[Federal Register Volume 76, Number 248 (Tuesday, December 27, 2011)]
[Rules and Regulations]
[Pages 81295-81325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32745]



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Vol. 76

Tuesday,

No. 248

December 27, 2011

Part VII





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: Cost Accounting Standards 412 and 413--Cost 
Accounting Standards Pension Harmonization Rule; Final Rule

Federal Register / Vol. 76 , No. 248 / Tuesday, December 27, 2011 / 
Rules and Regulations

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards: Cost Accounting Standards 412 and 
413--Cost Accounting Standards Pension Harmonization Rule

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

ACTION: Final rule.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards Board (Board), is publishing this final rule to 
revise Cost Accounting Standard (CAS) 412, ``Composition and 
Measurement of Pension Cost,'' and CAS 413, ``Adjustment and Allocation 
of Pension Cost.'' This revision will harmonize the measurement and 
period assignment of the pension cost allocable to Government 
contracts, and the minimum required contribution under the Employee 
Retirement Income Security Act of 1974 (ERISA), as amended, as required 
by the Pension Protection Act (PPA) of 2006. The PPA amended the 
minimum funding requirements for qualified defined benefit pension 
plans. The Board issues this final rule to revise CAS 412 and CAS 413 
to include the recognition of a ``minimum actuarial liability'' and 
``minimum normal cost,'' which are measured on a basis consistent with 
the liability measurement used to determine the PPA minimum required 
contribution, and accelerate the recognition of actuarial gains and 
losses. These and other revisions will better align both the 
measurement and period assignment of pension cost allocable to a 
contractor's Government contracts and other final cost objectives in 
accordance with CAS, and the measurement and period assignment 
requirements for determining the contractor's minimum pension 
contribution under the PPA.

DATES: Effective Date: February 27, 2012.

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

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The Rules, Regulations and Standards issued by the Board are 
codified at 48 CFR chapter 99. The Office of Federal Procurement Policy 
Act, 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 422(g)], requires that the 
Board, prior to the establishment of any new or revised Cost Accounting 
Standard, complete a prescribed rulemaking process. The process 
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, and prepare and publish a report on the issues 
reviewed, which is normally accomplished by publication of a 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 final rule completes the four-step process.

B. Background and Summary

    The Board is releasing a final rule on the revisions to 48 CFR 
9904.412 and 9904.413 (respectively, CAS 412 and 413, or 9904.412 and 
9904.413) to implement paragraph (d) of section 106 of the Pension 
Protection Act (PPA) of 2006 (Pub. L. 109-280, 120 Stat. 780).
    The PPA amended the minimum funding requirements for, and the tax-
deductibility of contributions to, qualified defined benefit pension 
plans under ERISA. Paragraph (d) of section 106 of the PPA requires the 
Board to revise CAS 412 and 413 to harmonize the ERISA minimum required 
contribution and the reimbursable pension cost.
    In addition to the revisions to implement harmonization, the Board 
is making 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. 
The technical corrections for CAS 412 are being made to paragraphs 
9904.412-30(a)(1), (8) and (9); paragraph 9904.412-50(a)(6); 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), paragraph 9904.413-
50(c)(1)(i), and paragraphs 9904.413-60(c)(12) and (18).

Different Roles and Responsibilities

    The Board recognizes that heightened interest in pension-related 
matters may attract attention to this regulatory action by members of 
the public who are not familiar with CAS and the Board. The Board has a 
limited role, albeit an indirect one, with respect to pension funding, 
through its rulemaking regarding reimbursement of Government contractor 
pension costs. Under ERISA, the authority to implement the statute and 
promulgate rules and regulations regarding the minimum funding 
requirements for pension plans, tax deductibility of contributions, and 
protection of participant's rights has been granted to the Department 
of Treasury, Department of Labor (DOL) and the Pension Benefit Guaranty 
Corporation (PBGC). By contrast, the OFPP Act gave the CAS Board the 
exclusive authority to ``make, promulgate, amend, and rescind cost 
accounting standards and interpretations thereof designed to achieve 
uniformity and consistency in the cost accounting standards governing 
measurement, assignment, and allocation of costs to contracts with the 
United States.''
    In this preamble, references to ERISA serve to identify and 
distinguish the federal system of funding requirements and restrictions 
for qualified pension plans from financial disclosure and reporting 
guidance, which is also known as generally accepted accounting 
principles (GAAP), and the CAS. References to ERISA may include: ERISA 
as amended to date; relevant sections of the Internal Revenue Code 
(IRC) at Title 26 of the U.S.C.; regulations and other pertinent 
guidance issued by Treasury, DOL and PBGC; and pertinent case law. The 
Board acknowledges that the tax deductibility of pension contributions 
is governed by the IRC at Title 26 of the U.S.C. and refers to the IRC 
when addressing issues related to tax deductibility. The Board 
acknowledges the pension funding responsibilities of ERISA as being 
distinct from the Board's responsibilities under the OFPP Act, which 
are to establish contract cost accounting standards governing the 
reimbursement of contract costs, including pension costs. Government 
contractors must continue to comply with ERISA and its implementing 
regulations that govern the funding of pension plans. This includes the 
new minimum funding requirements imposed by the PPA as implemented by 
Treasury. The Board's rules do not change the minimum funding 
requirements imposed by ERISA or Treasury's implementing regulations. 
To the contrary, the Board has changed its regulations to harmonize 
with the PPA and Treasury's implementing regulations by revising the 
CAS measurement basis for determining the amount of pension cost 
allocable to

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Government contracts, which is reimbursable through contract pricing.

Prior Promulgations

    On July 3, 2007, the Board published a SDP (72 FR 36508) to solicit 
public views with respect to section 106 of the PPA that required the 
Board to review and revise CAS 412 and 413. Differences between CAS 412 
and 413, and the PPA, as well as potential issues associated with 
addressing those differences, were identified in the SDP.
    The ANPRM (73 FR 51261, September 2, 2008) proposed changes to CAS 
412 and 413. These proposed changes included the recognition of a 
``minimum actuarial liability,'' a ``minimum normal cost,'' special 
recognition of ``mandatory prepayment credits,'' accelerated gain and 
loss amortization, and revision of the assignable cost limitation. 
Other proposed changes addressed the PPA's mandatory cessation of 
benefit accruals for severely underfunded plans, projection of flat 
dollar benefits, recognition of accrued contribution values on a 
discounted basis, interest on prepayment credits, and prior period 
unfunded pension costs. The Board also proposed a transition period to 
phase in certain provisions to promote fairness and equity to the 
contracting parties, as has been done by the Board in other rulemaking. 
The public was invited to offer comments on these proposed changes and 
any other related matters. In response to many respondents who asked 
for additional time for the submission of additional or supplemental 
public comments, on November 26, 2008, the Board published a notice (73 
FR 72086) extending the comment period for the ANPRM.
    After considering the comments received on the ANPRM, as well as 
the results of further analysis and deliberations conducted by the 
Board, the Board published a NPRM (75 FR 25982) on May 10, 2010, to 
solicit public views with respect to the proposed revisions to CAS 412 
and 413. The NPRM reflected public comments in response to the SDP and 
ANPRM, as well as research accomplished by the staff for consideration 
by the Board.
    The NPRM proposed changes to CAS 412 and 413 that were considered 
necessary to harmonize the minimum required contributions under ERISA 
for Government contractor pension plans and the Government's 
reimbursable pension plan costs. The primary proposed changes were the 
recognition of a ``minimum actuarial liability,'' ``minimum normal 
cost,'' and an accelerated amortization of actuarial gains and losses. 
The minimum actuarial liability and minimum normal cost are measured on 
a settlement basis using the expected payout of currently accrued 
benefits that have been discounted using yield rates on investment 
grade corporate bonds with matching durations to forecasted pension 
benefit payments, and that are in the top three quality levels 
available, e.g., Moody's grade A and above. 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, 
interest on prepayments credits, and prior period unfunded pension 
costs. The Board continued to propose a transition period to phase in 
certain provisions to promote fairness and equity to the contracting 
parties, as has been done by the Board in other rulemaking. The public 
was invited to offer comments on these proposed changes and any other 
related matters.
    A major feature of the NPRM was the proposal that the minimum 
actuarial liability and minimum normal cost would only be recognized if 
three threshold criteria were met. Otherwise, the actuarial accrued 
liability and normal cost are measured on a going concern basis using 
the expected payout of projected benefits that have been discounted 
using an interest assumption equal to the expected future rate of 
return on investments which reflect long-term trends so as to avoid 
distortions caused by short-term market fluctuations. (Note that the 
SDP, ANPRM and NPRM referred to this as the ``long-term'' interest 
assumption.) These threshold criteria, which have been referred to as 
``triggers,'' required that:
    (i) The ERISA minimum required contribution exceeds the contract 
pension costs measured on a going concern basis, referred to as 
``trigger 1;''
    (ii) The sum of the minimum actuarial liability and minimum normal 
cost exceeds the sum of the going concern actuarial accrued liability 
and normal cost, referred to as ``trigger 2;'' and
    (iii) The contract pension cost measured using the sum of the 
minimum actuarial liability and minimum normal cost exceeds the 
contract pension cost measured using the sum of the actuarial accrued 
liability and normal cost, referred to as ``trigger 3.''
    The Board provided illustrations of these proposed revisions in a 
new section 9904.412-60.1, Illustrations--CAS Pension Harmonization 
Rule. The illustrations showed the measurement, assignment and 
allocation of pension cost under the proposed rule for a contractor 
that separately accounted for pension costs for one segment and an 
aggregation of the remaining segments.
    The NPRM also added language to clarify that any difference between 
the expected and actual unfunded actuarial liability caused by a change 
between recognition of the going concern actuarial accrued liability 
and the minimum actuarial liability would be treated as part of the 
actuarial gain or loss for the period. The actuarial gain and loss 
recognition arising from the change in the liability basis (between 
using the actuarial accrued liability and the minimum actuarial 
liability) for computing pension costs was illustrated in the NPRM at 
9904.412-60.1(h). The proposed structural format differed from the 
format for 9904.412-60.
    The final rule considered the comments and other concerns expressed 
by the public in response to the NPRM. The Board's responses to the 
public comments are discussed in Section C--Public Comments to the 
NPRM.

Basis for Conclusions

    Paragraph (d) of section 106 of the PPA instructs the Board to 
revise CAS 412 and 413, as follows:

    COST ACCOUNTING STANDARDS PENSION HARMONIZATION RULE--The Cost 
Accounting Standards Board shall review and revise sections 412 and 
413 of the Cost Accounting Standards (48 CFR 9904.412 and 9904.413) 
to harmonize the minimum required contribution under the Employee 
Retirement Income Security Act of 1974 of eligible government 
contractor plans and government reimbursable pension plan costs not 
later than January 1, 2010. Any final rule adopted by the Cost 
Accounting Standards Board shall be deemed the Cost Accounting 
Standards Pension Harmonization Rule.

    In deliberating and deciding upon a final rule, the Board adopted 
the following criteria for harmonizing the minimum required 
contribution under ERISA:
     Accounting rules must satisfy the Board's Statement of 
Objectives, Policies and Concepts (57 FR 31036 published July 13, 
1992);
     Accounting rules must promote fairness and equity to both 
contracting parties;
     Measurement of pension costs must be objectively 
verifiable;
     Accounting rules must keep volatility to a minimum in the 
pricing of Government contracts; and
     Accounting rules must be understandable, particularly 
given the complexity of CAS 412.
    Throughout the comment process afforded by the SDP, ANPRM, and 
NPRM, many respondents commented

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that ``harmonize'' under PPA section 106(d) meant that it was 
Congress's intent that the Board adopt ERISA's minimum required 
contribution for measuring, assigning, and allocating pension costs to 
CAS-covered contracts. Further, these commenters stated that the plain 
meaning of ``harmonize,'' as defined in various dictionaries, would 
lead to an identical conclusion. The Board's review of the PPA, as well 
as its legislative history, did not reveal evidence of any such 
Congressional intent.
    The Board has historically recognized that financial accounting 
policies and procedure, i.e., GAAP, and tax accounting rules have 
inherently different goals from Government contract cost accounting 
that preclude their use for the appropriate measurement, assignment and 
allocation of pension costs for CAS. In the Board's view, PPA section 
106 did not seek to change that historical recognition. Based on the 
Board's analysis, entirely adopting either financial accounting or tax 
accounting rules for CAS 412 and 413 would have resulted in inequities 
and unfairness to both contracting parties. The Board noted that the 
public commenters most directly affected by the CAS Pension 
Harmonization Rule tended to agree with the NPRM provisions, except for 
a few matters which are discussed later in this preamble.
    The Board continues to believe that CAS 412 and 413 should reflect 
the continuing nature of the pension plan sponsored by a going concern, 
as well as the multi-year nature of the contractual relationship 
between the Government and contractors in the acquisition process. The 
CAS are intended to provide consistent and accurate cost data to 
determine the incurred cost for the current period and for the forward 
pricing of Government contracts over future years for multi-year 
contracts. With regard to pension accounting, both financial accounting 
and ERISA have taken a market-based approach toward pension 
liabilities, which are often referred to as ``mark-to-market'' 
liabilities. This approach is less predictable for purposes of 
projecting future costs than the going concern basis of CAS and, 
therefore, is less useful than CAS for forward pricing purposes for 
multi-year contracts.
    The Board recognizes that contract cost accounting must address the 
risks to both the contractor and the Government associated with 
inadequate funding of a plan's current period settlement liability 
measured on a ``mark-to-market'' basis. This final rule addresses this 
risk by recognizing a minimum actuarial liability and minimum normal 
cost that is based on currently accrued benefits valued using the top 
three quality levels of investment grade corporate bond rates 
consistent with the PPA criteria as cited in the IRC at 26 U.S.C. 
430(h)(2)(D)(i).
    ERISA's ``funding target'' and ``target normal cost'' were 
introduced by the PPA and are mark-to-market values consistent with the 
measurement basis for the minimum actuarial liability and minimum 
normal cost. The CAS recognition of the minimum actuarial liability and 
minimum normal cost ensures that the annual pension cost as measured 
and assigned under CAS is at least sufficient to liquidate ERISA's 
target normal cost currently and the unfunded target liability on an 
amortized basis. Therefore, recognizing the minimum actuarial liability 
and minimum normal cost will reduce differences between the CAS 
assigned cost and the ERISA minimum required contribution, although the 
CAS assigned cost may sometimes exceed the ERISA minimum required 
contribution. Maintaining the going concern basis for Government 
contract costing will allow contractors to set multi-year funding goals 
that avoid undue volatility in cash flow requirements.
    The Board was persuaded by public comments that the proposed 
threshold criteria (``triggers'') for recognition of the minimum 
actuarial liability and minimum normal cost were overly complex and 
might create inequities. The final rule only retains the criterion that 
assesses whether the sum of the minimum actuarial liability and minimum 
normal cost exceeds the sum of the actuarial accrued liability and 
normal cost. If the contractor computes pension costs on a composite 
basis for the plan as a whole, then the criterion should be examined at 
the plan level. However, if 9904.413-50(c)(2) or (3) require the 
contractor to separately compute pension costs for a segment, or if the 
contractor so elects, the criterion should be separately examined at 
the segment level. This may mean that some segments might use an 
actuarial accrued liability and normal cost to compute pension costs, 
and other segments might use the minimum actuarial liability and 
minimum normal cost. This ensures that variance in demographics or 
funding levels between different segments is recognized.
    ERISA imposes minimum funding requirements on qualified defined 
benefit plans based on a conservative measurement of the plan's 
liability and normal cost. It should be noted that the measurement 
mandated for ERISA minimum funding approximates the value of a bond 
portfolio required to liquidate the stream of expected payments for 
accrued benefits if purchased in the current market. While the purchase 
of such a bond portfolio would not transfer all asset and demographic 
risks to a third party, this measurement emulates the costs of self-
insuring the pension fund against the liability for accrued benefits 
and represents the mark-to-market (settlement) value without the 
premium charge for transfer of risk. The final rule requires that 
contract cost accounting for pension costs must recognize a mark-to-
market (settlement) based liability and normal cost as minimum values 
for CAS. By doing so, the Board believes that any ERISA minimum 
required contribution in excess of the allocable contract pension cost 
amount will be reconciled and reflected in contract pricing in the near 
term because, by definition, the CAS liability and normal cost would be 
equal to or greater than the minimum values determined under the 
settlement liability. Furthermore, by recognizing the settlement 
liability and normal cost as minimum values, this final rule will 
benefit the procuring agencies, as well as taxpayers, by minimizing the 
Government's exposure to the financial risk of unfunded actuarial 
liabilities as funding progresses.
    In order to promote equity and fairness in achieving an orderly 
change in the contract cost accounting for pension costs, this final 
rule retains the transition period consisting of five cost accounting 
periods, the Pension Harmonization Rule Transition Period, that will 
phase in recognition of any adjustment of the actuarial accrued 
liability and normal cost. This transition method will apply to all 
contractors with contracts subject to CAS 412 and 413.
    Because modern actuarial software programs can value the same data 
set multiple times using different assumptions, the final rule is 
designed to allow 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 externally verified data from ERISA and financial statement 
valuations while allowing contractors to avoid unnecessary additional 
actuarial effort and expense.

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Summary of Final Rule

    The primary harmonization provisions are consolidated within the 
``CAS Pension Harmonization Rule'' at 9904.412-50(b)(7). This 
consolidation eliminates the need to revise many long-standing 
provisions of CAS 412 and clearly identifies the special accounting 
practices required for harmonization. Some revisions to other 
provisions of CAS 412 and 413 are also necessary to achieve the full 
result. These basic changes to CAS 412 and 413 are as follows:
    (1) Recognition of a ``minimum actuarial liability'' and ``minimum 
normal cost.'' CAS 412 and 413 continue to measure the actuarial 
accrued liability and normal cost based on a going concern basis using 
``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 mark-to-market 
liability as a minimum value, the final rule requires that the measured 
pension cost must be determined using the minimum actuarial liability 
and minimum normal cost if a specific threshold criterion is met. That 
is, if the sum of the minimum actuarial liability and the minimum 
normal cost (as measured using current yield rates on the top three 
quality levels of investment-grade corporate bonds) exceeds the sum of 
actuarial accrued liability and normal cost (as measured using the 
expected rate of return on investments), the contractor must measure 
the pension cost for the period using the minimum actuarial liability 
and minimum normal cost. Furthermore, if the criterion is met, the 
minimum actuarial liability and minimum normal costs are used for all 
purposes of measurement, period assignment, and allocation under CAS 
412. However, the minimum actuarial liability is not recognized for the 
purposes of 9904.413-50(c)(8), (9) and (12).
    The minimum actuarial liability and minimum normal cost are 
measured under the accrued benefit cost method based on the current 
yield rate on the top three quality levels of investment-grade 
corporate bonds. Measuring the minimum actuarial liability and minimum 
normal cost on a current mark-to-market basis better aligns the CAS 
measurement with current accounting and economic theory. In addition, 
the minimum actuarial liability definition is consistent with the 
ERISA's funding target and the GAAP's ``accumulated benefit 
obligation.'' The minimum normal cost is similarly defined to be 
consistent with the ERISA's ``target normal cost'' and the GAAP's 
``service cost'' (without salary projection).
    (2) Accelerated Gain and Loss Amortization. The final rule 
accelerates the assignment of actuarial gains and losses to accounting 
periods by decreasing the amortization period from a fifteen-year to 
ten-year period. This accelerated assignment will reduce the period of 
deferral in cost recognition and is consistent with the shortest 
amortization period permitted for other portions of the unfunded 
actuarial liability (or actuarial surplus). Paragraph 9904.412-64-
1(b)(5) of the transition provisions clarify that the ten-year 
amortization of gains and losses begins with the first cost accounting 
period this final rule is applicable to the contractor.
    (3) Mandatory Cessation of Benefit Accruals. This final rule 
exempts any curtailment of benefit accrual required by ERISA from 
immediate adjustment under 9904.413-50(c)(12). Voluntary benefit 
curtailments will remain subject to immediate adjustment under 
9904.413-50(c)(12).
    (4) Projection of Flat Dollar Benefits. The final rule allows the 
projection of increases in specific dollar benefits granted under 
collective bargaining agreements. The recognition of such increases is 
limited to the average increase in such benefits over the preceding six 
years, limited to benefits governed by collective bargaining 
agreements. As with salary projections, the final rule will discontinue 
projection of these specific dollar benefit increases upon a segment 
closing, which uses the accrued benefit cost method to measure the 
actuarial accrued liability.
    (5) Present Value of Contributions Receivable. For both qualified 
and nonqualified defined benefit plans, the final rule discounts 
contributions attributable to the prior accounting period but made 
after the asset valuation date, i.e., the contribution receivable, at 
the expected rate of return on investments assumption that reflects 
long-term trends (assumed interest rate) from the date actually paid 
back to the valuation date. In considering the public comments on 
interest crediting on application of prepayment credits and the FAR 
31.205-6(j)(2)(iii) quarterly funding requirement, the Board also 
reviewed the provisions on interest adjustments on pension costs, 
contributions receivable, prepayment credits, and unfunded pension 
costs. The assumed interest rate is used to adjust amounts not yet 
funded, such as receivable contributions, quarterly pension costs, and 
unfunded pension costs. This is consistent with the general provision 
of 9904.412-40(b)(2) that the assumed interest rate must be based on 
expected rates of return on investments, except for the interest rate 
used to measure the minimum actuarial liability and minimum normal 
cost. However, interest adjustments on invested monies, such as the 
prepayment credits, are adjusted at the actual rate of return on the 
assets.
    (6) Interest on Prepayments Credits. Generally, the funding of 
pension plans is a financial management decision made by the 
contractor, and must satisfy the minimum funding requirements of ERISA. 
Thus, funding more than the pension cost measured and assigned under 
CAS is entirely possible. Funding in excess of the CAS assigned costs 
results in a prepayment for the purposes of CAS. Since all monies 
deposited into the funding agency are fungible and 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 
all other invested monies. This recognition ensures that any investment 
gain or loss attributable to the assets accumulated by prepayments does 
not inequitably affect the gains and losses of the plan or any 
segments. A decision to fund in excess of the CAS assigned cost should 
have a neutral impact on Government contract costing, although it might 
have a transitory negative impact on the contractor's cash flow.
    (7) Transition Period to Phase In Minimum Actuarial Liability and 
Minimum Normal Cost Mitigates Initial Impact of the Potential Increase. 
The changes to CAS 412 and 413 are phased in over a transition period 
consisting of five cost accounting periods, the Pension Harmonization 
Rule Transition Period. The phase in allows the cost impact of this 
final rule to be gradually recognized in the pricing and costing of 
CAS-covered and FAR-covered contracts alike. It also moderates the 
difference in the pension cost allocable to FAR-covered fixed price 
contracts entered into prior to the effective date of the CAS Pension 
Harmonization Rule that are not subject to equitable adjustment. The 
final rule was revised so that the transition period in the proposed 
rule is now a fixed schedule for the first five cost accounting 
periods, the Pension Harmonization Rule Transition Period, following 
the ``Implementation Date'' so that the transition does not extend 
unduly beyond the time needed for the contract pricing and budgetary 
systems to migrate from the existing rule to the CAS Pension 
Harmonization Rule. Also, the Board has modified the transition

[[Page 81300]]

schedule slightly to lessen the impact on contract prices and agency 
budgets in the near-term. To accomplish this, the difference between 
the minimum actuarial liability and the going concern actuarial accrued 
liability, and the difference between the minimum normal cost and the 
going concern normal cost, are recognized on a scheduled basis during 
the Pension Harmonization Rule Transition Period, the first five cost 
accounting periods that this rule is applicable. Under the revised 
schedule, 0% of the difference will be recognized in the First Cost 
Accounting Period, 25% in the Second Cost Accounting Period, 50% in the 
Third Cost Accounting Period, 75% in the Fourth Cost Accounting Period, 
and finally, 100% in the Fifth Cost Accounting Period. After the 
completion of the Pension Harmonization Rule Transition Period, 100% of 
the minimum actuarial liability and minimum normal cost are recognized, 
if applicable. While 0% of the difference is recognized in the First 
Cost Accounting Period, there will be other incremental differences, 
e.g., the change to ten-year amortization of gains and losses.
    (8) Extended Illustrations. Many illustrations in 9904.412-60 have 
been updated to reflect the proposed changes to CAS 412 and 413. To 
assist users with understanding how this final rule will function, 
examples have been added in a new section, ``9904.412-60.1 
Illustrations--CAS Pension Harmonization Rule.'' This section presents 
illustrations showing the measurement and assignment of pension cost 
for a contractor's pension plan that meets the criterion of the 
9904.412-50(b)(7) CAS Pension Harmonization Rule. The actuarial gain 
and loss recognition arising from the change in the liability basis 
(between using the actuarial accrued liability and the minimum 
actuarial liability) for computing pension cost is illustrated in 
9904.412-60.1(d). This structural format differs from the format of 
9904.412-60, Illustrations.

C. Public Comments to the Notice of Proposed Rulemaking

    The Board received 20 public comments to the NPRM. These comments 
came from Federal agencies, contractors, professional and trade 
associations, actuaries, and individuals. As with the ANPRM and SDP, 
the Board found the public comments to be focused, well developed, and 
informative. The Board appreciates the efforts of all parties who 
submitted comments. The public comments to the NPRM may be viewed at: 
http://www.whitehouse.gov/omb/casb_index_public_comments/, or http://www.regulations.gov.

Summary of Public Comments

    Many of the public commenters believed that, while the NPRM 
represented progress towards harmonizing the minimum required 
contribution under ERISA and reimbursable pension plan costs, the 
proposed three threshold criteria (``triggers'') for recognition of the 
minimum actuarial liability were an obstacle to adequate recognition of 
the contribution requirements of ERISA.
    Some of the commenters continued to recommend that the Board accept 
the PPA's mark-to-market based accounting as the only basis for 
contract cost accounting. Several commenters believed that full 
harmonization could only be achieved by the direct recognition of 
mandatory prepayment credits. The public comments also included many 
detailed recommendations regarding how the proposed rule might be 
corrected or clarified.
    Most of the public comments reiterated concerns that the 
differences between CAS and the PPA have the potential to cause cash 
flow problems for some Government contractors. Although there were 
diverse views on how to best achieve that goal, timely recognition of 
the ERISA minimum required contribution in contract costing was often 
recommended. Some commenters believed that section 106 of the PPA 
requires CAS 412 and 413 to be identical to PPA's minimum required 
contribution.
    Many commenters believed that the Board should remove the proposed 
first threshold criterion, which some commenters referred to as 
``trigger 1,'' that compared the pension cost measured on a going 
concern basis to the ERISA minimum required contribution. They noted 
that this criterion not only added complexity to the proposed rule, but 
also unnecessarily delayed the recovery of previously accumulated 
prepayment credits. Some of these comments also suggested that the 
Board remove the second threshold criterion (``trigger 2''), which 
compared the total liability for the period measured on a going concern 
basis (i.e., the actuarial accrued liability and normal cost) to the 
total liability for the period measured on a mark-to-market basis 
(i.e., the minimum actuarial liability and minimum normal cost). These 
commenters believe that the only necessary limitation on use of the 
minimum actuarial liability would occur when the pension cost measured 
on a going concern basis already exceeded the pension cost on a mark-
to-market basis.
    Many public comments objected to the segment closing and benefit 
curtailment provisions that excluded the recognition of the minimum 
actuarial liability. These commenters expressed their belief that such 
an exception could reverse the cost recovery and be non-compliant with 
the mandate of section 106 of the PPA.
    Some public comments expressed a concern that the proposed 
transition rules would delay full recovery and believed that the Board 
should address contract cost accounting and not budgetary impacts. On 
the other hand, several commenters believed that the delay caused by 
the transitional phase in rule was a reasonable compromise that allowed 
the Government and contractors to gradually implement the effect of the 
magnitude of the cost increase on the forward pricing process.
    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 the CAS 
Pension Harmonization Rule.

Responses to Specific Public Comments

Topic 1: Harmonization.
    Comments: Some commenters focused on the meaning of the 
Congressional mandate under section 106 of the PPA, the proposed 
continued recognition of pension liabilities on a going concern basis, 
and the relationship between the pension cost for contract costing and 
the ERISA minimum required contribution. One commenter stated that ``By 
allowing the recognition of the MAL and MNC [minimum actuarial 
liability and minimum normal cost] (sic) in determining the CAS cost, 
without precondition, eventually the CAS assignable cost should catch 
up with the ERISA funding requirements and full harmonization should be 
reached.''
    One public comment suggested that compliance with PPA section 106 
required adoption of the measurement and period assignment provisions 
of the PPA. This commenter believes that the NPRM as proposed did not 
fully implement the mandate of section 106 because the Board did not 
adopt the measurement and amortization rules of the PPA. The commenter 
stated that Webster's II New College Dictionary (3d ed. 2005) defines 
``harmonize'' and ``harmony'' to mean ``agreement.''
    Two commenters argued that ``the best approach to harmonization 
would

[[Page 81301]]

be to revamp CAS 412 and 413 to follow PPA, with modifications as 
necessary to meet the unique requirements of government contracts.'' 
One of these commenters quoted the Merriam-Webster's Online Dictionary 
which defines ``harmonize'' as ``to bring into consonance or accord.''
    On the other hand, one commenter believed that harmonization is a 
more generalized goal meaning to achieve ``equity between the 
parties.'' And, another public commenter asked the Board to consider 
the language of section 106, which tells the Board to ``harmonize the 
[ERISA minimum required contribution] (sic) and government reimbursable 
pension plan costs, not harmonize CAS with the PPA.'' [Emphasis Added]
    Three public commenters reminded the Board that the primary concern 
that prompted section 106 was the difference between the pension 
funding requirements imposed by ERISA and the delayed reimbursement of 
pension cost under contracts subject to CAS 412 and 413. Some 
commenters identified areas of concern that they believed were 
preventing the proposed rule from providing timely recovery of pension 
contributions.
    Another public commenter reminded the Board that improving the 
timeliness of pension cost recovery was a goal of the NPRM writing that 
``While pension funding rules have changed with the enactment of the 
PPA, this principle of equity--where the government does not excuse 
itself from requirements it is imposing on all plan sponsors--
remains.'' This commenter believed that the CAS Pension Harmonization 
Rule, as proposed, failed to satisfy that objective and provided 
specific suggestions for improvement.
    In contrast to the comments that the Board should fully adopt or 
more closely follow the measurement and amortization rules of the PPA, 
one commenter was concerned that ``the CAS Board is straying from the 
intent and historical precepts of contract cost accounting and veering 
toward tax-driven cash accounting.'' This commenter examined the goals 
of the Cost Accounting Standards vis-[agrave]-vis the goals of the PPA:

    As the Board's response notes, ``strictly tying pension 
accounting to settlement liabilities and current fair market values 
will cause volatility that will be counterproductive to 
predictability and disrupt the contract forward pricing process. 
Contract price predictability must remain a critical concern for the 
Board. ''

    The commenter's letter continues:

    The long standing concept of accounting is that pension plans 
are presumed to continue absent evidence to the contrary. We 
understand that actuaries include assumptions concerning settlement 
payment (lump sum) elections by terminating and retiring employees--
thus the likely risk of paying the extra settlement cost is already 
anticipated in actuarial measurements. Furthermore, the expected 
return on investment should reflect a contractor's investment policy 
for the plan, rather than theories of financial economics that are 
in vogue.

    Several public commenters suggested that success in achieving 
harmonization should be measured by reduction in ``mandatory'' 
prepayment credits, where mandatory prepayments refers to minimum 
funding requirements in excess of the allocable pension costs measured 
and assigned in accordance with CAS 412 and 413. These commenters were 
not only concerned with the prospective harmonization of the contract 
cost with the ERISA minimum contribution once the CAS Pension 
Harmonization Rule was applicable, but also with a reduction in the 
substantive mandatory prepayment credits that had been accumulated 
since the passage of the PPA and the recent dramatic decline in asset 
values.
    One public commenter stated this concern directly: ``Under the 
NPRM, there is no mechanism present to ensure that contractors will be 
able to assign mandatory prepayment credits.'' This commenter later 
continued: ``To eliminate these situations in which recovery of 
accumulated mandatory prepayment credits are indefinitely delayed, we 
ask the Board to reintroduce the mandatory prepayment credit mechanism 
that was contained in the ANPRM.''
    Another commenter expressed the belief that: ``Without such 
amortization, [mandatory prepayment credits] (sic) are not recovered in 
a reasonable time period, and situations may arise where the balances 
are inaccessible.'' This commenter cautioned the Board that: ``Without 
these suggested changes, we respectfully submit that the Board will not 
have met its mandate under section 106 of the PPA.''
    Response: As previously stated, the Board's review of the PPA, as 
well as its legislative history, did not reveal any expression of 
Congressional intent that ``harmonize'' under PPA section 106(d) 
requires the Board to adopt ERISA's minimum required contribution for 
measuring, assigning, and allocating pension costs to Government 
contracts. The Board's historical recognition that financial accounting 
and tax accounting rules have inherently different goals, that preclude 
them from being used for Government contract cost accounting, is well 
established. In the Board's view, PPA section 106 did not seek to 
change that historical recognition. Based on the Board's analysis, 
adopting either financial accounting or tax accounting rules for 
contract cost accounting purposes would have resulted in inequities to 
both contracting parties. The Board noted that the contracting parties 
most directly affected by the CAS Pension Harmonization Rule tended to 
agree with the general concepts articulated in the NPRM, except for a 
few matters which are dealt with later in this final rule.
    The Board does not believe adopting tax accounting rules, which 
establish a funding range rather than an accrual for the period, is 
appropriate for contract cost accounting purposes. Recognition of the 
minimum actuarial liability is a reflection of the potential risk of 
inadequate funding imposed by the ``mark-to-market,'' i.e., settlement 
liability, in the event that there is an immediate liquidation of the 
pension plan. To accomplish this, the minimum actuarial liability and 
minimum normal cost are treated as minimum values to the actuarial 
accrued liability and normal cost measurements. Apart from these 
minimum values, the measurement and period assignment rules continue to 
be based on the going concern concept wherein actuarial assumptions 
reflect long-term trends and avoid distortions caused by short-term 
fluctuations, which the Board has determined appropriate for contract 
cost accounting purposes. Furthermore, recognition of no less than the 
minimum actuarial liability and minimum normal cost for contract 
costing purposes ensures that over time the assignable pension cost is 
at least equal to the ERISA minimum required contribution computed 
using the funding target liability and target normal cost, which are 
mark-to-market values.
    By ensuring that the pension cost measurement recognizes the 
minimum actuarial liability and minimum normal cost in a manner similar 
to the basis for the PPA's funding target and target normal cost, the 
Board believes that the final rule will over time accumulate contract 
pension costs that are at least equal to the accumulated value of the 
PPA minimum required contributions.
    The Board agrees that timely recovery of the accumulated 
prepayments is essential to the degree practicable, but notes that 
there are some situations where recovery opportunities are limited, 
i.e., overfunded plans with benefits that have been frozen. Section 106 
of the PPA did not require direct reduction of accumulated prepayment

[[Page 81302]]

credits when CAS is harmonized. However, the Board acknowledges the 
importance of such a reduction, and the final rule will improve 
recovery of accumulated prepayment credits through recognition of the 
higher of either the settlement or going concern liability.
Topic 2: Proposed Threshold Criteria
    Comments: Several public commenters believed that the proposed rule 
was too complex because it combines going concern and settlement 
measurements. One public commenter expressed the belief that ``the 
Board's goal--to create a version of CAS that harmonizes with both the 
minimum funding requirements of PPA and the historical versions of CAS 
412 and 413--is not viable.'' Another commenter believed that 
continuing to compute an actuarial accrued liability and normal cost 
measured using an expected rate of return on investments as the 
interest assumption, solely for Government cost accounting purposes, 
would add a layer of complexity and expense that is not warranted, and 
which could not be directly verified. And one public commenter remarked 
that the description of the ``minimum required amount'' needed 
clarification.
    The industry associations were generally supportive of the proposed 
rule and believed that ``use of the new liability measure, the minimum 
actuarial liability (MAL), in conjunction with the existing actuarial 
accrued liability (AAL) provides for a balanced liability measurement 
despite varying economic circumstances and is a reasonable balance 
between long- and short-term approaches.'' Another commenter also gave 
general support for the rule as proposed, writing:

    We understand that given the urgency of the mandate to harmonize 
CAS, the CASB has chosen an approach to make modifications to the 
existing CAS rules rather than undertake a complete overhaul of the 
rules. We understand and support this approach. In addition, we 
continue to support the CAS modifications to adopt the PPA-like 
minimum actuarial liability (MAL) and shorter ten-year amortization 
period for actuarial gains/losses in order to achieve harmonization.

    In addition to the concern with complexity from using two different 
liability measures, a commenter found that imposition of a series of 
three threshold criteria as a prerequisite for recognizing the minimum 
actuarial liability and minimum normal cost values created a complexity 
that potentially would make the rule unmanageable.
First Threshold Criterion (``Trigger 1'')
    The first of the proposed threshold criteria, i.e., ``trigger 1,'' 
was the primary concern expressed in many public comments about the 
proposed rule. Most of the commenters believed that ``trigger 1'' 
prevented harmonization by limiting the periods during which the 
minimum actuarial liability could be recognized. Based on several 
analyses of ``trigger 1,'' these commenters concluded that ``trigger 
1'' retarded the recovery of prepayments accumulated before and after 
the applicability of the CAS Pension Harmonization Rule.
    Other concerns that were raised included the difficulty in 
predicting the minimum required contribution for forward pricing and 
the added volatility caused by using multiple ``triggers.'' These 
commenters uniformly urged the Board to eliminate ``trigger 1.''
    One commenter offered the following observations to assuage the 
Board's concerns with inappropriate increases in contract pension 
costs:

    But note that even with the elimination of this gateway, there 
would still be the five-year transition phase-in, the longer 
amortization period (a ten-year period versus the seven-year period 
in PPA), and greater asset smoothing than is permitted in PPA. These 
features will adequately control the cost increases that would 
otherwise be seen with a more direct and immediate harmonization.

    Another commenter remarked that, if the Board had added to the NPRM 
the three ``trigger'' prerequisite for using the minimum actuarial 
liability and minimum normal cost as a way of responding to its comment 
on the ANPRM, then the commenter believed that its prior recommendation 
was not properly implemented in the NPRM:
    In our ANPRM letter, we stated the following:

    If the intent of the CAS Harmonization Rule is to adjust the CAS 
assignable costs so that the excess of the PPA funding requirements 
over the CAS assignable costs are recovered on a timely basis, 
increasing the regular AAL to the MAL when the CAS cost is already 
greater than the PPA funding requirement for a given year may not be 
necessary, particularly if there are no existing prepayment credits.
    It appears that our suggestion was partly considered. However, 
Threshold Test 1 does not consider the existence of (mandatory) 
prepayment credits; it considers only the annual comparison of the 
minimum funding requirement and the regular CAS cost. As a result, 
it is too restrictive and will hinder full recovery of minimum 
funding requirements particularly for contractors who have been 
subject to the PPA requirements since 2008. Pension plans will 
eventually require funding contributions lower than CAS costs 
because the plans will become fully funded under the PPA earlier 
than when they will become fully funded under CAS. The plans will 
become fully funded under the PPA sooner because of the following 
reasons:
     The PPA became effective before the CAS Pension 
Harmonization Rule will become effective.
     The PPA has a 7-year amortization for unfunded 
liabilities, compared to the ten-year amortization period for gains/
losses and even longer amortization periods for other amortization 
bases (e.g., plan amendments, assumption changes, etc.) in the NPRM.
     The MAL and MNC are phased in and are not fully 
recognized during the transition period.
    Thus, plans will fail the ``trigger 1'' threshold test before 
contractors can recover all of the minimum funding contributions 
required of them.

Second and Third Threshold Criteria (``Trigger 2 and Trigger 3'')
    Several commenters recommended that the Board also eliminate 
``trigger 2,'' which requires that the sum of the minimum actuarial 
liability (MAL) and the minimum normal cost (MNC) exceed the sum of the 
actuarial accrued liability (AL) and normal cost (NC) as a precondition 
for recognition of the minimum actuarial liability and minimum normal 
cost. The general recommendation was to retain only the final threshold 
criterion, i.e., ``trigger 3'' and eliminate ``trigger 2'' because it 
was duplicative and added unnecessary complexity. One of these 
commenters believed that rather than comparing the liabilities and 
normal costs as a pre-condition, the rule should simply use the 
contract pension cost computed using the minimum actuarial liability 
and minimum normal cost as a minimum pension cost:

    Considering the ANPRM's ``MAL > AL'' criterion and how it 
impacts the calculations, we recommended that if no (mandatory) 
prepayment credits exist and if the regular CAS cost already exceeds 
the PPA minimum funding requirement, then the CAS cost need not be 
adjusted to reflect the MAL and the MNC to result in an even higher 
CAS assignable cost. Our recommendation was intended for the 
specific--and less frequent--situations when CAS reimbursements will 
have already caught up with the ERISA required cash funding of the 
plan on a cumulative basis, i.e., when there are no mandatory 
prepayment credits.
    In our ANPRM comment letter, we also recommended considering a 
minimum CAS cost approach for harmonization, in lieu of the ``MAL > 
AL'' criterion. In other words, there is no need to impose a ``MAL > 
AL'' criterion when satisfaction of this criterion simply results in 
reflecting the MAL and the MNC as ``floor'' liabilities and normal 
costs in the calculations. Instead, we recommended directly 
calculating the CAS cost based on the MAL and MNC, and use the 
result as a floor for the CAS cost.


[[Page 81303]]


    Some commenters made suggestions for improving the second criterion 
(``trigger 2'') if retained in the final rule. One commenter 
recommended that the final rule should ``provide that when ERISA or 
GAAP asset, liability, cost, or other values are to be used for CAS 
purposes, such values are per se CAS-compliant amounts. This will avoid 
unnecessary disputes with government auditors regarding whether these 
values are appropriate.''
    Another public comment recommended that ``the Board restore the 
ANPRM interest rate definition as it provides the necessary leeway for 
contractors to set interest rates assumptions that will be more stable 
than rates tied to current periods. Along with this definition, it will 
be helpful to retain the NPRM provision allowing the PPA rates as a 
safe harbor option.'' The comment noted that the ANPRM required that 
the interest rate be based on ``high quality'' corporate bonds, rather 
than the NPRM requirement that the rate be based on ``investment 
grade'' bonds.
    Response: The Board has been persuaded to eliminate the first 
threshold criterion (``trigger 1''), which was proposed in the NPRM, 
from the final rule. This test, which had been recommended in public 
comments to the ANPRM, adds complexity and inserts the vagaries of tax 
accounting into contract cost accounting.
    The Board has reviewed the advantages and disadvantages of 
retaining either the second threshold criterion (``trigger 2'') or the 
third threshold criterion (``trigger 3'') as the single prerequisite 
for using recognition of the minimum actuarial liability and minimum 
normal cost. Based on this review, the Board has concluded the second 
criterion directly implements the Board's intent that the minimum 
actuarial liability and minimum normal cost are minimum values for the 
pension cost measurement. The Board also notes that unless the second 
criterion is satisfied, the effort needed to compute the contract 
pension cost using the minimum values is not necessary. Moreover, first 
determining which liability to use lessens the potential for 
computation errors because the contract pension cost needs to be 
computed once instead of twice. Therefore, the third threshold 
criterion, ``trigger 3,'' has also been eliminated.
    The interest rate criteria used for measuring the minimum actuarial 
liability and minimum normal cost proposed in the NPRM referenced 
``investment grade'' fixed-income investments, which infers the top 
four levels of investments (e.g., Moody's Baa or higher) and differed 
from the ANPRM reference to ``high quality'' (e.g., Moody's Aa or 
higher) fixed-income investments, which as used for GAAP is restricted 
to the top two levels of investments. The Board believes that the 
criterion of ``the top three quality levels of investment grade'' is 
appropriate because it is restricted to the higher tier ratings from 
the bond rating agencies, e.g., Moody's' single ``A'' rated or higher, 
and is consistent with the investment quality required by the PPA as 
cited in 26 U.S.C. 430(h)(2)(D)(i). A lesser rated bond would pay more 
coupon interest, but the additional default risk is unacceptable for 
determining the contingent cost of liquidating all benefit obligations 
for contract cost accounting. The Board also believes that the criteria 
proposed in the NPRM permits less stringent interest rate criteria than 
the PPA. The final rule requirement for ``investment grade corporate 
bonds with varying maturities and that are in the top 3 quality levels 
available, such as Moody's' single `A' rated or higher,'' supports 
consistency and is less likely to engender disputes. The ANPRM criteria 
relied upon GAAP requirements, which must reflect the expected rates at 
which the pension benefits could be effectively settled. The criteria 
used in this final rule, which is the slightly more stringent than the 
criteria proposed in the NPRM, should also satisfy the GAAP 
requirements.
    The provisions of 9904.412-50(b)(7)(iii)(B) allows the contractor 
to elect to use investment grade corporate bond yield rates ``published 
or defined by the Secretary of the Treasury for determination of the 
minimum contribution required by ERISA'' as its established cost 
accounting practice for setting the interest to be used for 9904.412-
50(b)(7)(iii)(A) purposes. This permits the PPA yield curve to be used 
as a ``safe harbor.'' The 9904.412-50(b)(7)(iii)(A) criteria is 
consistent with, although less stringent than, the discount rate used 
to compute the accrued benefit obligation as described by GAAP which 
refers to ``high quality'' (e.g., Moody's Aa or higher) corporate 
bonds.
    Because all other assumptions must be based on best estimate 
assumptions that reflect long-term trends in accordance with 9904.412-
50(b)(4), this provision will preclude the use of the ``most valuable'' 
benefit assumptions, i.e., most conservative assumptions used to value 
the funding target for an ``at risk'' plan, unless there is a 
persuasive actuarial study that supports such assumptions as 
appropriate based on the past experience and future expectations for 
the plan. All other actuarial assumptions are also required by 
9904.412-50(b)(7)(iii)(D) to be the same as the assumptions used to 
compute the actuarial accrued liability on a going concern basis. Also, 
CAS 412 generally requires that the plan's liability be based on the 
terms of the written plan document, whereas GAAP requires that patterns 
of benefit improvements and other features of the ``substantive plan'' 
be recognized. These differences in the basis for measuring the 
liability for ERISA's funding target and GAAP's accrued benefit 
obligation can cause variances between those values and the minimum 
actuarial liability. Therefore the Board believes the automatic 
adoption of ERISA's funding target or GAAP's accrued benefit obligation 
is inappropriate.
Topic 3: Suggested Alternative Means of Achieving Harmonization
    Comments: Several commenters continue to recommend that the Board 
replace the going concern basis for liability measurement with the 
current mark-to-market measurement adopted by Congress for the PPA, and 
by the Financial Accounting Standards Board for financial statement 
reporting and disclosure. These commenters believe that issues unique 
to contract cost accounting can be addressed through existing or 
modified provisions, e.g., volatility might be addressed through longer 
amortization periods for contract costing purposes.
    There were differing views presented as to whether the CAS should 
directly reference ERISA and GAAP liabilities or simply establish a 
mark-to-market measurement basis. Proponents of direct reference 
believed that direct adoption of ERISA or GAAP values would permit 
contractors and auditors to rely on values already subject to review by 
the Internal Revenue Service (IRS) or independent audit. However, the 
opponents of this approach noted differences in the criteria concerning 
assumptions and events that must be recognized, such as ``at risk'' 
status under ERISA or anticipation of plan changes that may occur under 
GAAP.
    One commenter was concerned with switching back to a going concern 
liability basis when the ERISA or GAAP liability was fully funded. 
Besides the potential for complexity, the concern was that the proposed 
rule would impose a requirement to fund a contract cost for pensions in 
a period in which ERISA would have a lesser minimum required 
contribution or GAAP would recognize a lower pension expense.
    Another commenter agreed that the Board should recognize the mark-
to-market based liability, but

[[Page 81304]]

recommended that the current going concern measurement basis be phased 
out over a five-year transition period. The commenter believed that 
once the entire transition period was completed, then contract cost 
accounting should rely solely on the mark-to-market based liability.
    A different alternative to pension harmonization suggested by one 
commenter would be to retain exclusive use of the going concern basis 
for measuring pension liability, but allow the difference between the 
going concern actuarial accrued liability and the mark-to-market 
minimum actuarial liability during the initial year of harmonization to 
be amortized as the costs of a transitional ``special event.'' This 
commenter believes that this approach would greatly simplify 
harmonization while permitting the previously unrecognized portion of 
the mark-to-market liability to be included in contract costs.
    The third alternative approach suggested came from a commenter who 
believed that the CAS should retain the going concern basis for 
measuring the liability, but that any excess of the ERISA minimum 
required contribution over the contract cost would be amortized over a 
relatively short period, such as a five-year period. This commenter 
also argued that certain contractors, whose business is predominantly 
from cost-based Government contracts, be permitted to recognize the 
full excess in the current period because they do not have a sufficient 
business base to subsidize the excess during the amortization period.
    Response: The Board reiterates its belief that absent evidence to 
the contrary, defined benefit plans are ongoing commitments, and 
therefore contract costing should reflect the average cost based on 
expected average asset returns in the future. However, the Board 
believes that the mark-to-market liability must be recognized as a 
minimum value in order to reflect the risk that the pension plan may 
have to settle its liability for pension benefits. The suggested 
alternative for amortizaton of the initial excess of the minimum 
actuarial liability over the actuarial accrued liability might reduce 
the accumulated value of prepayment credits, but during extended 
periods of low bond rates, substantial prepayment credits could again 
accumulate.
    The Board does not believe that the suggested amortizing of the PPA 
minimum required contribution in excess of the going concern pension 
cost is a viable solution. Adding such amortization to the current 
computations of CAS 412 and 413 adds complexities, whereas the going 
concern based pension cost does adjust to the PPA minimum required 
contribution over a period of time. The simplier approach of adopting 
the PPA minimum required contribution, but using a smoothing mechanism, 
was one of the many options included in the Staff Discussion Paper, but 
it was ultimately rejected by the Board due to concerns that minimum 
funding might not achieve adequate funding in every economic 
environment.
Topic 4: Proposed Accelerated Gain & Loss Amortization
    Comments: Two commenters expressed their support for the proposed 
accelerated amortization of actuarial gains and losses over a ten-year 
period instead of the current fifteen-year period. As one commenter 
stated:

    We also believe the change in amortization period for actuarial 
gains and losses from a fifteen-year to ten-year period, while 
longer than the seven-year amortization period used for PPA, 
provides a reasonable balance between timely cost recovery and an 
acceptable level of volatility for pension costs measured for CAS.

    However, one commenter objected to the imposition of an 
amortization period that exceeded the amortization period required for 
the ERISA minimum required contribution. This commenter was concerned 
that the minimum required contribution would not be fully recognized 
for CAS purposes for a decade.
    In response to the Board's inquiry concerning whether there should 
be special recognition of a gain or loss from an exceptional event, two 
commenters opined that this issue was not directly tied to 
harmonization and should be addressed in a separate case. Another 
commenter expressed their belief that ``the proposed NPRM retains 
effective smoothing mechanisms for gains and losses, so alternative 
rules for exceptional gains or losses are unnecessary.'' They were also 
concerned about the introduction of a new issue this late in the 
promulgation process.
    Two commenters found confusing the proposed language added to 
9904.412-50(a)(1)(v) and 9904.412-50(b)(7) regarding the adjustment to 
the actuarial accrued liability based on the minimum actuarial 
liability. They asked for clarification of the Board's intent.
    Response: The Board agrees that the wording of proposed 9904.412-
50(a)(1)(v) should be further clarified. The adjustment language of the 
proposed 9904.412-50(a)(1)(v) was intended to identify the portion of 
the period gain or loss attributable to the change in liability 
measurement basis. The adjustment language was used in the proposed 
9904.412-50(b)(7) to tie the gain and loss provision and the proposed 
9904.412-64.1 transitional provisions together.
    In the final rule, the proposal at 9904.412-50(a)(1)(v) of the NPRM 
for a specific adjustment of the actuarial accrued liability to become 
the minimum actuarial liability, or the normal cost to become the 
minimum normal cost, is no longer used and has been deleted. Paragraph 
9904.412-50(b)(7)(ii) of the final rule provides for a direct 
computation of the minimum actuarial liability and minimum normal cost.
    The Board understands that standard actuarial practice is to 
measure the expected unfunded actuarial liability by updating the 
unfunded actuarial liability from the prior period for interest and 
expected demographic changes. The current period experience gain or 
loss is simply the difference between the actual and expected unfunded 
actuarial liability. The normal gain and loss measurement will include 
the effects of a switch between bases for measuring the liability. The 
gain and loss measurement, when the measurement basis changes, is 
illustrated at 9904.412-60.1(d).
    The adjustment language has been deleted from the transition rule 
at 9904.412-50(a)(1)(v) and 9904.412-50(b)(7). The provisions of 
9904.412-64.1 have been revised to address the scheduled phase in of 
the mark-to-market based minimum actuarial liability and minimum normal 
cost, and govern only the first five cost accounting periods of the 
Pension Harmonization Rule Transition Period.
    The amortization of the experience gain or loss that occurs between 
the prior and current valuations is an element of the current period 
cost. The gain or loss is measured as the difference between the 
expected and actual unfunded actuarial liability as of the valuation 
date. Although the source of the gain or loss is the actuarial 
experience during the prior period, the amortization installment of the 
gain/loss is included in the determination of the current year cost 
together with amortization of the other bases. To avoid any disputes, 
9904.412-64.1(b)(5) has been added to clarify that the gain or loss 
measured in the First Cost Accounting Period of the Pension 
Harmonization Rule Transition Period, which is the first cost 
accounting period this final rule is applicable, shall be amortized 
over a ten-year period.

[[Page 81305]]

Topic 5: General References to ERISA
    Comment: Two commenters believe that the general references to 
ERISA in the proposed rule should be modified to cite specific 
provisions of ERISA. They are concerned that confusion or disputes may 
arise because of the numerous provisions that form ERISA. They also 
note that many of the provisions that affect pension contribution 
requirements and limitations are addressed by 26 U.S.C. 401 through 
436, which implement the tax treatment of the contribution amount.
    In particular, one commenter was concerned the general reference to 
ERISA in 9904.412-50(b)(5) and Illustration 9904.412-60(b)(3) might not 
provide adequate guidance regarding the projection of increases in 
benefits that are not based on salaries and wages. The commenter wrote 
the following regarding 9904.412-50(b)(5):

    In my opinion, the reference above to ``ERISA'' is tied to the 
current ERISA Tax Deductible Limit as defined in the Pension 
Protection Act of 2006. The Act Title VIII, Pension Related Revenue 
Provisions, added section 801 which amended Internal Revenue Code 
[at 26 U.S.C.] Section 404 to increase the Tax Deductible Limit for 
Single Employer plans. These rules became effective in 2008. The 
above ERISA reference should be clarified to my interpretation since 
ERISA also has numerous provisions tied to Minimum Funding rules.

    This commenter also suggested that the reference to ERISA in 
9904.413-50(c)(12)(viii) should be clarified:

    Under (viii), in my opinion the requirement is tied to the new 
Internal Revenue Code [ 26 U.S.C.] Section 436 mandated cessation of 
benefit accruals due to funding target attainment percentage. This 
section was created by the Pension Protection Act of 2006 and should 
be clarified.

    Response: The Board agrees that the references to ERISA proposed in 
the NPRM require that the user ascertain the relevant U.S.C., Title 26 
provision. The Board reiterates its precept that tax accounting is 
inappropriate for contract costing. The Board continues to believe that 
replacing the general references to ERISA with specific U.S.C., Title 
26 provisions is not desirable because it might require frequent 
updates to CAS 412 and 413 to the extent that ERISA and Title 26 of the 
U.S.C. are amended in the future. The Board acknowledges that the tax 
deductibility of pension contributions is governed by the IRC at Title 
26 of the U.S.C, and has made conforming technical corrections to the 
existing and proposed rules in the promulgation of this final rule.
    The Board agrees that the general reference to ERISA in 9904.412-
50(b)(5) might create confusion as to the applicable provision of 
ERISA. In this case the provision was intended to refer to section 
801(a) of the PPA, which is implemented by 26 U.S.C. 
404(o)(3)(A)(ii)(II). To avoid confusion and disputes concerning the 
relevant ERISA coverage, the Board has replaced the general reference 
to ERISA with specific provisions that parallel 26 U.S.C. 
404(o)(3)(A)(ii)(II).
    This new language does not indicate a loosening of the restrictions 
on recognizing the costs for contingencies. Certain reasonably 
foreseeable contingencies, such as salary increases, may be recognized 
in contract costing. CAS 412 has always permitted the projection of a 
contingent liability for future salary increases but subject to the 
requirement that actuarial assumptions must be individually reasonable 
based on future expectations and grounded by past experience. Like 26 
U.S.C. 404(o)(3)(A)(ii)(II), this final rule limits the basis for 
projection of the contingent liability for flat benefit increases to 
the historical data from the last six years, and adds the restriction 
that the benefits must be provided under a collective bargaining 
agreement. The formality of collective bargaining negotiations and 
agreements will provide verifiable evidence of the pattern of benefit 
improvements because such evidence may be lacking or subject to dispute 
in less formal situations.
    Regarding the general reference to ERISA in 9904.413-
50(c)(12)(viii), the Board is not adopting a specific concept from 
ERISA, but instead is providing an exemption for involuntary benefit 
curtailments imposed by an outside authority, i.e., ERISA. Use of a 
general reference to ERISA in this provision allows the 9904.413-
50(c)(12)(viii) exemption to continue to reflect benefit curtailments 
required by ERISA without requiring CAS 412 and 413 to be amended for 
future changes in ERISA. Moreover, this is neither a measurement nor a 
period assignment provision; rather, 9904.413-50(c)(12) requires an 
immediate adjustment of the unfunded actuarial liability or actuarial 
surplus when specific events occur, which are defined as a segment 
closing, benefit curtailment, or plan termination. The purpose of 
9904.413-50(c)(12)(viii) is to provide an exemption from an otherwise 
required immediate adjustment.
    Under the current ERISA provision, the contractor can provide that 
benefit accruals will automatically resume if the plan's funding level 
sufficiently improves within 12 months. If the funding level takes 
longer to improve, the contractor can amend the plan to reinstate the 
accruals once the plan attains an adequate level of funding. Because 
the contractor has not unilaterally decided to change the pension plan 
(from an ongoing plan that grants and accrues benefits for matching 
contract service to a frozen state where there is no expectation of 
future accruals), the Board believes an immediate settlement, or true 
up, of assets and liabilities is inappropriate and unnecessarily 
disruptive to contract pricing.
    It is noteworthy that 9904.413-50(c)(12)(viii) was derived from the 
aforementioned ERISA provision which permits the restoration of benefit 
accruals if the required funding level is attained within 12 months. 
Otherwise, under the ERISA provision, a plan amendment would be 
required to restore the missed accruals, which would require 
amortization in accordance with 9904.412-50(a)(1)(iii). Under the 
amendments for the CAS Pension Harmonization Rule, the contractor can 
elect to continue to accrue benefits that are expected to be 
reinstated, and thereby continue to match the pension cost with the 
underlying activity. If the pension plan does not automatically restore 
the missed accruals, then the future reinstatement of the missed 
accruals is contingent upon future action by the contractor, and cannot 
be recognized until and unless the plan is amended to restore the 
missed benefit accruals.
    In reviewing this provision for inclusion in the final rule, the 
Board considered whether the ``ERISA missed accrual'' was a liability 
to be recognized by the normal cost under CAS, which is the measurement 
of the actuarial present value of the annual benefit accrual. The Board 
has revised this provision to ensure that there is a strong expectation 
that benefit accruals will be incurred. First, the employee's right to 
the restoration of the benefit accrual must be included in the written 
plan documents. (See 9904.413.50(c)(12)(viii).) Second, the contractor 
cannot elect to anticipate the future accruals if there is evidence to 
the contrary, e.g., there is consideration of eliminating the 
restoration provision by plan amendment or the entity is facing 
bankruptcy due to serious financial difficulties. Finally, as with all 
pension costs assigned to a current period, the pension cost must be 
funded by the contractor to be allocable, and thereby allowable, for 
reimbursement by the Government through contract pricing. Reimbursement 
to the contractor by the Government of its allocable share of the 
funded pension cost attributable to the ``ERISA missed

[[Page 81306]]

accrual'' provides a funding source to improve the plan's funding 
level, which directly supports the goal of the PPA.
Topic 6: Proposed Accounting for Prepayments
    Comments: Some commenters objected to the proposed revision to 
9904.412-30(a)(23) and 9904.412-50(a)(4), which would adjust the 
prepayment credits based on investment returns and administrative 
expenses in accordance with 9904.413-50(c)(7). The commenters agreed 
that expenses associated with investment management are properly 
charged against the prepayment credits because the prepayments are part 
of the invested assets. However, the commenters believed that expenses 
associated with benefit administration should not be charged against 
prepayment credits which have not been allocated to benefit liability. 
As one public commenter explained:

    We have several comments concerning proposed section 412-
50(a)(4) which states that accumulated prepayment credits are to be 
adjusted for investment returns and administrative expenses. It 
seems reasonable to us that a proportional share of investment 
returns and investment related expenses should be allocated to the 
prepayment credit account, as a prepayment credit represents plan 
assets. As such, we agree that the prepayment credit should be 
allocated a proportional share of investment related administrative 
expenses. On the other hand, it does not seem reasonable that the 
prepayment credit should receive an allocation of any non-investment 
related administrative expenses (e.g., for items such as plan 
administration, actuarial fees, and ERISA audits)--these types of 
expenses are not typically based on asset size, and the existence of 
a prepayment credit will not generally affect these fees.

    To avoid confusion, one of the commenters recommended that 
9904.412-30(a)(23) ``explicitly provide that the average rate of 
investment return for a year can be used to adjust all cash flows 
occurring in that year. This would eliminate the possibility that an 
auditor might require a contractor to measure investment returns within 
a plan year, which would be a difficult and expensive task.''
    Several commenters believed that illustrations, in which the 
application of prepayment credits to fund the current pension cost on 
the first day of the plan year, might be misconstrued to be a cost 
measurement rule that might affect the allowability of interest on 
prepayment credits.
    Two commenters were also concerned that the illustrations, in which 
the prepayment credits are accounted for separately from the segment 
accounting, might be read to require such accounting for prepayment 
credits. They believed that it was the contractor's prerogative to set 
the accounting practice on whether prepayment credits are identified by 
segment. Furthermore, they believe such a rule governing the accounting 
for prepayment credits was beyond the scope of harmonization.
    Response: The Board understands that benefit-related expenses, such 
as PBGC premiums, fees for processing benefit payments, etc., might not 
be directly associated to prepayment credits that have not been 
allocated towards the funding of benefits. The Board is concerned about 
the additional effort that would be required, and the potential for 
disputes, if contractors were required to separately identify 
administrative expenses as either investment-related or benefit-
related. Furthermore, the Board views the monies deposited into the 
pension assets as fungible, i.e., not individually identifiable. 
Besides, the Board notes that the PPA, as implemented by 26 U.S.C. 
430(f)(8), adjusts the prefunding balance--which is the ERISA 
equivalent of the prepayment credit--at the rate of return on plan 
assets taking into account ``all contributions, disbursements, and 
other plan payments during such period.''
Topic 7: Actuarial Value of Assets
    Comments: Three public comments questioned why the Board did not 
propose, as part of pension harmonization, the adoption of the PPA 
asset averaging method and 10% corridor around the market value of 
assets. The commenters believed that the proposed rule should have 
permitted adopting the PPA asset averaging method as part of the 
harmonization change so that the impact of the change in asset 
valuation method would be includable in the equitable adjustment claim. 
One commenter suggested that the 20% asset corridor be maintained to 
address the concerns with volatility.
    One commenter questioned the illustration that implies a 
requirement that the prepayment be subtracted from the market value of 
assets before determining the actuarial value of assets as a 
requirement. In contrast the commenter noted that minimum funding 
requirements include the ERISA prefunding balance (prepayment) in the 
determination of the asset corridor. They asked that the Board clarify 
its intent and the proper treatment of the prepayment credit in the 
determination of the actuarial value of assets.
    Response: The method of measuring the average value of assets 
(actuarial value of assets) under the PPA limits the expected rate of 
return on assets to the lower of the assumed rate of return on assets 
or the PPA interest rate for third segment. This limitation understates 
expected investment return when the prevailing yield curve rates are 
lower than the going concern expectations. However, the PPA average 
value of assets is not limited when the prevailing yield curve rates 
exceed the going concern expectations. The PPA average value of assets 
does not give equal treatment to gains and losses. When the PPA 
interest rates are lower than the going concern assumption, the 
required suppression of the expected return in investments can 
introduce an additional element of asset loss (or reduced gain) by 
understating the actuarial value of assets that would be developed on a 
going concern basis. However when the PPA interest rates are higher 
than the going concern assumption, there is no limit on the recognition 
expected investment earnings or losses. This added element of 
additional asset loss (or reduction in asset gain) does not comply with 
9904.413-50(b)(2), which requires that the actuarial value of the 
assets ``be determined by the use of any recognized asset valuation 
method which provides equivalent recognition of appreciation and 
depreciation of the market value of the assets of the pension plan.'' 
The conditional limitation of the actuarial value of assets can also 
add some volatility and difficulty in forward pricing projections. And 
finally, the traditional equal recognition of gains and losses allows 
the contractor to follow its own decisions concerning investment policy 
without penalty for gains in excess of the current corporate bond rate. 
The Board believes that the existing provisions regarding the actuarial 
value of assets permit a wide variety of reasonable asset valuation 
methods to be used. A contractor may elect to use a 2-year asset 
averaging method with a 10% corridor around the market value of assets, 
but switching to such a method is not required to achieve 
harmonization.
    The accounting for the prepayment credit in a separate side account 
is an example in the NPRM of a possible methodology for measuring the 
actuarial value of assets. And as explained above, any reasonable asset 
valuation method may be used as part of a consistently applied cost 
accounting practice. The Board does not believe any further 
modification to the rule, including illustrations, is necessary.

[[Page 81307]]

Topic 8: Discounting of Contributions Receivable
    Comments: One public commenter asked the Board to clarify the 
proposed 9904.413-50(b)(6)(i) requiring contributions receivable to be 
discounted to the beginning of the cost accounting period at the 
applicable effective interest rate.
    Response: The PPA requires that contributions made after the end of 
the plan year be adjusted for interest based on the ``effective 
interest rate.'' The PPA defines the ``effective interest rate'' as the 
single interest rate that will produce the same present value of 
accrued benefits as the duration-specific corporate bond yield rates. 
In reviewing the relationship of interest adjustments under the 
proposed harmonization rule to the Board's conceptual framework for 
harmonization and contract cost accounting, the Board believes the 
proposed rule was internally inconsistent. The general guiding 
principle for contract costing under harmonization is that the assumed 
interest rate, based on expected rates of return on investments, shall 
be used for all measurement purposes except the measurement of the 
minimum actuarial liability and minimum normal cost under 9904.412-
50(b)(7)(ii).
    Under the final rule, pension costs would be adjusted to the date 
of funding. Accumulated balances under 9904.412-50(a)(2) and 
amortization installments under 9904.412-50(a)(1) would be determined 
based on the assumed interest rate. Adjusting contributions receivable 
at the current corporate bond rate, which may not be representative of 
the expected earnings on the pension fund, is inconsistent with the 
assumed interest used for other measurements. Therefore, the Board has 
modified 9904.413-50(b)(6) to require that all contributions receivable 
be adjusted based on the assumed interest rate.
    The harmonization rule adjusts amounts that have been deposited 
into the pension fund at the net rate of return on plan investments for 
the period.
Topic 9: Assignable Cost Limits
    Comments: Some commenters recommended that the Board restore the 
ANPRM proposal for a buffer on the assignable cost limitation. The 
commenters did note that the 25% buffer proposed in the ANPRM was too 
large, and suggested that a 10% buffer would be sufficient to promote 
predictability while not permitting the accumulation of an excessive 
surplus.
    Response: The Board recognizes that permitting a reasonable buffer 
in the assignable cost limitation has the advantage of dampening cost 
volatility for forward pricing purposes when the plan funding is close 
to the limit. However, the Board remains concerned that use of a buffer 
may result in the accumulation of excessive surplus assets. Currently 
the 9904.412-50(c)(2)(i) provision prohibiting the assignment of 
negative pension costs inhibits the Government's ability to recover an 
excessive asset surplus. Addressing the buffer concept and changing the 
zero dollar floor (9904.412-50(c)(2)(i)) are beyond the scope of 
harmonization. The Board believes these issues require further research 
because recognizing amounts in excess of measured cost has no precedent 
in the Cost Accounting Standards. The issue of excessive assets and the 
inclusion of a buffer in the assignable cost limitation must be 
considered together should the Board decide to open a new case on 
segment closing and other such adjustments.
Topic 10: Segment Closings and Benefit Curtailments
    Comments: Many commenters objected to the proposed exclusion of the 
minimum actuarial liability from recognition for segment closings and 
benefit curtailment purposes under 9904.413-50(c)(12)(i). The 
commenters advised the Board of their strong belief that the proposed 
exclusion of the minimum actuarial liability in measuring the segment 
closing adjustment effectively reversed the CAS Pension Harmonization 
Rule. One public commenter summarized the objection as follows:

    The NPRM currently requires segment closing calculations to use 
the unadjusted Actuarial Accrued Liability (AAL), or the ongoing 
liability currently applicable in the existing CAS rules. We believe 
that the more appropriate measure of the liability in a segment 
closing calculation is the Minimum Accrued Liability (MAL) to 
achieve harmonization. The MAL, by its nature, is intended to 
reflect the present value of a pension plan if its obligations were 
settled at a particular point in time (i.e., the segment closing 
date), while the AAL is reflective of an ongoing plan by 
incorporating long-term liability assumptions. The application of 
the AAL at segment closing effectively reverses the impact of 
harmonization that may have applied in prior periods since the final 
true-up of plan costs will revert back to the current (non-
harmonized) CAS rules. We believe this is a fundamental flaw of the 
current NPRM that must be modified to ensure harmonization is 
achieved in the spirit of the mandate within the Pension Protection 
Act.

    The following public commenter addressed the acceptance of risk by 
the contractor's decisions to settle or retain the benefit liability at 
segment closing:

    Looking from a theoretical standpoint, a segment closing should 
be based on a relatively risk-free basis, which essentially calls 
for the MAL to be used. If a contractor wishes to assume risks 
inherent in the investment of assets on a greater risk basis, then 
the contractor should absorb any losses as well as any gains that 
might arise.

    Another commenter noted the relationship between the market value 
of assets, which is required in the measurement of the segment closing 
adjustment, and the minimum actuarial liability, which is not 
recognized:

    In order to harmonize pension cost, benefit curtailment and 
segment closing adjustments should be based on the difference 
between the Market Value of Assets (MVA) and the MAL. Both the MVA 
and the MAL are market-based measurements of the pension plan assets 
and obligations at the prevailing market conditions, and this basis 
is consistent with the requirements of the PPA.

    One commenter asked that, in addition to mandatory benefit 
curtailments, voluntary benefit curtailments also should be exempted 
from the adjustment requirements of 9904.413-50(c)(12). The commenter 
argued that the required adjustment was disruptive and unnecessary if 
the segment was continuing and pension costs would continue to be 
charged to the contract.
    There were three public comments concerning the proposed accounting 
for 9904.413-50(c)(12) adjustments in subsequent periods. These 
comments recommended revisions to the wording of 9904.413-
50(c)(12)(ix). One commenter believed that the Board should consider 
addressing, in a future case on segment closings, subsequent actuarial 
gains for which the recovery of any excessive asset surplus is limited 
by the zero-dollar floor of 9904.412-50(c)(2)(i).
    Response: The Board limited its proposed amendment to 9904.413-
50(c)(12) to the exemption of benefit curtailments mandated by ERISA. 
Currently such benefit curtailments are addressed by 26 U.S.C.436. The 
Board recognizes that there are issues concerning the risks and rewards 
of settling or retaining the benefit liability upon the occurrence of a 
segment closing or benefit curtailment. There is also a potential that 
an analysis would demonstrate that the risks and rewards will vary 
depending upon market and economic conditions at the time of the 
segment closing or benefit curtailment.
    The Board believes that any changes to the current provisions of 
9904.413-50(c)(12), including the provision at 9904.413-50(c)(12)(ix) 
that was

[[Page 81308]]

proposed in the NPRM, must be based on a full consideration of these 
issues. Unintended consequences might arise if all the issues are not 
fully vetted. The Board believes that the issues and problems with the 
current segment closing and benefit curtailment provisions are beyond 
the scope of pension harmonization required under section 106, and 
should be addressed in a separate case, which the Board is considering. 
Accordingly, the Board has deleted the proposed provision at 9904.413-
50(c)(12)(ix) from the final rule.
    In reviewing the relationship of the segment closing liability to 
the liability used to compute annual pension costs, the Board noted 
that transfers of participants to other segments, including inactive 
segments, might be an integral part of winding down a segment's 
workforce prior to a segment closing. To fully respond to the public 
comments, the Board considered whether the asset transfers associated 
with participant transfers should be based on the same liability as 
used for 9904.413-50(c)(12) purposes, that is, the actuarial accrued 
liability determined under the accrued benefit cost method rather than 
the contractor's normal funding method. In the preamble to the 1995 
amendments to CAS 412 and 413 (60 FR 16534, March 30, 1995), the Board 
noted that it was adding this distinction for the liability to be used 
to transfer assets because of its relationship to segment closings:

    Under the revised definition of a segment closing, some 
employees may remain in a segment performing non-Government work 
while other employees may be transferred to other segments. For 
consistency, the provisions for transfers of either active or 
retired participants specify that the assets transferred must equal 
the actuarial accrued liability determined under the accrued benefit 
cost method.

    Therefore, the Board believes that to be consistent with the 
exemption of 9904.413-50(c)(12) from 9904.412-50(b)(7), the liability 
to be used to transfer assets under 9904.413-50(c)(8) and (9) should be 
likewise exempt. While participant and associated assets transfers also 
effect the measurement of ongoing pension costs, the Board believes 
that this treatment has the additional benefit of preserving assets 
within the segment in which they were accumulated. In the 1995 
preamble, the Board explained its view on the impact of future costs of 
participant and associated asset transfers:

    If plan participants remain employed by the contractor, whether 
in the same or another segment, the Board believes the 
responsibility for future salary increases, which are attributable 
to future productivity, merit, and inflation, belongs to the future 
customers that benefit from the participants' continued employment.

    Furthermore, because asset transfers under 9904.413-50(c)(8) and 
(9) are based on the liability measured by the accrued benefit cost 
method, rather than the established funding method, the Board has added 
to these paragraphs clarifying language regarding which actuarial 
assumptions are appropriate. This clarification was not previously 
necessary because all assumptions were required to reflect long-term 
trends.
Topic 11: Illustrations
    Comments: Two commenters recommended that the Board eliminate 
proposed harmonization illustrations that ``do not focus on unique 
features of the rule and that could imply acceptance of tax 
accounting.'' They believed that, not only were the portions of the 
illustration related to ERISA measurements unnecessary, as ERISA is 
amended in the future, these illustrations could also become confusing 
and obsolete.
    Response: The Board agrees and has limited the harmonization 
illustrations to those that demonstrate the measurement and assignment 
of the pension cost under this final rule.
Topic 12: Transition Rule
    Comments: The comments from the industry associations were 
supportive of the proposed 9904.412-64.1 transition rule:

    We understand the transition rules are intended to mitigate any 
abrupt increase in costs as a result of the final rules to allow the 
Government to manage agency budgets. We continue to agree that this 
is an important reason to use such a transition and support the 
duration selected. In addition, we believe the phase-in will reduce 
the monetary amounts and number of equitable adjustments resulting 
from this required change in CAS, thereby lessening the 
opportunities for disagreements.

    The associations believed that their support for the proposed rule 
and the transition provision was demonstrated by their acceptances of a 
further delay in the timeliness of cost recovery and prolonged negative 
cash flow burden. Other commenters were also supportive of the proposed 
transition.
    However, two commenters believed that it was inappropriate for the 
Board to propose a transition rule to address the Government's 
budgetary concerns. One commenter opined that:

    * * * [there] will be significant gaps between CAS pension costs 
and the PPA funding requirements, gaps that do not exist for 
businesses selling commercially. These gaps will have detrimental 
cash flow and profit impacts on contractors because they will be 
required to fund shortfalls over a shorter period than they will be 
able to recover associated costs from the Government.

    The other commenter believed it was appropriate to include the 
proposed transition to allow both parties to the contract a means of 
managing the forward pricing process and equitable adjustments from the 
expected large change in pension costs.
    On the other hand, a joint public comment from several of the 
Government's military agencies expressed their belief that the 
magnitude of the potential pension cost increases requires a longer 
transition period in order to properly manage the impact on budgets and 
existing contracts.
    Response: The Board determined that a transition period was 
necessary to implement the CAS Pension Harmonization Rule in a fair and 
equitable manner, as it has done with previous promulgations. In any 
attempt to promote fairness and equity, the Board would necessarily 
take into account the nature of the Government acquisition process, 
which includes the budgetary process. The Board believes that this 
transition period was necessary to allow the cost impact of this final 
rule to be gradually recognized in the pricing and costing of CAS-
covered and FAR-covered contracts alike. It also moderates the 
difference in the pension cost allocable to FAR-covered fixed price 
contracts entered into prior to the effective date of the CAS Pension 
Harmonization Rule that are not subject to equitable adjustment.
Topic 13: Effective Date of the Final Rule and Its Applicability to 
Contracts
    Comments: Many contractors recommended that the Board allow 
sufficient time to modify cost projections and permit contract cost 
negotiation to accommodate the change in accounting practice that would 
be required by the final rule. There was general agreement that the 
final rule should not be effective prior to January 1, 2011, and that 
the effective date should be delayed for 60 days from the publication 
of the final rule. Some of the commenters noted that delayed effective 
and applicability dates might ease the impact of equitable adjustments.
    Response: The Board has considered the comments regarding the 
effective date of the final rule. This final rule is being published 
after January 1, 2011, which is later than the effective date mandated 
by section 106 of the PPA, but provides the relief requested in the

[[Page 81309]]

public comments to delay the effective and applicability dates. The 
Board decided to delay the effective date for 60 days after publication 
to permit time for contractors to make the necessary changes to the 
actuarial valuation and cost projection systems. Furthermore, to ensure 
that no contractor becomes immediately applicable to the final rule, 
the implementation date is the first cost accounting period after June 
30, 2012. The Board agrees that such a delay will eliminate a portion 
of the equitable adjustment claims for contractors that report on a 
calendar year basis.
Topic 14: Guidance on Equitable Adjustments
    Comments: Two commenters requested that the Board provide guidance 
on the calculation of the cost impact for equitable adjustment. The 
commenters believed such guidance was important to avoid having 
different interpretations that would lead to disputes over equitable 
adjustments. One of the commenters asked that the Board explicitly 
identify what constitutes a mandatory cost accounting practice change 
due to the CAS Pension Harmonization Rule.
    Response: The Board believes that the final rule changes cost 
accounting practices contained in CAS 412 and 413 that are necessary to 
implement the CAS Pension Harmonization Rule required by section 106 of 
the PPA. Whether a particular accounting practice has changed, the 
actual determination of the cost impact and the processing of equitable 
adjustments are matters for CAS administration as may be undertaken by 
the contracting parties for CAS-covered contracts. Therefore, this 
final rule is limited to contract cost accounting and does not include 
any guidance on the administration of the change in cost accounting 
practice; the Board urges the Federal agency heads to issue the 
necessary policies and procedures.
Topic 15: Request for Additional Opportunities for Public Comment
    Comments: Several commenters recommended that the Board republish 
the CAS Pension Harmonization Rule as a second NPRM if substantive 
changes are made to the rule. The commenters believed that a second 
NPRM would be advantageous given the complexity and cost impact of the 
proposed changes.
    Response: The Board believes that the conceptual basis that 
underpinned the NPRM has been extended to the final rule. While the 
elimination of the threshold criteria of ``trigger 1'' and ``trigger 
3'' have greatly reduced the wording and complexity of 9904.412-
50(b)(7), the basic concepts for establishing a harmonization 
prerequisite have not changed. This final rule does not add any 
substantive changes to how the CAS Pension Harmonization Rule is 
implemented. Therefore, the Board believes that a second NPRM is not 
necessary, and after consideration of the public comments to the NPRM, 
the Board is publishing the CAS Pension Harmonization Rule as a final 
rule.

D. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this final rule because this rule imposes no additional 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 final rule are those normally 
maintained by contractors and subcontractors who claim reimbursement of 
costs under Government contracts.

E. Executive Order 12866, the Congressional Review Act, and the 
Regulatory Flexibility Act

    Because the affected contractors and subcontractors are those who 
are already subject to CAS 412 and 413, the economic impact of the 
promulgation of this CAS Pension Harmonization Rule as a final rule on 
contractors and subcontractors is expected to be minor. As a result, 
the Board has determined that this final 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. For the same reason, the Administrator 
of the Office of Information and Regulatory Affairs has determined that 
this final rule is not a ``major rule'' under the Congressional Review 
Act, 5 U.S.C. Chapter 8. Furthermore, this final rule does not have a 
significant effect on a substantial number of small entities because 
small businesses are exempted from the application of the Cost 
Accounting Standards. Therefore, this final rule does not require a 
regulatory flexibility analysis under the Regulatory Flexibility Act of 
1980, 5 U.S.C. chapter 6.

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 amended as set forth below:

PART 9904--COST ACCOUNTING STANDARDS

0
1. The authority citation for Part 9904 continues to read as follows:

    Authority:  Pub. L. 111-350, 124 Stat. 3677, 41 U.S.C. 1502 
[formerly Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. 422].


0
2. Section 9904.412-30 is amended by revising paragraphs (a)(1), (8), 
(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.)
* * * * *
    (8) Assignable cost deficit means the increase in unfunded 
actuarial liability that results when the pension cost computed for a 
qualified defined-benefit pension plan exceeds the maximum tax-
deductible amount for the cost accounting period determined in 
accordance with the Internal Revenue Code at Title 26 of the U.S.C.
    (9) Assignable cost limitation means the excess, if any, of the 
actuarial accrued liability and 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 income and expenses in accordance with 9904.413-
50(c)(7) and decreased for amounts used to fund pension costs or 
liabilities, whether assignable or not.
* * * * *

0
3. Section 9904.412-40 is amended by adding paragraph (b)(3) to read as 
follows:

[[Page 81310]]

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 CAS Pension 
Harmonization Rule.'' However, paragraphs 9904.413-50(c)(8), (9) and 
(12) are exempt from the requirements of 9904.412-50(b)(7).
* * * * *

0
4. In 9904.412-50, paragraphs (a)(2), (4) and (6); (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) * * *
    (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 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 subsection.
    (ii) Such portions of unfunded actuarial liability shall be 
adjusted for interest based on the interest assumption established 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 
income and 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.
* * * * *
    (6) For purposes of this Standard, defined-benefit pension plans 
funded exclusively by the purchase of individual or group permanent 
insurance or annuity contracts, and thereby exempted from the minimum 
funding requirements implemented by the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., as amended, shall 
be treated as defined-contribution pension plans. However, all other 
defined-benefit pension plans administered wholly or in part through 
insurance company contracts shall be subject to the provisions of this 
Standard relative to defined-benefit pension plans.
    (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 
whose benefits are subject to a collectively bargained agreement(s) and 
whose benefits are not based on salaries and wages, the contractor may 
recognize benefit improvements expected to occur in succeeding plan 
years determined on the basis of the average annual increase in 
benefits over the 6 immediately preceding plan years.
* * * * *
    (7) CAS Pension Harmonization Rule: For qualified defined benefit 
pension plans, the pension cost shall be determined in accordance with 
the provisions of paragraph (b)(7)(i) of this section.
    (i) In any period that the sum of the minimum actuarial liability 
and the minimum normal cost exceeds the sum of the actuarial accrued 
liability and the normal cost, the contractor shall measure and assign 
the pension cost for the period in accordance with 9904.412 and 
9904.413 by using the minimum actuarial liability and minimum normal 
cost as the actuarial accrued liability and normal cost, respectively, 
for all purposes unless otherwise excepted.
    (ii) 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)(iii).
    (B) The minimum normal cost shall be the normal cost measured under 
the accrued benefit cost method and using an interest rate assumption 
as described in 9904.412-50(b)(7)(iii). Anticipated administrative 
expense for the period shall be recognized as a separate incremental 
component of normal cost.
    (iii) 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 and that are in 
the top 3 quality levels available, e.g., Moody's' single ``A'' rated 
or higher;
    (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 may be published by the Secretary of the Treasury and used 
for determination of the minimum contribution required by ERISA. The 
contractor's cost accounting practice includes the election of the 
specific published rate or set of rates and must be consistently 
followed;
    (C) For purposes of 9904.412-50(b)(7)(ii)(A) and (B), use of 
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 actuarial assumptions, other than interest 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

[[Page 81311]]

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) An amount of pension cost of a qualified pension plan, 
adjusted pursuant to paragraphs (c)(2)(i) and (ii) of this subsection 
that exceeds the sum of (A) the maximum tax-deductible amount, 
determined in accordance with the Internal Revenue Code at Title 26 of 
the U.S.C., and (B) 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 and 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.
* * * * *

0
5. Section 9904.412-60 is amended by revising paragraphs (b)(2) and 
(3), (c)(1) through (6), (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 fifteen years at the interest rate 
assumption, which is based on expected rate of return on investments 
and complies with 9904.412-40(b)(2) and 9904.412-50(b)(4), 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) and 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.
    (i) Under the first plan, in which the benefits are not subject to 
a collective bargaining agreement, 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 for this first plan, the contractor may not assume future 
benefits greater than that currently required by the plan.
    (ii) 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 not only benefits increases required by the 
collective bargaining agreement, but may also consider subsequent 
benefit increases based on the average increase in benefits during the 
previous 6 years in computing pension costs for the current cost 
accounting period in accordance with 9904.412-50(b)(5). The contractor 
shall limit projected benefits to the increases specified in the 
provisions of the existing plan, as amended by the collective 
bargaining agreement, 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 
is measured by the minimum actuarial liability in accordance with 
9904.412-50(b)(7)(ii) since the criterion of 9904.412-50(b)(7(i) has 
been satisfied. 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 2017, 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 
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 2017 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, 2018, 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

[[Page 81312]]

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 a ten-year period beginning in 2018 in 
accordance with 9904.412-50(c)(2)(ii)(C) and 9904.413-50(a)(2)(ii).
    (3) Assume the same facts shown in illustration 9904.412-60(c)(2), 
except that in 2016, 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 2016 and 2017, and was brought forward to 2017 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 2017. 
The next year, 2018, 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 2017 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 
limitation on tax-deductible contributions imposed by the Internal 
Revenue Code at Title 26 of the U.S.C., 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 2018 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 which was deposited on the first day of the plan year, 
Contractor K could apply up to $700,000 of the accumulated value of 
prepayment credits towards the pension cost computed for the period. In 
accordance with the provisions of 9904.412-50(c)(2)(iii), the amount of 
pension cost assigned to the current period shall not exceed 
$1,700,000, which the sum of the $1 million maximum tax-deductible 
amount and $700,000 accumulated value of prepayment credits. 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 sum of the $1 million contribution 
and $700,000 accumulated value of prepayment credits towards the $1.5 
million assigned pension cost ($700,000 + $1,000,000-$1,500,000). The 
$200,000 of remaining accumulated value of prepayment credits is 
adjusted for $14,460 of investment income allocated in accordance with 
9904.412-50(a)(4) 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) and 9904.412-50(c)(1).
    (6) Assume the same facts for Contractor K in 9904.412-60(c)(4), 
except that the 2017 assignable cost limitation is $1.3 million and the 
accumulated value of prepayment credits is $0. Pension cost of $1.5 
million is computed for the cost accounting period, but the assignable 
cost is limited to $1.3 million in accordance with 9904.412-
50(c)(2)(ii)(A). Pursuant to 9904.412-50(c)(2)(ii)(B), all existing 
amortization bases maintained in accordance with 9904.412-50(a)(1) are 
considered fully amortized. The assignable cost of $1.3 million is then 
compared to the maximum tax-deductible amount of $1 million. Pursuant 
to 9904.412-50(c)(2)(iii), Contractor K's assignable pension cost for 
the period is limited to $1 million. The $300,000 ($1.3 million-$1 
million) excess of the assignable cost limitation over the tax-
deductible maximum is assigned to future periods as an assignable cost 
deficit.
* * * * *
    (13) The assignable pension cost for Contractor O's qualified 
defined-benefit 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 an 
interest assumption of 8%, which is based on the expected rate of 
return on investments and complies with 9904.412-40(b)(2) and 9904.412-
50(b)(4). 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 income and expenses in 
accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7). Allocated 
earnings and expenses, and the prepayment credits, shall be excluded 
from the actuarial value of assets used to compute the next year's 
pension cost. For the current period the net return on assets 
attributable to investment income and expenses was 6.5%. Therefore, the 
accumulated value of prepayment credits of $5,325 (5,000 x 1.065) may 
be used to fund the next year's assigned pension cost, if needed.
* * * * *

0
6. Section 9904.412-60.1 is added to read as follows:


9904.412-60.1   Illustrations--CAS Pension Harmonization Rule.

    The following illustrations address the measurement, assignment and 
allocation of pension cost on or after the Applicability Date of the 
CAS Harmonization Rule. The illustrations present the measurement, 
assignment and allocation of pension cost for a contractor that 
separately computes pension costs by segment or aggregation of 
segments. The actuarial gain and loss recognition of changes between 
measurements based on the actuarial accrued liability, determined 
without regard to the provisions of 9904.412-50(b)7) and the minimum 
actuarial liability are illustrated in 9904.412-60.1(d). The structural 
format for

[[Page 81313]]

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, of which some segments have 
contracts that are subject to this Standard and 9904.413, while other 
segments perform commercial work only. The demographic experience 
regarding employee terminations for employees of 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 in the 
aggregate and allocates the aggregate cost to segments on a composite 
basis. Inactive employees are retained in the segment from which they 
terminated employment. 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.
    (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) and 50(b)(1), for measuring the 
actuarial accrued liability and normal cost. The contractor uses the 
accrued benefit cost method (also known as the unit credit cost method 
without projection) to measure the minimum actuarial liability and 
minimum normal cost. The accrued benefit cost method satisfies 
9904.412-50(b)(7)(ii) as well as 9904.412-40(b)(1) and 50(b)(1).
    (ii) Interest Rates: (A) Assumed interest rate used to measure the 
actuarial accrued liability and normal cost: The contractor's basis for 
establishing the expected rate of return on investments assumption 
satisfies the criteria of 9904.412-40(b)(2) and 9904.412-50(b)(4). This 
is referred to as the ``assumed interest rate'' for purposes of this 
illustration.
    (B) Corporate bond rate used to measure the minimum actuarial 
liability and minimum normal cost: For purposes of measuring the 
minimum actuarial liability and minimum normal cost the contractor has 
elected to use a specific set of investment grade corporate bond yield 
rates published by the Secretary of the Treasury for ERISA's minimum 
funding requirements. The basis for establishing the set of corporate 
bond rates meets the requirements of 9904.412-50(b)(7)(iii)(A) as 
permitted by 9904.412-50(b)(7)(iii)(B). This set of rates is referred 
to as the ``corporate bond rates'' for purposes of this illustration.
    (iii) Mortality: The mortality assumption 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)(2) which requires assumptions to ``represent the 
contractor's best estimates of anticipated experience under the plan, 
taking into account past experience and reasonable expectations.'' The 
specific table used for each valuation shall be identified.
    (iv) Termination of Employment: The termination of employment 
(turnover) assumption is based on an experience study of Harmony 
Company employee terminations or causes other than retirement. Because 
the experience for Segment 1 was materially different from the 
experience for the rest of the company, the termination of employee 
assumption for Segment 1 was developed based on the experience of that 
segment only in accordance with 9904.413-50(c)(2)(iii). The termination 
of employment experiences for each of Segments 2 through 7 were 
materially similar, and therefore the termination of employee 
assumption for Segments 2 through 7 was developed based on the 
experiences of those segments in the aggregate.
    (v) Actuarial Value of Assets: 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) 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 the pension plan, as 
well as Segment 1 and Segments 2 through 7, have unfunded actuarial 
liabilities and measures its pension cost for plan year 2017 as 
follows:
    (1) Asset Values: (i) Market Values of Assets: The contractor 
accounts for the market value of assets in accordance with 9904.413-
50(c)(7). The contractor has elected to separately identify the 
accumulated value of prepayment credits from the assets allocated to 
segments. The accumulated value of prepayment credits are adjusted in 
accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7). The market 
value of assets as of January 1, 2017, including the accumulated value 
of prepayment credits, is summarized in Table 1.

                                Table 1--January 1, 2017, Market Value of Assets
----------------------------------------------------------------------------------------------------------------
                                                                       Segments 2      Accumulated
                                     Total plan       Segment 1        through 7       prepayments       Note
----------------------------------------------------------------------------------------------------------------
Market Value of Assets..........     $14,257,880       $1,693,155      $11,904,328         $660,397           1
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.

     (ii) Actuarial Value of Assets: Based on the contractor's 
disclosed asset valuation method, and recognition of the asset gain or 
loss, which is the difference between the expected income, based on the 
assumed interest rate, which complies with 9904.412-40(b)(2) and 
9904.412-50(b)(4), and the actual income, including realized and 
unrealized appreciation and depreciation for the current and four prior 
periods as required by 9904.413-40(b), is delayed and amortized over a 
five-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. The actuarial value of assets cannot be less than 80%, or 
more than 120%, of the market value of assets. The development of the 
actuarial value of assets for the total plan, as well as for

[[Page 81314]]

Segment 1 and Segments 2 through 7, as of January 1, 2017 is shown in 
Table 2.

                               Table 2--January 1, 2017, Actuarial Value of Assets
----------------------------------------------------------------------------------------------------------------
                                                                        Segments 2      Accumulated
                                      Total plan       Segment 1        through 7       prepayments       Note
----------------------------------------------------------------------------------------------------------------
Market Value at January 1, 2017..      $14,257,880       $1,693,155      $11,904,328         $660,397          1
    Total Deferred Appreciation..         (37,537)          (4,398)         (31,400)          (1.739)          2
                                  --------------------------------------------------------------------
Unlimited Actuarial Value of            14,220,343        1,688,757       11,872,928          658,658  .........
 Assets..........................
CAS 413 Asset Corridor 80% of           11,406,304        1,354,524        9,523,462          528,318  .........
 Market Value of Assets..........
Market Value at January 1, 2017..       14,257,880        1,693,155       11,904,328          660,397          1
120% of Market Value of Assets...       17,109,456        2,031,786       14,285,194          792,476  .........
CAS Actuarial Value of Assets....       14,220,343        1,688,757       11,872,928          658,658       3, 4
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 1.
Note 2: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation.
Note 3: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
  Market Value of Assets.
Note 4: The Actuarial Value of Assets are used in determination of any Unfunded Actuarial Liability or Unfunded
  Actuarial Surplus regardless of whether the liability is based on the actuarial accrued liability measured
  without regard to 9904.412-50(b)(7) or minimum actuarial liability measured in accordance with 9904.412-
  50(b)(7).

     (2) Liabilities and Normal Costs: (i) Actuarial Accrued 
Liabilities and Normal Costs: Based on the plan population data and the 
disclosed methods and assumptions for CAS 412 and 413 purposes, the 
contractor measures the actuarial accrued liability and normal cost on 
a going concern basis using an assumed interest rate that satisfies the 
requirements of 9904.412-40(b)(2) and 9904.412-50(b)(4). The actuarial 
accrued liability and normal cost for each segment are measured based 
on the termination of employment assumption unique to that segment. The 
actuarial accrued liability and normal cost for the total plan is the 
sum of the actuarial accrued liability and normal cost for the 
segments. The actuarial accrued liability and normal cost are shown in 
Table 3.

                  Table 3--Actuarial Accrued Liabilities and Normal Costs as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
Actuarial Accrued Liability (AAL).................      $16,325,000       $2,100,000      $14,225,000          1
Normal Cost.......................................          910,700           89,100          821,600          1
Expense Load on Normal Cost.......................  ...............  ...............  ...............     2 1, 2
----------------------------------------------------------------------------------------------------------------
Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation. The actuarial accrued liability and normal cost are computed using the assumed
  interest rate in accordance with 9904.412-40(b)(2) and 9904.412.50(b)(4).
Note 2: Expected administrative expenses are implicitly recognized as part of the assumed interest rate.

     (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 using 
a set of investment grade corporate bond yield rates published by the 
Secretary of the Treasury that satisfy the requirements of 9904.412-
50(b)(7)(iii). The minimum actuarial liability and minimum normal cost 
for each segment are measured based on the termination of employment 
assumption for that segment. The minimum actuarial liability and 
minimum normal cost for the total plan is the sum of the actuarial 
accrued liability and normal cost for the segments as shown in Table 4.

              Table 4--Minimum Actuarial Liabilities and Minimum Normal Costs as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
Minimum Actuarial Liability.......................      $16,636,000       $2,594,000      $14,042,000          1
Minimum Normal Cost...............................          942,700          102,000          840,700          1
Expense Load on Minimum Normal Cost...............           82,000            8,840           73,160       1, 2
----------------------------------------------------------------------------------------------------------------
Note 1: Plan level information taken directly from the actuarial valuation report prepared for ERISA purposes
  and supporting documentation and equals the sum of the data for the segments. Data for the segments is taken
  directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and supporting
  documentation.
Note 2: Anticipated annual administrative expenses are separately recognized as an incremental component of
  minimum normal cost in accordance with 9904.412-50(b)(7)(ii)(B).

     (3) CAS Pension Harmonization Test: (i) In accordance with 
9904.412-50(b)(7)(i), the contractor compares the sum of the actuarial 
accrued liability and normal cost plus any expense load, to the sum of 
the minimum actuarial liability and minimum normal cost plus any 
expense load. Because the contractor separately computes pension costs 
by segment, or aggregation of segments, the applicability of 9904.412-
50(b)(7)(i) is determined separately for

[[Page 81315]]

Segment 1 and Segments 2 through 7. See Table 5, which shows the 
application of the provisions of 9904.412-50(b)(7)(i), i.e., the CAS 
pension harmonization test.

                           Table 5--CAS Pension Harmonization Test at January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)         (Note 2)         (Note 2)  .........
``Going Concern'' Liability for Period:...........  ...............  ...............  ...............          3
    Actuarial Accrued Liability...................  ...............       $2,100,000      $14,225,000          4
    Normal Cost...................................  ...............           89,100          821,600          4
    Expense Load on Normal Cost...................  ...............  ...............  ...............       4, 5
                                                                    ----------------------------------
        Total Liability for Period................  ...............        2,189,100       15,046,600  .........
Minimum Liability for Period:
    Minimum Actuarial Liability...................  ...............        2,594,000       14,042,000          6
    Minimum Normal Cost...........................  ...............          102,000          840,700          6
    Expense Load on Minimum Normal Cost...........  ...............            8,840           73,160       6, 7
                                                                    ----------------------------------
        Total Minimum Liability for Period........  ...............        2,704,840       14,955,860  .........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the contractor determines pension costs separately for Segment 1 and Segments 2 through 7, the
  data for the Total Plan is not needed for purposes of the 9904.412-50(b)(7)(i) determination.
Note 2: Because the contractor determines pension cost separately for Segment 1 and Segments 2 through 7, the
  9904.412-50(b)(7) CAS Pension Harmonization test is applied at the segment level to determine the larger of
  the Total Liability for Period or the Total Minimum Liability for Period. For Segment 1, the larger Total
  Minimum Liability for Period determines the measurement basis for the liability and normal cost. For Segments
  2 through 7, the larger Total Liability for Period determines the measurement basis for the liability and
  normal cost.
Note 3: The actuarial accrued liability and normal cost plus any expense load are computed using interest
  assumptions based on long-term expectations in accordance with 9904.412-40(b)(2) and 9904.412-50(b)(4). For
  purposes of Illustration 9904.412-60.1(b), the sum of these amounts are referred to as the ``Going Concern''
  Liability for the Period.
Note 4: See Table 3.
Note 5: Because the contractor's assumed interest rate implicitly recognizes expected administrative expenses
  there is no explicit amount added to the normal cost.
Note 6: See Table 4.
Note 7: The contractor explicitly identifies the expected expenses as a separate component of the minimum normal
  cost, as required by 9904.412-50(b)(7)(ii)(B).

     (ii) As shown in Table 5 for Segment 1, the total minimum 
liability for the period (minimum actuarial liability and minimum 
normal cost) of $2,704,840 exceeds the total liability for the period 
(actuarial accrued liability and normal cost) of $2,189,100. Therefore, 
the contractor must measure the pension cost for Segment 1 using the 
minimum actuarial liability and minimum normal cost as the values of 
the actuarial accrued liability and normal cost in accordance with 
9904.412-50(b)(7)(i). In other words, the contractor substitutes the 
minimum actuarial liability and minimum normal cost for the actuarial 
accrued liability and normal cost.
    (iii) Conversely, as shown in Table 5 for Segments 2 through 7, the 
total liability for the period of $15,046,600 exceeds the total minimum 
liability for the period of $14,955,860 for Segments 2 through 7. 
Therefore, the contractor must measure the pension cost using the 
actuarial accrued liability and normal cost without regard for the 
minimum actuarial liability and minimum normal cost.
    (4) Measurement of Current Period Pension Cost: (i) To determine 
the pension cost for Segment 1, the contractor measures the unfunded 
actuarial liability, pension cost without regard to 9904.412-50(c)(2) 
limitations, and the assignable cost limitation using the actuarial 
accrued liability and normal cost as measured by the minimum actuarial 
liability and minimum normal cost, respectively, which are based on the 
accrued benefit cost method. This measurement complies with the 
requirements of 9904.412-50(b)(7) and the definition of actuarial 
accrued liability, 9904.412-30(a)(2) and normal cost, 9904.412-
30(a)(18).
    (ii) To determine the pension cost for Segments 2 through 7, the 
contractor measures the unfunded actuarial liability, pension cost 
without regard to 9904.412-50(c)(2) limitations, and the assignable 
cost limitation using the actuarial accrued liability and normal cost 
based on the projected unit credit cost method, which is the 
contractor's established cost accounting method and the contractor's 
assumed interest rate based on long-term trends as required by 
9904.412-50(b)(4).
    (iii) Unfunded Actuarial Liability (Table 6):

                           Table 6--Unfunded Actuarial Liability as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)  ...............  ...............  .........
Actuarial Accrued Liability.......................      $16,819,000      $ 2,594,000      $14,225,000          2
CAS Actuarial Value of Assets.....................     (13,561,685)      (1,688,757)     (11,872,928)          3
                                                   ---------------------------------------------------
Unfunded Actuarial Liability......................        3,257,315          905,243        2,352,072  .........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the contractor determines pensions separately for Segment 1 and Segments 2 through 7, the values
  are the sum of the values for Segment 1 and Segments 2 through 7.

[[Page 81316]]

 
Note 2: For Segment 1, the actuarial accrued liability is measured by the accrued benefit cost method as
  required by 9904.412-50(b)(7), i.e., the minimum actuarial liability as described in 9904.412-50(b)(7)(ii).
  See Table 4. For Segments 2 through 7, the actuarial accrued liability is measured by the projected unit
  credit cost method, which is the contractor's established actuarial cost method since these the 9904.412-
  50(b)(7)(i) criterion was not met for these segments. See Table 3.
Note 3: See Table 2. The CAS Actuarial Value of Assets is used regardless of the basis for determining the
  liabilities. The CAS Actuarial Value of Assets allocated to Segment 1 and Segments 2 through 7 excludes the
  accumulated value of prepayment credits as required by 9904.412-50(a)(4).

    (iv) Measurement of the Adjusted Pension Cost (Table 7):

                             Table 7--Measurement of Pension Cost at January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)  ...............  ...............  .........
Normal Cost.......................................  ...............        $ 102,000         $821,600          2
Expense Load on Normal Cost.......................  ...............            8,840  ...............       2, 3
Amortization Installments.........................  ...............          140,900          366,097          4
                                                   ---------------------------------------------------
Measured Pension Cost.............................        1,439,437          251,740        1,187,697  .........
----------------------------------------------------------------------------------------------------------------
Note 1: Because the contractor separately computes pension cost for Segment 1 and Segments 2 through 7, only the
  total pension cost is shown.
Note 2: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
  50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii). See Table 4. For Segments 2
  through 7, the normal cost is measured by the contractor's established immediate gain cost method since these
  the 9904.412-50(b)(7)(i) criterion was not met for these segments. See Table 3.
Note 3: Because the criterion of 9904.412-50(b)(7)(i) was met for Segment 1, the Normal Cost is measured by the
  Minimum Normal Cost, which explicitly identifies the expected expenses as a separate component of the minimum
  normal cost in accordance with 9904.412-50(b)(7)(ii)(B). See Table 4. For Segments 2 through 7, the normal
  cost is measured by the contractor's established immediate gain cost method, which implicitly recognizes
  expenses as a decrement to expected assumed interest rate, since the 9904.412-50(b)(7)(i) criterion was not
  met for these segments. See Table 3.
Note 4: Net amortization installment based on the unfunded actuarial liability of $3,257,315 ($905,243 for
  Segment 1, and $2,352,072 for Segments 2 through 7) and the contractor's assumed interest rate in compliance
  with 9904.412-40(b)(2) and 9904.412-50(b)(4). See Table 6.

    (c) Assignment of Pension Cost. In 9904.412-60.1(b), the Harmony 
Corporation measured the total pension cost to be $1,439,437 ($251,740 
for Segment 1 and $1,187,697 for Segments 2 through 7). The contractor 
must now determine if any of the limitations of 9904.412-50(c)(2) apply 
at the segment level.
    (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 8.

                      Table 8--CAS 412-50(c)(2)(i) Zero Dollar Floor as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)  ...............  ...............  .........
Measured Pension Cost >= $0.......................  ...............         $251,740       $1,187,697          2
Assignable Cost Credit............................  ...............  ...............  ...............          3
----------------------------------------------------------------------------------------------------------------
Note 1: Because the provisions of CAS 412-50(c)(2)(i) are applied at the segment level, no values are shown for
  the Total Plan.
Note 2: See Table 7. The Assignable Pension Cost in accordance with 9904.412-50(c)(2)(i) is the greater of zero
  or the Harmonized Pension Cost.
Note 3: There is no Assignable Cost Credit since the Measured 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 met the harmonization criterion of 9904.412-50(b)(7)(i), 
the assignable cost limitation is based on the sum of the actuarial 
accrued liability and normal cost plus expense load, using the accrued 
benefit cost method in accordance with 9904.412-50(b)(7)(ii). 
Therefore, the actuarial accrued liability and normal cost plus expense 
load are measured by the minimum actuarial liability and minimum normal 
cost plus expense load. See Table 9.

                 Table 9--CAS 412-50(c)(2)(ii) Assignable Cost Limitation as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)  ...............  ...............  .........
Actuarial Accrued Liability.......................  ...............       $2,594,000      $14,225,000          2
Normal Cost.......................................  ...............          102,000          821,600          3
Expense Load on Normal Cost.......................  ...............            8,840  ...............          4
                                                                    ----------------------------------

[[Page 81317]]

 
Total Liability for Period........................  ...............       $2,704,840      $15,046,600  .........
CAS Actuarial Value of Plan Assets................  ...............      (1,688,757)     (11,872,928)          5
                                                                    ----------------------------------
(A) Assignable Cost Limitation Amount.............  ...............       $1,016,083       $3,173,672          6
(B) 412-50(c)(2)(i) Assigned Cost.................  ...............         $251,740       $1,187,697          7
(C) 412-50(c)(2)(ii) Assigned Cost................       $1,439,437         $251,740       $1,187,697          8
----------------------------------------------------------------------------------------------------------------
Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
  calculated by segment or aggregation of segments, no values are shown for the Total Plan other than the
  Assigned Cost after consideration of the Assignable Cost Limit.
Note 2: For Segment 1, the actuarial accrued liability is measured by the accrued benefit cost method as
  required by 9904.412-50(b)(7), i.e., the minimum actuarial liability as described in 9904.412-50(b)(7)(ii)(A).
  See Table 4. For Segments 2 through 7, the actuarial accrued liability is measured by the contractor's
  established immediate gain cost method since these the 9904.412-50(b)(7)(i) criterion was not met for these
  segments. See Table 3.
Note 3: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
  50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii)(B). See Table 4. For Segments 2
  through 7, the normal cost is measured by the contractor's established immediate gain cost method since these
  the 9904.412-50(b)(7)(i) criterion was not met for these segments. See Table 3.
Note 4: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
  50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii)(B), which explicitly identifies
  the expected expenses as a separate component of the minimum normal cost. See Table 4. For Segments 2 through
  7, the normal cost is measured by the contractor's established immediate gain cost method, which implicitly
  recognizes expenses as a decrement to the assumed interest rate since these the 9904.412-50(b)(7)(i) criterion
  was not met for these segments. See Table 3.
Note 5: See Table 2. The CAS Actuarial Value of Assets is used regardless of the basis for determining the
  liabilities. The CAS Actuarial Value of Assets allocated to Segment 1 and Segments 2 through 7 excludes the
  accumulated value of prepayment credits as required by 9904.412-50(a)(4).
Note 6: The Assignable Cost Limitation cannot be less than $0.
Note 7: See Illustration 9904.412-60.1(c)(1), Table 8.
Note 8: Lesser of lines (A) or (B).

     (ii) As shown in Table 9, the contractor determines that the 
measured pension costs for Segment 1 and Segments 2 through 7 do not 
exceed the assignable cost limitation and are not limited.
    (3) Measurement of Tax-Deductible Limitation on Assignable Pension 
Cost: (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 
$15,674,697, which is the sum of the maximum tax-deductible 
contribution ($15,014,300), which is developed in the actuarial 
valuation prepared for ERISA, and the accumulated value of prepayment 
credits ($660,397) shown in Table 1. Since the tax-deductible 
contribution and accumulated value of prepayment credits 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 10.

                 Table 10--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation as of January 1, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
Maximum Tax-deductible Amount.....................      $15,014,300       $2,625,818      $12,388,482       1, 2
Accumulated Prepayment Credits....................          660,397          115,495          544,902       3, 4
                                                   ---------------------------------------------------
(A) 412-50(c)(2)(iii) Limitation..................      $15,674,697       $2,741,313      $12,933,384  .........
(B) 412-50(c)(2)(ii) Assigned Cost................       $1,439,437         $251,740       $1,187,697          5
Assigned Pension Cost.............................       $1,439,437         $251,740       $1,187,697          6
----------------------------------------------------------------------------------------------------------------
Note 1: The Maximum Deductible Amount for the Total Plan is obtained from the valuation report prepared for
  ERISA purposes.
Note 2: The Maximum Tax-deductible Amount for the Total Plan is allocated to segments based on the assigned cost
  after application of 9904.412-50(c)(2)(ii) in accordance with 9904.413-50(c)(1)(i) for purposes of this
  assignment limitation test.
Note 3: The Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the assigned
  cost after application of 9904.412-50(c)(2)(ii) in accordance with 9904.413-50(c)(1)(i) for purposes of this
  assignment limitation test.
Note 4: See Table 1.
Note 5: See Table 9.
Note 6: Lesser of lines (A) or (B).

     (ii) For Segment 1, the assignable pension cost of $251,740, 
measured after considering the assignable cost limitation, does not 
exceed the 9904.412-50(c)(2)(iii) limit of $2,716,649. For Segments 2 
through 7, the assignable pension cost of $1,187,697, measured after 
considering the assignable cost limitation, does not exceed the 
9904.412-50(c)(2)(iii) limit of $12,958,048.
    (d) Actuarial Gain and Loss--Change in Liability Basis. (1) Assume 
the same facts shown in 9904.412-60.1(b) for Segment 1 of the Harmony 
Corporation for 2017. Table 11 shows the actuarial liabilities and 
normal costs plus any expense loads for Segment 1 for 2016 through 
2018.

[[Page 81318]]



                         Table 11--Summary of Liabilities for Segment 1 as of January 1
----------------------------------------------------------------------------------------------------------------
                                                          2016             2017             2018         Notes
----------------------------------------------------------------------------------------------------------------
``Going Concern'' Liabilities for the Period:
    Actuarial Accrued Liability...................       $1,915,000       $2,100,000       $2,305,000          1
    Normal Cost...................................           89,600           89,100           99,500          1
    Expense Load on Normal Cost...................  ...............  ...............  ...............       1, 2
                                                   ---------------------------------------------------
        Total Liability for Period................       $2,004,600       $2,189,100       $2,404,500  .........
Minimum Liabilities for the Period:
    Minimum Actuarial Liability...................       $1,901,000       $2,594,000       $2,212,000          3
    Minimum Normal Cost...........................           83,800          102,000           96,500          3
    Expense Load on Minimum Normal Cost...........            8,300            8,840            9,300       3, 4
                                                   ---------------------------------------------------
        Total Minimum Liability for Period........       $1,993,100       $2,704,840       $2,317,800  .........
Interest Basis as Determined by Segment's           9904.412-50(b)(  9904.412-50(b)(  9904.412-50(b)(          5
 Liabilities for Period...........................               4)          7)(iii)               4)
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 3 for 2017 values. For 2016 and 2018, the data for Segment 1 is taken directly from the
  actuarial valuation report prepared for CAS 412 and 413 purposes and supporting documentation, including
  subtotals of the data by segment.
Note 2: Because the contractor's interest assumption, which satisfies the requirements of 9904.412-40(b)(2) and
  9904.412-50(b)(4), implicitly recognizes expected administrative expenses there is no explicit amount shown
  for the normal cost.
Note 3: See Table 4 for 2017 values. For 2016 and 2018, the data for Segment 1 is taken directly from the
  actuarial valuation report prepared for ERISA purposes and supporting documentation, including subtotals of
  the data by segment. The values for 2016 are based on the transitional minimum actuarial liability and
  transitional minimum normal cost measured in accordance with 9904.412-64.1(a) and (b).
Note 4: For purposes of determining minimum normal cost, the contractor explicitly identifies the expected
  administrative expense as a separate component as required by 9904.412-50(b)(7)(ii)(B).
Note 5: For determining the pension cost for the period, the measurements are based on the actuarial accrued
  liability and normal cost unless the total minimum liability for the period exceeds the ``Going Concern''
  total liability for the period. The measurement basis was separately determined for each segment in accordance
  with 9904.412-50(b)(7)(i).

    (2) For 2016, the sum of the minimum actuarial liability and 
minimum normal cost does not exceed the sum of the actuarial accrued 
liability and normal cost. Therefore the criterion of 9904.412-
50(b)(7)(i) is not met, and the actuarial accrued liability and normal 
cost are used to compute the pension cost for 2016. For 2017, the sum 
of the minimum actuarial liability and minimum normal cost exceeds the 
sum of the actuarial accrued liability and normal cost, and therefore 
the pension cost is computed using minimum actuarial liability and 
minimum normal cost as required by 9904.412-50(b)(7)(i). For 2018, the 
sum of the minimum actuarial liability and minimum normal cost does not 
exceed the sum of the actuarial accrued liability and normal cost, and 
the actuarial accrued liability and normal cost are used to compute the 
pension cost for 2018 because the criterion of 9904.412-50(b)(7)(i) is 
not met. Table 12 shows the measurement of the unfunded actuarial 
liability for 2016 through 2018.

                      Table 12--Unfunded Actuarial Liability for Segment 1 as of January 1
----------------------------------------------------------------------------------------------------------------
                                                          2016             2017             2018         Notes
----------------------------------------------------------------------------------------------------------------
Current Year Actuarial Liability Basis............  9904.412-50(b)(  9904.412-50(b)(  9904.412-50(b)(          1
                                                                 4)          7)(iii)               4)
Actuarial Accrued Liability.......................       $1,915,000       $2,594,000       $2,305,000          1
CAS Actuarial Value of Assets.....................      (1,500,000)      (1,688,757)      (1,894,486)          2
                                                   ---------------------------------------------------
Unfunded Actuarial Liability (Actual).............         $415,000         $905,243         $410,514  .........
----------------------------------------------------------------------------------------------------------------
Note 1: See Table 11.
Note 2: The 2017 CAS Actuarial Value of Assets is developed in Table 2. For 2016 and 2018, the Actuarial Value
  of Assets for Segment 1 is taken directly from the actuarial valuation report prepared for CAS 412 and 413
  purposes and supporting documentation.

    (3) Except for changes in the value of the assumed 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 2016 through 2018. The 
contractor's actuary measured the expected unfunded actuarial liability 
and determined the actuarial gain or loss for 2017 and 2018 as shown in 
Table 13.

                  Table 13--Measurement of Actuarial Gain or Loss for Segment 1 as of January 1
----------------------------------------------------------------------------------------------------------------
                                                         2016              2017             2018         Notes
----------------------------------------------------------------------------------------------------------------
Actual Unfunded Actuarial Liability..............         (Note 1)          $905,243         $410,514          2
Expected Unfunded Actuarial Liability............  ................        (381,455)        (848,210)          3
                                                                    ----------------------------------
Actuarial Loss (Gain)............................  ................         $523,788       $(437,696)  .........
----------------------------------------------------------------------------------------------------------------
Note 1: The determination of the actuarial gain or loss that occurred during 2015 and measured on 2016 is
  outside the scope of this Illustration.
Note 2: See Table 12.

[[Page 81319]]

 
Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
  supporting documentation. The expected unfunded actuarial liability is based on the prior unfunded actuarial
  liability updated based on the assumed interest rate in compliance with 9904.412-40(b)(2) and 9904.412-
  50(b)(4). Note that in accordance with 9904.412-50(b)(7)(iii)(D), the corporate bond yield rate is only used
  to determine the minimum actuarial liability but not to adjust the liability for the passage of time.

    (4) According to the actuarial valuation report, the 2017 actuarial 
loss of $523,788 includes a $494,000 actuarial loss due to a change in 
measurement basis from using an actuarial accrued liability of 
$2,100,000 to using a minimum actuarial liability of $2,594,000, 
including the effect of any change in the interest rate basis. (See 
Table 11 for the actuarial accrued liability and the minimum actuarial 
liability.) The $494,000 loss ($2,594,000-$2,100,000) due to the change 
in the liability basis is amortized as part of the total actuarial loss 
of $523,788 over a ten-year period in accordance with 9904.412-
50(a)(1)(v) and 9904.413-50(a)(2)(ii). Similarly, the next year's 
valuation report shows a 2018 actuarial gain of $437,696, which 
includes a $93,000 actuarial gain ($2,305,000-$2,212,000) due to a 
change from a minimum actuarial liability back to a an actuarial 
accrued liability basis, which includes the effect of any change in 
interest rate basis. The $93,000 gain due the change in the liability 
basis will be amortized as part of the total $437,696 actuarial gain 
over a ten-year period in accordance with 9904.412-50(a)(1) and 
9904.413-50(a)(2)(ii).

0
7. Section 9904.412-63 is revised to read as follows:


9904.412-63   Effective Date.

    (a) This Standard is effective as of February 27, 2012, hereafter 
known as the ``Effective Date'', and is applicable for cost accounting 
periods after June 30, 2012, hereafter known as the ``Implementation 
Date.''
    (b) Following receipt of a contract or subcontract subject to this 
Standard on or after the Effective Date, contractors shall follow this 
Standard, as amended, beginning with its next cost accounting period 
beginning after the later of the Implementation Date or the receipt 
date of a contract or subcontract to which this Standard is applicable 
in accordance with paragraph (a) of this section. The first day of the 
cost accounting period that this Standard, as amended, is first 
applicable to a contractor or subcontractor is the ``Applicability Date 
of the CAS Pension Harmonization Rule'' for purposes of this Standard. 
Prior to the Applicability Date of the CAS Pension Harmonization Rule, 
contractors or subcontractors shall follow the Standard in 9904.412 in 
effect prior to the Effective Date.
    (1) Following the award of a contract or subcontract subject to 
this Standard received on or after the Effective Date, contractors with 
contracts or subcontracts subject to this Standard that were received 
prior to the Effective Date shall continue to follow the Standard in 
9904.412 in effect prior to the Effective Date. Beginning with the 
Applicability Date of the CAS Pension Harmonization Rule, such 
contractors shall follow this Standard, as amended, for all contracts 
or subcontracts subject to this Standard.
    (2) Following the award of a contract or subcontract subject to 
this Standard received during the period beginning on or after the date 
published in the Federal Register and ending before the Effective Date, 
contractors shall follow the Standard in 9904.412 in effect prior to 
the Effective Date. If another contract or subcontract, subject to this 
Standard, is received on or after the Effective Date, the provisions of 
9904.412-63(b)(1) shall apply.

0
8. Section 9904.412-64.1 is added to read as follows:


9904.412-64.1  Transition Method for the CAS Pension Harmonization 
Rule.

    Contractors or subcontractors that become subject to the Standard, 
as amended, during the Pension Harmonization Transition Period shall 
recognize the change in cost accounting method in accordance with 
paragraphs (a) and (b).
    (a) The Pension Harmonization Rule Transition Period is the five 
cost accounting periods beginning with a contractor's first cost 
accounting period beginning after June 30, 2012, and is independent of 
the receipt date of a contract or subcontract subject to this Standard. 
The Pension Harmonization Rule Transition Period begins on the first 
day of a contractor's first cost accounting period that begins after 
June 30, 2012.
    (b) Phase in of the Minimum Actuarial Liability and Minimum Normal 
Cost. During each successive accounting period of Pension Harmonization 
Rule Transition Period, the contractor shall recognize on a scheduled 
basis the amount by which the minimum actuarial liability differs from 
the actuarial accrued liability; and the amount by which the sum of the 
minimum normal cost plus any expense load differs from the sum of the 
normal cost plus any expense load.
    (1) For purposes of determining the amount of the difference, the 
minimum actuarial liability and minimum normal cost shall be measured 
in accordance with 9904.412-50(b)(7)(ii).
    (2) During each successive accounting period of the Pension 
Harmonization Rule Transition Period, the transitional minimum 
actuarial liability shall be set equal to the actuarial accrued 
liability adjusted by an amount equal to the difference between the 
minimum actuarial liability and actuarial accrued liability, multiplied 
by the scheduled applicable percentage for that period. The sum of the 
transitional minimum normal cost plus any expense load shall be set 
equal to the sum of normal cost plus any expense load, adjusted by an 
amount equal to the difference between the minimum normal cost and the 
normal cost, plus expense loads, multiplied by the scheduled applicable 
percentage for that period.
    (3) The scheduled applicable percentages for each successive 
accounting period of the Pension Harmonization Rule Transition Period 
are as follows: 0% for the First Cost Accounting Period, 25% for the 
Second Cost Accounting Period, 50% for the Third Cost Accounting 
Period, 75% for the Fourth Cost Accounting Period, and 100% for the 
Fifth Cost Accounting Period.
    (4) The transitional minimum actuarial liability and transitional 
minimum normal cost measured in accordance with this provision shall be 
used for purposes of the 9904.412-50(b)(7) minimum actuarial liability 
and minimum normal cost.
    (5) The actuarial gain or loss attributable to experience since the 
prior valuation, measured as of the First Cost Accounting Period of the 
Pension Harmonization Rule Transition Period, shall be amortized over a 
ten-year period in accordance with 9904.413-50(a)(2)(ii).
    (c) Transition Illustration. Assume the same facts for the Harmony 
Corporation in Illustration 9904.412-60.1(a) and (b), except that this 
is the Fourth Cost Accounting Period of the Pension Harmonization Rule 
Transition Period. As in Illustration 9904.412-60.1(a) and (b), the 
contractor separately computes pension costs for Segment 1, and 
computes pension costs for Segments 2 through 7 in the aggregate. The 
contractor has two actuarial valuations prepared: one measures the 
actuarial accrued liability and normal cost using the contractor's 
expected rate of return on investments assumption, in accordance with 
9904.412-40(b)(2) and

[[Page 81320]]

9904.412-50(b)(4), and the other valuation measures the minimum 
actuarial liability and minimum normal cost based on the assumed 
current yields on investment quality corporate bonds in accordance with 
9904.412-50(b)(7)(iii)(A). The actuarial valuations present the values 
subtotaled for each segment and in total for the plan as a whole.
    (1) The contractor applies 9904.412-64.1(b) as follows:
    (i) (A) For Segment 1, the $494,000 ($2,594,000--$2,100,000) 
difference between the minimum actuarial liability and the actuarial 
accrued liability is multiplied by 75%. Therefore for Segment 1, the 
minimum actuarial liability for purposes of 9904.412-50(b)(7) is 
adjusted to a transitional minimum actuarial liability of $2,470,500 
($2,100,000 + [75% x $494,000]).
    (B) For Segments 2 through 7, the ($183,000) difference 
($14,042,000-$14,225,000) between the minimum actuarial liability and 
the actuarial accrued liability is multiplied by 75%. For Segment 2 
through 7, the minimum actuarial liability for purposes of 9904.412-
50(b)(7) is adjusted to a transitional minimum actuarial liability of 
$14,115,200 ($14,087,750 + [75% x ($183,000)]).
    (C) The computation of the transitional minimum actuarial liability 
that incrementally recognizes the difference between the minimum 
actuarial liability and the actuarial accrued liability for Segment 1, 
and for Segments 2 through 7, is shown in Table 1 below:

          Table 1--Development of Transitional Minimum Actuarial Liability for Fourth Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                      Total plan        Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                          (Note 1)   ...............  ...............  .........
Minimum Actuarial Liability......................  ................       $2,594,000      $14,042,000          2
                                                                         (2,100,000)     (14,225,000)          3
                                                                    ----------------------------------
Phase In Percentage (Period 4)...................  ................              75%              75%          5
                                                                    ----------------------------------
Actuarial Accrued Liability......................  ................        2,100,000       14,225,000          6
                                                                    --------------------------------------------
    Actuarial Liability..........................  ................       $2,470,500      $14,087,750  .........
----------------------------------------------------------------------------------------------------------------
Note 1: The values for the Total Plan are not shown because the 9904.412-50(b)(7)(i) threshold criterion is
  applied separately for each segment.
Note 2: See Illustration 9904.412-60.1(b)(2)(ii), Table 4.
Note 3: See Illustration 9904.412-60.1(b)(2)(i), Table 3.
Note 4: The phase in percentage will be applied to positive or negative differences in the actuarial
  liabilities, since the purpose of the phase in is to incrementally move the measurement away from the
  actuarial accrued liability to the minimum actuarial liability, regardless of the direction of the movement.
Note 5: Appropriate transition percentage for the Fourth Cost Accounting Period of the Pension Harmonization
  Rule Transition Period as stipulated in 9904.412-64.1(b)(3).
Note 6: The actuarial accrued liability is adjusted by the phase in difference between liabilities, either
  positive or negative, in accordance with 9904.412-64.1(b)(2).

     (ii) (A) For Segment 1, the $21,740 ($110,840-$89,100) difference 
between the minimum normal cost and the normal cost, plus expense 
loads, is multiplied by 75%. Therefore for Segment 1, the minimum 
normal cost plus expense load, for purposes of 9904.412-50(b)(7), is 
adjusted to a transitional minimum normal cost plus expense load of 
$105,405 ($89,100 + [75% x $21,740]).
    (B) For Segments 2 through 7, the 92,260 ($913,860-$821,600) 
difference between the minimum normal cost and the normal cost, plus 
expense loads, is multiplied by 75%. Therefore, for Segments 2 through 
7, the minimum normal cost for purposes of 9904.412-50(b)(7) is 
adjusted to a transitional minimum normal cost plus expense load of 
$890,795 ($821,600 + [75% x $92,260]).
    (C) The computation of the transitional minimum normal cost plus 
expense load for Segment 1, and for Segments 2 through 7, is shown in 
Table 2 below:

              Table 2--Development of Transitional Minimum Normal Cost for Fourth Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                      Total plan        Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                          (Note 1)   ...............  ...............  .........
Minimum Normal Cost..............................  ................         $102,000         $840,700          2
Expense Load on Normal Cost......................  ................            8,840           73,160       2, 3
                                                                    ----------------------------------==========
Normal Cost Plus Expense Load....................  ................         (89,100)        (821,600)          4
                                                                    --------------------------------------------
Phase In Percentage (Period 4)...................  ................              75%              75%          6
                                                                    ----------------------------------
Normal Cost Plus Expense Load....................  ................           89,100          821,600          7
                                                                    --------------------------------------------

[[Page 81321]]

 
    Normal Cost Plus Expense Load................  ................         $105,405         $890,795  .........
----------------------------------------------------------------------------------------------------------------
Note 1: The values for the Total Plan are not shown because the 9904.412-50(b)(7)(i) threshold criterion is
  applied separately for each segment.
Note 2: See Illustration 9904.412-60.1(b)(2)(ii), Table 4.
Note 3: For minimum normal cost valuation purposes, the contractor explicitly identifies the expected
  administrative expenses as a separate component of minimum normal cost.
Note 4: See Illustration 9904.412-60.1(b)(2)(i), Table 3. Expected expenses are implicitly recognized as part of
  the contractor's expected rate of return on investments assumption.
Note 5: The phase in percentage will be applied to positive and negative differences in the normal costs plus
  expense loads, since the purpose of the phase in is to incrementally move the measurement from the normal cost
  plus expense load, to the minimum normal cost plus expense load, regardless of the direction of the movement.
Note 6: Appropriate transition percentage for the Fourth Cost Accounting Period of the Pension Harmonization
  Rule Transition Period stipulated in 9904.412-64.1(b)(3).
Note 7: The sum of the normal cost plus expense load is adjusted by the phase in difference between normal
  costs, either positive or negative, in accordance with 9904.412-64.1(b)(2).

    (2) The contractor applies the provisions of with 9904.412-
50(b)(7)(i) using the transitional minimum actuarial liability and 
transitional minimum normal cost plus expense load, in accordance with 
9904.412-64.1(b)(4).
    (i) The comparison of the sum of the actuarial accrued liability 
and normal cost plus expense load, and the sum of the transitional 
minimum actuarial liability and minimum normal cost plus expense load, 
for Segment 1, and for Segments 2 through 7, is summarized in Table 3 
below:

                Table 3--Summary of Liability and Normal Cost Values for Fourth Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                      Total plan        Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                          (Note 1)   ...............  ...............  .........
``Going Concern'' Liabilities for Period:
    Actuarial Accrued Liability..................  ................       $2,100,000      $14,225,000          2
    Normal Cost Plus Expense Load................  ................           89,100          821,600          3
                                                                    --------------------------------------------
        ,s,nTotal Liability for Period..........  ................        2,189,100       15,046,600  .........
Transitional Minimum Liabilities for the Period:
    Transitional Minimum Actuarial Liability.....  ................        2,470,500       14,087,750          1
    Transitional Minimum Normal Cost Plus Expense  ................          105,405          890,795          3
     Load........................................
                                                                    --------------------------------------------
    ,s,nTotal Transitional Minimum Liability for  ................        2,575,905       14,978,545          4
     Period......................................
----------------------------------------------------------------------------------------------------------------
Note 1: The values for the Total Plan are not shown because the 9904.412-50(b)(7)(i) threshold criterion is
  applied separately for each segment.
Note 2: See Table 1.
Note 3: See Table 2.
Note 4: If the threshold criterion is met, then the pension cost for the period is measured based on the
  Transitional Minimum Actuarial Liability and Transition Normal Cost Plus Expense Load.

     (ii) For Segment 1, the Total Transitional Minimum Liability for 
the Period of $2,575,905 exceeds the total liability for the period of 
$2,189,100. (See Table 3.) Therefore, in accordance with 9904.412-
50(b)(7)(i), the pension cost for Segment 1 is measured using the 
actuarial accrued liability and normal cost as measured by the 
transitional minimum actuarial liability and transitional minimum 
normal cost, which are based on the accrued benefit cost method. This 
measurement complies with the requirements of 9904.412-50(b)(7) and 
with the definition of actuarial accrued liability, 9904.412-30(a)(2), 
and normal cost, 9904.412-30(a)(18).
    (iii) For Segments 2 through 7, the total liability for the period 
of $15,046,600 exceeds the Total Transitional Minimum Liability for the 
Period of $14,978,545. (See Table 3.) Therefore, in accordance with 
9904.412-50(b)(7)(i), the pension cost for Segment 2 through 7 is 
measured using the actuarial accrued liability and normal cost, which 
are based on the projected benefit cost method.
    (3) The contractor computes the pension cost for the period in 
accordance with the provisions of 9904.412-50(b)(7)(i), which considers 
the transitional minimum actuarial liability and transitional minimum 
normal cost plus expense load, in accordance with 9904.412-64.1(b).
    (i) The contractor computes the unfunded actuarial liability as 
shown in Table 4 below:

                       Table 4--Unfunded Actuarial Liability for Fourth Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                      Total Plan        Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                          (Note 1)
Actuarial Accrued Liability......................  ................       $2,470,500      $14,225,000          2

[[Page 81322]]

 
CAS Actuarial Value of Assets....................  ................      (1,688,757)     (11,872,928)          3
                                                                    --------------------------------------------
,s,nUnfunded Actuarial Liability................  ................          781,743        2,352,072
----------------------------------------------------------------------------------------------------------------
Note 1: The values for the Total Plan are not shown because the 9904.412-50(b)(7)(i) threshold criterion is
  applied separately for each segment.
Note 2: Because the Pension Harmonization criterion of 9904.412-50(b)(7)(i) has been met for Segment 1, the
  actuarial accrued liability is measured by the transitional minimum actuarial liability as required by
  9904.412-64.1(b)(4). See Table 3. Because the Pension Harmonization criterion of 9904.412-50(b)(7)(i) was not
  satisfied for Segments 2 through 7, the actuarial accrued liability is based on the actuarial assumptions that
  reflect long-term trends in accordance with 9904.412-50(b)(4), i.e., the transitional minimum actuarial
  liability does not apply.
Note 3: See Illustration 9904.412-60.1(b)(1)(ii), Table 2.

     (ii) Measurement of the Pension Cost for the current period (Table 
5):

                               Table 5--Pension Cost for Fourth Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                       Total plan       Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                           (Note 1)
Normal Cost Plus Expense Load.....................  ...............         $105,405         $821,600          2
Amortization Installments.........................  ...............          101,990          314,437       3, 4
                                                                    --------------------------------------------
,s,nPension Cost Computed for the Period.........        1,343,432          207,395        1,136,037
----------------------------------------------------------------------------------------------------------------
Note 1: Except for the Total Pension Cost Computed for the Period, the values for the Total Plan are not shown
  because the 9904.412-50(b)(7)(i) threshold criterion is applied separately for each segment.
Note 2: See Table 3. Because the Pension Harmonization criterion of 9904.412-50(b)(7)(i) has been met for
  Segment 1, the sum of the normal cost plus the expense load is measured by the sum of the transitional minimum
  normal cost plus the expense load, as required by 9904.412-64.1(a). Because the Pension Harmonization
  criterion of 9904.412-50(b)(7)(i) was not satisfied for Segments 2 through 7, the sum of the normal cost plus
  any applicable expense load is based on the contractor's actuarial assumptions reflecting long-term trends in
  accordance with 9904.412-40(b)(2) and 9904.412-50(b)(4), i.e., the transitional minimum normal cost plus the
  expense load does not apply.
Note 3: Net amortization installment based on the unfunded actuarial liability of $781,743 for Segment 1, and
  $2,352,072 for Segments 2 through 7, including an interest equivalent on the unamortized portion of such
  liability. See Table 4. The interest adjustment is based on the contractor's interest rate assumption in
  compliance with 9904.412-40(b)(2) and 9904.412-50(b)(4).
Note 4: See 9904.64-1(c)(4) for details concerning the recognition of the unfunded actuarial liability during
  the first Pension Harmonization Rule Transition Period.

     (4) The Silvertone Corporation separately computes pension costs 
for Segment 1, and computes pension costs for Segments 2 through 7 in 
the aggregate.
    (i) For the First Cost Accounting Period of the Pension 
Harmonization Rule Transition Period, the difference between the 
actuarial accrued liability and the minimum actuarial liability, and 
the difference between the normal cost and the minimum normal cost, are 
multiplied by 0%. Therefore the transitional minimum actuarial 
liability and transitional minimum normal are equal to the actuarial 
accrued liability and normal cost. The total transitional minimum 
liability for the period does not exceed the total liability for the 
period in conformity with the criterion of 9904.412-50(b)(7)(i). 
Therefore, the pension cost for the First Cost Accounting Period of the 
Pension Harmonization Rule Transition Period is computed using the 
actuarial accrued liability and normal cost.
    (ii) The actuarial gain attributable to experience during the prior 
period that is measured for the cost accounting period is amortized 
over a ten-year period in accordance with 9904.412-50(a)(1)(v) and 
9904.413-50(a)(2)(ii).
    (iii) The contractor computes the pension cost for First Cost 
Accounting Period of the Pension Harmonization Rule Transition Period 
as shown in Table 6 below.

                       Table 6--Computation of the Pension for the First Transition Period
----------------------------------------------------------------------------------------------------------------
                                                                                         Segments 2
                                                      Total plan        Segment 1        through 7       Notes
----------------------------------------------------------------------------------------------------------------
                                                          (Note 1)
Amortization of Unfunded Liability Net             ................          $81,019         $523,801          2
 Amortization Installment from Prior Periods.....
    January 1, 2013, Actuarial Loss (Gain)         ................          (9,369)         (68,740)          3
     Amortization Installment....................
                                                                    ----------------------------------
Net Amortization Installment.....................  ................           71,650          455,061  .........
Normal Cost plus expense load....................  ................           78,400          715,000          4
                                                                    ----------------------------------
Pension Cost Computed for the Period.............  ................          150,050        1,170,061
----------------------------------------------------------------------------------------------------------------
Note 1: The values for the Total Plan are not shown because the 9904.412-50(b)(7)(i) threshold criterion is
  applied separately for each segment.

[[Page 81323]]

 
Note 2: Amortization installments of actuarial gains and losses, and other portions of the unfunded actuarial
  liability identified prior to January 1, 2013, in accordance with 9904.412-50(a)(1)(v) and 9904.413-
  50(b)(2)(ii), including an interest adjustment based on the contractor's long-term interest assumption in
  compliance with 9904.412-40(b)(2) and 9904.412-50(b)(4).
Note 3: The actuarial gains for both Segment 1, and Segments 2 through 7, as measured as of January 1, 2013, are
  amortized over a ten-year period in accordance with 9904.413-50(a)(2)(ii) and 9904.412-64-1(b)(4). Note that
  although the source of the actuarial gains was the deviation between assumed and actual changes during the
  prior period, the gain is measured on January 1, 2013, and so the ten-year amortization period applies in the
  current period, including an interest adjustment based on the contractor's long-term interest assumption in
  compliance with 9904.412-40(b)(2) and 9904.412-50(b)(4).
Note 4: For the first period of the Pension Harmonization Rule transition period, the adjustment to the sum of
  the actuarial accrued liability and normal cost is adjusted by $0. Therefore the sum of the transitional
  minimum actuarial liability and transitional minimum normal cost plus expense load is equal to the sum of the
  actuarial accrued liability and normal cost plus expense load, and the criterion of 9904.412-50(b)(7)(i) was
  not met for either Segment 1, or Segments 2 through 7. The sum of the normal cost plus expense load is based
  on the sum of the going concern normal cost plus expense load.


0
9. Section 9904.413-30 is amended by revising paragraphs (a)(1) and 
(16) to read as follows:


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 income and expenses in accordance with 9904.413-
50(c)(7) and decreased for amounts used to fund pension costs or 
liabilities, whether assignable or not.
* * * * *

0
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.
    (1) 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.
    (2) 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 shall not exceed the sum of:
    (i) The maximum tax-deductible amount computed for the plan as a 
whole, and
    (ii) The accumulated value of prepayment credits not already 
allocated to segments apportioned among the segment(s).

0
11. Section 9904.413-50 is amended by revising paragraphs (a)(2), 
(c)(1)(i) and (c)(7), (8), and (9) and adding paragraphs (b)(6) and 
(c)(12)(viii) to read as follows:


9904.413-50  Techniques for application.

    (a) * * *
* * * * *
    (2) Actuarial gains and losses shall be amortized as required by 
9904.412-50(a)(1)(v).
    (i) For periods beginning prior to the ``Applicability Date of the 
CAS Pension 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 fifteen-year period in 
equal annual installments, beginning with the date as of which the 
actuarial valuation is made.
    (ii) For periods beginning on or after the ``Applicability Date of 
the CAS Pension Harmonization Rule,'' such actuarial gains and losses 
shall be amortized over a ten-year period in equal annual installments, 
beginning with the date as of which the actuarial valuation is made.
    (iii) The installment for a cost accounting period shall consist of 
an element for amortization of the gain or loss, and 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) The assumed rate of interest, established in accordance with 
9904.412-40(b)(2) and 9904.412-50(b)(4), shall be used to determine the 
present value of such receivable contributions as of the valuation 
date.
    (ii) The market value of plan assets measured in accordance with 
paragraphs (b)(6)(i) 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 the 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 Internal Revenue Code 
at Title 26 of the U.S. C., as amended, and (B) the accumulated value 
of the prepayment credits not already allocated to segments, 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 
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

[[Page 81324]]

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.
    (8) If plan participants transfer among segments, contractors need 
not transfer assets or actuarial accrued liabilities, unless a transfer 
is sufficiently large to distort the segment's ratio of pension plan 
assets to actuarial accrued liabilities determined using the accrued 
benefit cost method. If assets and liabilities are transferred, the 
amount of assets transferred shall be equal to the actuarial accrued 
liabilities transferred, determined using the accrued benefit cost 
method and long-term assumptions in accordance with 9904.412-40(b)(2) 
and 9904.412-50(b)(4).
    (9) Contractors who separately calculate the pension cost of one or 
more segments may calculate such cost either for all pension plan 
participants assignable to the segment(s) or for only the active 
participants of the segment(s). If costs are calculated only for active 
participants, a separate segment shall be created for all of the 
inactive participants of the pension plan and the cost thereof shall be 
calculated. When a contractor makes such an election, assets shall be 
allocated to the segment for inactive participants in accordance with 
paragraphs (c)(5), (6), and (7) of this subsection. When an employee of 
a segment becomes inactive, assets shall be transferred from that 
segment to the segment established to accumulate the assets and 
actuarial liabilities for the inactive plan participants. The amount of 
assets transferred shall be equal to the actuarial accrued liabilities, 
determined under the accrued benefit cost method and long-term 
assumptions in accordance with 9904.412-40(b)(2) and 9904.412-50(b)(4), 
for these inactive plan participants. If inactive participants become 
active, assets and liabilities shall similarly be transferred to the 
segments to which the participants are assigned. Such transfers need be 
made only as of the last day of a cost accounting period. The total 
annual pension cost for a segment having active employees shall be the 
amount calculated for the segment and an allocated portion of the 
pension cost calculated for the inactive participants. Such an 
allocation shall be on the same basis as that set forth in paragraph 
(c)(1) of this subsection.
* * * * *
    (12) * * *
    (viii) If a benefit curtailment is caused by a cessation of benefit 
accruals mandated by the Employee Retirement Income Security Act of 
1974 (ERISA), 29 U.S.C. 1001 et seq., as amended based on the plan's 
funding level, then no adjustment for the curtailment of benefit 
pursuant to this paragraph (c)(12) is required. Instead, the 
curtailment of benefits shall be recognized as follows:
    (A) If the written plan document provides that benefit accruals are 
nonforfeitable once employment service has been rendered, and shall be 
retroactively restored if, and when, the benefit accrual limitation 
ceases, then the contractor may elect to recognize the expected benefit 
accruals in the actuarial accrued liability and normal cost during the 
period of cessation for the determination of pension cost in accordance 
with the provisions of 9904-412 and 413.
    (B) Otherwise, the curtailment of benefits shall be recognized as 
an actuarial gain or loss for the period. The subsequent restoration of 
missed benefit accruals shall be recognized as an actuarial gain or 
loss in the period in which the restoration occurs.

0
12. Section 9904.413-60 is amended by revising paragraphs (a) and 
(c)(12) and (18) 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 CAS Pension Harmonization Rule,'' the gain or loss shall 
be amortized over a fifteen-year period. For gains and losses measured 
for periods beginning on or after the ``Applicability Date for the CAS 
Pension Harmonization Rule,'' the gain or loss shall be amortized over 
a ten-year period.
    (b) * * *
    (3) Assume that besides the market value of assets of $10 million 
that Contractor B has on the valuation date of January 1, 2017, the 
contractor makes a contribution of $100,000 on July 1, 2017, 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, 
2017, 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 on January 1, 2017, must also reflect $98,000 
as the present value of the July 1, 2017, contribution of $100,000.
    (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 of 
$22 million. In accordance with the sales agreement, Contractor M is 
required to transfer $20 million of plan assets to the new plan 
sponsored by the buyer. 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's new plan in accordance with the terms of the sales agreement. 
The adjustment amount, which is the difference between the remaining 
assets ($2 million) and the remaining actuarial liability ($0), is $2 
million.
* * * * *
    (18) Contractor Q terminates its qualified defined-benefit pension 
plan without establishing a replacement plan. At termination, the 
market value of assets is $85 million. All obligations for benefits are 
irrevocably transferred to an insurance company by the purchase of 
annuity contracts at a cost of $55 million, which thereby determines 
the actuarial liability in accordance with 9904.413-50(c)(12)(i). The 
contractor receives a reversion of $30 million ($85 million-$55 
million). The adjustment is equal to the reversion amount, which is the 
excess of the market value of assets over the actuarial liability. 
However, the Internal Revenue Code imposes a 50% excise tax of $15 
million (50% of $30 million) on the reversion amount. In accordance 
with 9904.413-50(c)(12)(vi), the $30 million adjustment amount is 
reduced by the $15 million excise tax. Pursuant to 9904.413-
50(c)(12)(vi), a share of the $15 million net adjustment ($30 million-
$15 million) shall be allocated,

[[Page 81325]]

without limitation, as a credit to CAS-covered contracts.
* * * * *
    (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 pension cost measured pursuant to CAS 412 and this 
Standard for contract costing purposes may continue to recognize the 
benefit accruals, if the contractor has so elected. If there is 
evidence that the contractor might revoke the plan provision to restore 
the missed benefit accruals, then the contractor shall not make such 
election. Otherwise, the pension cost measured pursuant to CAS 412 and 
this Standard shall not recognize any benefit accruals until, and 
unless, the plan is subsequently amended to reinstate the accruals. 
Furthermore, when the plan is amended, the change in the actuarial 
accrued liability shall be measured as an actuarial gain or loss, and 
amortized in accordance with 9904.412-50(a)(1)(v) and 9904.413-
50(a)(2)(ii).

0
13. Section 9904.413-63 is revised to read as follows:


9904.413-63  Effective Date.

    (a) This Standard is effective as February 27, 2012, hereafter 
known as the ``Effective Date'', and is applicable for cost accounting 
periods after June 30, 2012, hereafter known as the ``Implementation 
Date.''
    (b) Following receipt of a contract or subcontract subject to this 
Standard on or after the Effective Date, contractors shall follow this 
Standard, as amended, beginning with its next cost accounting period 
beginning after the later of the Implementation Date or the receipt 
date of a contract or subcontract to which this Standard is applicable 
in accordance with this paragraph (a). The first day of the cost 
accounting period that this Standard, as amended, is first applicable 
to a contractor or subcontractor is the ``Applicability Date of the CAS 
Pension Harmonization Rule'' for purposes of this Standard. Prior to 
the Applicability Date of the CAS Pension Harmonization Rule, 
contractors or subcontractors shall follow the Standard in 9904.413 in 
effect prior to the Effective Date.
    (1) Following the award of a contract or subcontract subject to 
this Standard received on or after the Effective Date, contractors with 
contracts or subcontracts subject to this Standard that were received 
prior to the Effective Date shall continue to follow the Standard in 
9904.413 in effect prior to the Effective Date. Beginning with the 
Applicability Date of the CAS Pension Harmonization Rule, such 
contractors shall follow this Standard, as amended, for all contracts 
or subcontracts subject to this Standard.
    (2) Following the award of a contract or subcontract subject to 
this Standard received during the period beginning on or after the date 
published in the Federal Register and ending before the Effective Date, 
contractors shall follow the Standard in 9904.413 in effect prior to 
the Effective Date. If another contract or subcontract, subject to this 
Standard, is received on or after the Effective Date, the provisions of 
9904.413-63(b)(1) shall apply.

0
14. Section 9904.413-64.1 is added to read as follows:


9904.413-64.1  Transition Method for the CAS Pension Harmonization 
Rule.

    The transition method for the CAS Pension Harmonization Rule under 
this Standard shall be in accordance with 9904.412.64.1 Transition 
Method for CAS Pension Harmonization Rule.

[FR Doc. 2011-32745 Filed 12-23-11; 8:45 am]
BILLING CODE P