benefit increases attributable to the salary 
increases are part of the long-term cost of the pension plan, 
including a salary increase assumption helps to ensure that the 
assigned cost adequately funds the long-term liability. Anticipating 
future salary growth may also avoid sharp pension cost increases as 
the average age of the plan population increases with the march of 
the ``baby-boomers'' towards retirement.''

    Response: The Board has approached harmonization by ensuring that 
the liability used for contract costing purposes cannot be less than 
the liability mandated for measuring the minimum required amount. The 
NPRM does not add any new restrictions on the measurement of the going 
concern liability. While ERISA and GAAP have moved to settlement 
interest rates for computing the pension contribution or disclosed 
expense, both include recognition of established patterns of salary 
increases for purposes of determining the maximum tax-deductible 
contribution and the disclosed net periodic pension expense.
    (3) Comment--Cost Increase Due to Assumed Interest Rates: One 
commenter expressed their belief that concerns about the increase in 
contract costs attributable to recognition of a settlement interest 
rate may be overstated. This commenter notes that the increase in 
benefits being paid as lump sum settlements has already lessened the 
difference between the going concern and the settlement liability. This 
commenter explains as follows:

    We concede that market-based bond rates may result in increased 
costs, but the increases may be less than expected. For plans that 
pay lump sums based on current bond rates in accordance with Sec.  
417(e) of the Internal Revenue Code, the increased costs are 
probably already reflected to some degree. For plans that pay 
benefits not based on pay, and for many cash balance plans, costs 
will likely be determined under the minimum liability provisions of 
the proposed

[[Page 25996]]

rule and will therefore reflect the lower interest rates even if the 
standard measurement basis is not changed. Finally, we expect that 
many contractors will move to lower their projected long-term rates 
of return and will cite the current economic situation as 
justification for the change. These cost increases will be amortized 
over as little as 10 years under the proposed rules but can be 
phased-in more slowly under a transition rule if a change in the 
measurement basis is mandated.

    Response: The Board believes that the current and proposed use of 
the long-term interest assumption, which is tied to the long-term 
expected return of the investment portfolio, is the most appropriate 
rate for contract costing that extends over multiple periods. A best 
estimate for the going concern approach includes reasonable assumptions 
regarding the payment of lump sums upon termination or retirement. 
However, as a matter of CAS harmonization, the use of a settlement rate 
basis for the limited purpose of determining the minimum actuarial 
liability and minimum normal cost is permitted and exempted from the 
general requirement that all assumptions be the contractor's ``best 
estimate'' of long-term expectations.
    (4) Comment--Interest Rate and Payment Amount to Amortize the 
Unfunded Actuarial Liability: One commenter asked the Board to clarify 
the interest rate used to amortize the unfunded actuarial liabilities 
and submitted:

    We believe the final rules need to clarify whether the long-term 
interest rate assumption is to be used to develop all amortization 
payments, regardless of whether the MAL is higher than the AAL.
    Recommendation: We recommend the use of the long-term interest 
rate assumption in developing all amortization payments. This will 
simplify the calculations compared to an alternative that would 
reflect the long-term interest rate assumption in some situations 
and the MAL interest rate in other situations.

    Another commenter was concerned with the re-computation of the 
amortization installment when interest rates are changed and 
recommended follows:

    The proposed rule requires amortization payments to be based on 
the assumed long-term rate of return. If the liability measurement 
basis is changed to reflect current bond rates, the rules should 
clarify that amortization payments will be calculated based on the 
effective interest rate. Under ERISA/PPA, liabilities must be 
discounted using rates that vary by duration, but the plan's actuary 
is required to determine and disclose the single effective interest 
rate that will produce an equivalent liability. This rate should be 
materially consistent with the single discount rate used for FAS 
purposes. The CAS rule does not need to tie directly to ERISA or 
FAS, but if the language is properly drafted, it will allow the 
liabilities and interest rate to be obtained directly from either an 
ERISA report or a FAS report. Such a rule will also avoid confusion 
with the PPA rules that require amortization payments to be 
discounted using the yield curve or segment interest rates.

    Response: The NPRM proposes to continue the current requirement to 
determine a level annual amount based on the prevailing long-term 
interest assumption and remaining amortization period. The Board notes 
that potential variances between asset values due to prepayments and 
asset valuation methods will often mean that the amortization bases and 
installments shown in a valuation report prepared for ERISA purposes 
will differ from amortization bases and installments shown in a 
valuation report prepared for CAS purposes.
    (5) Comment--Trust Expenses as a Component of Minimum Normal Cost: 
One commenter requested that the rule specify that trust expenses are 
part of normal cost based on the amendments made to the PPA by the 
Worker, Retiree, and Employer Recovery Act of 2008 (WRERA).

    The Senate passed H.R. 7327, the Worker, Retiree, and Employer 
Recovery Act of 2008 on December 11, 2008. The bill was previously 
passed by the House. It now goes to the President where signature is 
expected. The Act contains provisions prescribing that pension asset 
trust expenses be included as part of ERISA target normal costs. 
These provisions were generically described as ``technical 
corrections'' to the Pension Protection Act (PPA). Accordingly we 
believe the change in treatment of trust expenses to be clearly 
within the PPA harmonization mandate to the CASB. The implications 
of this change would be significant for some contractors, 
exacerbating the negative cash flows that will be experienced by 
certain contractors.
    [We believe] that PPA and CAS should be harmonized by revising 
the ANPRM to call out trust expenses as a component of CAS normal 
costs and to specify that reclassification of trust expenses as part 
of normal costs under both the actuarial accrued liability and 
minimum actuarial liability bases (versus a reduction to the 
expected long term interest rate) results in a required change in 
cost accounting practices whenever necessary to implement the 
harmonized CAS.

    Response: The Board agrees that the minimum required amount should 
be computed in full accordance with the PPA and its amendments. The 
Board also believes it is not necessary to make such a specification 
concerning the long-term cost for CAS purposes. Currently the 
recognition of plan expenses under CAS is part of the contractor's 
actuarial assumptions and disclosed cost method. Expenses can be 
recognized as an increment of normal cost, either as an additional 
liability or as a decrement to the long-term interest assumption. 
Additionally, the NPRM specifies that the accumulated value of 
prepayment credits receives an allocation of administrative expenses in 
conformity with allocations to segments. The CAS is not in conflict 
with the PPA and there is no reason to change the current rule.
    Administrative expenses can include the payment of investment and 
trustee fees associated with the investment and management of the 
assets, i.e., asset-related expenses. Administrative expenses can come 
from the payment of the PBGC premium and distribution of benefit 
payments associated with the participants in the plan, i.e., 
participant-related expenses. The Board is aware that the computation 
of the pension cost for segments will implicitly or explicitly 
recognize the estimated administrative expense for the period without 
distinction between asset investments and participant related expenses. 
When updating the market value of the assets, an allocation of asset-
related expenses across all segments and the accumulated value of 
prepayment credits matches that expense with the causal/beneficial 
source of the expense. Allocation of participant-related expenses 
across all segments including the accumulated value of prepayment 
credits causes a mismatch of that portion of the expense with the 
causal/beneficial source of the expense. Conversely not allocating a 
portion of the asset-related expense to the accumulated value of 
prepayment credits causes a mismatch in the measurement of the period 
cost.
    The Board believes that the complexity, expense and administrative 
burden associated with separate identification and allocation of asset-
related expenses and participant-related expenses exceed any 
misallocations in measurement of the period costs, and/or in the 
allocation of expenses in the updating of asset values. The Board would 
be interested in any recommendations or analysis regarding the 
allocation of administrative expenses.
    (6) Comment--Require Use of Projected Unit Credit Actuarial Cost 
Method: One commenter recommended that the CAS restrict the choice of 
actuarial cost method to the projected unit credit (PUC) cost method 
for the going concern basis of accounting.

    The ANPRM notes that responses to the Staff Discussion Paper 
overwhelmingly support the adoption of a liability basis consistent 
with ERISA, as amended by the PPA. The Board narrowly interpreted 
the PPA liability as the amount computed for minimum funding 
purposes and rejected this

[[Page 25997]]

approach because it does not represent the liability for an ongoing 
plan. We advocate the use of the PUC method, which is required for 
financial reporting and also for determining the PPA maximum tax 
deductible limit. The PUC approach reflects projected liabilities 
(including estimated future salary increases) and is appropriate for 
an ongoing plan.
    The PUC cost method is acceptable under the current and proposed 
CAS and many contractors are already using this method. Therefore, 
the discount rate is the only material change required to eliminate 
the conflict and ensure consistency between the CAS and other 
pension standards. * * *

    Response: The NPRM permits the use of any immediate gain actuarial 
cost method, including the projected unit credit and therefore does not 
conflict with ERISA. The Board believes that the contractor should be 
permitted to use the actuarial cost method and assumptions that best 
suits its long term financial goals. The Board has not been presented 
with any risk to the Government or contractor that would demonstrate a 
need for such a restriction in choice of method.
    (7) Comment--Some Terminology is Inconsistent: One commenter noted 
that the normal cost terminology was inconsistent in the ANPRM and 
advised the Board as follows:

    We recommend that the rule define the terms ``current normal 
cost'' (used in CAS 412-30 but used in definition of Assignable Cost 
Limitation), ``minimum normal costs'' and ``normal cost for 
period.''

    Response: The Board agrees. The NPRM includes proposed revisions 
that should ensure all terminology is used consistently throughout CAS 
412 and 413.
    The major structural difference of the NPRM has been to place most 
of the harmonization rule into one distinct paragraph at 9904.412-
50(b)(7). In this way, the existing measurement, assignment and 
allocation language can stand unmodified, with some exceptions. If the 
criteria of 9904.412-50(b)(7) are met, then the user constructively 
substitutes the minimum actuarial liability value, through an 
adjustment computation, for the actuarial accrued liability, and the 
minimum normal cost for the normal cost, and then re-determines the 
computed, assigned, and allocated costs.
    (8) Comment--Illustrations are Complex: One commenter opined that 
the illustrations are complex and suggested using a single reference 
table of actuarial information.

    The illustrations are difficult to evaluate because of the 
complexity of the rule and the fact patterns of each illustration. 
We recommend that one reference table be used for the actuarial 
information covered under one or more illustrations.

    Response: The Board agrees. The NPRM includes three examples of the 
proposed harmonization accounting in a new subsection 9904.412-60.1, 
Illustrations--CAS Harmonization Rule. The plan facts and actuarial 
methods and assumptions used for all three harmonization illustrations 
are described at 9904.412-60.1. These facts disclose that the 
contractor computes pension costs separately for one segment and on a 
composite basis for the remaining segments. A pension plan with all 
segments having an unfunded actuarial liability is the subject of 
9904.412-60.1(b), (c) and (d), while a pension plan with one of the 
segments having an asset surplus is presented in 9904.412-60.1(e), (f) 
and (g). These two comprehensive examples illustrate the process of 
measuring, assigning and allocating pension costs for the period. The 
last illustration, 9904.412-60.1(h), shows how changes over three years 
between the long-term liability and the settlement liability bases are 
recognized as actuarial gains or losses.
    (9) Comment--Review the Board's Statement of Objectives, Principles 
and Concepts: One commenter suggested that the Board should review and 
reaffirm its Statement of Objectives, Principles and Concepts.

    In conclusion, I recommend that the CAS Board consider 
revisiting the Board's Statement of Objectives, Policies and 
Concepts. Part of any such review should include a reaffirmation of 
predictability as a specific goal or objective of CAS.

    Response: The Board believes that while this may be a worthwhile 
endeavor, such a project would be time consuming and is beyond the 
scope and timetable for harmonization.
    Topic K: Accounting at the Segment Level.
    Comment: One commenter suggested that the Board explicitly state 
how the minimum actuarial liability calculation should be applied in 
segment accounting, writing:

    The ANPRM is not clear regarding the comparison of the regular 
AAL and MAL under segment accounting: should the comparison be done 
at a plan level or for each segment individually?

This commenter then continued:

    It would be helpful if the final rule is explicit regarding how 
the MAL should be applied in segment accounting. Otherwise, two 
contractors might apply the rules differently.

    Response: Paragraphs 9904.413-50(c)(3) and (4) require the 
contractor to measure pension costs separately for a segment or 
segments whenever there is a difference in demographics, experience, or 
funding level. A contractor is also permitted to voluntarily compute 
pension costs on a segment basis. Currently a contractor is required to 
apply the criteria of 9904.412 to the determination of pension cost for 
each segment, or aggregation of segments, whenever costs are separately 
computed. Accordingly, if pension costs are computed at the segment 
level, under this proposed rule the minimum actuarial liability and 
minimum normal cost shall be computed at the segment level and the 
proposed provisions of 9904.412-50(b)(7) shall also be applied at the 
segment level. If pension costs are permitted to be measured on a 
composite basis and that is the contractor's established practice, then 
the minimum actuarial liability and minimum normal cost shall be 
measured for the plan taken as a whole.
    Topic L: CAS 413-50(c)(12) Segment Closing Adjustments.
    Comments: One commenter believes that the CAS 413-50(c)(12) segment 
closing adjustment should be based on the ``going concern'' liability 
unless there is an actual settlement. The commenter explained their 
position as follows:

    The CAS 413-50(c)(12) adjusts pension costs when certain non-
recurring events occur such as a curtailment of benefits or a 
segment closing. Though we agree with using the ``settlement or 
liquidation approach'' for the measurement of annual pension cost 
(because of the burden of the added funding requirements of PPA), we 
believe that the ``going concern approach'' is the superior method 
of cost accounting for pension costs and should be generally 
retained for purposes of computing the CAS 413-50(c)(12) adjustment. 
We believe that the ``going concern approach'' provides the best 
measure of the funds needed by the pension trust to pay pension 
benefits absent a settlement of the pension obligation. Our 
experience shows that defense contractors only very rarely settle 
pension obligations. Therefore, we recommend that the use of the 
``going concern approach'' when a segment has (i) been sold or 
ownership has been otherwise transferred, (ii) discontinued 
operations, or (iii) discontinued doing or actively seeking 
Government business). We note that if the contractor settles the 
pension obligation due to a segment closing, the current CAS rule 
permits the use of the ``settlement or liquidation approach.'' Also, 
we believe that using the ``settlement or liquidation approach'' for 
a curtailment of benefits is appropriate since the segment and 
Government contracts continue.

    Three commenters believed that the Board should exempt segment 
closing adjustments from the five-year phase-in of the minimum 
liability. They believe that the segment closing adjustment, which is 
based on the current fair value of assets, should be subject to the 
current fair value liability for accrued benefits. It has been 
suggested in other

[[Page 25998]]

venues that the absence of such recognition has created a moral hazard 
wherein contractors purchase annuity contracts or pay lump sums to 
capture the current value of the liability and pass the increased cost 
to the Government. Comments included:

    The transition rules at ANPRM section 413-64.1(c) provide that 
the MAL is to be phased-in over five years for segment closing 
purposes. Given that the premise of segment closing adjustments is 
that prior-period costs must be trued-up because there are no future 
periods in which to make adjustments, it does not make sense to us 
to have a phase-in rule where there is a final settlement. Because 
this phase-in does not apply to plan terminations, such a rule may 
encourage contractors to engage in more expensive terminations as a 
means of avoiding the phase-in. To correct this problem, we 
recommend that the phase-in be eliminated for segment closing 
calculations.
    The proposed CAS 413-50(c)(12)(i) indicates that the liability 
used in the determination of a segment closing adjustment shall not 
be less than the minimum actuarial liability. In addition, the 
proposed CAS 413-64.1(c) indicates that the minimum actuarial 
liability is subject to a 5-year phase-in.
    We recommend that a segment closing adjustment be determined 
without regard to the 5-year phase-in. Without this change, a 
segment closing adjustment can be significantly affected by the 
exact timing of the event. All other things being equal, other than 
the timing of the event (i.e., within the 5-year phase-in period 
versus beyond this period), the ANPRM rules will result in different 
segment closing adjustments.
    The transition rules were put in place to ``allow time for 
agency budgets to manage the possible increase in contract costs and 
to mitigate the impact on existing non-CAS covered contracts.'' 
Since the segment closing adjustment represents a one-time event to 
``true up'' CAS assets, it would be unreasonable to subject it to 
the transition rules and never ``true up'' the assets to the 
liability that would have been determined had the event occurred at 
a later date.

    Response: The Board agrees that ``the `going concern approach' 
provides the best measure of the funds needed by the pension trust to 
pay pension benefits absent a settlement of the pension obligation.'' 
During periods leading up to the segment closing the proposed on-going 
contract accounting is intended to adequately fund the segment. The 
settlement liability will serve as a floor to the long-term ``going 
concern'' liability. Final accounting (i.e., the true-up of assets and 
liabilities) when a segment is closed shall be based on the 
contractor's decision on how to maintain future funding of the segment, 
including the contractor's decision to accept risk of investment in 
stock equities or to incur the additional expense of transferring the 
liability. The segment closing provision continues to require that the 
actuarial accrued liability be based on ``actuarial assumptions that 
are ``consistent with the current and prior long term assumptions used 
in the measurement of pension costs.'' The assumptions used to measure 
the going concern liability may be influenced by modifications to the 
investment policy for the plan based on changed circumstances (Gould, 
Inc., ASBCA 46759, Sept. 19, 1997) or a persuasive experience study. 
This is the same position the Board held when CAS 413 was amended in 
1995 when the Board stated in the preamble:

    Consistent with the requirement that actuarial assumptions be 
individual best-estimates of future long-term economic and 
demographic trends, this final rule requires that the assumptions 
used to determine the actuarial liability be consistent with the 
assumptions that have been in use. This is consistent with the fact 
that the pension plan is continuing even though the segment has 
closed or the earning of future benefits has been curtailed. The 
Board does not intend this rule to prevent contractors from using 
assumptions that have been revised based on a persuasive actuarial 
experience study or a change in a plan's investment policy.

    Because the segment closing adjustment shall continue to be 
determined based on the going concern approach, whether the benefit 
obligation is retained or settled, this NPRM has removed the 5-year 
phase-in requirement since the 9904.412-50(b)(7) ``Harmonization Rule'' 
does not apply to 9904.413-50(c)(12) segment closing adjustments.
    Topic M: CAS 413-50(c)(12) Benefit Curtailment Adjustments.
    Several commenters believed that the NPRM should eliminate 
voluntary benefit curtailments from the CAS 413-50(c)(12) required 
adjustment as long as the segment and contractual relationship 
continue, i.e., let the curtailment be adjusted as an actuarial gain. 
These commenters noted that even if there is a complete benefit 
curtailment, there can be future pension costs due to experience 
losses. One commenter stated:

    Since the CASB is addressing an issue related to plan 
curtailments, we submit the following suggestion: Revise the 
proposed rule to also exempt curtailments resulting from voluntary 
decisions to freeze benefit accruals (in circumstances where the 
segment is not closed and performance on Government contracts 
continues) from pension segment closing adjustment requirements. In 
these instances, gains and losses continue in the plan from 
demographics, measurement of liabilities and from performance of 
assets in the trust relative to expectations. Although there are no 
ongoing normal costs, in order to eliminate risk to both the 
Government and the contractor, (the contractor) believes these gains 
and losses should be measured and allocated to final cost objectives 
in cost accounting periods subsequent to the curtailment.

    Another commenter was concerned that retaining the requirement to 
adjust for a voluntary benefit curtailment might create an incentive to 
settle the liability and potentially increase the government liability 
unnecessarily, as follows:

    In a case where ERISA would require a cessation of benefit 
accruals for an ``at risk'' plan the ANPRM exempts that situation 
from the segment closing adjustment under CAS 413. We would suggest 
that CAS Board take this a step further and remove a curtailment of 
benefits as one of the triggers for a segment closing adjustment. 
This provision is unnecessary if the contractor is still conducting 
business with the government. The ongoing calculation of annual 
assignable cost could easily continue for a pension plan with frozen 
benefits. Implementing a segment closing adjustment would only 
provide incentive for the contractor to terminate the frozen plan 
and settle the pension obligations through annuity purchases and 
lump sum payments. That would only reduce the amount of any excess 
assets or increase the amount of any funding shortfall, which would 
then become an obligation of the government. It would seem to be 
advantageous to both the government and the contracting companies 
for the CAS Board to make this change.

    One commenter believes that all benefit curtailments should be 
exempted from adjustment under 9904.413-50(c)(12) as follows:

    Under current CAS 413, even if there are ongoing contracts an 
immediate segment closing adjustment occurs when a contractor 
freezes its pension plan voluntarily. We note that even when a plan 
is frozen, there are ongoing CAS costs. We also note that the 
current CAS 413 is silent as to whether or not ongoing CAS costs can 
be recognized. Because CAS 413 is silent, it is our understanding 
that in some situations, contractors are not allowed to further 
recognize the CAS costs, while there are other situations when such 
CAS costs are allowed. This results in inequity.
    We believe that CAS 413 should be amended to explicitly allow 
ongoing CAS costs even after a contractor voluntarily freezes its 
pension plan, if there are ongoing contracts. We note that ongoing 
CAS costs are allowed under PPA-triggered plan freezes.

    Another commenter echoed this request concerning post-curtailment 
accounting, and asked that if the requirement to make a CAS 413-
50(c)(12) adjustment for voluntary benefit curtailments is retained, 
then the Board should address how to account for subsequent costs and 
events; i.e., a benefit curtailment followed by a segment closing or 
plan termination.

    The current and revised CAS rules require a CAS 413-50(c)(12) 
adjustment when

[[Page 25999]]

certain events occur such as a divestiture, curtailment of benefits, 
or pension plan termination. Over the history of a pension plan 
several events may occur, each requiring its own CAS 413-50(c)(12). 
Some of the events may impact the pension plan in total such as a 
curtailment of benefits and termination. To clarify the cost 
accounting rules, we recommend an illustration be added to show the 
accounting of a curtailment of benefits followed years later by a 
termination or when the contractor discontinues doing business with 
the Government.

    Finally, one commenter asked that the Board consider whether the 
current government agency guidance on accounting for benefit 
curtailments, ``Joint DCMA/DCAA Policy On Defined Benefit Plan 
Curtailments'' dated August 2007, is consistent with the provisions of 
CAS 413.

    Consistent with our earlier recommendation, the Board has 
provided that any temporary cessations of benefit accruals that may 
be required by PPA will not be deemed to be ``curtailments'' under 
CAS 413. Because curtailments must be revisited in any event to 
achieve harmonization, we encourage the CASB to abandon the 
curtailment concept in its entirety, given the ongoing nature of the 
contractual relationship between the parties. Alternatively, the 
CASB should consider whether or not current agency guidance, which 
requires contractors to compute ongoing pension costs under CAS 412/
413 for periods following a curtailment, meets the requirements of 
CAS 413.

    Response: The Board believes that the existing CAS 413 curtailment 
adjustment should be retained except for PPA mandated curtailments for 
underfunded plans. The 1995 amendments added a $0 floor to the assigned 
cost, a negative assigned cost would be measured based on the 
amortization credit for associated actuarial gains, but not assigned 
and adjusted. This raises a concern that recovery of the potentially 
large actuarial gain could be indefinitely deferred. This concern was 
remedied by the CAS 413-50(c)(12) adjustment which permits the 
Government to recover the surplus either immediately or, if the segment 
and plan continue, via an amortized contract cost adjustment external 
to the CAS assigned cost.
    For a 9904.413-50(c)(12) adjustment for a benefit curtailment, the 
liability is adjusted to reflect the benefit curtailment, but the 
liability is not settled. In this case there is no justification for 
measuring the liability on a settlement basis. The Board realizes that 
ability to influence the amount of the benefit curtailment adjustment 
can provide an incentive for the contractor to consider settling the 
liability by payment of a lump sum or purchase of an annuity. The Board 
believes that the Cost Accounting Standards should not constrain the 
contractor's decisions concerning the financial management that it 
believes is most appropriate for the pension plan. The contract cost 
accounting must reflect the cost of the pension plan based on the 
actual financial management of the plan.
    The Board agrees that after a benefit curtailment has occurred and 
been adjusted, there will continue to be actuarial gains and losses due 
to demographic and asset experience. To remove disputes concerning the 
accounting for pension costs and adjustments that are incurred after 
the benefit curtailment or other segment closing event, the provision 
proposed at 9904.413-50(c)(12)(ix) provides accounting guidance on the 
appropriate accounting for the adjustment charge or credit.
    The Board does not comment on the administrative guidance issued by 
individual agencies. Such concerns about the CAS and its administration 
should be addressed to the Director of the Office of Federal 
Procurement Policy. The Board notes that agency guidance may have to be 
revised once this NPRM is issued as a Final Rule.
    Topic N: CAS 412 Transition Rules Require Modification.
    Comments: Some commenters expressed their concern that the 
transition rules were lengthy and complex.

    As a general rule, we feel that the transition rules require 
additional thinking, and suggest that the Board carefully consider 
alternative transition approaches in the time leading up to the 
publication of a Notice of Proposed Rulemaking (NPRM). In 
particular, we are concerned that the transition rules are 
exceedingly complex. In our experience, this level of complexity 
will inevitably lead to increased disputes and the associated 
administrative costs. We understand that this is not an easy issue 
and would be willing to meet with the CASB or staff in an attempt to 
identify approaches that yield acceptable results to all parties.

    One of these commenters remarked that the potential increase in 
pension costs argued for a longer smoothing period, but also noted that 
the contractors still had a concern with more immediate cost recovery.

    We understand that the lengthy transition rules are intended to 
provide for smoothing of the substantial increases in pension costs 
likely to result from the final rules and the backlog of prepayment 
credits from funding PPA minimum requirements prior to the 
harmonization. Again, we worked with [an actuary] to gather 
contractor data estimates to develop a practical measure of the 
materiality of the increases anticipated to consider whether such an 
extended and complex transition seemed justified. The same 13 
contractors participated in this data survey. The survey considered 
the effects of mandatory prepayments expected to be amortized under 
the transition rules and the effects on pension cost of using the 
higher of the AAL or MAL during the transition period. [The actuary] 
shared with us our combined data results * * * We believe that 
considering the data results in the context of the challenging 
financial conditions likely to affect Government contracting now and 
in the near future, the lengthy transition rules are generally 
appropriate. Though from a contractor's perspective more immediate 
cost recovery of cash outlays made as a result of PPA funding would 
be desirable, there clearly are other more significant competing 
considerations.

    Gain and loss amortization: Two commenters recommended reducing the 
current 5-year transition period to 3 years, and two other commenters 
believed there should be no phase-in for the new 10-year gain/loss 
amortization rule. Regarding reducing the transition period, one 
commenter wrote:

    [The commenter] believe that the rules providing for a five-year 
phase-in of certain harmonization provisions result in an 
undesirable and theoretically problematic shifting of costs from the 
years when the harmonized CAS 412 and 413 become effective to later 
years. This results in a bulge in costs in later years that will 
make programs unaffordable and contractors who continue to maintain 
defined benefit pension plans uncompetitive. This result is not 
theoretically sound and importantly has the effect of punishing 
contractors maintaining defined benefit pension plans, which is 
contrary to the intent of the PPA. Accordingly, [the commenter] 
recommends that the CASB shorten the current five-year transition 
period to three years.

    Another commenter noted that given the recent market collapse, the 
elimination of the transition for gains and losses would result in a 
favorable impact to contract costing, and recommended:

    * * * In particular, we do not see a need to phase-in the 
reduced amortization period for gains and losses. These costs (or 
credits) will not emerge until after the effective date of the 
revised standard. Unless the stock market recovers fairly quickly 
from its current lows, there may be significant market-related gains 
emerging during the transition period that could help to offset the 
increased costs anticipated under the revised rule. A phase-in of 
the 10-year amortization period will diminish the impact of these 
potential gains.

    One commenter expressed their belief that the benefits of the gain 
and loss transition were not material, stating as follows:

    We support the change from 15 years to 10 years in the 
amortization period for actuarial gains and losses. However, we do 
not agree with the 5-year transitional period that gradually reduces 
the amortization period. There is no advantage to the transitional

[[Page 26000]]

period as it only adds unnecessary complexity. If the Board believes 
that the current 15-year period delays recognition too far beyond 
the emergence of the gain or loss, and that 10 years is more 
appropriate, then there should simply be a change made from 15 years 
to 10 years. We don't believe that the impact on the cost would be 
material enough to justify adding a transition period for this 
change.

    Legacy prepayments: Many commenters asked that the Board clarify 
how to make determination of mandatory vs. voluntary prepayment 
credits. These commenters noted that the legacy voluntary prepayment 
credits could be simply set equal to the ERISA credit balance. The 
following comment summarizes the basis for their request:

    The proposed CAS 412-64.1(c)(2) indicates that any prepayment 
credit existing at the transition to the new rules will be deemed to 
be Voluntary Prepayment Credits (VPC), unless they can be identified 
as Mandatory Prepayment Credits (MPC).
    It may be difficult for contractors to determine the split 
between the MPC and the VPC at transition, particularly if 
contributions were made many years ago. The burden will be greatest 
on contractors who have the longest contractual relationships with 
the Government. Also, contractors who have undergone merger and 
acquisition activity will deal with additional complexities. Without 
any provision specifying how the determination is to be made, how a 
contractor decides to develop the MPC at transition is potentially 
an area for dispute between the contractor and the Government.
    Recommendation: We recommend a simplified method in determining 
the VPC and the MPC at transition. Under our proposed method, the 
VPC account at transition will be the ERISA Credit Balance. The MPC 
account at transition will be equal to the difference between the 
Prepayment Credit (as determined under the current CAS rules) and 
the ERISA Credit Balance (including both Carryover and Prefunding 
Balances as defined in PPA).
    Note that the ERISA Credit Balance reflects the cumulative 
excess of discretionary contributions over ERISA minimum required 
contributions. This is akin to the ANPRM's intent of bucketing into 
the VPC account the contributions in excess of ERISA minimum 
required contributions, when the ERISA minimum required 
contributions exceed the CAS assignable costs.
    Any remaining Prepayment Credit not categorized as Voluntary 
Prepayment Credit should thus be in the MPC account. If the 
Prepayment Credit at transition exceeds the Credit Balance, then 
that excess would be representative of the aggregate excess of ERISA 
minimum required contributions over CAS assignable costs, which this 
ANPRM intends to bucket into the MPC account.

    Two commenters believed that the transition accounting for legacy, 
mandatory prepayment credits is untimely and overly complex and should 
be replaced with smoother 5-year amortization or a straight 7 to 10-
year amortization. One commenter discussed the issue as follows:

    We also do not believe that there should be a transitional 
provision for the amortization period that applies to mandatory 
prepayment credits. We don't understand the desire to establish a 
transitional period that roughly matches the typical contracting 
cycle. It would be more appropriate for the amortization period (as 
opposed to the transitional period) to roughly match the typical 
contracting cycle. This would more closely follow the themes of the 
FAR and CAS that prefer to match cost with the contracts under which 
that cost arose, and would also more closely follow the goal of 
harmonization with the PPA. So the amortization period for mandatory 
prepayment credits should simply be established at 5 years with no 
transition. If the government has a concern regarding the possible 
magnitude of legacy prepayment credits that have been created prior 
to the effective date of the harmonization rule then the government 
should try to collect some data regarding the amount of those legacy 
prepayment credits. If such data should demonstrate that the 
amortization amounts related to the legacy mandatory prepayment 
credits would impose a difficult financial burden on the government 
then perhaps a longer amortization period (longer than 5 years) 
should be established for the legacy mandatory prepayment credits.

    Another commenter suggested the proposed tiered 12-year phase-in be 
maintained, but modified so all amortization ends in year 12, writing:

    [The commenter] believes that the proposed transition rule for 
assigning existing mandatory prepayment credits to cost accounting 
periods is overly complex. The proposed transition rule divides 
existing mandatory prepayment credits into multiple increments which 
are then spread over varying periods of up to twelve years with a 
deferral of the commencement of the amortization of certain 
increments for up to four years. In addition to being overly complex 
and, unnecessarily protracted, the process described in the proposed 
rule results in an undesirable shifting of costs from earlier 
periods to the middle periods of the12-year range. This deferral 
will create an unaffordable burden on program budgets due to the 
theoretically problematic bulge in costs in the middle years of the 
proposed 12-year period. [The commenter] believes that the Board 
could remedy these issues by adopting a shorter overall amortization 
period of seven to ten years and through utilization of a simple 
straight line amortization technique.

    In contrast, one commenter expressed its belief that transition 
accounting for legacy, mandatory prepayment credits prior to 2008 is 
unnecessary and that the special recognition should be limited to the 
period from 2008 when the PPA became effective until the harmonization 
rule is applicable.

    Finally, the new PPA funding rules went into effect for plan 
years beginning after 2007 unless a Defense contractor qualifies for 
an exception pursuant to Section 106, which provides delayed 
implementation at the earlier of the effective date of the CAS 
Pension Harmonization Rule or January 1, 2011. Except for certain 
large Defense contractors that are permitted for delayed 
implementation, contractors are required to implement the PPA 
beginning in 2008. Their minimum required contributions under the 
PPA would likely exceed the CAS assigned cost resulting in 
``mandatory prepayment credits.'' To avoid any disparity and attain 
a fair playing field for all contractors, we recommend recognition 
of mandatory prepayment credits that are created as a direct result 
of the implementation of the PPA during the period between 2008 and 
the effective date of the CAS Harmonization Rule. The method for 
recognizing these ``mandatory prepayment credits'' under Government 
contracts is provided in the Phase-in provision of the ANPRM. We 
believe that recognition of mandatory prepayment credits as an 
additional component of assignable pension costs should be limited 
to these specific circumstances.

    Response: In the ANPRM the Board explored several approaches for 
transition to the harmonization provisions. The Board agrees that the 
transition provisions of the ANPRM were too complex and that the 
transition period may have been too long. Many of the transition 
requirements proposed in the ANPRM have been eliminated from this NPRM. 
The NPRM only addresses the transition treatment of the change in 
unfunded liability due to recognition of the minimum actuarial 
liability.
    One of the contracting community's major concerns even prior to the 
passage of the PPA was the large prepayment credits that had been 
accumulated because the CAS assigned cost had been less than the ERISA 
minimum required contribution, especially when the minimum was driven 
by the additional ``deficit reduction contribution'' based on the 
``current liability.'' The Board understands this concern. Several 
elements of the proposed harmonization rule will shorten the waiting 
period for using the prepayment because the allocable contract cost 
will approximate or exceed the PPA minimum required contribution. Some 
of these elements include the reduction of plan assets by prepayment 
credit when measuring the unfunded actuarial liability for CAS 
purposes, and continuing to base the CAS pension cost on the long-term 
liability and normal cost in periods when the minimum actuarial 
liability does not impose a floor liability.
    The Board believes that the proposed 10-year amortization of 
actuarial gains and losses provides adequate smoothing of costs and 
avoids the build-up of amortization installments. Accordingly,

[[Page 26001]]

the NPRM includes no proposal to phase-in the 10-year amortization 
period which eliminates complexity.
    As previously addressed, this NPRM does not provide special 
recognition of ``mandatory prepayment credits'' as defined in the 
ANPRM. As part of the analysis of the proposed provisions of the ANPRM 
and the public comments, the Board reviewed the requirements of Section 
106 of the PPA. Section 106 only addresses harmonization of CAS 412 and 
413 with the minimum funding requirement of the PPA. The Board believes 
that any special recognition of ``legacy'' mandatory prepayments is 
beyond the scope of this case.
    The Board is concerned with the variance between the required 
minimum contribution and the allocable cost during the delay of CAS 
harmonization since PPA became effective in 2008. Assuming that CAS 
harmonization had been in effect in 2008, the main drivers behind this 
variance for a pension plan with no CAS prepayment credits and no ERISA 
prefunding or carry-over balances are (1) the difference in 
amortization periods for experience gains and losses, and (2) the 
actuarial loss attributable to using the minimum actuarial liability. 
The Board did consider providing a remedy for these variances during 
the delay period. However, the recent extraordinary large asset losses 
have so magnified the difference between the assigned pension cost and 
the ERISA minimum contribution that the cost increase for any special 
recognition is prohibitive and would skew the true cost for the period. 
Once the initial effects of the market downturn and the initial 
contribution increase attributable to the PPA have been recognized, the 
proposed harmonization should bring CAS and ERISA into better alignment 
while reducing the risk of any unnecessary budget shortfalls for the 
government contracting agencies.
    To manage possible increases in contract costs, the revised draft 
proposed rule retains a transitional 5-year phase-in, approximating the 
typical contracting cycle, for any liability adjustment. As proposed, 
any adjustment to the actuarial accrued liability and normal cost, 
based on recognition of the minimum actuarial liability and minimum 
normal cost, will be phased-in over a 5-year period at 20% per year, 
i.e., 20% of the difference will be recognized the first year, 40% the 
next year, then 60%, 80%, and finally 100% beginning in the fifth year. 
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.
    Topic O: Consideration for Effect of Significant Declines in Asset 
Values Given Extreme Adverse Economic Conditions.
    Comment: One commenter was concerned that the amount of prepayments 
will grow at the assumed long-term rate of interest while the market 
value of assets declined 30%. This would allow the contractor to 
unfairly, but unintentionally, gain an out of pocket windfall by 
permitting an artificially larger prepayment balance to ``fund'' the 
pension cost. The commenter noted:

    We agree with the proposed change to use the actual net rate of 
return on investments to adjust the value of and the accumulated 
value of voluntary prepayment credits. However, we are concerned 
with the implementation of the proposed change. Many Government 
contractor pension plans have been around for a long time and have 
accumulated large surpluses. We have seen an influx of significant 
prepayment credits by Government contractors in recent years. The 
current historic adjustment in the stock market is an extraordinary 
event. Implementation of the new rule could create a situation where 
huge market adjustments attributable to the prepayment credits will 
be leveraged against the Government share of contractor pension 
assets while the prepayment credits are left, not only untouched, 
but increased by the long-term interest assumption rate. After 
implementation of the proposed change, the prepayment credits will 
then share in future market rebounds. Therefore, consideration 
should be given to the impact of the asset loss from this 
extraordinary event in the implementation of the proposed ruling. 
Additionally, special recognition of extraordinary events should be 
included in the basic rule for annual costing and segment closings.

    Response: The Board appreciates this concern with the potential 
windfall because the prepayment credits are adjusted with a positive 
interest rate while the actual assets have declined precipitously. The 
Board notes that during periods over the last few decades that pension 
funds have earned returns in excess of the long-term assumption. The 
net under or over-statement of the accumulated value of prepayments due 
to the difference in assumed and actual rate of returns over time is 
difficult to assess. For this reason, and because the Board may only 
promulgate rules that are prospectively applied, this NPRM does not 
provide for any special adjustment of the accumulated value of 
prepayment credits prior to the applicability date of the proposed 
rule.
    Once harmonization becomes applicable, the proposed rule will 
update the accumulated value of prepayment credits based on an 
allocable portion of the actual rate of return. This will eliminate the 
commenter's specific concern once harmonization is in effect.
    The exceptional events in the market since late 2008 raise the 
question as to whether there should be special provisions for the gains 
and losses attributable to such circumstances. The Board is interested 
in any comments concerning whether the gain or loss from exceptional 
events should be amortized over a longer period, i.e., retain the 15-
year amortization for such gains and losses. The Board would also 
appreciate comments on how an exceptional event might be defined or 
identified.
    Topic P: Effective Date and Applicability Date.
    Comments: Many commenters asked the Board to revise the effective 
date of the final rule so as to delay PPA funding requirements until 1/
1/2011 for ``eligible government contractors'' who report on a calendar 
year basis. The contractors were also concerned that if the 
harmonization rule was published close to the end of one calendar year 
they could become subject to it on the first day of the following 
calendar year without sufficient time to revise their internal cost 
accounting systems or pricing models. A commenter stated:

    Having a delayed effective date would be a reasonable way of 
dealing with this problem. Another approach would be to allow 
contractors to currently update forward pricing even though the 
final changes to the CAS have not yet been determined. It is 
unlikely that the Department of Defense would support that approach. 
Therefore we feel that the CAS Board should clarify that the 
effective date would not be until 2011.

    Several other commenters asked the Board to clarify the effective 
date of the rule change for existing and new CAS covered contracts. As 
one of these commenters explained:

    We agree with the ANPRM that the rule should be effective 
immediately, so that contractors can begin incorporating the effects 
of the new rule into pricing. We understand that the rule will then 
become applicable for a contractor in the year following receipt of 
a new contract or subcontract covered by CAS. We believe the CAS 
Board intends for the final rule to be applicable to all CAS covered 
contracts of the contractor after the applicability date not just 
new contracts, so contractors will be calculating pension costs 
under only the new CAS rules. However, this is unclear in the ANPRM.

    Another commenter asked that the Board consider permitting early

[[Page 26002]]

adoption of the new rules subject to Contracting Officer approval, 
especially if the contractor only had a very limited number of CAS-
covered contracts which would not be re-awarded for a delayed period.

    The ANPRM states that the new rule will apply to the first cost-
accounting period commencing after the later of (i) the date the 
final rule is published in the Federal Register, or (ii) the receipt 
of a contract or subcontract covered by the CAS. This rule may 
therefore have a delayed effective date for many CMS contractors who 
operate under 5-year contracts. Since the new rule is intended to 
resolve conflicts between the CAS and the PPA, we believe there 
should be a provision to allow a contractor to adopt early 
compliance, subject to the approval of the Contracting Officer.

    Response: As proposed there are three key dates involved when this 
rule is published:
    1. Date published in the Federal Register;
    2. Effective Date--Date when contractors must first comply with the 
new or revised Standard when pricing new contracts or negotiating cost 
ceilings for new contracts that will be performed after the 
applicability date; and
    3. Applicability Date--Date when the new or revised CAS must be 
followed by the contractor's cost accounting system for the 
accumulating, reporting and final settlement of direct costs and 
indirect rates. This is the first cost accounting period following the 
receipt of a contract subject to CAS 412 and 413 either through CAS-
Coverage or Part 31 of the FAR.
    The Board is making every effort to complete this case as quickly 
as possible. The Board cannot control the publication date for the 
Federal Register, and the Final Rule might be published in 2010. The 
NPRM proposes to make this rule ``effective'' as of the date published 
in the Federal Register as a Final Rule.
    Once the Final Rule is effective and a contractor accepts the award 
of a new contract subject to CAS 412 and 413, that contract and any 
subsequent contracts will be subject to the CAS Harmonization Rule 
beginning with the next accounting period.
    CAS-covered contracts awarded and priced prior to the effective 
date, that priced or budgeted costs based on the existing CAS, may be 
eligible for an equitable adjustment in accordance with FAR 52.230-2. 
This includes contracts awarded on or after the publication date but 
before the effective date.
    To minimize the period between the publication and effective dates, 
the Board will be closely monitoring the date the Final Rule will be 
approved and the expected publication date.
    The Board believes that the proposed coverage at 9904.412-63.1 and 
9904.413-63.1 is consistent with the Board's authorizing statue and 
past practice. The Board believes that basing the effective and 
applicability date provisions on any event other than the award of a 
new contract subject to the provisions of CAS 412 and 413 can cause 
uncertainty and increase disputes. Therefore, the NPRM does not propose 
any mechanism for early adoption of the proposed rule. Once the CAS 
Harmonization Rule is published as a Final Rule, contractors that may 
not receive a new contract subject to CAS 412 and 413 for several years 
may request a voluntary change in accounting method and request that 
the contracting officer consider the change as a desirable change. The 
contracting officer's decision would be considered under the normal 
administrative procedure for such requests and would be based on facts 
and circumstances.
    Topic Q: Change in Accounting Practice and Equitable Adjustments.
    Comments: One commenter requested clarification that changes to 
conform to the CAS Harmonization Rule are ``Mandatory'' Changes that 
are eligible for Equitable Adjustments.

    The response to item 19 in the background and summary of the 
ANPRM indicates that new rules would be mandatory changes. However, 
this is not specified in the proposed rules themselves. Recognizing 
the significant impact of the changes being introduced, we would 
suggest to ensure that the portions of the new rules, which should 
be treated as required changes be clearly identified. Accordingly, 
we ask the CAS Board to consider adding additional language * * * to 
9904.412-63(d) and 9904.413-63(d) such as the following suggestion:
    All changes to a contractor's cost accounting practices required 
to comply with the revisions to the Standards in 9904.412 as 
published [Date published in the Federal Register] shall be treated 
as required changes in practice as defined under 9903.201-6(a) to be 
applied to both existing and new contracts.

    Two commenters asked that changes to better align their actuarial 
cost method (cost accounting practice) with the PPA be deemed 
``desirable'' changes, or possibly ``mandatory'' changes. Changes in 
actuarial valuation of assets and treatment of expenses as a component 
of normal cost were given as examples. They are hopeful that all such 
mandatory and desirable changes could be combined for purposes of 
measuring the cost impact and negotiating an equitable adjustment.

    In our view, there would be significant advantages to both 
contractors and the Government if contractors were permitted to 
harmonize their CAS asset smoothing methodology to match their PPA 
method without that change being deemed a voluntary change in cost 
accounting practice. This approach would reduce administrative costs 
by contractors, would simplify future audits and would be consistent 
with the PPA requirement to harmonize CAS 412/413 with the PPA 
minimum required contribution. In addition, this would simplify 
contract and administration with respect to contractors that are 
considering announcing soon that they intend to modify their asset 
smoothing formula, effective January 1, 2011, to be the same as 
their PPA method.
    The ANPRM implies that any change in actuarial asset method 
would be considered as a voluntary change in cost accounting 
practice, even if a contractor wanted to adopt the same actuarial 
asset value that is used for calculating ERISA costs under the 
provisions of the PPA. We feel that such a change should not be 
considered as a voluntary change in cost accounting practice. The 
introduction of the MAL will better align the CAS accrued liability 
with the ERISA liability. If a contractor determines that aligning 
the actuarial asset value with the ERISA asset value would enhance 
the objective of achieving harmonization then that specific change 
should explicitly be allowed.

    One commenter asked the Board to clarify that a contractor will 
continue to have an ability to choose measurement bases and accounting 
methods, writing as follows:

    To minimize disputes, it will be helpful if the rules make clear 
that in the areas where the contractor has options in how certain 
items are determined (e.g., MAL interest assumption, actual return 
on assets, etc.), those items would be considered part of the 
contractor's CAS accounting policy. Any meaningful changes would be 
subject to the rules on changes in accounting policy. Because every 
contractor has their own methodologies and specific issues, general 
rules that become part of the CAS accounting policy would be 
preferential to any proscriptive rules. If proscriptive rules were 
used, contractors would have more certainty around how a particular 
item should be determined, but odd results could arise depending on 
the contractor's particular situation.

    One commenter asked that plan consolidations made in response to 
the PPA be treated as a ``desirable'' change of cost accounting 
practice.

    Because of the increased funding requirements PPA imposes and 
the sweeping nature of changes to CAS 412 and 413 contemplated by 
the ANPRM, Northrop Grumman believes the CASB should consider 
adopting a provision addressing consolidation of plans with 
disparate practices by expressly providing for desirable change 
treatment for the impact of consequential changes in cost accounting 
practices. Such a provision could reasonably provide for tests to 
ensure the government's interests were not harmed by materially

[[Page 26003]]

adverse reallocation of existing trust assets or pension 
liabilities. We believe this would result in lower administrative 
expense over time and should in certain circumstances partially 
mitigate contractors' cash flow issues. Suggested additional 
language might read as follows:
    ``Cost accounting practice changes required to implement pension 
plan realignments and plan consolidations are deemed to be desirable 
changes if the resulting combination does not materially reduce the 
government's participation in pension plan assets net of pension 
plan liabilities.''

    Another commenter asked if the pension harmonization rule would 
require a single or multiple equitable adjustments.

    The Transition Method at 9904.412.64.1 provides that the 
adjustment of the actuarial accrued liability, mandatory prepayment 
credit, and normal cost are phased-in over a 5-year period. This 
adjustment will require an equitable adjustment when the standard 
becomes effective. While the equitable adjustment may be measured in 
year one, the actual adjustment would need to be made in each of the 
first five years (2011 through 2016). Some may argue that the 
contracting officer may be required to enter into a series of 
equitable adjustments for each change to the amortization period. 
This approach is overly burdensome to the contracting officers and 
may cause contract disputes. As a result, we recommend that the ANPR 
add language to clarify this important point, or remove these phase-
in rules.

    Response: While the NPRM includes changes to or introduction of new 
elements regarding the measurement, assignment and allocation of 
pension costs, the proposed amendment of CAS 412 and 413 causes a 
single change in cost accounting practice. The change is from the 
existing CAS 412 and 413 bases to the amended CAS 412 and 413 bases. 
Implementation of the changes and any equitable adjustments that might 
be required by this single mandatory change are CAS administration 
processes and are beyond the Board's authority.
    Changes not required to be made to conform to the proposed 
amendments are voluntary changes. The determination of whether such 
voluntary changes may or may not constitute a desirable change is also 
a CAS administration matter and dependent upon the facts and 
circumstances unique to each request.
    Some contractors may have changed their asset valuation, 
recognition of expenses, or other method in response to the PPA prior 
to the publication of this proposed rule. The Board believes it would 
be unfair for contractors to be afforded different treatments based on 
when the change was made. As discussed elsewhere, the Board has only 
proposed changes necessary to harmonize CAS with the PPA and has 
avoided limiting or restricting the contractor's ability to adopt cost 
methods that it believes are most appropriate for the pension plan.
    The Board believes that changes in plan design, plan mergers and 
other such changes are not contract cost accounting changes required by 
the harmonization rule. Furthermore, some contractors may have made 
many of these plan design and consolidation changes prior to the 
harmonization rule's effective date. As with the desirable changes 
discussed above, it would be unfair to provide different treatment 
based on when changes on made.
    Topic R: Opportunity for Additional Comments.
    Comments: Several commenters asked the Board to consider (i) 
extending the ANPRM comment period, (ii) publishing a second ANPRM for 
additional public comment or (iii) publish a second NPRM if significant 
changes are made from ANPRM. One of these commenters acknowledged the 
short timeframe available to the Board.
    Response: The Board published a notice on November 26, 2008 (73 FR 
72086) extending the comment deadline to December 3, 2008. Two 
supplemental comments and one new comment were received. While this 
NPRM has changed, replaced or eliminated many of the proposed revisions 
from the ANPRM, these changes are based on comments and recommendation 
from the public. The NPRM does not introduce any significant new 
concepts and the Board decided to publish the proposed changes as a 
proposed rule. The Board has decided to publish the proposed revisions 
as a NPRM and permit a 60-day comment period for this NPRM. The Board 
does not anticipate permitting an extension of time to comment upon the 
NPRM.
    Surveys and Modeling Data. The Board continues to be very 
interested in obtaining the results of any studies or surveys that 
examine the pension cost determined in accordance with the CAS and the 
PPA minimum required contribution and maximum tax-deductible 
contribution.

D. Paperwork Reduction Act

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

E. Executive Order 12866 and the Regulatory Flexibility Act

    Because most contractors must measure and report their pension 
liabilities and expenses in order to comply with the requirements of 
FAS 87 for financial accounting purposes, the economic impact of this 
proposed rule on contractors and subcontractors is expected to be 
minor. As a result, the Board has determined that this 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 
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 proposed 
rule does not require a regulatory flexibility analysis under the 
Regulatory Flexibility Act of 1980.

F. Public Comments to Notice of Proposed Rulemaking

    Interested persons are invited to participate by providing input 
with respect to this proposed rule for harmonization of CAS 412 and 413 
with the PPA. All comments must be in writing, and submitted either 
electronically via the Federal eRulemaking Portal, e-mail, or 
facsimile, or via mail as instructed in the ADDRESSES section.
    As with the ANPRM the Board reminds the public that this case must 
be limited to pension harmonization issues. As always, the public is 
invited to submit comments on other issues regarding contract cost 
accounting for pension costs that respondents believe the Board should 
consider. However, comments unrelated to pension harmonization will be 
separately considered by the Board in determining whether to open a 
separate case on pension costs in the future. The staff continues to be 
especially appreciative of comments and suggestions that attempt to 
consider the concerns of all parties to the contracting process.

List of Subjects in 48 CFR 9904

    Government procurement, Cost Accounting Standards.

Daniel I. Gordon,
Chair, Cost Accounting Standards Board.

    For the reasons set forth in this preamble, Chapter 99 of Title 48 
of the Code of Federal Regulations is proposed to be amended as set 
forth below:

[[Page 26004]]

PART 9904--COST ACCOUNTING STANDARDS

    1. The authority citation for Part 9904 continues to read as 
follows:

    Authority: Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. 422.

    2. Section 9904.412-30 is amended by revising paragraphs (a)(1), 
(9) and (23) to read as follows:


9904.412-30   Definitions.

    (a) * * *
    (1) Accrued benefit cost method means an actuarial cost method 
under which units of benefits are assigned to each cost accounting 
period and are valued as they accrue; that is, based on the services 
performed by each employee in the period involved. The measure of 
normal cost under this method for each cost accounting period is the 
present value of the units of benefit deemed to be credited to 
employees for service in that period. The measure of the actuarial 
accrued liability at a plan's measurement date is the present value of 
the units of benefit credited to employees for service prior to that 
date. (This method is also known as the Unit Credit cost method without 
salary projection.)
* * * * *
    (9) Assignable cost limitation means the excess, if any, of the 
actuarial accrued liability plus the normal cost for the current period 
over the actuarial value of the assets of the pension plan.
* * * * *
    (23) Prepayment credit means the amount funded in excess of the 
pension cost assigned to a cost accounting period that is carried 
forward for future recognition. The Accumulated Value of Prepayment 
Credits means the value, as of the measurement date, of the prepayment 
credits adjusted for investment returns and administrative expenses and 
decreased for amounts used to fund pension costs or liabilities, 
whether assignable or not.
* * * * *
    3. Section 9904.412-40 is amended by adding paragraph (b)(3) to 
read as follows:


9904.412-40  Fundamental requirement.

* * * * *
    (b) * * *
    (3) For qualified defined benefit pension plans, the measurement of 
pension costs shall recognize the requirements of 9904.412-50(b)(7) for 
periods beginning with the ``Applicability Date of the Harmonization 
Rule.''
* * * * *
    4. In 9904.412-50, paragraphs (a)(1)(v), (2), (4), (b)(5) and 
(c)(1), (2) and (5) are revised, and paragraph (b)(7) is added to read 
as follows:


9904.412-50  Techniques for application.

    (a) * * *
    (1) * * *
    (v) Actuarial gains and losses shall be identified separately from 
unfunded actuarial liabilities that are being amortized pursuant to the 
provisions of this Standard. The accounting treatment to be afforded to 
such gains and losses shall be in accordance with Cost Accounting 
Standard 9904.413. The change in the unfunded actuarial liability 
attributable to the liability adjustment amount computed in accordance 
with 9904.412-50(b)(7)(i)(A), including a liability adjustment amount 
of zero if the provisions of 9904.412-50(b)(7) do not apply for the 
period, shall be identified and included in the actuarial gain or loss 
established in accordance with 9904.412-50(a)(1)(v) and 9904.413-
50(a)(1) and (2) and amortized accordingly.
* * * * *
    (2)(i) Except as provided in 9904.412-50(d)(2), any portion of 
unfunded actuarial liability attributable to either pension costs 
applicable to prior years that were specifically unallowable in 
accordance with the then existing Government contractual provisions, or 
pension costs assigned to a cost accounting period that were not funded 
in that period, shall be separately identified and eliminated from any 
unfunded actuarial liability being amortized pursuant to paragraph 
(a)(1) of this section.
    (ii) Such portions of unfunded actuarial liability shall be 
adjusted for interest at the assumed rate of interest in accordance 
with 9904.412-50(b)(4) without regard to 9904.412-50(b)(7). The 
contractor may elect to fund, and thereby reduce, such portions of 
unfunded actuarial liability and future interest adjustments thereon. 
Such funding shall not be recognized for purposes of 9904.412-50(d).
* * * * *
    (4) Any amount funded in excess of the pension cost assigned to a 
cost accounting period shall be accounted for as a prepayment credit. 
The accumulated value of such prepayment credits shall be adjusted for 
investment returns and administrative expenses in accordance with 
9904.413-50(c)(7) until applied towards pension cost in a future 
accounting period. The accumulated value of prepayment credits shall be 
reduced for portions of the accumulated value of prepayment credits 
used to fund pension costs or to fund portions of unfunded actuarial 
liability separately identified and maintained in accordance with 
9904.412-50(a)(2). The accumulated value of any prepayment credits 
shall be excluded from the actuarial value of the assets used to 
compute pension costs for purposes of this Standard and Cost Accounting 
Standard 9904.413.
* * * * *
    (b) * * *
    (5) Pension cost shall be based on provisions of existing pension 
plans. This shall not preclude contractors from making salary 
projections for plans whose benefits are based on salaries and wages, 
or from considering improved benefits for plans which provide that such 
improved benefits must be made. For qualified defined benefit plans 
that ERISA permits recognition of historical patterns of benefit 
improvements under a plan covered by a collectively bargained 
agreement, the contractor may recognize the same benefit improvements.
* * * * *
    (7) ``CAS 412 Harmonization Rule'': For qualified defined benefit 
pension plans, in any period that the minimum required amount, measured 
for the plan as a whole, exceeds the pension cost, measured for the 
plan as a whole and limited in accordance with 9904.412-50(c)(2)(i), 
then the actuarial accrued liability and normal cost are subject to 
adjustment in accordance with the provisions of paragraph (b)(7)(i) of 
this section, and the measured cost shall be adjusted if the criteria 
of paragraph (b)(7)(ii) of this section are met.
    (i) Actuarial accrued liability and normal cost adjustment: In any 
period that the sum of the minimum actuarial liability plus the minimum 
normal cost exceeds the sum of the unadjusted actuarial accrued 
liability plus the unadjusted normal cost, the contractor shall adjust 
the actuarial accrued liability and normal cost as follows:
    (A) The actuarial accrued liability and normal cost determined 
without regard to this paragraph are the unadjusted actuarial accrued 
liability and normal cost, respectively:
    (B) The liability adjustment amount shall be equal to the minimum 
actuarial liability, as defined by paragraph (b)(7)(iii)(A) of this 
section, minus the unadjusted actuarial accrued liability. The 
liability adjustment amount shall be added to the unadjusted actuarial 
accrued liability to determine the adjusted actuarial accrued 
liability. If the liability adjustment amount is a negative amount, 
that amount shall be subtracted from unadjusted actuarial

[[Page 26005]]

accrued liability to determine the adjusted actuarial accrued 
liability:
    (C) The normal cost adjustment amount shall be equal to the minimum 
normal cost, as defined by paragraph (b)(7)(iii)(B) of this section, 
minus the unadjusted normal cost. The normal cost adjustment amount 
shall be added to the unadjusted normal cost to determine the adjusted 
normal cost. If the normal cost adjustment amount is a negative amount, 
that amount shall be subtracted from unadjusted normal cost to 
determine the adjusted normal cost; and
    (D) The contractor shall measure and assign the pension cost for 
the period in accordance with 9904.412 and 9904.413 by using the values 
of the adjusted actuarial accrued liability and adjusted normal cost as 
the values of the actuarial accrued liability and normal cost.
    (ii) The pension cost for the period shall be the greater of either 
the pension cost, measured for the period in accordance with paragraph 
(b)(7)(i) of this section, or the pension cost measured without regard 
to this paragraph. For purposes of this paragraph (b)(7)(ii), the 
pension costs measured for the period shall be compared before limiting 
the cost in accordance with 9904.412-50(c)(2)(ii) and (iii).
    (iii) Special definitions to be used for this paragraph:
    (A) The minimum actuarial liability shall be the actuarial accrued 
liability measured under the accrued benefit cost method and using an 
interest rate assumption as described in 9904.412-50(b)(7)(iv).
    (B) The minimum normal cost shall be measured as the normal cost 
measured under the accrued benefit cost method and using an interest 
rate assumption as described in 9904.412-50(b)(7)(iv).
    (C) Minimum required amount means the contribution required to 
satisfy the minimum funding requirements of ERISA. For purposes of this 
paragraph, the minimum required contribution shall not include any 
additional contribution requirements or elections based upon the plan's 
ratio of actuarial or market value of assets to the actuarial accrued 
liabilities measured for ERISA purposes. The minimum required amount 
shall be measured without regard to any prepayment credits that have 
been accumulated for ERISA purposes (i.e., prefunding balances).
    (iv) Actuarial Assumptions: The actuarial assumptions used to 
measure the minimum actuarial liability and minimum normal cost shall 
meet the following criteria:
    (A) The interest assumption used to measure the pension cost for 
the current period shall reflect the contractor's best estimate of 
rates at which the pension benefits could effectively be settled based 
on the current period rates of return on investment grade fixed-income 
investments of similar duration to the pension benefits:
    (B) The contractor may elect to use the same rate or set of rates, 
for investment grade corporate bonds of similar duration to the pension 
benefits, as published or defined by the Government for ERISA purposes. 
The contractor's cost accounting practice includes any election to use 
a specific table or set of such rates and must be consistently 
followed:
    (C) For purposes of this paragraph, use of the current period rates 
of return on investment grade corporate bonds of similar duration to 
the pension benefits shall not violate the provisions of 9904.412-
40(b)(2) and 9904.412-50(b)(4) regarding the interest rate used to 
measure the minimum actuarial liability and minimum normal cost: and
    (D) All other actuarial assumptions used to measure the minimum 
actuarial liability and minimum normal cost shall be the same as the 
assumptions used elsewhere in this Standard.
* * * * *
    (c) * * *
    (1) Amounts funded in excess of the pension cost assigned to a cost 
accounting period pursuant to the provisions of this Standard shall be 
accounted for as a prepayment credit and carried forward to future 
accounting periods.
    (2) For qualified defined-benefit pension plans, the pension cost 
measured for a cost accounting period is assigned to that period 
subject to the following adjustments, in order of application:
    (i) Any amount of pension cost measured for the period that is less 
than zero shall be assigned to future accounting periods as an 
assignable cost credit. The amount of pension cost assigned to the 
period shall be zero.
    (ii) When the pension cost equals or exceeds the assignable cost 
limitation:
    (A) The amount of pension cost, adjusted pursuant to paragraph 
(c)(2)(i) of this subsection, shall not exceed the assignable cost 
limitation,
    (B) All amounts described in 9904.412-50(a)(1) and 9904.413-50(a), 
which are required to be amortized, shall be considered fully 
amortized, and
    (C) Except for portions of unfunded actuarial liability separately 
identified and maintained in accordance with 9904.412-50(a)(2), any 
portion of unfunded actuarial liability, which occurs in the first cost 
accounting period after the pension cost has been limited by the 
assignable cost limitation, shall be considered an actuarial gain or 
loss for purposes of this Standard. Such actuarial gain or loss shall 
exclude any increase or decrease in unfunded actuarial liability 
resulting from a plan amendment, change in actuarial assumptions, or 
change in actuarial cost method effected after the pension cost has 
been limited by the assignable cost limitation.
    (iii) Any amount of pension cost of a qualified pension plan, 
adjusted pursuant to paragraphs (c)(2)(i) and (ii) of this section that 
exceeds the sum of the maximum tax-deductible amount, determined in 
accordance with ERISA, and the accumulated value of prepayment credits 
shall be assigned to future accounting periods as an assignable cost 
deficit. The amount of pension cost assigned to the current period 
shall not exceed the sum of the maximum tax-deductible amount plus the 
accumulated value of prepayment credits.
* * * * *
    (5) Any portion of pension cost measured for a cost accounting 
period and adjusted in accordance with 9904.412-50(c)(2)that exceeds 
the amount required to be funded pursuant to a waiver granted under the 
provisions of ERISA shall not be assigned to the current period. 
Rather, such excess shall be treated as an assignable cost deficit, 
except that it shall be assigned to future cost accounting periods 
using the same amortization period as used for ERISA purposes.
* * * * *
    5. Section 9904.412-60 is amended by revising paragraphs (b)(2) and 
(3), (c)(1) through (5), (c)(13), and (d)(4) to read as follows:


9904.412-60  Illustrations.

* * * * *
    (b) * * *
    (2) For several years Contractor H has had an unfunded nonqualified 
pension plan which provides for payments of $200 a month to employees 
after retirement. The contractor is currently making such payments to 
several retired employees and recognizes those payments as its pension 
cost. The contractor paid monthly annuity benefits totaling $24,000 
during the current year. During the prior year, Contractor H made lump 
sum payments to irrevocably settle the benefit liability of several 
participants with small benefits. The annual installment to amortize 
these lump sum payments over

[[Page 26006]]

fifteen years at the long-term interest rate assumption is $5,000. 
Since the plan does not meet the criteria set forth in 9904.412-
50(c)(3)(ii), pension cost must be accounted for using the pay-as-you-
go cost method. Pursuant to 9904.412-50(b)(3), the amount of assignable 
cost allocable to cost objectives of that period is $29,000, which is 
the sum of the amount of benefits actually paid in that period 
($24,000) plus the second annual installment to amortize the prior 
year's lump sum settlements ($5,000).
    (3) Contractor I has two qualified defined-benefit pension plans 
that provide for fixed dollar payments to hourly employees. Under the 
first plan, the contractor's actuary believes that the contractor will 
be required to increase the level of benefits by specified percentages 
over the next several years based on an established pattern of benefit 
improvements. In calculating pension costs, the contractor may not 
assume future benefits greater than that currently required by the 
plan. However, if ERISA permits the recognition of the established 
pattern of benefit improvements, 9904.412-50(b)(5) permits the 
contractor to include the same recognition of expected benefit 
improvements in computing the pension cost for contract costing 
purposes. With regard to the second plan, a collective bargaining 
agreement negotiated with the employees' labor union provides that 
pension benefits will increase by specified percentages over the next 
several years. Because the improved benefits are required to be made, 
the contractor can consider such increased benefits in computing 
pension costs for the current cost accounting period in accordance with 
9904.412-50(b)(5).
* * * * *
    (c) * * *
    (1) Contractor J maintains a qualified defined-benefit pension 
plan. The actuarial accrued liability for the plan is $20 million and 
has been adjusted based on the minimum actuarial liability required by 
9904.412-50(b)(7). The actuarial value of the assets of $18 million is 
subtracted from the actuarial accrued liability of $20 million to 
determine the total unfunded actuarial liability of $2 million. 
Pursuant to 9904.412-50(a)(1), Contractor J has identified and is 
amortizing twelve separate portions of unfunded actuarial liabilities. 
The sum of the unamortized balances for the twelve separately 
maintained portions of unfunded actuarial liability equals $1.8 
million. In accordance with 9904.412-50(a)(2), the contractor has 
separately identified, and eliminated from the computation of pension 
cost, $200,000 attributable to a pension cost assigned to a prior 
period that was not funded. The sum of the twelve amortization bases 
maintained pursuant to 9904.412-50(a)(1) and the amount separately 
identified under 9904.412-50(a)(2) equals $2 million ($1,800,000 + 
200,000). Because the sum of all identified portions of unfunded 
actuarial liability equals the total unfunded actuarial liability, the 
plan is in actuarial balance and Contractor J can assign pension cost 
to the current cost accounting period in accordance with 9904.412-
40(c).
    (2) Contractor K's pension cost computed for 2016, the current 
year, is $1.5 million. This computed cost is based on the components of 
pension cost described in 9904.412-40(a) and 9904.412-50(a) and is 
measured in accordance with 9904.412-40(b) and 9904.412-50(b). The 
pension cost measured for the total plan exceeds the minimum 
contribution amount for the period, and therefore the actuarial accrued 
liability and normal cost were not required to be adjusted in 
accordance with 9904.412-50(b)(7). The assignable cost limitation, 
which is defined at 9904.412-30(a)(9), is $1.3 million. In accordance 
with the provisions of 9904.412-50(c)(2)(ii)(A), Contractor K's 
assignable pension cost for 2016 is limited to $1.3 million. In 
addition, all amounts that were previously being amortized pursuant to 
9904.412-50(a)(1) and 9904.413-50(a) are considered fully amortized in 
accordance with 9904.412-50(c)(2)(ii)(B). The following year, 2017, 
Contractor K computes an unfunded actuarial liability of $4 million. 
Contractor K has not changed his actuarial assumptions nor amended the 
provisions of his pension plan. Contractor K has not had any pension 
costs disallowed or unfunded in prior periods. Contractor K must treat 
the entire $4 million of unfunded actuarial liability as an actuarial 
loss to be amortized over ten years beginning in 2017 in accordance 
with 9904.412-50(c)(2)(ii)(C) and 9904.413-50(a)(2).
    (3) Assume the same facts shown in illustration 9904.412-60(c)(2), 
except that in 2015, the prior year, Contractor K's assignable pension 
cost was $800,000, but Contractor K only funded and allocated $600,000. 
Pursuant to 9904.412-50(a)(2), the $200,000 of unfunded assignable 
pension cost was separately identified and eliminated from other 
portions of unfunded actuarial liability. This portion of unfunded 
actuarial liability was adjusted for 8% interest, which is the interest 
assumption for 2015 and 2016, and was brought forward to 2016 in 
accordance with 9904.412-50(a)(2). Therefore, $216,000 ($200,000 x 
1.08) is excluded from the amount considered fully amortized in 2016. 
The next year, 2017, Contractor K must eliminate $233,280 ($216,000 x 
1.08) from the $4 million so that only $3,766,720 is treated as an 
actuarial loss in accordance with 9904.412-50(c)(2)(ii)(C).
    (4) Assume, as in 9904.412-60(c)(2), the 2016 pension cost computed 
for Contractor K's qualified defined-benefit pension plan is $1.5 
million and the assignable cost limitation is $1.7 million. The 
accumulated value of prepayment credits is $0. However, because of the 
ERISA limitation on tax-deductible contributions, Contractor K cannot 
fund more than $1 million without incurring an excise tax, which 
9904.412-50(a)(5) does not permit to be a component of pension cost. In 
accordance with the provisions of 9904.412-50(c)(2)(iii), Contractor 
K's assignable pension cost for the period is limited to $1 million. 
The $500,000 ($1.5 million - $1 million) of pension cost not funded is 
reassigned to the next ten cost accounting periods beginning in 2017 as 
an assignable cost deficit in accordance with 9904.412-50(a)(1)(vi).
    (5) Assume the same facts for Contractor K in 9904.412-60(c)(4), 
except that the accumulated value of prepayment credits equals 
$700,000. Therefore, in addition to the $1 million tax-deductible 
contribution, Contractor K can also apply the $700,000 accumulated 
value of prepayment credits, which is available for funding as of the 
first day of the plan year, towards the pension cost computed for the 
period. In accordance with the provisions of 9904.412-50(c)(2)(iii), 
Contractor K's assignable pension cost for the period is the full $1.5 
million computed for the period. A new prepayment credit of $200,000 is 
created by the excess funding after applying the full $700,000 
accumulated value of prepayment credits, plus $800,000 of the $1 
million tax deductible contribution, towards the assigned cost of $1.5 
million creating a new prepayment credit ($700,000 + $1 million - $1.5 
million). The remaining $200,000 prepayment credit is adjusted for 
$14,460 of investment returns allocated in accordance with 9904.412-
50(c)(1) and 9904.413-50(c)(7) and the sum of $214,460 is carried 
forward until needed in future accounting periods in accordance with 
9904.412-50(a)(4).
* * * * *
    (13) The assignable pension cost for Contractor O's qualified 
defined-benefit

[[Page 26007]]

plan is $600,000. For the same period, Contractor O contributes 
$700,000 which is the minimum funding requirement under ERISA. In 
addition, there exists $75,000 of unfunded actuarial liability that has 
been separately identified pursuant to 9904.412-50(a)(2). Contractor O 
may use $75,000 of the contribution in excess of the assignable pension 
cost to fund this separately identified unfunded actuarial liability, 
if he so chooses. The effect of the funding is to eliminate the 
unassignable $75,000 portion of unfunded actuarial liability that had 
been separately identified and thereby eliminated from the computation 
of pension costs. Contractor O shall then account for the remaining 
$25,000 ([$700,000 - $600,000] - $75,000) of excess contribution as a 
prepayment credit in accordance with 9904.412-50(a)(4).
* * * * *
    (d) * * *
    (4) Again, assume the set of facts in 9904.412-60(d)(2) except 
that, Contractor P's contribution to the Trust is $105,000 based on a 
long-term assumed interest assumption of 8%. Under the provisions of 
9904.412-50(d)(2) the entire $100,000 is allocable to cost objectives 
of the period. In accordance with the provisions of 9904.412-50(c)(1) 
Contractor P has funded $5,000 ($105,000 - $100,000) in excess of the 
assigned pension cost for the period. The $5,000 shall be accounted for 
as a prepayment credit. Pursuant to 9904.412-50(a)(4), the $5,000 shall 
be adjusted for an allocated portion of the total investment earnings 
and expenses in accordance with 9904.412-50(a)(4) and 9904.413-
50(c)(7). The prepayment credit plus allocated earnings and expenses 
shall be excluded from the actuarial value of assets used to compute 
the next year's pension cost. The accumulated value of prepayment 
credits of $5,400 (5,000 x 1.08) may be used to fund the next year's 
assigned pension cost, if needed.
* * * * *
    6. Section 9904.412-60.1 is added to read as follows:


9904.412-60.1  Illustrations--CAS Harmonization Rule.

    The following illustrations address the measurement, assignment and 
allocation of pension cost on or after the Applicability Date of the 
Harmonization Rule. The first series of illustrations present the 
measurement, assignment and allocation of pension cost for a contractor 
with an under-funded segment, followed by another series of 
illustrations which present the measurement, assignment and allocation 
of pension cost for a contractor with an over-funded segment. The 
actuarial gain and loss recognition of changes between the long-term 
liability and the settlement liability bases are illustrated in 
9904.412-60.1(h). The structural format for 9904.412-60.1 differs from 
the format for 9904.412-60.
    (a) Description of the pension plan, actuarial assumptions and 
actuarial methods used for 9904.412-60.1 Illustrations. (1) 
Introduction: Harmony Corporation has a defined-benefit pension plan 
covering employees at seven segments, all of which have some contracts 
subject to this Standard and 9904.413. The demographic experience for 
employees of the Segment 1 is materially different from that of the 
other six segments so that pursuant to 9904.413-50(c)(2)(iii) the 
contractor must separately compute the pension cost for Segment 1. 
Because the factors comprising pension cost for Segments 2 through 7 
are relatively equal, the contractor computes pension cost for these 
six segments on a composite basis. The contractor does not separately 
account for pension costs related to its inactive employees. The 
contractor has received its annual actuarial valuation for its 
qualified defined benefit pension plan, which bases the pension benefit 
on the employee's final average salary. The plan's Enrolled Actuary has 
provided the following disclosure concerning the methods (Table 1) and 
assumptions (Table 2) used to perform the valuation. The Contractor has 
accepted and adopted these methods and assumptions as its cost 
accounting practice for this pension plan.

       Table 1--Actuarial Methods for CAS 412 and 413 Computations
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Valuation date...............  January 1, 2016
------------------------------------------------------------------------
Actuarial Cost Methods:        .........................................
    CAS 412 & 413 and Tax      Projected Unit Credit Cost Method.
     Deductibility.
    Minimum Required Amount..  Unit Credit Cost Method without Salary
                                Projection.
------------------------------------------------------------------------
Asset Valuation Methods (Actuarial Value of Assets):
    CAS 412 and 413..........  5-Year delayed recognition of realized
                                and unrealized gains and losses; but
                                within 80% to 120% of Market Value of
                                Assets.
    ERISA....................  24-Month Average Value of Assets but
                                within 90% to 110% of Market Value.
------------------------------------------------------------------------


     Table 2--Actuarial Assumptions for CAS 412 and 413 Computations
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Long-term expected interest    .........................................
 rate:
    Basis....................  Based on expected long-term return on
                                investment for each class of investment
                                and on the investment mix and policy.
    Long-term best-estimate..  7.50%
Corporate Bond ``Settlement''  .........................................
 Rate:
    Basis....................  24-Month Average 3-Segment Yield Curve as
                                of preceding November 1.
    Current Value (Effective   6.20%
     Rate).
Future Salary Increases......  3.00%
Mortality....................  RP2000 Generational Tables as published
                                by the Secretary of Treasury.
Expense Load on Liability or
 Normal Cost:
    Long-term liability &      Included as decrement to long-term
     Normal Cost.               interest assumption.
    Minimum liability &        0.5% of market value of assets added to
     Normal Cost.               minimum normal cost.
All other assumptions:.......  Based on the long-term best estimate of
                                future events. Same set of assumptions
                                is used for ERISA without regard to ``At
                                Risk'' status.
Change in assumptions since    None.
 last year:.
------------------------------------------------------------------------


[[Page 26008]]

     (2) Actuarial Methods and Assumptions: (i) Salary Projections: As 
permitted by 9904.412-50(b)(5), the contractor includes a projection of 
future salary increases and uses the projected unit credit cost method, 
which is an immediate gain actuarial cost method that satisfies the 
requirements of 9904.412-40(b)(1) for measuring the actuarial accrued 
liability and normal cost. The unit credit cost method (also known as 
the accrued benefit cost method) measures the liability for benefits 
earned prior to and during the current plan year and is also an 
immediate gain cost method that satisfies 9904.412-40(b)(1) and 
50(b)(1).
    (ii) Interest Rate:
    (A) Long-Term Interest Rate: The contractor's basis for 
establishing the long-term interest rate assumption satisfies the 
criteria of 9904.412-40(b)(2) and 9904.412-50(b)(4).
    (B) ``Settlement'' Rate: For purposes of measuring the minimum 
actuarial liability and minimum normal cost the contractor has elected 
to use a set of investment grade corporate bond yield rates published 
by the Secretary of the Treasury. The basis and set of corporate bond 
rates meet the requirements of 9904.412-50(b)(7)(iv)(A), (B) and (C).
    (iii) Mortality: Mortality is based on a table of generational 
mortality rates published by the Secretary of the Treasury and reflects 
recent mortality improvements. This table satisfies 9904.412-40(b)(4) 
which requires assumptions to ``represent the contractor's best 
estimates of anticipated experience under the plan, taking into account 
past experience and reasonable expectations.'' Alternatively, use of 
the annually updated and published static mortality table would also 
satisfy this requirement, but in that case the contractor should 
disclose the source and annual nature of the mortality rate rather than 
the specific table. The specific table used for each valuation shall be 
identified.
    (iv) Actuarial Value of Assets:
    (A) The valuation of the actuarial value of assets used for CAS 412 
and 413 is based on a recognized smoothing technique that ``provides 
equivalent recognition of appreciation and depreciation of the market 
value of the assets of the pension plan.'' The disclosed method also 
constrains the asset value to a corridor bounded by 80% to 120% of the 
market value of assets. This method for measuring the actuarial value 
of assets satisfies the provisions of 9904.413-50(b)(2).
    (B) The Actuarial value of assets used for ERISA purposes limits 
the expected interest to a specific corporate bond rate regardless of 
the investment mix and actual expectations. This method fails the 
criteria of 9904.413-50(b)(2) by not allowing for recognition of 
potential appreciation. The actuarial value of assets derived under 
this method cannot be used for CAS 412 and 413 purposes. This actuarial 
value of assets may be used to determine the minimum required amount 
since that amount is measured in accordance with ERISA rather than CAS 
412 and 413.
    (v) An actuarial cost method, as defined at 9904.412-30(a)(4), 
recognizes current and future administrative expenses. For contract 
costing purposes, administrative expenses are implicitly recognized as 
a decrement to the assumed interest rate. Since the published sets of 
corporate bond rates are not decremented for expenses, the expected 
expense is explicitly added to the minimum normal cost.
    (b) Underfunded Segment--Measurement of Pension Costs. Based on the 
pension plan, actuarial methods and actuarial assumptions described in 
9904.412-60.1(a), the Harmony Corporation determines that Segment 1 and 
Segments 2-7 each have an unfunded actuarial liability and measures its 
pension cost for plan year 2016 as follows:
    (1) Asset Values: (i) Market Values of Assets: The contractor 
adjusts the prior period's market value of assets in accordance with 
9904.413-50(c)(7). The accumulated value of prepayment credits are 
separately identified from the assets allocated to segments and are 
adjusted in accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7). 
The adjustment of the market value of assets, including the accumulated 
value of prepayment credits is summarized in Table 3.

                                 Table 3--January 1, 2016 Market Value of Assets
----------------------------------------------------------------------------------------------------------------
                                                                                         Accumulated
                                   Total plan         Segment 1       Segments 2-7       prepayments      Note
----------------------------------------------------------------------------------------------------------------
Market Value at January 1,          $13,190,000        $1,503,000       $10,633,000        $1,054,000         1
 2015.........................
    Prepayment Credit Applied.  ................           49,000           390,700          (439,700)        1
    Contribution..............          940,080           104,400           835,680   ................        1
    Benefit Payments..........         (864,800)          (80,600)         (784,200)              n/a         1
    Investment Earnings.......        1,068,600           126,341           892,633            49,626         2
    Administrative Expenses...          (76,000)           (8,986)          (63,485)           (3,529)        3
                               ------------------------------------------------------------------------
Market Value at January 1,           14,257,880         1,693,155        11,904,328           660,397   ........
 2016.........................
Weighted Average Asset Values.       13,227,640         1,563,900        11,049,440           614,300         4
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.
Note 2: The investment earnings are allocated among segments and the accumulated value of prepayment credits
  based on average weighted asset values in accordance with 9904.413-50(c)(7) and 9904.412-50(a)(4).
Note 3: The administrative expenses are allocated among segments and the accumulated value of prepayment credits
  based on average weighted asset values in accordance with 9904.413-50(c)(7) and 9904.412-50(a)(4).
Note 4: The prepayment credits were transferred and applied on the first day of the plan year. The contribution
  deposit and benefit payments occurred on July 1, 2015. The weighted average asset value for each segment and
  the accumulated value of prepayment credits was computed by giving 100% weight to the prepayment credit
  transfer amounts and 50% weighting to the contribution and benefit payments.

     (ii) Actuarial Value of Assets: Based on the contractor's 
disclosed asset valuation method, recognition of the realized and 
unrealized appreciation and depreciation from the current and four 
prior periods is delayed and amortized over a 5-year period. The 
portion of the appreciation and depreciation that is deferred until 
future periods is subtracted from the market value of assets to 
determine the actuarial value of assets for CAS 412 and 413 purposes. 
Table 4 summarizes the determination of the actuarial value of assets 
by segment as of January 1, 2016.

[[Page 26009]]



                               Table 4--January 1, 2016 Actuarial Value of Assets
----------------------------------------------------------------------------------------------------------------
                                                      Total plan        Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
CAS 413 Actuarial Value of Assets................      (Note 1)     ................  ................  ........
    Market Value at January 1, 2016..............  ...............       $1,693,155       $11,904,328         2
    Total Deferred Appreciation..................  ...............           (4,398)          (31,400)        3
                                                                   ------------------------------------
    Unlimited Actuarial Value of Assets..........  ...............        1,688,757        11,872,928   ........
CAS 413 Asset Corridor
    80% of Market Value of Assets................  ...............        1,354,526         9,523,462   ........
    Market Value at January 1, 2016..............  ...............        1,693,155        11,904,328         2
    120% of Market Value of Assets...............  ...............        2,031,788        14,285,194   ........
CAS Actuarial Value of Assets....................      $13,561,685        1,688,757        11,872,928         4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the actuarial value of assets is determined at the segment level, no values are shown for the
  Total Plan except as a summation at the end of the computation.
Note 2: See Table 3.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.
Note 4: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
  Market Value of Assets.

     (2) Liabilities and Normal Costs: (i) Long-Term Liabilities and 
Normal Costs: Based on the plan population data and the disclosed 
methods and assumptions for CAS 412 ad 413 purposes, the contractor 
measures the liability and normal cost on a going-concern basis using a 
long-term interest assumption. The liability and normal cost are shown 
in Table 5.

                            Table 5--``Long-Term'' Liabilities as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability........................      $16,525,000       $2,100,000      $14,425,000        1
Normal Cost........................................          947,700           94,100          853,600        1
Expense Load on Normal Cost........................  ...............  ...............  ...............        1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.

     (ii) Likewise, based on the plan population data and the disclosed 
methods and assumptions for CAS 412 and 413 purposes, the contractor 
measures the minimum actuarial liability and minimum normal cost on a 
``settlement'' basis using a set of investment grade corporate bond 
yield rates published by the Secretary of the Treasury. This 
measurement is shown in Table 6.

                            Table 6--``Settlement'' Liabilities as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Minimum Actuarial Liability........................      $15,557,000       $2,194,000      $13,363,000        1
Minimum Normal Cost................................          933,700           93,000          840,700        1
Expense Load on Normal Cost........................           82,000            8,840           73,160        1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for ERISA purposes and
  supporting documentation.

     (3) ERISA Contribution Range: For ERISA purposes, the contractor 
can deposit any amount that satisfies the minimum contribution 
requirement and does not exceed the maximum tax deductible contribution 
amount. The ERISA minimum required and maximum tax-deductible 
contributions are computed for the plan as a whole. ERISA does not 
recognize segments or business units.
    (i) Funding Shortfall (Surplus):
    (A) The contractor computes the funding shortfall (the unfunded 
actuarial liability for ERISA purposes) as shown in Table 7.

          Table 7--PPA Funding Shortfall as of January 1, 2016
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Funding Target..............................      $15,557,000         1
Actuarial Value of Assets for ERISA.........      (13,469,400)        2
                                             ------------------
Total Shortfall (Asset Surplus).............        2,087,600   ........
------------------------------------------------------------------------
Note 1: See Table 6.
 
Note 2: Information taken directly from the actuarial valuation report
  prepared for ERISA purposes and supporting documentation.


[[Page 26010]]

     (B) The ERISA actuarial value of assets does not meet the criteria 
for measuring the actuarial value of assets for CAS purposes. 
Accordingly, there is a difference of $88,894 between the actuarial 
value of assets used for ERISA purposes ($13,469,400) and the asset 
value used for CAS purposes ($13,561,685) as developed in Table 4. 
However, for purposes of this computation the contractor uses the 
actuarial value of assets developed for ERISA purposes since this is an 
ERISA computation.
    (ii) Minimum Required Amount: In accordance with 9904.412-
50(b)(7)(iii)(C), the minimum required amount is the gross minimum 
contribution required by ERISA, i.e. the minimum required contribution 
unreduced by any prefunding balances. The contractor can satisfy the 
ERISA minimum funding requirement by depositing an amount at least 
equal to the minimum required contribution minus any prefunding 
balances, subject to certain ERISA restrictions on use of the 
prefunding balances. This calculation is done at the plan level in 
accordance with 9904.413-50(c)(7). Table 8 shows the contractor's 
computation of the minimum required amount (the unreduced minimum 
required contribution for ERISA purposes) for CAS purposes.

                 Table 8--Minimum Required Contribution
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Target Normal Cost..........................         $933,700         1
Expense Load on Target Normal Cost..........           82,000         1
Shortfall Amortization Amount...............          576,225         2
Minimum Required Contribution...............        1,591,925         3
Available Prefunding Balance................         (500,000)        4
ERISA Minimum Deposit.......................        1,091,925         5
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Net amortization installment required for the various portions
  of the Funding Shortfall of $2,087,600 (Table 7) in accordance with
  ERISA.
Note 3: The ERISA Minimum Required Contribution is the CAS 9904.412-
  50(b)(7)(iii)(C) ``Minimum Required Amount.''
Note 4: Information taken directly from the actuarial valuation report
  prepared for ERISA purposes and supporting documentation
Note 5: This is the minimum deposit the contractor must make to satisfy
  ERISA.

     (iii) Maximum Tax-Deductible Contribution: In accordance with 
9904.412-50(c)(2)(iii), the assigned pension cost may not exceed the 
ERISA maximum tax-deductible contribution plus any accumulated value of 
prepayment credits. Presuming the tax-deductible contribution rules 
have not changed since 2008, the contractor computes the maximum tax-
deductible contribution as shown in Table 9.

                     Table 9--Tax-Deductible Maximum
------------------------------------------------------------------------
                                                 Total Plan       Notes
------------------------------------------------------------------------
Funding Target..............................      $15,557,000         1
Target Normal Cost..........................          933,700         1
Expense Load on Target Normal Cost..........           82,000         1
PPA Cushion (50% Funding Target)............        7,778,500   ........
Projected Liability Increment...............        2,505,000         2
Liability for Deduction Limit...............       26,856,200   ........
Actuarial Value of Assets for ERISA.........      (13,469,400)        3
Tax-Deductible Maximum......................       13,386,800         4
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Increase in Funding Target if salaries increases are projected.
Note 3: See Table 7.
Note 4: The Tax-Deductible Maximum Contribution cannot be less than the
  ERISA minimum required contribution developed in Table 8.

     (4) Initial Measurement of Assigned Pension Cost: Before 
considering if any adjustments are required by 9904.412-50(b)(7), the 
contractor must first measure the pension cost for the period based on 
the actuarial accrued liability and normal cost valued with the long-
term interest assumption and the actuarial value of assets.
    (i) Measurement of the unfunded actuarial liability: The contractor 
measures the unfunded actuarial liability in order to compute any 
portions of unfunded actuarial liability to be amortized in accordance 
with 9904.412-50(a)(1) and 9904.412-50(a)(2). (Note that the 
accumulated value of prepayment credits is accounted for separately and 
is not included in the actuarial value of assets allocated to 
segments.) See Table 10.

                                 Table 10--Initial Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
                                                     Total plan         Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability.....................      $16,525,000        $2,100,000       $14,425,000         1
CAS Actuarial Value of Assets...................      (13,561,685)       (1,688,757)      (11,872,928)        2
Unfunded Actuarial Liability....................        2,963,315           411,243         2,552,072   ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5.
Note 2: See Table 4.


[[Page 26011]]

     (ii) Measurement of pension cost: The new amortization 
installment(s) are added to the amortization installments remaining 
from prior years. The pension cost for the period is measured as the 
normal cost plus the sum of the amortization installments. Because the 
long-term interest assumption implicitly recognizes expected 
administrative expenses, there is no separately identified increment 
for administrative expenses added to the normal cost. See Table 11.

                                     Table 11--Initial Measured Pension Cost
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Normal Cost........................................      (Note 1)             $94,100         $853,600        2
Expense Load on Normal Cost........................  ...............  ...............  ...............        2
Net Amortization Installment.......................  ...............           75,387          467,856        3
Measured Pension Cost..............................       $1,490,943          169,487        1,321,456  ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the pension cost is measured at the segment level, no values are shown for the Total Plan except
  as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Net annual installment required to amortize the portions of unfunded actuarial liability, $411,243 for
  Segment 1 and $2,552,072 for Segments 2-7, in accordance with 9904.412-50(a)(1).

     (5) Harmonization Tests: (i) Harmonization Threshold Test:
    (A) The pension cost measured for the period is only subject to the 
adjustments of 9904.412-50(b)(7) if the minimum required amount for the 
plan exceeds the pension cost, measured for the plan as a whole. See 
Table 12.

                 Table 12--Harmonization Threshold Test
------------------------------------------------------------------------
                                                  Total plan      Notes
------------------------------------------------------------------------
                                                   (Note 1)     ........
CAS Measured Pension Cost....................       $1,490,943        2
ERISA Minimum Required Amount................        1,591,925        3
------------------------------------------------------------------------
Note 1: The ERISA Minimum Required Amount is measured for the Total
  Plan, therefore the Harmonization Threshold Test is performed for the
  plan as a whole.
Note 2: See Table 11. CAS Measured Cost cannot be less than $0.
Note 3: See Table 8. The ERISA minimum required contribution unreduced
  for any prefunding balance.

     (B) In this case, the minimum required amount is larger, and 
therefore the contractor proceeds to determine whether the pension cost 
must be adjusted in accordance with 9904.412-50(b)(7). If the minimum 
required amount had been equal to or less than the assigned pension 
cost, then the pension cost measured for the period would not be 
subject to the adjustment provisions of 9904.412-50(b)(7).
    (ii)(A) Actuarial Liability and Normal Cost Threshold Test: The 
contractor compares the sum of the actuarial accrued liability plus 
normal cost, including any expense load, to the minimum actuarial 
liability plus minimum normal cost to determine whether the assigned 
cost for the segment must be adjusted in accordance with 9904.412-
50(b)(7)(i). This comparison and determination is separately performed 
at the segment level in accordance with 9904.413-50(c)(2)(iii). See 
Table 13.

                                   Table 13--Harmonization ``Liability'' Test
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
                                                         (Note 1)     ...............  ...............  ........
CAS Long-Term Liabilities:                           ...............  ...............  ...............  ........
    Actuarial Accrued Liability....................  ...............       $2,100,000      $14,425,000        2
    Normal Cost....................................  ...............           94,100          853,600        2
    Expense Load on Normal Cost....................  ...............  ...............  ...............     2, 3
                                                                     ----------------------------------
        Total Liability for Period.................  ...............        2,194,100       15,278,600  ........
``Settlement Liabilities'':                          ...............  ...............  ...............  ........
    Minimum Actuarial Liability....................  ...............        2,194,000       13,363,000        4
    Minimum Normal Cost............................  ...............           93,000          840,700        4
    Expense Load on Normal Cost....................  ...............            8,840           73,160     4, 5
                                                                     ----------------------------------
        Total Liability for Period.................  ...............        2,295,840       14,276,860  ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the liability and normal cost used to measure the pension cost is determined at the segment
  level, no values are shown for the Total Plan except as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Because the long-term interest assumption implicitly recognizes expected admin expense there is no
  explicit amount added to the long-term normal cost.
Note 4: See Table 6.
Note 5: For settlement valuation purposes the contractors explicitly identifies the expected expenses as a
  separate component of normal cost.


[[Page 26012]]

     (B) As shown in Table 13, the minimum actuarial liability plus 
minimum normal cost ($2,295,840) exceeds the actuarial accrued 
liability plus normal cost ($2,194,100) for Segment 1 but not for 
Segments 2 through 7. Therefore, the contractor must measure the 
adjusted pension cost for Segment 1 only.
    (6) Measurement of Potentially Adjusted Pension Cost: To determine 
whether the pension cost measured for the period must be adjusted in 
accordance with 9904.412-50(b)(7)(ii), the contractor measures the 
unfunded actuarial liability, basic pension cost, and the assignable 
cost limitation by substituting the minimum actuarial liability and 
minimum normal cost for the actuarial accrued liability and normal 
cost.
    (i) Re-measured Unfunded Actuarial Liability (Table 14):

                               Table 14--Re-measured Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
                                                       Total plan        Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Minimum Actuarial Liability.......................  ...............       $2,194,000   ...............        1
CAS Actuarial Value of Assets.....................  ...............       (1,688,757)  ...............        2
                                                                    ------------------
Unfunded Actuarial Liability......................  ...............          505,243   ...............  ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: See Table 4.

     (ii) Measurement of the Adjusted Pension Cost (Table 15):

                                         Table 15--Adjusted Pension Cost
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Minimum Normal Cost................................  ...............          $93,000  ...............        1
Expense Load on Normal Cost........................  ...............            8,840  ...............     1, 2
Re-measured Amortization Installments..............  ...............           88,126  ...............        3
                                                                     -----------------
Adjusted Pension Cost..............................  ...............          189,966  ...............  ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: For PPA purposes the contractors explicitly identifies the expected expenses as part of the normal cost.
Note 3: Net amortization installment based on the remeasured unfunded actuarial liability of $505,243 for
  Segment 1.

     (7) Harmonization of Measured Pension Cost: For Segment 1 the 
contractor compares the unadjusted pension cost measured by the 
unadjusted actuarial accrued liability and normal cost with the 
adjusted pension cost re-measured by the minimum actuarial liability 
and minimum normal cost. Because the adjusted pension cost exceeds the 
unadjusted pension cost, the adjusted pension cost determines the 
measured pension cost for Segment 1. For Segments 2 through 7 the 
measured pension cost was not required to be adjusted. See Table 16.

                                          Table 16--Harmonization Test
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
                                                         (Note 1)     ...............  ...............  ........
(A) Unadjusted Pension Cost........................  ...............         $169,487       $1,321,456        2
(B) Adjusted Pension Cost..........................  ...............          189,966              n/a        3
Harmonized Pension Cost............................        1,511,422          189,966        1,321,456        4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the comparison of the unadjusted and adjusted pension cost is performed separately at the
  segment level, no values are shown for the Total Plan except as a summation at the end of the computation.
Note 2: See Table 11.
Note 3: See Table 15.
Note 4: Greater of (A) or (B).

     (c) Underfunded Segment--Assignment of Pension Cost. In 9904.412-
60.1(b) the Harmony Corporation measured the total pension cost to be 
$1,511,422, which is the total of the adjusted pension cost of $189,966 
for Segment 1 and the unadjusted pension cost of $1,321,456 for 
Segments 2 through 7. The contractor must now determine if any of the 
limitations of 9904.412-50(c)(2) apply.
    (1) Zero Dollar Floor: The contractor compares the measured pension 
cost to a zero dollar floor as required by 9904.412-50(c)(2)(i). In 
this case, the measured pension cost is greater than zero and no 
assignable cost credit is established. See Table 17.

[[Page 26013]]



                                 Table 17--CAS 412-50(c)(2)(i) Zero Dollar Floor
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
                                                         (Note 1)     ...............  ...............  ........
Measured Pension Cost >= $0........................  ...............         $189,966       $1,321,456        2
Assignable Cost Credit.............................  ...............  ...............  ...............        3
----------------------------------------------------------------------------------------------------------------
Note 1: Because the provisions of CAS 412-50(2)(i) are applied at the segment level, no values are shown for the
  Total Plan except as a summation at the end of the computation.
Note 2: See Table 16. The Measured Pension Cost is the greater of zero or the Harmonized Pension Cost.
Note 3:There is no Assignable Cost Credit since the Harmonized Pension Cost is greater than zero.

     (2) Assignable Cost Limitation:
    (i) As required by 9904.412-50(c)(2)(ii), the contractor measures 
the assignable cost limitation amount. The pension cost assigned to the 
period cannot exceed the assignable cost limitation amount. Because the 
measured pension cost for Segment 1 was adjusted as required by 
9904.412-50(b)(7)(ii), the assignable cost limitation for Segment 1 is 
based on the adjusted values for the actuarial accrued liability and 
normal cost, including expense load. The unadjusted values of the 
actuarial accrued liability and normal cost, including expense load, 
are used to measure the assignable cost limitation for Segment 2 
through 7. See Table 18.

                            Table 18--CAS 412-50(c)(2)(ii) Assignable Cost Limitation
----------------------------------------------------------------------------------------------------------------
                                                      Total plan        Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
                                                       (Note 1)     ................  ................  ........
Actuarial Accrued Liability......................  ...............       $2,194,000       $14,425,000         2
Normal Cost......................................  ...............           93,000           853,600         3
Expense Load on Normal Cost......................  ...............            8,840   ................        4
                                                                   ------------------------------------
    Total Liability for Period...................  ...............        2,295,840        15,278,600   ........
Actuarial Value of Plan Assets...................  ...............       (1,688,757)      (11,872,928)        5
                                                                   ------------------------------------
(A) Assignable Cost Limitation Amount............  ...............          607,083         3,405,672         6
(B) 412-50(c)(2)(i) Assigned Cost................  ...............          189,966         1,321,456         7
(C) 412-50(c)(2)(ii) Assigned Cost...............        1,511,422          189,966         1,321,456         8
----------------------------------------------------------------------------------------------------------------
Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
  calculated, no values are shown for the Total Plan.
Note 2: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Actuarial Accrued
  Liability has been adjusted to equal the Minimum Actuarial Liability (Table 6). The unadjusted actuarial
  accrued liability is used for Segments 2-7 (Table 5).
Note 3: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Normal Cost has been
  adjusted to equal the Minimum Normal Cost (Table 6). The unadjusted normal cost is used for Segments 2-7
  (Table 5).
Note 4: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were met for Segment 1, the Normal Cost is based
  on the Minimum Normal Cost which explicitly identifies the expected expenses as a separate component of normal
  cost (Table 6). For Segments 2-7, the expected expenses are implicitly recognized in the measurement of the
  normal cost (Table 5).
Note 5: See Table 4.
Note 6: The Assignable Cost Limitation cannot be less than $0.
Note 7: See Table 17.
Note 8: Lesser of lines (A) or (B).

     (ii) As shown in Table 18, the contractor determines that the 
measured pension costs for Segment 1 and Segments 2-7 does not exceed 
the assignable cost limitation and are not limited.
    (3) Measurement of Tax-Deductible Limitation:
    (i) Finally, after limiting the measured pension cost in accordance 
with 9904.412-50(c)(2)(i) and (ii), the contractor checks to ensure 
that the total assigned pension cost will not exceed $14,047,197, which 
is the sum of the maximum tax-deductible contribution ($13,386,800) as 
determined in Table 9 plus the accumulated value of prepayment credits 
($660,397) shown in Table 3. Since the tax-deductible contribution and 
prepayments are maintained for the plan as a whole, these values are 
allocated to segments based on the assignable pension cost after 
adjustment, if any, for the assignable cost limitation in accordance 
with 9904.413-50(c)(1)(ii). See Table 19.

                            Table 19--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Maximum Deductible Amount..........................      $13,386,800       $1,682,546      $11,704,254     1, 2
Accumulated Prepayment Credits.....................          660,397           83,003          577,394     3, 4
                                                    ---------------------------------------------------
(A) 412-50(c)(2)(iii) Limitation...................       14,047,197        1,765,549       12,281,648  ........
(B) 412-50(c)(2)(ii) Assigned Cost.................        1,511,422          189,966        1,321,456        5
Assigned Pension Cost..............................        1,511,422          189,966        1,321,456       6
----------------------------------------------------------------------------------------------------------------
Note 1: Maximum Deductible Amount for the Total Plan is allocated to segments based on the 9904.412-50(c)(2)(ii)
  Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation test.
Note 2: See Table 9.

[[Page 26014]]

 
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
  50(c)(2)(ii) Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation
  test.
Note 4: See Table 3.
Note 5: See Table 18.
Note 6: Lesser of lines (A) or (B).

     (ii) The assignable pension cost of $1,511,422, measured after 
considering the assignable cost limitation, does not exceed the 
9904.412-50(c)(2)(ii) limit of $14,047,197.
    (d) Underfunded Segment--Allocation of Pension Cost. In 9904.412-
60.1(c) the Harmony Corporation determined that the assigned pension 
cost for the period was $1,511,422, which is the total of the assigned 
pension cost of $189,966 for Segment 1 and $1,321,456 for Segments 2 
through 7. See Table 19. The contractor determines the amount to be 
contributed to the funding agency and the allocation of the assigned 
cost as follows:
    (1) Funding Decision: (i) The contractor examines several different 
amounts to contribute to the plan. The contractor must contribute an 
amount equal to the assigned pension cost of $1,511,422 (Table 19) 
minus the accumulated value of prepayment credits of $660,397 (Table 3) 
for the assigned cost to be fully allocable. The minimum contribution 
amount that must be deposited is determined by segment is shown in 
Table 20.

                                        Table 20--CAS Funding Requirement
----------------------------------------------------------------------------------------------------------------
                                                     Total plan         Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost...............................       $1,511,422          $189,966        $1,321,456         1
Accumulated Value of Prepayments................         (660,397)          (83,003)         (577,394)     2, 3
                                                 ------------------------------------------------------
CAS Assigned Cost to be Funded..................          851,025           106,963          744,062
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 19.
Note 2: See Table 3.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
  50(c)(2) Assigned Cost (Table 19) so that the prepayments are proportionally allocated to each segment's
  assigned pension cost.

     (ii) To satisfy the minimum funding requirements of ERISA. The 
contractor must contribute an amount equal to the minimum required 
contribution minus any prefunding balances that are permitted to be 
applied under ERISA. If the pension plan's funding level is below 
certain ERISA thresholds, then the contractor may also consider 
including an additional contribution amount to improve the plan's 
funding level. In this case the plan is sufficiently funded and no 
additional contribution is needed. See Table 21.

                   Table 21--ERISA Funding Requirement
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Gross Minimum Required Contribution.........       $1,591,925         1
ERISA Prefunding Credits....................         (500,000)        1
                                             ------------------
Net Minimum Required Contribution...........        1,091,925
Additional Voluntary Contribution...........  ................        2
                                             ------------------
ERISA Minimum Deposit.......................        1,091,925        3
------------------------------------------------------------------------
Note 1: See Table 8.
Note 2: The plan is sufficiently funded and no additional contribution
  is needed to avoid benefit restrictions.
Note 3: To satisfy ERISA's minimum funding contribution, at least
  $1,091,925 must be deposited.

     (iii) And finally, the contractor's financial management policy 
for the pension plan is to deposit an amount equal to the cost as 
determined by the aggregate actuarial cost method so that the liability 
is liquated in even payments over the years of expected service of the 
active employees. In this case, the plan's actuary reports that the 
cost under the aggregate method is $1,254,000.
    (iv) Table 22 shows the contractor's determination of the possible 
range of contributions.

                      Table 22--Contribution Range
------------------------------------------------------------------------
                                                  Total plan      Notes
------------------------------------------------------------------------
CAS Assigned Cost to be Funded...............         $851,025        1
ERISA Minimum Required Deposit...............        1,091,925        2
Aggregate Method Normal Cost.................        1,254,000        3
Maximum Tax-Deductible Contribution..........       13,386,800        4
------------------------------------------------------------------------
Note 1: See Table 20.
Note 2: See Table 21.
Note 3: Information taken directly from the actuarial valuation report
  prepared for funding policy purposes and supporting documentation.
Note 4: See Table 9.


[[Page 26015]]

     (v) The contractor decides to contribute $1,091,925, which is the 
net ERISA minimum required contribution (MRC) after deducting any 
permissible prefunding balances. The contractor applies this required 
contribution amount toward the CAS assigned pension cost of $1,511,422 
(Table 19) and then applies $419,497 ($1,511,422-$1,091,925 (Table 21)) 
of the $660,397 (Table 3) accumulated value of prepayment credits to 
fully fund the CAS assigned pension cost for the period. The $1,091,925 
is adjusted for interest and is deposited before the end of the year. 
The prepayment credit of $419,497 is applied as of the first day of the 
plan year. The funding of the assigned pension cost by segment is 
summarized in Table 23:

                                     Table 23--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
                                                     Total plan         Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost...............................       $1,511,422          $189,966        $1,321,456         1
ERISA Minimum Deposit...........................       (1,091,925)         (137,241)         (954,684)        2
                                                 ------------------------------------------------------
Remaining Cost to be Funded.....................          419,497            52,725           366,772   ........
Regular Prepayments Credit Applied..............         (419,497)          (52,725)         (366,772)        3
                                                 ------------------------------------------------------
Remaining CAS Assigned Cost.....................  ................  ................  ................  ........
Contribution over Net MRC.......................  ................  ................  ................        4
                                                 ------------------------------------------------------
Unfunded (Prepaid) Cost.........................  ................  ................  ................        5
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 19.
Note 2: The Net Minimum Required Contribution is proportionally allocated to segments based on the Harmonized
  CAS Assigned Cost that must be funded to be allocable.
Note 3: Before the contractor expends any additional resources, CAS Assigned Cost is funded by application of
  any available prepayment credits. The prepayment credits are proportionally allocated to segments based on the
  Remaining Cost to be Funded that must be funded to be allocable in accordance with 9904.413-50(c)(1)(i).
Note 4: The contractor decided not to contribute any funds in excess of the ERISA minimum required contribution
  reduced by the prefunding balance, if any.
Note 5: When prepayment credits are used to fund the CAS assigned pension cost for the current period, the
  amount of prepayment credit used will be deducted from the accumulated value of prepayment credits and
  transferred to segments when the market value of assets are updated for the next valuation. The application of
  this prepayment credit will appear in the asset roll-up from 1/1/2016 to 1/1/2017.

     (2)(i) Since the full $1,511,422 (Table 19) assigned cost is 
funded, the entire assigned cost can be allocated to intermediate and 
final cost objectives in accordance with 9904.412-50(d)(1). The pension 
benefit is determined as a function of salary, and therefore, the 
salary dollars of plan participants, i.e., covered payroll, is used to 
allocate the assigned composite pension cost for Segment 2 through 7 
(Table 19) among segments. Table 24 summarizes the allocation of 
assigned pension cost to segment.

                                     Table 24--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
                                                                          Segment
                                                     Covered payroll     allocation       Allocated       Notes
                                                                           factor        pension cost
----------------------------------------------------------------------------------------------------------------
Direct Allocation (Segmented Cost):
     (A) Segment 1.................................       $1,127,000              n/a         $189,966        2
Indirect Allocation (Composite Cost)                                      (Note 1)
        Segment 2..................................          810,000         0.099963          132,097        3
        Segment 3..................................        1,621,000         0.200049          264,356        3
        Segment 4..................................        2,026,000         0.250031          330,405        3
        Segment 5..................................        1,158,000         0.142910          188,849        3
        Segment 6..................................        1,247,000         0.153894          203,364        3
        Segment 7..................................        1,241,000         0.153153          202,385        3
                                                    -----------------                 -----------------
    (B) Subtotal Segments 2-7......................        8,103,000         1.000000        1,321,456        2
        Total Plan (A)+(B).........................        9,230,000  ...............        1,511,422        2
----------------------------------------------------------------------------------------------------------------
Note 1: Allocation factor for segment = segment's covered payroll divided by the total covered payroll for
  segments 2 though 7, subtotal (B).
Note 2: See Table 19.
Note 3: Pension cost for Segments 2-7, subtotal (B), multiplied by allocation factor for the individual segment.

     (ii) Once allocated to segments, the assigned pension cost is 
allocated to intermediate and final cost objectives in accordance with 
the contractor's disclosed cost accounting practice.
    (e) Overfunded Segment--Measurement of Pension Cost. Assume the 
same facts as shown in 9904.412-60.1(b), (c) and (d) for Harmony 
Corporation except that Segment 1 has an asset surplus, the accumulated 
value of prepayment credits is $0 and the January 1, 2016 Market Value 
of Assets is $16,055,092 for the total plan.
    (1) Asset Values: (i) Table 25 shows the market value of assets 
held by the Funding Agency.

[[Page 26016]]



                             Table 25--Funding Agency Balance as of January 1, 2016
----------------------------------------------------------------------------------------------------------------
                                                                                         Accumulated
                                       Total plan       Segment 1       Segments 2-7      prepayment      Notes
----------------------------------------------------------------------------------------------------------------
Market Value at January 1, 2016...      $16,055,092       $2,148,712      $13,906,380  ...............        1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.

     (ii) As before, the portion of the appreciation and depreciation 
that is deferred until future periods is subtracted from the market 
value of assets to determine the actuarial value of assets for CAS 412 
and 413 purposes. The determination of the actuarial value of assets as 
of January 1, 2016 is summarized in Table 26.

                               Table 26--January 1, 2016 Actuarial Value of Assets
----------------------------------------------------------------------------------------------------------------
                                                      Total plan        Segment 1       Segments 2--7     Notes
----------------------------------------------------------------------------------------------------------------
                                                       (Note 1)
CAS 413 Actuarial Value of Assets:
    Market Value at January 1, 2016..............  ...............       $2,148,712       $13,906,380         2
    Total Deferred Appreciation..................  ...............           (5,700)          (35,200)        3
                                                                   ------------------------------------
        Unlimited Actuarial Value of Assets......  ...............        2,143,012        13,871,180   ........
CAS 413 Asset Corridor:
    80% of Market Value of Assets................  ...............        1,718,970        11,125,104   ........
    Market Value at January 1, 2016..............  ...............        2,148,712        13,906,380         2
    120% of Market Value of Assets...............  ...............        2,578,454        16,687,656   ........
CAS Actuarial Value of Assets....................      $16,014,192        2,143,012        13,871,180         4
----------------------------------------------------------------------------------------------------------------
Note 1: Because the actuarial value of assets is determined at the segment level, no values are shown for the
  Total Plan except as a summation at the end of the computation.
Note 2: See Table 25.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.
Note 4: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
  Market Value of Assets.

     (2) ERISA Contribution Range: (i) Funding Shortfall (Surplus): The 
contractor computes the funding shortfall (the unfunded actuarial 
liability for ERISA purposes), which in this case is an asset surplus, 
as shown in Table 27.

          Table 27--PPA Funding Shortfall as of January 1, 2016
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Funding Target..............................      $15,557,000         1
Actuarial Value of Assets for ERISA.........      (16,895,000)        2
                                             ------------------
    Total Shortfall (Surplus)...............       (1,338,000)  ........
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Information taken directly from the actuarial valuation report
  prepared for ERISA purposes and supporting documentation.

     (ii) Minimum Required Amount: Table 28 shows the contractor 
computation of the minimum required amount (the unreduced minimum 
required contribution for ERISA purposes).

                 Table 28--Minimum Required Contribution
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Target Normal Cost..........................         $933,700         1
Expense Load on Target Normal Cost..........           82,000         1
Reduced by Asset Surplus....................       (1,338,000)        2
Shortfall Amortization Amount...............              n/a   ........
Minimum Required Contribution...............  ................        3
Available Prefunding Balance................              n/a   ........
ERISA Minimum Deposit.......................  ................        4
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: See Table 27.
Note 3: The Minimum Required Contribution cannot be less than zero. The
  ERISA Minimum Required Contribution is the CAS 9904.412-
  50(b)(7)(iii)(C) ``Minimum Required Amount.''
Note 4: This is the minimum deposit the contractor must make to satisfy
  ERISA.


[[Page 26017]]

     (iii) Maximum Tax-Deductible Contribution: Presuming the tax-
deductible contribution rules have not changed since 2008, the 
contractor computes the maximum tax-deductible contribution as the sum 
of the funding target, target normal cost, the ``cushion'' amount and 
the increase in the funding target for salary projections minus the 
actuarial value of assets determined for ERISA purposes. The 
contractor's computation is shown in Table 29.

                    Table 29--Tax-Deductible Maximum
------------------------------------------------------------------------
                                                 Total plan       Notes
------------------------------------------------------------------------
Funding Target..............................      $15,557,000         1
Target Normal Cost..........................          933,700         1
Expense Load on Target Normal Cost..........           82,000         1
PPA Cushion (50% Funding Target)............        7,778,500   ........
Projected Liability Increment...............        2,505,000         2
                                             ------------------
    Liability for Deduction Limit...........       26,856,200   ........
Actuarial Value of Assets for ERISA.........      (16,895,000)        3
                                             ------------------
    Tax-Deductible Maximum..................        9,961,200   ........
------------------------------------------------------------------------
Note 1: See Table 6.
Note 2: Increase in Funding Target if salaries increases are projected.
Note 3: See Table 27.

     (3) Initial Measurement of Assigned Pension Cost: The pension cost 
is initially measured on the actuarial accrued liability and normal 
cost, including any expense load, before any adjustments that might be 
required by 9904.412-50(b)(7)(ii).
    (i) Measurement of the unfunded actuarial liability: The contractor 
measures the unfunded actuarial liability in order to compute any 
portions of unfunded actuarial liability to be amortized in accordance 
with 9904.412-50(a)(1) and 9904.412-50(a)(2). See Table 30.

                                 Table 30--Initial Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
                                                     Total plan         Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability.....................      $16,525,000        $2,100,000       $14,425,000         1
CAS Actuarial Value of Assets...................      (16,014,192)       (2,143,012)      (13,871,180)        2
                                                 ------------------------------------------------------
    Unfunded Actuarial Liability................          510,808           (43,012)          553,820   ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5.
Note 2: See Table 26.

     (ii) Measurement of pension cost: The new amortization 
installment(s) are added to the amortization installments remaining 
from prior years. The pension cost for the period is measured as the 
normal cost plus the sum of the amortization installments. Because the 
long-term interest assumption implicitly recognizes expected 
administrative expenses, there is no separately identified increment 
for administrative expenses added to the normal cost. See Table 31.

                                     Table 31--Initial Measured Pension Cost
----------------------------------------------------------------------------------------------------------------
                                                       Total plan        Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Normal Cost.......................................      (Note 1)             $94,100          $853,600        2
Expense Load on Normal Cost.......................  ...............  ................  ...............        2
Net Amortization Installment......................  ...............           (4,800)           88,700        3
                                                                    -----------------------------------
    Measured Pension Cost.........................       $1,031,600           89,300           942,300  ........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the pension cost is measured at the segment level, no values are shown for the Total Plan except
  as a summation at the end of the computation.
Note 2: See Table 5.
Note 3: Net annual installment required to amortize the portions of unfunded actuarial liability, $(43,012),
  which is a surplus for Segment 1 and $553,820 for Segments 2-7, in accordance with 9904.412-50(a)(1).

     (4) Harmonization Threshold Test: (i) The pension cost measured 
for the period is only subject to the adjustments of 9904.412-50(b)(7) 
if the minimum required amount for the plan exceeds the pension cost, 
measured for the plan as a whole. See Table 32.

                 Table 32--Harmonization Threshold Test
------------------------------------------------------------------------
                                                  Total plan      Notes
------------------------------------------------------------------------
                                                   (Note 1)     ........

[[Page 26018]]

 
CAS Measured Pension Cost....................       $1,031,600        2
    ERISA Minimum Required Amount............  ...............        3
------------------------------------------------------------------------
Note 1: The ERISA Minimum Required Amount is measured for the Total
  Plan, therefore the Harmonization Threshold Test is performed for the
  plan as a whole.
Note 2: See Table 31. CAS Measured Cost cannot be less than $0.
Note 3: See Table 28. The ERISA minimum required contribution unreduced
  for any prefunding balance.

     (ii) In this case, the CAS measured cost is larger than the 
minimum required amount for all segments, and therefore the contractor 
does not need to determine whether the pension cost must be adjusted in 
accordance with 9904.412-50(b)(7). The contractor can proceed directly 
to checking the measured pension cost for assignability.
    (f) Overfunded Segment--Assignment of Pension Cost. In 9904.412-
60.1(e) the Harmony Corporation measured the total pension cost to be 
$1,031,600, which is the sum of the pension cost of $89,300 for Segment 
1 and $942,300 for Segments 2 through 7. See Table 31. The contractor 
must now determine if any of the limitations of 9904.412-50(c)(2) 
apply.
    (1) Zero Dollar Floor: The contractor compares the measured pension 
cost to a zero dollar floor as required by 9904.412-50(c)(2)(i) as 
shown in Table 33.

                                 Table 33--CAS 412-50(c)(2)(i) Zero Dollar Floor
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
                                                         (Note 1)     ...............  ...............  ........
Measured Pension Cost >= $0........................  ...............          $89,300         $942,300        2
Assignable Cost Credit.............................  ...............  ...............  ...............        3
----------------------------------------------------------------------------------------------------------------
Note 1: Because the provisions of CAS 412-50(2)(i) are applied at the segment level, no values are shown for the
  Total Plan except as a summation at the end of the computation.
Note 2: See Table 31. The Measured Pension Cost is the greater of zero or the Harmonized Pension Cost.
Note 3: There is no Assignable Cost Credit since the Harmonized Pension Cost is greater than zero.

     (2) Assignable Cost Limitation: (i) As required by 9904.412-
50(c)(2)(ii), the contractor measures the assignable cost limitation 
amount. The pension cost assigned to the period cannot exceed the 
assignable cost limitation amount. Because the measured pension costs 
for Segment 1 and Segments 2-7 were not subject to adjustment pursuant 
to 9904.412-50(b)(7)(ii), the assignable cost limitation for Segment 1 
and Segments 2-7 are based on the unadjusted values of the actuarial 
accrued liability and normal cost, including the implicit expense load. 
See Table 34.

                            Table 34--CAS 412-50(c)(2)(ii) Assignable Cost Limitation
----------------------------------------------------------------------------------------------------------------
                                                      Total plan        Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
                                                       (Note 1)     ................  ................  ........
Actuarial Accrued Liability......................  ...............       $2,100,000       $14,425,000      2, 3
Normal Cost......................................  ...............           94,100           853,600      3, 4
Expense Load on Normal Cost......................  ...............  ................  ................     3, 5
                                                                   ------------------------------------
Total Liability for Period.......................  ...............        2,194,100        15,278,600   ........
Actuarial Value of Plan Assets...................  ...............       (2,143,012)      (13,871,180)        6
                                                                   ------------------------------------
(A) Assignable Cost Limitation Amount............  ...............           51,088         1,407,420         7
(B) 412-50(c)(2)(i) Assigned Cost................  ...............           89,300           942,300         8
(C) 412-50(c)(2)(ii) Assigned Cost...............         $993,388           51,088           942,300         9
----------------------------------------------------------------------------------------------------------------
Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
  calculated, no values are shown for the Total Plan.
Note 2: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Actuarial Accrued
  Liability has not been adjusted.
Note 3: See Table 5.
Note 4: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Normal Cost has
  not been adjusted.
Note 5: Because the criteria of 9904.412-50(b)(7)(i) and (ii) were not met for Segment 1, the Normal Cost is
  based on the long-term Normal Cost which implicitly identifies the expected expenses within the measurement of
  the normal cost.
Note 6: See Table 26.
Note 7: The Assignable Cost Limitation cannot be less than $0.
Note 8: See Table 33.
Note 9: Lesser of (A) or (B). Pension cost for Segment 1 is limited by the Assignable Cost Limitation.

    (ii) As shown in Table 34, the contractor determines that the 
measured pension cost for Segment 1 exceeds the assignable cost 
limitation and therefore the pension cost for Segment 1 is limited. The 
measured pension cost for

[[Page 26019]]

Segments 2-7 does not exceed the assignable cost limitation and is not 
limited.
    (3) Measurement of Tax-Deductible Limitation: (i) Finally, after 
limiting the measured pension cost in accordance with 9904.412-
50(c)(2)(i) and (ii), the contractor checks to ensure that the assigned 
pension cost will not exceed the sum of the maximum tax-deductible 
contribution and the accumulated value of prepayments credits. Since 
the tax-deductible contribution and prepayments are maintained for the 
plan as a whole, these values are allocated to segments based on the 
assignable pension cost after adjustment, if any, for the assignable 
cost limitation in accordance with 9904.413-50(c)(1)(ii). See Table 35.

                            Table 35--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
Maximum Deductible Amount..........................       $9,961,200         $512,311       $9,449,389     1, 2
Accumulated Prepayment Credits.....................  ...............  ...............  ...............     3, 4
                                                    ---------------------------------------------------
(A) 412-50(c)(2)(iii) Limitation...................        9,961,200          512,311        9,449,389  ........
(B) 412-50(c)(2)(ii) Assigned Cost.................          993,388           51,088          942,300        5
Assigned Pension Cost..............................          993,388           51,088          942,300        6
----------------------------------------------------------------------------------------------------------------
Note 1: Maximum Deductible Amount for the Total Plan is allocated to segments based on (B) 9904.412-50(c)(2)(ii)
  Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation test.
Note 2: See Table 29.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
  50(c)(2)(ii) Assigned Cost in accordance with 9904.413-50(c)(1)(i) for purposes of this assignment limitation
  test.
Note 4: See Table 25.
Note 5: See Table 34.
Note 6: Lesser of lines (A) or (B).

    (ii) The assignable pension cost of $993,388, measured after 
considering the assignable cost limitation, does not exceed $9,961,200, 
which is the sum of the tax-deductible maximum ($9,961,200) plus the 
accumulated value of prepayment credits ($0), and is therefore fully 
assignable to the period.
    (g) Overfunded Segment--Allocation of Pension Cost. In 9904.412-
60.1(f) the Harmony Corporation determined that the assigned pension 
cost for the period was $993,388, which is the total of the assigned 
pension cost of $51,088 for Segment 1 and $942,300 for Segments 2 
through 7. (See Table 35.) The contractor must now determine the amount 
to be contributed to the funding agency and then the allocation of the 
assigned cost as follows:
    (1) Funding Decision: (i) The contractor examines several different 
amounts to contribute to the plan. The contractor must contribute an 
amount equal to the assigned pension cost minus the accumulated value 
of prepayment credits for the assigned cost to be fully allocable. See 
Table 36.

                                        Table 36--CAS Funding Requirement
----------------------------------------------------------------------------------------------------------------
                                                        Total plan       Segment 1       Segments 2-7     Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost..................................         $993,388          $51,088         $942,300        1
Accumulated Value of Prepayments...................                0  ...............  ...............     2, 3
                                                    ---------------------------------------------------
CAS Assigned Cost to be Funded.....................          993,388           51,088          942,300  ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 35.
Note 2: See Table 25.
Note 3: Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the 9904.412-
  50(c)(2) Assigned Cost (Table 19) so that the prepayments are proportionally allocated to each segment's
  assigned pension cost.

    (ii) To satisfy the minimum funding requirements of ERISA the 
contractor must also contribute an amount equal to the minimum required 
contribution minus any prefunding balances that are permitted to be 
applied under ERISA. If the plan's funding level is below certain ERISA 
thresholds, then the contractor may also consider including an 
additional contribution amount to improve the plan's funding level. In 
this case the plan is sufficiently funded and no additional 
contribution is needed. See Table 37.

                   Table 37--ERISA Funding Requirement
------------------------------------------------------------------------
                                                  Total plan      Notes
------------------------------------------------------------------------
Gross Minimum Required Contribution..........  ...............        1
ERISA Prefunding Credits.....................              n/a        1
Net Minimum Required Contribution............  ...............  ........
Additional Voluntary Contribution............  ...............        2
ERISA Minimum Deposit........................  ...............        3
------------------------------------------------------------------------
Note 1: See Table 28.
Note 2: The plan is sufficiently funded and no additional contribution
  is needed to avoid benefit restrictions.
Note 3: No contribution is needed to satisfy ERISA's minimum funding
  contribution requirements.


[[Page 26020]]

    (iii) And finally, the contractor's financial management policy for 
the pension plan is to deposit an amount equal to the cost as 
determined by the aggregate actuarial cost method so that the liability 
is liquated in even payments over the years of expected service of the 
active employees. In this case, the plan's actuary reports that the 
cost under the aggregate method is $799,000.
    (iv) As shown in Table 38, the contractor determines that the 
possible range of contributions is:

                      Table 38--Contribution Range
------------------------------------------------------------------------
                                                  Total plan      Notes
------------------------------------------------------------------------
CAS Assigned Cost to be Funded...............         $993,388        1
ERISA Minimum Required Deposit...............                0        2
Aggregate Method Normal Cost.................          799,000        3
Maximum Tax-Deductible Contribution..........        9,961,200        4
------------------------------------------------------------------------
Note 1: See Table 36.
Note 2: See Table 28.
Note 3: Information taken directly from the actuarial valuation report
  prepared for funding policy purposes and supporting documentation.
Note 4: See Table 29.

    (v) In this case the contractor must deposit $993,388 to fully fund 
the assigned pension cost so that the full amount is allocable in 
accordance with 9904.412-50(d)(1). The contractor decides to fund 
$1,500,000 and build a prepayment credit/prefunding balance reserve 
that can be used to fund pension costs in future periods. See Table 39.

                                     Table 39--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
                                                     Total plan         Segment 1       Segments 2-7      Notes
----------------------------------------------------------------------------------------------------------------
CAS Assigned Cost...............................         $993,388           $51,088          $942,300         1
ERISA Minimum Deposit...........................  ................                0                 0         2
                                                 ------------------------------------------------------
Remaining Cost to be Funded.....................          993,388            51,088           942,300   ........
Regular Prepayments Credit Applied..............  ................  ................  ................        3
                                                 ------------------------------------------------------
Remaining CAS Assigned Cost.....................          993,388            51,088           942,300   ........
Contribution over Net MRC.......................       (1,500,000)          (51,088)         (942,300)        4
                                                 ------------------------------------------------------
Unfunded (Prepaid) Cost.........................         (506,612)  ................  ................        5
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 35.
Note 2: See Table 28. The Net Minimum Required Contribution is proportionally allocated to segments based on the
  Harmonized CAS Assigned Cost that must be funded to be allocable.
Note 3: Before the contractor expends any additional resources, CAS Assigned Cost is funded by application of
  any available prepayment credits. The prepayment credits are proportionally allocated to segments based on the
  Remaining Cost to be Funded that must be funded to be allocable in accordance with 9904.413-50(c)(1)(i).
Note 4: The contractor decided not to contribute any funds in excess of the ERISA minimum required contribution
  reduced by the prefunding balance, if any.
Note 5: When prepayment credits are used to fund the CAS assigned pension cost for the current period, the
  amount of prepayment credit used will be deducted from the accumulated value of prepayment credits and
  transferred to segments when the market value of assets are updated for the next valuation. The application of
  this prepayment credit will appear in the asset roll-up from 1/1/2016 to 1/1/2017.

    (2)(i) Since the full $993,388 assigned cost is funded, the entire 
assigned cost can be allocated to intermediate and final cost 
objectives in accordance with 9904.412-50(d)(1). The allocation of 
assigned pension cost to segment is summarized in Table 40.

                                     Table 40--Funding of CAS Assigned Cost
----------------------------------------------------------------------------------------------------------------
                                                                          Segment
                                                     Covered payroll     allocation       Allocated       Notes
                                                                           factor        pension cost
----------------------------------------------------------------------------------------------------------------
Direct Allocation (Segmented Cost)
    (A) Segment 1..................................       $1,127,000              n/a          $51,088        2
Indirect Allocation (Composite Cost)                 ...............      (Note 1)     ...............  ........
        Segment 2..................................          810,000         0.099963           94,195        3
        Segment 3..................................        1,621,000         0.200049          188,506        3
        Segment 4..................................        2,026,000         0.250031          235,605        3
        Segment 5..................................        1,158,000         0.142910          134,664        3
        Segment 6..................................        1,247,000         0.153894          145,014        3
        Segment 7..................................        1,241,000         0.153153          144,316        3
                                                    ---------------------------------------------------
    (B) Subtotal Segments 2-7......................        8,103,000         1.000000          942,300        2
                                                    ---------------------------------------------------

[[Page 26021]]

 
        Total Plan (A)+(B).........................        9,230,000  ...............          993,388        2
----------------------------------------------------------------------------------------------------------------
Note 1: Allocation factor for segment = segment's covered payroll divided by the total covered payroll for
  segments 2 though 7, subtotal (B).
Note 2: See Table 36.
Note 3: Pension cost for Segments 2-7, subtotal (B), multiplied by allocation factor for the individual segment.

    (ii) Once allocated to segments, the assigned pension cost is 
allocated to intermediate and final cost objectives in accordance with 
the contractors disclosed cost accounting practice.
    (h) Actuarial Gain and Loss--Change in Liability Basis. (1) Assume 
the same facts shown in 9904.412-60.1(b) for the Harmony Corporation 
for 2016. The contractor measured the pension cost for 2015 through 
2017, in accordance with 9904.412 and 9904.413 before making any 
adjustments pursuant to 9904.412-50(b)(7) and compared the CAS measured 
costs to the minimum required amounts for the same period. This 
comparison is shown in Table 41.

                                     Table 41--Harmonization Threshold Test
----------------------------------------------------------------------------------------------------------------
                                                     Total plan 2015  Total plan 2016  Total plan 2017    Notes
----------------------------------------------------------------------------------------------------------------
CAS Measured Pension Cost..........................       $1,426,033       $1,490,943       $1,496,497        1
ERISA Minimum Required Amount......................        1,266,997        1,591,925        1,386,346        2
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 11 for 2016. CAS Measured Cost cannot be less than $0.
Note 2: See Table 8 for 2016. The ERISA minimum required contribution unreduced for any prefunding balance.

    (2) Table 42 shows the actuarial liabilities and normal costs, 
including any expense loads, for 2015 through 2017.

                                   Table 42--Harmonization ``Liability'' Test
----------------------------------------------------------------------------------------------------------------
                                                      Segment 1 2015   Segment 1 2016   Segment 1 2017    Notes
----------------------------------------------------------------------------------------------------------------
CAS Long-Term Liabilities:
    Actuarial Accrued Liability (AAL)..............       $1,915,000       $2,100,000       $2,305,000        1
    Normal Cost (NC)...............................           89,600           94,100          103,200        1
    Expense Load on Normal Cost....................  ...............  ...............  ...............     1, 2
                                                    ---------------------------------------------------
        Total Liability for Period.................        2,004,600        2,194,100        2,408,200  ........
``Settlement Liabilities'':
    Minimum Actuarial Liability (MAL)..............        1,901,000        2,194,000        2,312,000        3
    Minimum Normal Cost (MNC)......................           83,800           93,000          100,500        3
    Expense Load on Normal Cost....................            8,300            8,840            9,300     3, 4
                                                    ---------------------------------------------------
        Total Liability for Period.................        1,993,100        2,295,840        2,421,800  ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 5 for 2016 values.
Note 2: Because the long-term interest assumption implicitly recognizes expected admin expense there is no
  explicit amount added to the long-term normal cost.
Note 3: See Table 6 for 2016 values.
Note 4: For settlement valuation purposes the contractors explicitly identifies the expected expenses as a
  separate component of normal cost.

    (3) For 2015, the unadjusted pension cost measured in accordance 
with 9904.412 and 9904.413 equals or exceeds the minimum required 
amount and no adjustment to the actuarial accrued liability and normal 
cost is required by 9904.412-50(b)(7). For 2016, the minimum required 
amount does exceed the CAS measured pension cost and the contractor 
must perform the test required by 9904.412-50(b)(7)(i), and in this 
case the total settlement liability exceeds the total long-term 
liability for the period and the actuarial accrued liability and normal 
cost must be adjusted. This results in an adjusted actuarial accrued 
liability of $2,194,000, an adjusted normal cost of $93,000 and an 
adjusted expense load of $8,840. However, for 2017, although the total 
settlement liability exceeds the total long-term liability for the 
period, the actuarial accrued liability and normal cost are not 
adjusted because the unadjusted CAS pension cost equals or exceeds the 
minimum required amount. Table 43 shows the measurement of the unfunded 
actuarial liability for 2015 through 2017.

[[Page 26022]]



                                     Table 43--Unfunded Actuarial Liability
----------------------------------------------------------------------------------------------------------------
                                                      Segment 1 2015   Segment 1 2016   Segment 1 2017    Notes
----------------------------------------------------------------------------------------------------------------
Current Year Actuarial Liability Basis.............        AAL              MAL              AAL
Actuarial Accrued Liability, Including Adjustment..       $1,915,000       $2,194,000       $2,305,000        1
Actuarial Value of Assets..........................      (1,500,000)      (1,688,757)      (1,894,486)        2
                                                    ---------------------------------------------------
Unfunded Actuarial Liability (Actual)..............          415,000          505,243          410,514  ........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 42.
Note 2: The 2016 actuarial value of assets is developed in Table 4.

    (4) Except for changes in the value of the settlement interest rate 
used to measure the minimum actuarial liability and minimum normal 
cost, there were no changes to the pension plan's actuarial assumptions 
or actuarial cost methods during the period of 2015 through 2017. The 
contractor's actuary measured the expected unfunded actuarial liability 
and determined the actuarial gain or loss for 2016 and 2017 as shown in 
Table 44.

                                 Table 44--Measurement of Actuarial Gain or Loss
----------------------------------------------------------------------------------------------------------------
                                                    Segment 1 2015   Segment 1 2016    Segment 1 2017     Notes
----------------------------------------------------------------------------------------------------------------
Actual Unfunded Actuarial Liability..............      (Note 1)            $505,243          $410,514         2
Expected Unfunded Actuarial Liability............  ...............         (381,455)         (448,209)        3
                                                  -----------------------------------------------------
Actuarial Loss (Gain)............................  ...............          123,788           (37,695)  ........
----------------------------------------------------------------------------------------------------------------
Note 1: The determination of the actuarial gain or loss that occurred during 2014 and measured on 2015 is
  outside the scope of this Illustration.
Note 2: See Table 43.
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.

    (5) According to the actuarial valuation report, the 2016 actuarial 
loss of $123,788 includes a $94,000 actuarial loss ($2,194,000-
$2,100,000) (Table 42) due to a change from a long-term liability to a 
settlement liability basis, including the effect of any change in the 
value of the settlement interest rate. As required by 9904.412-
50(a)(1)(v), the $94,000 loss due to the change in the liability basis 
will be amortized as part of the total actuarial loss of $123,788 over 
ten years in accordance with 9904.413-50(a)(1) and (2). Similarly, the 
next year's valuation report shows a 2017 actuarial gain of $37,695 
includes a $7,000 actuarial gain ($2,305,000-$2,312,000) due to a 
change from a settlement liability back to a long-term liability basis, 
which includes the effect of any change in the value of the settlement 
interest rate. As required by 9904.412-50(a)(1)(v), the $7,000 gain due 
the change in the liability basis will be amortized as part of the 
total $37,695 actuarial gain over ten years in accordance with 
9904.413-50(a)(1) and (2).
    7. Section 9904.412-63 is revised to read as follows:


9904.412-63   Effective date.

    (a) This Standard is effective as of [DATE OF PUBLICATION OF FINAL 
RULE IN THE FEDERAL REGISTER].
    (b) This Standard shall be followed by each contractor on or after 
the start of its next cost accounting period beginning after the 
receipt of a contract or subcontract to which this Standard is 
applicable in accordance with paragraph (a) of this section. The date 
this version of the Standard is first applicable to a contractor's cost 
accounting period is the ``Applicability Date of the Harmonization 
Rule'' for purposes of this Standard.
    (c) Contractors with prior CAS-covered contracts with full coverage 
shall continue to follow the Standard in 9904.412 in effect prior to 
[DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], until this 
Standard, effective [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER], becomes applicable following receipt of a contract or 
subcontract to which this Standard applies.
    8. Section 9904.412-64.1 is added to read as follows:


9904.412-64.1   Transition Method for Pension Harmonization.

    Contractors that were subject to this Standard prior to [DATE OF 
PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER] shall recognize the 
change in cost accounting method over the initial 5-year period of 
applicability, determined in accordance with 9904.412-63(c), as 
follows:
    (a) Phase-in of the Minimum Actuarial Liability and Minimum Normal 
Cost Adjustments. The contractor shall recognize on a pro rata basis 
the actuarial accrued liability and normal cost adjustment amounts 
measured in accordance with 9904.412-50(b)(7)(i). The actuarial accrued 
liability and normal cost adjustment amounts shall be multiplied by a 
percentage based on the year of applicability for this amendment. The 
percentages are as follows: 20% First Year, 40% Second Year, 60% Third 
Year, 80% Fourth Year, and 100% thereafter.
    (b) Transition illustration. Assume that in the second year that 
this amendment is applicable, Contractor J in Illustration 9904.412-
60(c)(1) again measures $18 million as the actuarial accrued liability, 
$20 million as the minimum actuarial liability, $4 million as the 
normal cost and $4.5 million as the minimum normal cost. Under 
9904.412-64.1(a), the $2 million excess of the minimum actuarial 
liability over the actuarial accrued liability and the $0.5 million 
excess of the minimum normal cost over the normal cost are multiplied 
by 40%. The actuarial accrued liability is adjusted to $18.8 million 
($18 million + [40% x $2 million]) and the normal cost is adjusted to 
$4.2 million ($4 million + [40% x $0.5 million]).
    9. Section 9904.413-30 is amended by revising paragraphs (a)(1) and 
(16) to read as follows:

[[Page 26023]]

9904.413-30   Definitions.

    (a) * * *
    (1) Accrued benefit cost method means an actuarial cost method 
under which units of benefits are assigned to each cost accounting 
period and are valued as they accrue; that is, based on the services 
performed by each employee in the period involved. The measure of 
normal cost under this method for each cost accounting period is the 
present value of the units of benefit deemed to be credited to 
employees for service in that period. The measure of the actuarial 
accrued liability at a plan's measurement date is the present value of 
the units of benefit credited to employees for service prior to that 
date. (This method is also known as the Unit Credit cost method without 
salary projection.)
* * * * *
    (16) Prepayment credit means the amount funded in excess of the 
pension cost assigned to a cost accounting period that is carried 
forward for future recognition. The Accumulated Value of Prepayment 
Credits means the value, as of the measurement date, of the prepayment 
credits adjusted for investment returns and administrative expenses and 
decreased for amounts used to fund pension costs or liabilities, 
whether assignable or not.
* * * * *
    10. Section 9904.413-40 is amended by revising paragraph (c) to 
read as follows:


9904.413-40  Fundamental requirement.

* * * * *
    (c) Allocation of pension cost to segments. Contractors shall 
allocate pension costs to each segment having participants in a pension 
plan. A separate calculation of pension costs for a segment is required 
when the conditions set forth in 9904.413-50(c)(2) or (3) are present. 
When these conditions are not present, allocations may be made by 
calculating a composite pension cost for two or more segments and 
allocating this cost to these segments by means of an allocation base. 
When pension costs are separately computed for a segment or segments, 
the provisions of Cost Accounting Standard 9904.412 regarding the 
assignable cost limitation shall be based on the actuarial value of 
assets, actuarial accrued liability and normal cost for the segment or 
segments for purposes of such computations. In addition, for purposes 
of 9904.412-50(c)(2)(iii), the amount of pension cost assignable to a 
segment or segments, for the plan as a whole and apportioned among the 
segment(s), shall not exceed the sum of
    (1) The maximum tax-deductible amount computed, plus
    (2) The accumulated value of prepayment credits.
    11. Section 9904.413-50 is amended by revising paragraphs (a)(2), 
(c)(1)(i) and (c)(7) and adding paragraphs (b)(6) and (c)(12)(viii) and 
(ix) to read as follows:


9904.413-50  Techniques for application.

    (a) * * *
    (2) For periods beginning prior to the ``Applicability Date of the 
Harmonization Rule,'' actuarial gains and losses determined under a 
pension plan whose costs are measured by an immediate-gain actuarial 
cost method shall be amortized over a 15-year period in equal annual 
installments, beginning with the date as of which the actuarial 
valuation is made. For periods beginning on or after the 
``Applicability Date of the Harmonization Rule,'' such actuarial gains 
and losses shall be amortized over a 10-year period in equal annual 
installments, beginning with the date as of which the actuarial 
valuation is made. The installment for a cost accounting period shall 
consist of an element for amortization of the gain or loss plus an 
element for interest on the unamortized balance at the beginning of the 
period. If the actuarial gain or loss determined for a cost accounting 
period is not material, the entire gain or loss may be included as a 
component of the current or ensuing year's pension cost.
* * * * *
    (b) * * *
    (6) The market value of the assets of a pension plan shall include 
the present value of contributions received after the date the market 
value of plan assets is measured.
    (i) Except for qualified defined benefit pension plans, the long-
term assumed rate of interest shall be used to determine the present 
value of such receivable contributions as of the valuation date.
    (ii) For qualified defined benefit pension plans, the present value 
of such receivable contributions shall be measured in accordance with 
ERISA
    (iii) The market value of plan assets measured in accordance with 
paragraphs (b)(6)(i) or (ii) of this section shall be the basis for 
measuring the actuarial value of plan assets in accordance with this 
Standard.
* * * * *
    (c) * * *
    (1) * * *
    (i) When apportioning to segments the sum of (A) the maximum tax-
deductible amount, which is determined for a qualified defined-benefit 
pension plan as a whole pursuant to the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., as amended, plus 
(B) the accumulated value of the prepayment credits, the contractor 
shall use a base that considers the otherwise assignable pension costs 
or the funding levels of the individual segments.
* * * * *
    (7) After the initial allocation of assets, the contractor shall 
maintain a record of the portion of subsequent contributions, permitted 
unfunded accruals, income, benefit payments, and expenses attributable 
to the segment and paid from the assets of the pension plan. Income 
(investment returns) shall include a portion of any investment gains 
and losses attributable to the assets of the pension plan. Income and 
expenses of the pension plan assets shall be allocated to the segment 
in the same proportion that the average value of assets allocated to 
the segment bears to the average value of total pension plan assets, 
including the accumulated value of prepayment credits, for the period 
for which income and expenses are being allocated.
* * * * *
    (12) * * *
    (viii) If a benefit curtailment is caused by a cessation of benefit 
accrual mandated by ERISA based on the plan's funding level, and it is 
expected that such accruals will recommence in a later period, then no 
adjustment amount for the curtailment of benefit pursuant to this 
paragraph (c)(12) is required. Instead, the curtailment of benefits 
shall be recognized as an actuarial gain or loss for the period. 
Likewise the recommencement of benefit accruals shall be recognized as 
an actuarial gain or loss in the period in which benefits recommenced. 
If the written plan document provides that benefit accruals will be 
retroactively restored, then the intervening valuations shall continue 
to recognize the accruals in the actuarial accrued liability and normal 
cost during the period of cessation.
    (ix) Once determined, any adjustment credit shall be first used to 
reduce the accumulated value of permitted unfunded accruals. After the 
accumulated value of permitted unfunded accruals has been fully 
reduced, any remaining adjustment amount shall be accounted for as a 
prepayment credit. Any adjustment charge shall be accounted for as a 
permitted unfunded accrual to the extent that funds are not added to 
the fair value of assets. All unamortized balances maintained in 
accordance with 9904.412-50(a)(1) and 9904.413-

[[Page 26024]]

50(a)(1) and (2) shall be deemed immediately recognized and eliminated 
as part of the adjustment charge or credit. If the segment no longer 
exists, the accumulated value of prepayment credits, the accumulated 
value of permitted unfunded accruals and the balance separately 
identified under 9904.412-50(a)(2) shall be transferred to the former 
segment's immediate home office.
    12. Section 9904.413-60 is amended by revising paragraphs (a) and 
(c)(12) and adding paragraphs (b)(3) and (c)(26) to read as follows:


9904.413-60  Illustrations.

    (a) Assignment of actuarial gains and losses. Contractor A has a 
defined-benefit pension plan whose costs are measured under an 
immediate-gain actuarial cost method. The contractor makes actuarial 
valuations every other year. In the past, at each valuation date, the 
contractor has calculated the actuarial gains and losses that have 
occurred since the previous valuation date and has merged such gains 
and losses with the unfunded actuarial liabilities that are being 
amortized. Pursuant to 9904.413-40(a), the contractor must make an 
actuarial valuation annually and any actuarial gains or losses measured 
must be separately amortized over a specific period of years beginning 
with the period for which the actuarial valuation is made in accordance 
with 9904.413-50(a)(1) and (2). If the actuarial gain or loss is 
measured for a period beginning prior to the ``Applicability Date for 
the Harmonization Rule,'' the gain or loss shall be amortized over 
fifteen years. For gains and losses measured for periods beginning on 
or after the ``Applicability Date for the Harmonization Rule,'' the 
gain or loss shall be amortized over ten years.
* * * * *
    (b) * * *
    (3) Assume that besides the market value of assets of $10 million 
that Contractor B has on the valuation date of January 1, 2014, the 
contractor makes a contribution of $100,000 on July 1, 2014 to cover 
its prior year's pension cost. For ERISA purposes, the contractor 
measures $98,000 as the present value of the contribution on January 1, 
2014 and therefore recognizes $10,098,000 as the market value of 
assets. The contractor must also use this market value of assets for 
contract costing purposes as required by 9904.413-50(b)(6)(ii). The 
actuarial value of assets must also reflect the $98,000 present value 
of the July 1, 2014 contribution.
    (c) * * *
    (12) Contractor M sells its only Government segment. Through a 
contract novation, the buyer assumes responsibility for performance of 
the segment's Government contracts. Just prior to the sale, the 
actuarial accrued liability under the actuarial cost method in use is 
$18 million and the market value of assets allocated to the segment is 
$22 million. In accordance with the sales agreement, Contractor M is 
required to transfer $20 million of assets to the new plan. In 
determining the segment closing adjustment under 9904.413-(50)(c)(12) 
the actuarial accrued liability and the market value of assets are 
reduced by the amounts transferred to the buyer by the sale. The 
adjustment amount, which is the difference between the remaining assets 
($2 million) and the remaining actuarial liability ($0), is $2 million.
* * * * *
    (26) Assume the same facts as Illustration 9904.413-60(c)(20), 
except that ERISA required Contractor R to cease benefit accruals. In 
this case, the segment closing adjustment is exempted by 9904.413-
50(c)(12)(viii). If the written plan document provides that benefit 
accruals will automatically be retroactively reinstated when permitted 
by ERISA, then the actuarial accrued liability and normal cost measured 
for contract costing purposes shall continue to recognize the benefit 
accruals. Otherwise, the actuarial accrued liability and normal cost 
will not recognize any benefit accruals until and unless the plan is 
subsequently amended to reinstate the accruals. Furthermore, the 
decrease in the actuarial accrued liability will be measured as an 
actuarial gain and amortized in accordance with 9904.413-50(a)(2).
    13. Section 9904.413-63 is revised to read as follows:


9904.413-63  Effective date

    (a) This Standard is effective as of [DATE OF PUBLICATION OF FINAL 
RULE IN THE FEDERAL REGISTER].
    (b) This Standard shall be followed by each contractor on or after 
the start of its next cost accounting period beginning after the 
receipt of a contract or subcontract to which this Standard is 
applicable in accordance with paragraph (a) of this section. The date 
this version of the Standard is first applicable to a contractor's cost 
accounting period is the ``Applicability Date of the Harmonization 
Rule'' for purposes of this Standard.
    (c) Contractors with prior CAS-covered contracts with full coverage 
shall continue to follow the Standard in 9904.413 in effect prior to 
[DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER], until this 
Standard, effective [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER], becomes applicable following receipt of a contract or 
subcontract to which this Standard applies.
    14. Section 9904.413-64.1 is added to read as follows:


9904.413-64.1  Transition Method for Pension Harmonization.

    See 9904.412.64.1 Transition Method for Pension Harmonization.

[FR Doc. 2010-9783 Filed 5-7-10; 8:45 am]
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