95-7555. Cost Accounting Standards Board; Cost Accounting Standards for Composition, Measurement, Adjustment, and Allocation of Pension Costs  

  • [Federal Register Volume 60, Number 61 (Thursday, March 30, 1995)]
    [Rules and Regulations]
    [Pages 16534-16557]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 95-7555]
    
    
    
    
    [[Page 16533]]
    
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    Part II
    
    
    
    
    
    Office of Management and Budget
    
    
    
    
    
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    Office of Federal Procurement Policy
    
    
    
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    48 CFR Parts 9903 and 9904
    
    
    
    Cost Accounting Standards Board; Cost Accounting Standards for 
    Composition, Measurement, Adjustment, and Allocation of Pension Costs; 
    Final Rule
    
    Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules 
    and Regulations 
    [[Page 16534]] 
    
    OFFICE OF MANAGEMENT AND BUDGET
    
    Office of Federal Procurement Policy
    
    48 CFR Parts 9903, 9904
    
    
    Cost Accounting Standards Board; Cost Accounting Standards for 
    Composition, Measurement, Adjustment, and Allocation of Pension Costs
    
    AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
    Policy, OMB.
    
    ACTION: Final rule.
    
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    SUMMARY: The Office of Federal Procurement Policy, Cost Accounting 
    Standards Board (CASB), is revising the Cost Accounting Standards 
    relating to accounting for pension costs under negotiated government 
    contracts. Section 26(g)(1) of the Office of Federal Procurement Policy 
    Act, 41 U.S.C. 422(g)(1), requires that the Board, when promulgating 
    any new or revised Cost Accounting Standard, publish a final rule. This 
    final rule addresses certain problems that have emerged since the 
    original promulgation (in the 1970's) of the pension Standards: CAS 
    9904.412--``Cost Accounting Standard for composition and measurement of 
    pension cost,'' and CAS 9904.413, ``Adjustment and allocation of 
    pension cost.'' The changes address pension cost recognition for 
    qualified pension plans subject to the tax-deductibility limits of the 
    Federal Tax Code, problems associated with pension plans that are not 
    qualified plans under the Federal Tax Code, and problems associated 
    with overfunded pension plans.
    
    EFFECTIVE DATE: March 30, 1995.
    
    FOR FURTHER INFORMATION CONTACT: Richard C. Loeb, Executive Secretary, 
    Cost Accounting Standards Board (telephone: 202-395-3254).
    
    SUPPLEMENTARY INFORMATION:
    
    A. Regulatory Process
    
        The Cost Accounting Standards Board's rules and regulations are 
    codified at 48 CFR Chapter 99. Section 26(g)(1) of the Office of 
    Federal Procurement Policy Act, 41 U.S.C. 422(g)(1), requires that the 
    Board, prior to the establishment of any new or revised Cost Accounting 
    Standard, complete a prescribed rulemaking process. This 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 a proposed 
    Standard.
        2. Promulgate an Advance Notice of Proposed Rulemaking.
        3. Promulgate a Notice of Proposed Rulemaking.
        4. Promulgate a final rule.
        This final rule is step four in the four step process.
    
    B. Background
    
        Prior Promulgations: The previous CASB published CAS 9904.412--
    ``Cost Accounting Standard for Composition and Measurement of Pension 
    Cost'' on September 24, 1975 and CAS 9904.413--``Adjustment and 
    Allocation of Pension Cost'' on July 20, 1977. The effective dates of 
    these Standards were January 1, 1976 and March 10, 1978, respectively. 
    These Standards were developed in the early years of the applicability 
    of the Employee Retirement Income Security Act (ERISA). At that time, 
    the problems on which this final rule focuses were not significant. 
    Adequate or minimum, rather than excess funding, concerned pension 
    managers of that era. Over the intervening years, government 
    contractors' pension plans have become more adequately funded. At the 
    same time, limits on the maximum amount of benefits that can be 
    provided by a qualified pension plan have been considerably constrained 
    in real terms. At the time the previous coverage was promulgated, there 
    was little or no inconsistency between an orderly method of accruing 
    pension costs and a contractor's ability to concurrently fund those 
    accruals.
        The Tax Reform Act of 1986 amended the Federal Tax Code to impose 
    an excise tax on contributions in excess of the maximum tax-deductible 
    amount for qualified pension plans. Immediately thereafter, the Omnibus 
    Budget Reconciliation Act of 1987 (OBRA 87) added a second, often more 
    restrictive full-funding limitation on the determination of the tax-
    deductible amount. To avoid the incurrence of an unallowable excise 
    tax, government contractors generally did not fund any accrued pension 
    cost in excess of the maximum tax-deductible pension contribution. 
    However, portions of accrued pension costs that were not funded were 
    not allowable. Furthermore, because the Standards prohibited the 
    reassignment of accrued but unfunded pension costs, contractors could 
    not allocate such costs to contracts when funded in future periods. On 
    April 8, 1991, the Board issued a ``Memorandum for Agency Senior 
    Procurement Executives'' which granted temporary authority to reassign 
    to future periods pension costs that were not funded in the year of 
    accrual because they lacked tax-deductibility.
        An overwhelming majority of respondents to the Board's November 
    1990 solicitation of agenda items gave a high priority to the problems 
    associated with fully-funded qualified plans and those connected with 
    the growing universe of nonqualified pension plans. The Board sought 
    public comments with a set of Staff Discussion Papers. A Paper 
    addressing the ``pay-as-you-go'' or unfunded plan issue was published 
    by the Board on June 17, 1991. See 56 FR 27780. A Paper seeking views 
    on the ``full funding'' problem was published on August 19, 1991. See 
    56 FR 41151. On January 26, 1993, after consideration of the public 
    comments received on these Staff Discussion Papers, the CASB published 
    an Advance Notice of Proposed Rulemaking (ANPRM) in the Federal 
    Register, 58 FR 6103. The ANPRM set forth proposed amendments to deal 
    with both the unfunded pension plan issue related to nonqualified 
    pension plans and the ``full-funding'' problem of qualified plans.
        In the public comments to the ANPRM, the Board found two areas of 
    concern particularly persuasive. These dealt with the ANPRM lacking any 
    full-funding limitation, and the complexities and problems introduced 
    by drastic revisions to the amortization period for actuarial gains and 
    losses.
        The ANPRM was premised on the idea that, by reducing such 
    amortization periods, there would be only a relatively short time lag 
    between cost/price recognition and the eventual funding. This premise, 
    as pointed out by the commenters, was unsound. Because the ANPRM lacked 
    any full-funding limitation, it could result in recognition of pension 
    costs in years in which surplus assets existed. This is of particular 
    concern to the Board because of the number of contractors that now have 
    overfunded plans.
        The Board also determined that changing amortization periods, in 
    order to improve cost predictability, was unnecessary. Most commenters 
    believed that a satisfactory degree of predictability could be achieved 
    under the existing Standards' amortization rules.
        On November 5, 1993, after consideration of the public comments 
    received on the ANPRM, the CASB published a Notice of Proposed 
    Rulemaking (NPRM), 58 FR 58999. The NPRM set forth proposed amendments 
    to resolve the regulatory conflict for qualified pension plans by 
    incorporating into the Standards the ERISA full-funding limitation, 
    while [[Page 16535]] maintaining the current amortization rules. To 
    address questions concerning overfunded pension plans, the Board added 
    coverage to CAS 9904.413 defining what constitutes a segment closing 
    and providing greater specificity regarding accounting for pension 
    costs when segments are closed or pension plans are terminated. The 
    NPRM retained the accounting approach for nonqualified pension plans 
    included in the ANPRM.
        The public comments received in response to the NPRM raised some 
    new issues. In the final rule, the Board addresses these issues 
    focusing on three areas in particular. These deal with the restriction 
    of accrual accounting by an outside limit, incomplete and unclear 
    coverage for segment closings and pension plan terminations, and the 
    lack of accounting for differences between accrued and funded pension 
    costs. A majority of public comments expressed strong opinions, which 
    were divided between support for accrual accounting and support for 
    funding as the basis for determining allocable contract costs. In 
    addition, numerous public comments were submitted concerning specific 
    actuarial and technical issues.
        The final rule reflects these and other concerns expressed by 
    commenters to the NPRM. In addition, certain pension actuaries and the 
    Pension Committee of the American Academy of Actuaries submitted 
    suggestions to address the actuarial soundness of the final rule.
    
    Termination of Temporary Waiver Authority
    
        The final rule removes the regulatory conflict between the funding 
    limits of ERISA and the period assignment provisions of CAS 9904.412-
    40(c). Therefore, the Board terminates the temporary waiver authority 
    granted in the ``Memorandum for Agency Senior Procurement Executives'' 
    issued on April 8, 1991.
    
    Summary of Proposed Amendments
    
        The Board's final rule provides for accrual accounting to initially 
    compute the pension cost for a cost accounting period. The Board also 
    recognizes that funding of such cost serves to substantiate the cost 
    and adds to the verifiability of the measurement of cost. For 
    assignment purposes, the computed cost is subject to a corridor with 
    zero as the floor and the maximum tax-deductible amount, where 
    applicable, as the ceiling. The computed cost is also subject to an 
    assignable cost limitation so that cost will not be assigned to an 
    overfunded pension plan. The cost assigned to the period must be funded 
    as specified in the Standard to be allocable to final cost objectives. 
    This four-step process of computing, assigning, funding, and allocating 
    pension cost applies to both qualified and nonqualified defined-benefit 
    pension plans.
        This final rule affirms the complementary funding approach for 
    nonqualified plans that takes into account Federal income tax 
    deductibility. The Board views the complementary funding approach as a 
    reasonable compromise addressing the Government's concern that claimed 
    cost be substantiated by funding while providing contractors with 
    relief from adverse cash flow consequences of funding a cost that is 
    not tax-deductible. The Board decided that tax-exempt entities do not 
    experience such cash flow disadvantages, and therefore, they are 
    required to fund all pension cost that is assigned to the period.
        For nonqualified defined-benefit plans that do not meet the 
    communication, nonforfeiture, or funding criteria, or for which the 
    contractor chooses to use the pay-as-you-go method, the assigned cost 
    is equal to the amount of benefits paid in that period. To promote 
    consistency between periods, this final rule requires that any lump sum 
    settlements or annuity purchases be amortized.
        For qualified defined-benefit pension plans, the conflict between 
    the Standards and ERISA is removed. The cost assigned to a period is 
    limited to the accrued cost that can be funded without penalizing a 
    contractor. A $0 floor was added to the corridor to eliminate any 
    inequity between a requirement to credit negative costs to contracts 
    and the contractor's inability to make withdrawal from the funding 
    agency.
        By not requiring the assignment of negative pension cost, the Board 
    has deferred the Government's recovery of excess assets in overfunded 
    plans. This delay is appropriate for on-going pension plans when no 
    assets have reverted or inured to the contractor. The effect of this 
    delay has been mitigated by clarifying and strengthening the 
    Government's rights or obligations for a cost adjustment when there is 
    a segment closing, plan termination, or freezing of benefits.
        Portions of pension costs computed for a period that fall outside 
    of the assignable cost corridor ($0 floor and a ceiling based on tax-
    deductibility) are reassigned to future periods, together with an 
    interest adjustment, as portions of unfunded actuarial liability and 
    are identified as assignable cost deficits or assignable cost credits, 
    respectively. Unfunded portions of assigned cost continue to be 
    separately identified and eliminated from future cost computations.
        For nonqualified plans, a clarification in the final rule is made 
    by the addition of the concept of ``permitted unfunded accruals''; the 
    portion of the computed and assigned cost of a nonqualified plan 
    exempted from current funding based on the tax rate offset. These 
    amounts are updated and described as the accumulated value of permitted 
    unfunded accruals. All such previously assigned and allocated costs, 
    adjusted for earnings, expenses, and benefit payments, are treated as 
    plan assets retained by the contractor for purposes of assessing the 
    funding status of the plan.
        The fundamental requirement for assignment of pension cost has been 
    expanded to include a ``CAS balance test'' modeled after the Internal 
    Revenue Service ``equation of balance''. The CAS balance test requires 
    that the entire actuarial accrued liability be accounted for by the 
    assets or the portions of unfunded actuarial liability identified under 
    subparagraphs 9904.412-50(a) (1) and (2). For the CAS balance test to 
    function, the definition of unfunded actuarial liability is revised to 
    clarify that an actuarial surplus exists whenever the actuarial value 
    of assets exceeds the actuarial accrued liability. The accumulated 
    value of prepayment credits, that is, funds that have yet to be applied 
    to assigned costs, is excluded from the assets.
        Technical corrections have been made to enhance the actuarial 
    completeness of the final rule. Consistent with recent changes in ERISA 
    and Generally Accepted Accounting Principles, as embodied in Statement 
    87 of the Financial Accounting Standards Board, and reflecting the 
    sophistication of modern actuarial valuations, this final rule requires 
    the use of explicit actuarial assumptions that are individually 
    reasonable. Revisions have been made to distinguish the actuarial value 
    of assets used for computations of on-going pension costs from the 
    market value of assets used for current period adjustments. In 
    addition, Generally Accepted Actuarial Principles and Practices as 
    promulgated by the Actuarial Standards Board were considered in the 
    drafting of this final rule.
        Finally, this rule implements an amendment to the CAS applicability 
    and exemption requirements contained in Section 9903.201-1(b)(11). This 
    amendment is made necessary due to recent statutory changes contained 
    in the Federal Acquisition Streamlining Act, Public Law 103-355. 
    [[Page 16536]] 
    
    Transition
    
        The Board is aware that contracting officers and contractors have 
    negotiated many pragmatic agreements while awaiting the promulgation of 
    this final rule. The transition methods and illustrations of 9904.412-
    64 and 9904.413-64 are presented as model solutions. The Board expects 
    that modifications of these methods and alternate approaches may be 
    necessary to ensure equity for both the Government and contractors. 
    Cognizant Federal officials are encouraged to ratify existing 
    agreements that comport with the concepts of this final rule. For prior 
    agreements or interim solutions based on a ``fresh-start'' amortization 
    of the unfunded actuarial liability of qualified defined-benefit 
    pension plans, the cognizant Federal official should verify that no 
    portion of unfunded actuarial liability for prior unfunded costs that 
    could have been funded, or, for other previously disallowed costs, have 
    in fact been inadvertently included in pension costs.
        The transition rules are constructed on a few basic concepts. Prior 
    assigned costs of qualified plans, which were neither funded nor 
    allocated to contracts because they lacked tax-deductibility, may be 
    assigned, with interest, to periods beginning on or after the effective 
    date of this rule. Conversely, unfunded accrued costs of nonqualified 
    plans allocated to contracts should be treated as assets, updated for 
    earnings and benefit payments, and applied against either the actuarial 
    accrued liability used to compute cost accruals or the benefits paid 
    under the pay-as-you-go method.
    
    C. Paperwork Reduction Act
    
        The Paperwork Reduction Act, Public Law 96-511, does not apply to 
    this final rule, because this rule imposes no paperwork burden on 
    offerors, affected contractors and subcontractors, or members of the 
    public which requires the approval of OMB under 44 U.S.C. 3501, et seq.
    
    D. Executive Order 12866 and the Regulatory Flexibility Act
    
        The economic impact of this final rule on contractors and 
    subcontractors is expected to be minor. As a result, the Board has 
    determined that this final rule does not result in the promulgation of 
    a ``major rule'' under the provisions of Executive Order 12866, and 
    that a regulatory impact analysis will not be required. Furthermore, 
    this final rule does not have a significant effect on a substantial 
    number of small entities because small businesses are exempt from the 
    application of the Cost Accounting Standards. Therefore, this rule does 
    not require a regulatory flexibility analysis under the Regulatory 
    Flexibility Act of 1980.
    
    E. Public Comments
    
        Public Comments: This final rule is based upon the Board's Notice 
    of Proposed Rulemaking made available for public comment on November 5, 
    1993, 58 FR 58999. Thirty sets of public comments were received from 
    contractors, Government agencies, professional associations, actuarial 
    firms, law firms, public accounting firms, and individuals. The 
    comments received and the Board's actions taken in response thereto are 
    summarized below:
        Comment: Twelve commenters expressed concern that the introduction 
    of a funding limit on accrual accounting was a significant departure 
    from the full accrual accounting approach of the ANPRM. Some commenters 
    were also concerned with the complexity inherent in any rule governing 
    pension costs. For these reasons the commenters supported the 
    promulgation of a second NPRM.
        Response: The Staff Discussion Papers, the ANPRM, and the NPRM each 
    addressed the role of accrual accounting and the role of funding. The 
    Staff Discussion Paper on fully-funded defined-benefit pension plans 
    requested comments on the relative weights the Board should assign to 
    accrual accounting, funding, and predictability as a basis for cost 
    determination. The Staff Discussion Paper on unfunded nonqualified 
    defined-benefit pension plans balanced its avoidance of a funding 
    requirement with a very constrained method of accrual accounting for 
    so-called ``accruable'' plans.
        In response to the comments on the Staff Discussion Papers, the 
    ANPRM adopted accrual accounting for both qualified plans and accruable 
    nonqualified plans, which permitted certain portions of computed 
    pension costs to be unfunded. Because the Board supported the need to 
    substantiate the accrual with funding, the ANPRM required that the 
    accrued costs for qualified plans be funded as soon as practicable. The 
    ANPRM presumed there would not be a lengthy delay between accrual and 
    funding, and so it did not link the period assignment of the accrual to 
    current period funding. For nonqualified plans, the assignment of 
    accrued costs was tied to funding, but the ANPRM introduced an 
    exception for the effect of taxes on contractor cashflows. As with the 
    Staff Discussion Paper, non-accruable plans, and accruable plans that 
    so elect, were limited to the pay-as-you-go method.
        The NPRM kept the same accounting approach for nonqualified plans 
    as the ANPRM. Comments from the Government and contractors persuaded 
    the Board that the conflict between full accrual accounting and ERISA 
    funding, not predictability, was the significant problem. Finding that 
    there could be indefinitely extended delays in the funding of the 
    accruals of overfunded plans, the Board determined that it was 
    necessary to link the period assignment of costs to current period 
    funding in order to assure the verifiability of the accrued amounts. To 
    resolve the conflict with ERISA's funding limits, the ERISA full-
    funding limitation was incorporated into the NPRM. Furthermore, aware 
    of the need to address overfunded plans, the Board added clarity and 
    specificity to the current period adjustment required when a segment 
    closes. The Board explicitly included an adjustment for plan 
    terminations because there has been some uncertainty as to the prior 
    Board's intent.
        With this final rule, the Board affirms the accounting approaches 
    of the NPRM. Throughout the four-step promulgation process, accrual 
    accounting consistently has been the starting point for the recognition 
    of pension costs. The period assignment rule is tied to ERISA's tax-
    deductible maximum to prevent conflict with any of ERISA's funding 
    limits. This final rule retains the complementary funding rule for 
    nonqualified plans. The Board adopted many technical corrections 
    suggested in public comments from actuaries and other professionals. To 
    ensure that the technical corrections did not alter the conceptual 
    approach of the NPRM, the Board sought and received input from certain 
    pension actuaries and the American Academy of Actuaries.
        Besides continuing support for either unrestricted accrual 
    accounting or cost recognition based solely on funding, the public 
    comments on the NPRM generally addressed details of the coverage 
    requiring clarification or correction. This final rule does not deviate 
    from the conceptual construct of the NPRM. As intended by the four-step 
    promulgation process, this rule has evolved and the Board has found an 
    informed balance between the advantages of accrual accounting and 
    funding. Further public exposure would not alter the conceptual 
    approach exposed in the NPRM and expressed in this final rule.
        Comment: Thirteen commenters expressed their opposition to the 
    adoption of the ERISA full-funding [[Page 16537]] limitation. These 
    commenters supported full accrual accounting as the only method that 
    provides true matching of the incurrence of pension costs with the 
    periods during which benefits were earned. They contend that tax law is 
    not good accrual accounting and that the Board should make accounting 
    rules independently of the concerns of taxability.
        Response: The Board continues to recognize that one of the primary 
    benefits of accrual accounting, and one of the stated goals of the 
    Board, is the proper matching of benefiting contracts with the 
    incurrence of expense. The Board also continues to support accrual 
    accounting as the most effective means to promote consistency between 
    cost accounting periods.
        This final rule is based on the use of accrual accounting to 
    initially compute the pension cost for a period. The assignable cost is 
    then determined by comparing the computed pension cost accrual to a 
    minimum of $0 and to the maximum tax-deductible amount. The Board has 
    determined that funding is needed to substantiate the cost allocation 
    because of the magnitude of the liability and the extended delay 
    between the accrual of the cost and the settlement of the liability. 
    This final rule has not adopted ERISA as an accounting method, but has 
    modified accrual accounting to fit within the confines of practicable 
    funding.
        Comment: Eleven other commenters supported the imposition of the 
    full-funding limit. Two commenters recommended that the cost accrual be 
    subject to a $0 minimum because contractors are prohibited from 
    withdrawing funds from a qualified trust.
        Response: In this final rule, the Board refines the NPRM concept of 
    a full-funding limitation. The full-funding limitation of the final 
    rule is implemented through the definition and operation of the 
    ``assignable cost limitation'' which defines the point when the plan is 
    overfunded for cost recognition purposes. When a pension plan is 
    overfunded, the Government would be violating its fiduciary duty to the 
    taxpayers by advancing any further reimbursements to the contractor. 
    The assignable cost limitation is similar to ERISA's pre-OBRA 87 full 
    funding limitation, but uniquely defined to avoid confusion with ERISA 
    terminology. As with the NPRM, whenever a plan is determined to be 
    overfunded, that is, the actuarial value of assets exceeds the 
    liability, all existing amortization bases are deemed fully amortized 
    and eliminated.
        The Board concurs that there should be a $0 floor imposed on the 
    assignable pension cost for the period. The Standard requires the 
    funding agency to be established for the ``exclusive benefit'' of the 
    participants so that withdrawals by the contractor are prohibited, 
    absent a plan termination. To be internally consistent, this final rule 
    eliminates the assignment of negative costs to a period and the 
    allocation of such credit to contracts, except when either assets 
    revert or inure to the contractor or the segment is no longer 
    continuing.
        However, when a contractor makes a voluntary investment decision to 
    not fund the assigned cost of its qualified pension plan, which is 
    otherwise allocable to and payable as cost or price under Government 
    contracts, the contractor has knowingly accepted the consequences of 
    its decision. In this case, because there is no conflict between ERISA 
    and the Standards, there is no reason to alter the cost computation and 
    assignment for the period. Permitting arbitrary reassignment of the 
    cost to other periods would be contrary to the Board's stated goal of 
    enhancing the consistency of costs between periods and could create a 
    potential for gaming.
        Comment: A major concern of thirteen commenters was that the full-
    funding limitation is difficult to predict. Some commenters opined that 
    the emphasis on funding made the rule unnecessarily complex.
        Response: In this final rule, full-funding, which is measured by 
    the assignable cost limitation based on the actuarial value of assets 
    and the actuarial accrued liability, is reasonably predictable. Through 
    the smoothing techniques of an asset valuation method, large swings in 
    assets values are dampened. In a relatively stable population, the 
    actuarial accrued liability can be fairly well predicted using 
    actuarial projection techniques for forward pricing purposes. Other 
    events that dramatically affect the liability are addressed in the 
    provisions on cost method changes, segmentation, segment closings, plan 
    terminations, and frozen plans. Finally, contractors have some 
    flexibility in determining the timing of certain other events, such as 
    assumption changes or plan amendments, that affect the size of the 
    actuarial accrued liability.
        When pension plan assets and liabilities are sufficiently different 
    in amount, the impact of the tax-deductible limits of ERISA can be 
    forecast with a fair degree of certainty. The tax-deductible limit, 
    computed without regard to the full-funding limitation, is generally 
    based on the normal cost and 10 year amortization of the unfunded 
    actuarial liability and is also relatively predictable.
        A predictability problem does arise when a plan is near the 
    threshold of ERISA's full-funding limitations. The impact of these 
    limits is sensitive to small changes in the market value of assets, the 
    actuarial accrued liability, and prevailing Treasury rates. The Board 
    believes that the ``all or nothing'' nature and the magnitude of the 
    impact are beyond the normal assumption of risk inherent in firm fixed-
    priced contracting. However, the Board believes that this is a forward-
    pricing problem that may be addressed by the contracting officer 
    through the negotiation of an advance agreement reflecting the 
    contractor's unique facts, circumstances, and expected level and mix of 
    Government contracting. Such advance agreements could provide a method 
    for achieving equity in the forecasting of pension costs for 
    contractors whose pension plans are close to entering or emerging from 
    the funding limits of ERISA.
        While the special problems of forward-pricing will continue to 
    require attention by the contracting officer, this final rule does not 
    add more complication. The concepts of assignable cost limitation, 
    assignable cost deficit, and assignable cost credit contained in this 
    final rule are simply the accounting and actuarial mechanisms necessary 
    to assign computed costs that fall outside of the funding corridor to 
    future periods.
        Comment: Twelve commenters noted that, despite the full-funding 
    limitation, the cost assigned under the NPRM could still be greater 
    than the tax-deductible maximum. Seven commenters remarked that ERISA 
    requires amortizations to continue, and a new base be established, when 
    the contribution is affected by the OBRA 87 full-funding limitation 
    only. Seven commenters recommended that subparagraph 9904.412-50(b)(1) 
    be clarified.
        Response: This has been corrected in the final rule by using the 
    maximum tax-deductible amount, however determined, as the limit on 
    assignable cost for qualified plans. The accrued pension cost not 
    assigned to the current period is reassigned to future periods as an 
    assignable cost deficit. This final rule also specifies that any 
    negative accrued cost be reassigned to future periods as an assignable 
    cost credit.
        This final rule specifies that all existing amortization bases are 
    deemed fully amortized when the accrued cost is affected by the 
    assignable cost limitation. This rule provides that any 
    [[Page 16538]] unfunded actuarial liability, including an actuarial 
    surplus, existing in the next accounting period is deemed to be an 
    actuarial gain or loss unless it is attributable to a change in 
    assumptions, plan amendment, or separately identified portions of 
    unfunded actuarial liability attributable to unfunded and/or disallowed 
    pension costs.
        Comment: Fifteen commenters stated that funding would not be needed 
    to validate the liability of nonqualified defined-benefit plans if the 
    Board retained the existing requirement that the benefits be 
    ``compelled''.
        Response: The Board believes it is reasonable for the Government to 
    require that pension cost of both qualified and nonqualified pension 
    plans allocated to contracts, which the Government pays for through 
    cost or price, be subject to funding. This final rule ensures that any 
    unfunded portion of assigned cost is isolated from the computation of 
    future cost accruals. To prevent windfall gains or losses and to 
    minimize the need for advance agreements discussed above, costs 
    allocated to fixed-priced contracts must be funded to the extent 
    possible.
        The Board notes that the excess funding, which occurs when a 
    contractor funds more than the assigned pension cost for the period, is 
    carried forward to future periods with interest. This final rule 
    retains the premature funding provisions of the original Standard 
    through the definition and operation of prepayment credits.
        Comment: Five commenters stated that current period funding of 
    assigned costs for nonqualified pension plans is necessary to enhance 
    the verifiability of all costs allocated to contracts and to reduce the 
    risk that the promised benefits might never be paid.
        Response: As already discussed, the Board is persuaded that funding 
    of the assigned cost is necessary to substantiate the liability. The 
    Board is also persuaded that requiring a taxable contractor to fund 
    100% of the pension cost could impose a cash flow penalty to the extent 
    the amount funded may not be tax-deductible. The Board has modified the 
    funding requirement accordingly. However, the Board does not wish to 
    provide a cash flow advantage to tax-exempt contractors for whom no 
    such cash flow penalty exists. Accordingly, the complementary funding 
    rule is restricted to taxable entities only.
        This final rule addresses the risk that unfunded costs will not be 
    verified by providing for an accounting of all assigned costs. Funded 
    costs are captured and accounted for within the assets of the funding 
    agency. Amounts exempted from funding based on the tax-rate are 
    retained in the general assets of the contractor and accounted for 
    within the accumulated value of permitted unfunded accruals. Portions 
    of assigned cost not substantiated by complementary funding must be 
    separately identified and accounted for pursuant to 9904.412-50(a)(2). 
    This final rule ensures that all portions of assigned cost and 
    allocated cost are tracked and accounted for, and thereby removes much 
    of the risk.
        Comment: Eight commenters were concerned that a ``Rabbi'' trust 
    would not satisfy the ``exclusive benefit'' requirement in the 
    definition of a funding agency since creditors might have superior 
    rights to those of the plan participants. Other commenters asked if 
    other nonqualified trust arrangements could qualify as a funding agency 
    under the Standard.
        Response: The Board's intention when revising the definition of a 
    funding agency was to prohibit the use of bookkeeping reserves, escrow 
    accounts, or any other arrangement under which the rights of the plan 
    participants were not clearly superior to those of the plan sponsor. 
    The basic test of ``exclusive benefit'' is whether the contractor has 
    relinquished all rights to the funds and that, except for the 
    extraordinary event of bankruptcy, the participants have primary rights 
    to the funds. The solvency of a contractor is always a concern to the 
    Government that is not restricted merely to pension costs.
        The Board does not intend that a ``Rabbi trust'' be the only 
    funding arrangement that satisfies the funding agency definition. Other 
    arrangements such as so-called secular trusts can be satisfactory. The 
    Board expects that as tax law changes and as qualified plan benefit 
    limits possibly become more or less restrictive, other funding 
    arrangements may become more effective and more widely adopted.
        The Board does not intend for the ``exclusive benefit'' clause to 
    prohibit asset reversions where, after settling all benefit obligations 
    to plan participants, the residual assets of the trust revert or inure 
    to a contractor. The funding agency coverage in the pension Standards 
    is intended to be consistent with the coverage for funded insurance 
    reserves found at 9904.416-50(a)(1)(v)(B), which permits a reversion of 
    assets only after all benefit obligations have been satisfied through 
    insurance.
        Comment: Nine commenters were concerned that taxes and 
    administrative costs associated with Rabbi trusts will increase pension 
    costs. Five commenters believe that the NPRM (and prior ANPRM) 
    complementary funding rule for nonqualified plans creates an 
    administrative burden.
        Response: The Board recognizes that there will be some additional 
    expenses associated with the use of complementary funding and the use 
    of nonqualified trust funds. The specificity of the final rule gives 
    contractors clear rules under which they can choose to compute, assign, 
    and allocate the costs of a nonqualified plan. The benefits of an 
    accurate accounting of all assigned costs will offset any increased 
    administrative expense to the Government and contractors.
        There will be an increase in the cost of such plans for the taxes 
    on the earnings of the nonqualified trust fund that are directly paid 
    by or reimbursed from the fund. These taxes are a valid expense of the 
    pension plan incurred in response to the final rule's requirement that 
    a portion of the assigned cost be funded. The Board notes that, in 
    fact, such increased costs are being returned to the Government through 
    the payment of the tax.
        The rule specifies that income taxes on the earnings of a 
    nonqualified trust are treated as administrative expenses and not as 
    decrements to the assumed investment earning rate. This technical 
    correction clarifies that the interest assumption used to compute 
    actuarial values is not reduced to reflect taxes on fund earnings. This 
    rule is not intended to prevent contractors from expressing the 
    actuarial assumption for administrative expenses as a percentage of the 
    earnings.
        Comment: Two commenters suggested that the final rule address how 
    ERISA's funding limits are allocated to segments.
        Response: Only the maximum tax-deductible amount and the 
    contribution to the funding agency are determined for the pension plan 
    in its entirety. Under segmented accounting, all other aspects of 
    period cost; i.e., normal cost, unfunded actuarial liability, 
    assignable cost limitation, are measured at the segment level. This 
    final rule requires that the tax-deductible maximum, determined for the 
    plan as a whole, must be apportioned to segments using a basis that 
    considers the assignable costs or the funding levels of the segments. 
    Illustrations of how plan-wide values are apportioned to segments have 
    been added.
        In addition, to ease the funding of costs attributable to 
    Government contracts, this final rule allows contractors with 
    predominantly commercial business to apportion contributions for 
    qualified defined- [[Page 16539]] benefit plans to their Government 
    segments first, but only if the contractor uses segmented accounting. 
    Unfunded assigned costs, whether attributable to Government contracts 
    or commercial business, will be separately identified under 9904.412-
    50(a)(2) and thereby isolated from future cost computations and future 
    allocation. This provision allows the contractor to determine when to 
    fund costs of its qualified defined-benefit plan for segments that are 
    associated solely with commercial business.
        Although the assets of a pension plan are subject to the claims of 
    all plan participants, the Board believes the funding requirements and 
    protections of ERISA will prevent any untenable differences in funding 
    levels of segments from arising. Because nonqualified plans lack the 
    funding requirement protection of ERISA, the funding of such plans must 
    be apportioned across all segments.
        Comment: Four commenters suggested that the definition of a segment 
    closing should be clarified. Concerns were raised that an internal 
    reorganization would require a current period adjustment for a segment 
    closing even though neither the segment's nor the contractor's 
    relationship to the Government had changed.
        Response: The definition has been revised to delineate three 
    conditions requiring a current period adjustment. The first condition 
    occurs when there is a change in ownership of the segment, not just a 
    simple reorganization within the contractor's internal structure. The 
    second event is the one addressed in the NPRM; that is, when the 
    contractual relationship ends because the segment operationally ceases 
    to exist. The third case addresses the end of the contractual 
    relationship with the Government, whether the segment continues in 
    operation or not.
        Comment: Two commenters opposed using the accrued benefit cost 
    method (ABCM) to determine the actuarial liability for a segment 
    closing or plan termination adjustment. These commenters believe the 
    ABCM understates the liability. Four commenters supported limiting the 
    actuarial assumptions used to determine the segment closing and plan 
    termination adjustment. These commenters also supported a phase-in of 
    benefit improvements adopted within 5 years of a segment closing or 
    plan termination.
        Response: In this final rule, the actuarial accrued liability, used 
    for determining the adjustment for a segment closing or curtailment of 
    benefits, is determined using the accrued benefit cost method. For a 
    curtailment of benefits or for plan participants who are terminated 
    from employment in a segment closing, the accrued benefit is the 
    appropriate measure of the ultimate benefit that will be paid under the 
    plan. 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. The Board 
    notes that the ABCM does recognize the cost of vesting earned by the 
    participants' future service.
        The Board also believes that when there is an immediate period 
    liquidation of the liability through the payment of lump sum 
    settlements or the purchase of annuities, the cost of such settlements 
    and annuities is an exact measure of the liability, although the 
    Government does have a right to share in any future dividends or 
    refunds. This final rule has been revised accordingly.
        Consistent with the requirement that actuarial assumptions be 
    individual best-estimates of future long-term economic and demographic 
    trends, this final rule requires that the assumptions used to determine 
    the actuarial liability be consistent with the assumptions that have 
    been in use. This is consistent with the fact that the pension plan is 
    continuing even though the segment has closed or the earning of future 
    benefits has been curtailed. The Board does not intend this rule to 
    prevent contractors from using assumptions that have been revised based 
    on a persuasive actuarial experience study or a change in a plan's 
    investment policy.
        This final rule does include a sixty-month phase-in of voluntary 
    benefit improvements to forestall an increase in the liability in 
    contemplation of a segment closing or plan termination. Improvements 
    mandated by law or granted though collective bargaining negotiations 
    are not considered voluntary. A plan termination or curtailment of 
    benefits is viewed as negating the intent of any recent voluntary 
    benefit improvements.
        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.
        Comment: One commenter asked if a contractor must determine whether 
    a termination of plan gain or loss has occurred before an adjustment is 
    required. Another commenter asked if a termination of plan gain or loss 
    occurs when a pension plan is ``frozen.''
        Response: The definition has been changed to refer to an event; 
    that is, the termination of a pension plan. Any resultant gain or loss 
    for Government contracting purposes is determined by the 9904.413-
    50(c)(12) adjustment. The ``freezing'' of a pension plan is addressed 
    by the addition of a definition for a ``Curtailment of Benefits.''
        Comment: Two commenters supported the amortization of any segment 
    closing adjustment, rather than an immediate period adjustment.
        Response: Under this final rule, the 9904.413-50(c)(12) adjustment 
    is determined as a current period adjustment, whether or not assets 
    actually revert from the trust. The Board believes a current period 
    adjustment is appropriate when there is a disruption of the contracting 
    relationship, a discontinuance of the operational segment, or a 
    discontinuance of the pension plan. When such events occur, pension 
    costs can no longer be computed and adjusted on an on-going basis since 
    there are either no future accounting periods in which credits or 
    charges can be allocated to contracts or no future periods in which 
    benefits will be earned.
        If a contractor will continue to have a contracting relationship 
    with the Government, the final rule does permit the cognizant Federal 
    official and the contractor to negotiate an amortization schedule. This 
    provision will allow a contractor to allocate an adjustment credit to 
    future years during which it can recover the amount of credited assets 
    either through decreased pension costs or through prices charged to 
    other customers benefiting from the future work performed by plan 
    participants.
        Comment: Eleven commenters requested that the Board clarify that 
    the 9904.413-50(c)(12) adjustment could result in a charge to final 
    cost objectives if the liabilities exceeded the assets.
        Response: The final rule refers to the ``difference'' between 
    assets and liabilities without prejudice towards either adjustment 
    credits or adjustment charges. An illustration of the adjustment when 
    liabilities exceed assets has been added.
        Comment: Four commenters asked the Board to clarify how the 
    Government's share of the adjustment was to be determined. Five 
    commenters opposed the inclusion of fixed-price contracts in 
    [[Page 16540]] any formula used to determine the Government's share.
        Response: The asset value used to determine the adjustment amount 
    is the market value of the assets, including permitted unfunded 
    accruals, plus portions of unfunded liability identified pursuant to 
    9904.412-50(a)(2), i.e., plan assets retained by the contractor due to 
    allocated but unfunded costs. The asset value is reduced for the 
    accumulated value of any prepayment credits since such assets have 
    never been assigned to past periods nor allocated to Government 
    contracts. Because this asset value represents the current value of 
    assigned costs of prior periods, the sum of previously assigned pension 
    costs is the denominator of the fraction. The portion of these assets 
    attributable to the Government's participation in the funding of the 
    pension plan through cost or price is measured by the sum of costs 
    allocated to Government contracts. The fraction is determined based on 
    data from years that are representative of the Government's 
    participation, which is a factual determination best made by the 
    contracting officer.
        Costs allocated to fixed-price contracts subject to CAS 9904.412 
    and 9904.413 are included since the Government has participated in the 
    funding of the plan through the payment of the estimated pension cost 
    considered in the pricing of the contract. A risk/reward of a fixed-
    price contract is the deviation of actual costs from the estimated cost 
    considered in the price. If a single period event, e.g., segment 
    closing, plan termination, or benefit curtailment, alters the on-going 
    nature of the pension plan or segment, the effect on fixed-price 
    contracts should be similar to that of an accounting practice change.
        Comment: Four commenters supported amending the NPRM coverage to 
    explicitly state that the 9904.413-50(c)(12) adjustment is determined 
    net of the excise tax on pension plan asset reversions.
        Response: The Board agrees. Before applying the fraction that 
    determines the Government's share, subdivision 9904.413-50(c)(12)(vi) 
    reduces the adjustment amount for any excise taxes assessed on assets 
    that revert to the contractor as part of a pension plan termination. 
    The excise tax is intended to discourage plan sponsors from terminating 
    their qualified pension plans, and under this final rule, Government 
    contractors are subject to the same termination penalty as their 
    commercial counterparts. Since the excise tax is returned to the 
    Government, albeit the Internal Revenue Service, the Board believes 
    equity warrants determining the Government's share based on the net 
    adjustment amount.
        While the Board believes the Government's allocable share of any 
    adjustment should be net of any reversion excise tax, the allowability 
    of such excise taxes continues to be determined by the applicable cost 
    principles. Income taxes, which are paid to the Internal Revenue 
    Service as an offset against prior tax deductions, continue not to be 
    allocable.
        Comment: Six commenters suggested that a segment closing adjustment 
    is not necessary if the assets and liabilities of the segment were 
    transferred to the successor contractor.
        Response: The Board agrees. The appropriate coverage and 
    illustrations have been added.
    
    List of Subjects in 48 CFR Parts 9903 and 9904
    
        Cost accounting standards, Government procurement.
    Richard C. Loeb,
    Executive Secretary, Cost Accounting Standards Board.
    
    PART 9903--CONTRACT COVERAGE
    
        1. The authority citations for Parts 9903 and 9904 continue to read 
    as follows:
    
        Authority: Public Law 100-679, 102 Stat 4056, 41 U.S.C. 422.
    
    
    9903.201  [Amended]
    
        2. Subsection 9903.201-1 is amended by removing and reserving 
    paragraph (b)(11).
    
    PART 9904--COST ACCOUNTING STANDARDS
    
        3. Subsection 9904.412-30 is amended by revising paragraph (a) to 
    read as follows:
    
    
    9904.412-30  Definitions.
    
        (a) The following are definitions of terms which are prominent in 
    this Standard. Other terms defined elsewhere in this chapter 99 shall 
    have the meanings ascribed to them in those definitions unless 
    paragraph (b) of this subsection requires otherwise.
        (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 inception 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.)
        (2) Actuarial accrued liability means pension cost attributable, 
    under the actuarial cost method in use, to years prior to the current 
    period considered by a particular actuarial valuation. As of such date, 
    the actuarial accrued liability represents the excess of the present 
    value of future benefits and administrative expenses over the present 
    value of future normal costs for all plan participants and 
    beneficiaries. The excess of the actuarial accrued liability over the 
    actuarial value of the assets of a pension plan is the Unfunded 
    Actuarial Liability. The excess of the actuarial value of the assets of 
    a pension plan over the actuarial accrued liability is an actuarial 
    surplus and is treated as a negative unfunded actuarial liability.
        (3) Actuarial assumption means an estimate of future conditions 
    affecting pension cost; for example, mortality rate, employee turnover, 
    compensation levels, earnings on pension plan assets, changes in values 
    of pension plan assets.
        (4) Actuarial cost method means a technique which uses actuarial 
    assumptions to measure the present value of future pension benefits and 
    pension plan administrative expenses, and which assigns the cost of 
    such benefits and expenses to cost accounting periods. The actuarial 
    cost method includes the asset valuation method used to determine the 
    actuarial value of the assets of a pension plan.
        (5) Actuarial gain and loss means the effect on pension cost 
    resulting from differences between actuarial assumptions and actual 
    experience.
        (6) Actuarial valuation means the determination, as of a specified 
    date, of the normal cost, actuarial accrued liability, actuarial value 
    of the assets of a pension plan, and other relevant values for the 
    pension plan.
        (7) Assignable cost credit means the decrease in unfunded actuarial 
    liability that results when the pension cost computed for a cost 
    accounting period is less than zero.
        (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 Employee Retirement Income Security Act of 1974 
    [[Page 16541]] (ERISA), 29 U.S.C. 1001 et seq., as amended.
        (9) Assignable cost limitation means the excess, if any, of the 
    actuarial accrued liability plus the current normal cost over the 
    actuarial value of the assets of the pension plan.
        (10) Defined-benefit pension plan means a pension plan in which the 
    benefits to be paid or the basis for determining such benefits are 
    established in advance and the contributions are intended to provide 
    the stated benefits.
        (11) Defined-contribution pension plan means a pension plan in 
    which the contributions are established in advance and the benefits are 
    determined thereby.
        (12) Funded pension cost means the portion of pension cost for a 
    current or prior cost accounting period that has been paid to a funding 
    agency.
        (13) Funding agency means an organization or individual which 
    provides facilities to receive and accumulate assets to be used either 
    for the payment of benefits under a pension plan, or for the purchase 
    of such benefits, provided such accumulated assets form a part of a 
    pension plan established for the exclusive benefit of the plan 
    participants and their beneficiaries. The fair market value of the 
    assets held by the funding agency as of a specified date is the Funding 
    Agency Balance as of that date.
        (14) Immediate-gain actuarial cost method means any of the several 
    cost methods under which actuarial gains and losses are included as 
    part of the unfunded actuarial liability of the pension plan, rather 
    than as part of the normal cost of the plan.
        (15) Market value of the assets means the sum of the funding agency 
    balance plus the accumulated value of any permitted unfunded accruals 
    belonging to a pension plan. The Actuarial Value of the Assets means 
    the value of cash, investments, permitted unfunded accruals, and other 
    property belonging to a pension plan, as used by the actuary for the 
    purpose of an actuarial valuation.
        (16) Multiemployer pension plan means a plan to which more than one 
    employer contributes and which is maintained pursuant to one or more 
    collective bargaining agreements between an employee organization and 
    more than one employer.
        (17) Nonforfeitable means a right to a pension benefit, either 
    immediate or deferred, which arises from an employee's service, which 
    is unconditional, and which is legally enforceable against the pension 
    plan or the contractor. Rights to benefits that do not satisfy this 
    definition are considered forfeitable. A right to a pension benefit is 
    not forfeitable solely because it may be affected by the employee's or 
    beneficiary's death, disability, or failure to achieve vesting 
    requirements. Nor is a right considered forfeitable because it can be 
    affected by the unilateral actions of the employee.
        (18) Normal cost means the annual cost attributable, under the 
    actuarial cost method in use, to current and future years as of a 
    particular valuation date, excluding any payment in respect of an 
    unfunded actuarial liability.
        (19) Pay-as-you-go cost method means a method of recognizing 
    pension cost only when benefits are paid to retired employees or their 
    beneficiaries.
        (20) Pension plan means a deferred compensation plan established 
    and maintained by one or more employers to provide systematically for 
    the payment of benefits to plan participants after their retirement, 
    provided that the benefits are paid for life or are payable for life at 
    the option of the employees. Additional benefits such as permanent and 
    total disability and death payments, and survivorship payments to 
    beneficiaries of deceased employees may be an integral part of a 
    pension plan.
        (21) Pension plan participant means any employee or former employee 
    of an employer, or any member or former member of an employee 
    organization, who is or may become eligible to receive a benefit from a 
    pension plan which covers employees of such employer or members of such 
    organization who have satisfied the plan's participation requirements, 
    or whose beneficiaries are receiving or may be eligible to receive any 
    such benefit. A participant whose employment status with the employer 
    has not been terminated is an active participant of the employer's 
    pension plan.
        (22) Permitted unfunded accrual means the amount of pension cost 
    for nonqualified defined-benefit pension plans that is not required to 
    be funded under 9904.412-50(d)(2). The Accumulated Value of Permitted 
    Unfunded Accruals means the value, as of the measurement date, of the 
    permitted unfunded accruals adjusted for imputed earnings and for 
    benefits paid by the contractor.
        (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 interest at the valuation rate and decreased for 
    amounts used to fund pension costs or liabilities, whether assignable 
    or not.
        (24) Projected benefit cost method means either (i) any of the 
    several actuarial cost methods which distribute the estimated total 
    cost of all of the employees' prospective benefits over a period of 
    years, usually their working careers, or (ii) a modification of the 
    accrued benefit cost method that considers projected compensation 
    levels.
        (25) Qualified pension plan means a pension plan comprising a 
    definite written program communicated to and for the exclusive benefit 
    of employees which meets the criteria deemed essential by the Internal 
    Revenue Service as set forth in the Internal Revenue Code for 
    preferential tax treatment regarding contributions, investments, and 
    distributions. Any other plan is a Nonqualified Pension Plan.
        (b) * * *
        4. Subsection 9904.412-40 is revised to read as follows:
    
    
    9904.412-40  Fundamental requirement.
    
        (a) Components of pension cost. (1) For defined-benefit pension 
    plans, except for plans accounted for under the pay-as-you-go cost 
    method, the components of pension cost for a cost accounting period are 
    (i) the normal cost of the period, (ii) a part of any unfunded 
    actuarial liability, (iii) an interest equivalent on the unamortized 
    portion of any unfunded actuarial liability, and (iv) an adjustment for 
    any actuarial gains and losses.
        (2) For defined-contribution pension plans, the pension cost for a 
    cost accounting period is the net contribution required to be made for 
    that period, after taking into account dividends and other credits, 
    where applicable.
        (3) For defined-benefit pension plans accounted for under the pay-
    as-you-go cost method, the components of pension cost for a cost 
    accounting period are:
        (i) The net amount of periodic benefits paid for that period, and
        (ii) An amortization installment, including an interest equivalent 
    on the unamortized settlement amount, attributable to amounts paid to 
    irrevocably settle an obligation for periodic benefits due in current 
    and future cost accounting periods.
        (b) Measurement of pension cost. (1) For defined-benefit pension 
    plans other than those accounted for under the pay-as-you-go cost 
    method, the amount of pension cost of a cost accounting period shall be 
    determined by use of an immediate-gain actuarial cost method. 
    [[Page 16542]] 
        (2) Each actuarial assumption used to measure pension cost shall be 
    separately identified and shall represent the contractor's best 
    estimates of anticipated experience under the plan, taking into account 
    past experience and reasonable expectations. The validity of each 
    assumption used shall be evaluated solely with respect to that 
    assumption. Actuarial assumptions used in calculating the amount of an 
    unfunded actuarial liability shall be the same as those used for other 
    components of pension cost.
        (c) Assignment of pension cost. Except costs assigned to future 
    periods by 9904.412-50(c) (2) and (5), the amount of pension cost 
    computed for a cost accounting period is assignable only to that 
    period. For defined-benefit pension plans other than those accounted 
    for under the pay-as-you-go cost method, the pension cost is assignable 
    only if the sum of (1) the unamortized portions of assignable unfunded 
    actuarial liability developed and amortized pursuant to 9904.412-50(a) 
    (1), and (2) the unassignable portions of unfunded actuarial liability 
    separately identified and maintained pursuant to 9904.412-50(a)(2) 
    equals the total unfunded actuarial liability.
        (d) Allocation of pension cost. Pension costs assigned to a cost 
    accounting period are allocable to intermediate and final cost 
    objectives only if they meet the requirements for allocation in 
    9904.412-50(d). Pension costs not meeting these requirements may not be 
    reassigned to any future cost accounting period.
        5. Subsection 9904.412-50 is revised to read as follows:
    
    
    9904.412-50  Techniques for application.
    
        (a) Components of pension cost. (1) The following portions of 
    unfunded actuarial liability shall be included as a separately 
    identified part of the pension cost of a cost accounting period and 
    shall be included in equal annual installments. Each installment shall 
    consist of an amortized portion of the unfunded actuarial liability 
    plus an interest equivalent on the unamortized portion of such 
    liability. The period of amortization shall be established as follows:
        (i) If amortization of an unfunded actuarial liability has begun 
    prior to the date this Standard first becomes applicable to a 
    contractor, no change in the amortization period is required by this 
    Standard.
        (ii) If amortization of an unfunded actuarial liability has not 
    begun prior to the date this Standard first becomes applicable to a 
    contractor, the amortization period shall begin with the period in 
    which the Standard becomes applicable and shall be no more than 30 
    years nor less than 10 years. However, if the plan was in existence as 
    of January 1, 1974, the amortization period shall be no more than 40 
    years nor less than 10 years.
        (iii) Each increase or decrease in unfunded actuarial liability 
    resulting from the institution of new pension plans, from the adoption 
    of improvements, or other changes to pension plans subsequent to the 
    date this Standard first becomes applicable to a contractor shall be 
    amortized over no more than 30 years nor less than 10 years.
        (iv) If any assumptions are changed during an amortization period, 
    the resulting increase or decrease in unfunded actuarial liability 
    shall be separately amortized over no more than 30 years nor less than 
    10 years.
        (v) Actuarial gains and losses shall be identified separately from 
    unfunded actuarial liabilities that are being amortized pursuant to the 
    provisions of this Standard. The accounting treatment to be afforded to 
    such gains and losses shall be in accordance with Cost Accounting 
    Standard 9904.413.
        (vi) Each increase or decrease in unfunded actuarial liability 
    resulting from an assignable cost deficit or credit, respectively, 
    shall be amortized over a period of 10 years.
        (vii) Each increase or decrease in unfunded actuarial liability 
    resulting from a change in actuarial cost method, including the asset 
    valuation method, shall be amortized over a period of 10 to 30 years. 
    This provision shall not affect the requirements of 9903.302 to adjust 
    previously priced contracts.
        (2) Except as provided in 9904.412-50(d)(2), any portion of 
    unfunded actuarial liability attributable to either (i) pension costs 
    applicable to prior years that were specifically unallowable in 
    accordance with then existing Government contractual provisions or (ii) 
    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. Such portions of unfunded actuarial 
    liability shall be adjusted for interest at the valuation rate of 
    interest. 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).
        (3) A contractor shall establish and consistently follow a policy 
    for selecting specific amortization periods for unfunded actuarial 
    liabilities, if any, that are developed under the actuarial cost method 
    in use. Such policy may give consideration to factors such as the size 
    and nature of the unfunded actuarial liabilities. Except as provided in 
    9904.412-50(c)(2) or 9904.413-50(c)(12), once the amortization period 
    for a portion of unfunded actuarial liability is selected, the 
    amortization process shall continue to completion.
        (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 
    interest at the valuation rate of interest 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.
        (5) An excise tax assessed pursuant to a law or regulation because 
    of excess, inadequate, or delayed funding of a pension plan is not a 
    component of pension cost. Income taxes paid from the funding agency of 
    a nonqualified defined-benefit pension plan on earnings or other asset 
    appreciation of such funding agency shall be treated as an 
    administrative expense of the fund and not as a reduction to the 
    earnings assumption.
        (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 ERISA's 
    minimum funding requirements, 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.
        (7) If a pension plan is supplemented by a separately-funded plan 
    which provides retirement benefits to all of the participants in the 
    basic plan, the two plans shall be considered as a single plan for 
    purposes of this Standard. If the effect of the combined plans is to 
    provide defined-benefits for the plan participants, the combined plans 
    shall [[Page 16543]] be treated as a defined-benefit plan for purposes 
    of this Standard.
        (8) A multiemployer pension plan established pursuant to the terms 
    of a collective bargaining agreement shall be considered to be a 
    defined-contribution pension plan for purposes of this Standard.
        (9) A pension plan applicable to a Federally-funded Research and 
    Development Center (FFRDC) that is part of a State pension plan shall 
    be considered to be a defined-contribution pension plan for purposes of 
    this Standard.
        (b) Measurement of pension cost. (1) For defined-benefit pension 
    plans other than those accounted for under the pay-as-you-go cost 
    method, the amount of pension cost assignable to cost accounting 
    periods shall be measured by an immediate-gain actuarial cost method.
        (2) Where the pension benefit is a function of salaries and wages, 
    the normal cost shall be computed using a projected benefit cost 
    method. The normal cost for the projected benefit shall be expressed 
    either as a percentage of payroll or as an annual accrual based on the 
    service attribution of the benefit formula. Where the pension benefit 
    is not a function of salaries and wages, the normal cost shall be based 
    on employee service.
        (3) For defined-benefit plans accounted for under the pay-as-you-go 
    cost method, the amount of pension cost assignable to a cost accounting 
    period shall be measured as the sum of:
        (i) The net amount for any periodic benefits paid for that period, 
    and
        (ii) The level annual installment required to amortize over 15 
    years any amounts paid to irrevocably settle an obligation for periodic 
    benefits due in current or future cost accounting periods.
        (4) Actuarial assumptions shall reflect long-term trends so as to 
    avoid distortions caused by short-term fluctuations.
        (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.
        (6) If the evaluation of the validity of actuarial assumptions 
    shows that any assumptions were not reasonable, the contractor shall:
        (i) Identify the major causes for the resultant actuarial gains or 
    losses, and
        (ii) Provide information as to the basis and rationale used for 
    retaining or revising such assumptions for use in the ensuing cost 
    accounting period(s).
        (c) Assignment of pension cost. (1) Amounts funded in excess of the 
    pension cost computed for 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 
    computed for a cost accounting period is assigned to that period 
    subject to the following adjustments, in order of application:
        (i) Any amount of computed pension cost that is less than zero 
    shall be assigned to future accounting periods as an assignable cost 
    credit. The amount of pension cost assigned to the period shall be 
    zero.
        (ii) When the pension cost equals or exceeds the assignable cost 
    limitation:
        (A) The amount of computed 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 9904.413-50(a)(2), any 
    portion of unfunded actuarial liability, which occurs in the first cost 
    accounting period after the pension cost has been limited by the 
    assignable cost limitation, shall be considered an actuarial gain or 
    loss for purposes of this Standard. Such actuarial gain or loss shall 
    exclude any increase or decrease in unfunded actuarial liability 
    resulting from a plan amendment, change in actuarial assumptions, or 
    change in actuarial cost method effected after the pension cost has 
    been limited by the assignable cost limitation.
        (iii) Any amount of computed 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 ERISA, 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 plus the accumulated value of prepayment credits.
        (3) The cost of nonqualified defined-benefit pension plans shall be 
    assigned to cost accounting periods in the same manner as qualified 
    plans (with the exception of paragraph (c)(2)(iii) of this subsection) 
    under the following conditions:
        (i) The contractor, in disclosing or establishing his cost 
    accounting practices, elects to have a plan so accounted for;
        (ii) The plan is funded through the use of a funding agency; and,
        (iii) The right to a pension benefit is nonforfeitable and is 
    communicated to the participants.
        (4) The costs of nonqualified defined-benefit pension plans that do 
    not meet all of the requirements in 9904.412-50(c)(3) shall be assigned 
    to cost accounting periods using the pay-as-you-go cost method.
        (5) Any portion of pension cost computed for a cost accounting 
    period 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.
        (d) Allocation of pension costs. The amount of pension cost 
    assigned to a cost accounting period allocated to intermediate and 
    final cost objectives shall be limited according to the following 
    criteria:
        (1) Except for nonqualified defined-benefit plans, the costs of a 
    pension plan assigned to a cost accounting period are allocable to the 
    extent that they are funded.
        (2) For nonqualified defined-benefit pension plans that meet the 
    criteria set forth at 9904.412-50(c)(3), pension costs assigned to a 
    cost accounting period are fully allocable if they are funded at a 
    level at least equal to the percentage of the complement (i.e., 100%-
    tax rate % = percentage of assigned cost to be funded) of the highest 
    published Federal corporate income tax rate in effect on the first day 
    of the cost accounting period. If the contractor is not subject to 
    Federal income tax, the assigned costs are allocable to the extent such 
    costs are funded. Funding at other levels and benefit payments of such 
    plans are subject to the following:
        (i) Funding at less than the foregoing levels shall result in 
    proportional reductions of the amount of assigned cost that can be 
    allocated within the cost accounting period.
        (ii) (A) Payments to retirees or beneficiaries shall contain an 
    amount drawn from sources other than the funding agency of the pension 
    plan that is, at least, proportionately equal to the 
    [[Page 16544]] accumulated value of permitted unfunded accruals divided 
    by an amount that is the market value of the assets of the pension plan 
    excluding any accumulated value of prepayment credits.
        (B) The amount of assigned cost of a cost accounting period that 
    can be allocated shall be reduced to the extent that such payments are 
    drawn in a higher ratio from the funding agency.
        (iii) The permitted unfunded accruals shall be identified and 
    accounted for year to year, adjusted for benefit payments directly paid 
    by the contractor and for interest at the actual annual earnings rate 
    on the funding agency balance.
        (3) For nonqualified defined-benefit pension plans accounted for 
    under the pay-as-you-go method, pension costs assigned to a cost 
    accounting period are allocable in that period.
        (4) Funding of pension cost shall be considered to have taken place 
    within the cost accounting period if it is accomplished by the 
    corporate tax filing date for such period including any permissible 
    extensions thereto.
        6. Subsection 9904.412-60 is revised to read as follows:
    
    
    9904.412-60  Illustrations.
    
        (a) Components of pension cost. (1) Contractor A has insured 
    pension plans for each of two small groups of employees. One plan is 
    exclusively funded through a group permanent life insurance contract 
    and is exempt from the minimum funding requirements of ERISA. The other 
    plan is funded through a deposit administration contract, which is a 
    form of group deferred annuity contract that is not exempt from ERISA's 
    minimum funding requirements. Both plans provide for defined benefits. 
    Pursuant to 9904.412-50(a)(6), for purposes of this Standard the plan 
    financed through a group permanent insurance contract shall be 
    considered to be a defined-contribution pension plan; the net premium 
    required to be paid for a cost accounting period (after deducting 
    dividends and any credits) shall be the pension cost for that period. 
    However, the deposit administration contract plan is subject to the 
    provisions of this Standard that are applicable to defined-benefit 
    plans.
        (2) Contractor B provides pension benefits for certain hourly 
    employees through a multiemployer defined-benefit plan. Under the 
    collective bargaining agreement, the contractor pays six cents into the 
    fund for each hour worked by the covered employees. Pursuant to 
    9904.412-50(a)(8), the plan shall be considered to be a defined-
    contribution pension plan. The payments required to be made for a cost 
    accounting period shall constitute the assignable pension cost for that 
    period.
        (3) Contractor C provides pension benefits for certain employees 
    through a defined-contribution pension plan. However, the contractor 
    has a separate fund that is used to supplement pension benefits for all 
    of the participants in the basic plan in order to provide a minimum 
    monthly retirement income to each participant. Pursuant to 9904.412-
    50(a)(7), the two plans shall be considered as a single plan for 
    purposes of this Standard. Because the effect of the supplemental plan 
    is to provide defined-benefits for the plan's participants, the 
    provisions of this Standard relative to defined-benefit pension plans 
    shall be applicable to the combined plan.
        (4) Contractor D provides supplemental benefits to key management 
    employees through a nonqualified defined-benefit pension plan funded by 
    a so-called ``Rabbi Trust.'' The trust agreement provides that Federal 
    income taxes levied on the earnings of the Rabbi trust may be paid from 
    the trust. The contractor's actuarial cost method recognizes the 
    administrative expenses of the plan and trust, such as broker and 
    attorney fees, by adding the prior year's expenses to the current 
    year's normal cost. The income taxes paid by the trust on trust 
    earnings shall be accorded the same treatment as any other 
    administrative expense in accordance with 9904.412-50(a)(5).
        (5) (i) Contractor E has been using the entry age normal actuarial 
    cost method to compute pension costs. The contractor has three years 
    remaining under a firm fixed price contract subject to this Standard. 
    The contract was priced using the unfunded actuarial liability, normal 
    cost, and net amortization installments developed using the entry age 
    normal method. The contract was priced as follows:
    
                             Entry Age Normal Values                        
    ------------------------------------------------------------------------
                 Cost component                Year 1     Year 2     Year 3 
    ------------------------------------------------------------------------
    Normal cost............................   $100,000   $105,000   $110,000
    Amortization...........................     50,000     50,000     50,000
                                            --------------------------------
      Pension cost.........................    150,000    155,000    160,000
    ------------------------------------------------------------------------
    
        (ii) The contractor, after notifying the cognizant Federal 
    official, switches to the projected unit credit actuarial cost method. 
    The unfunded actuarial liability and normal cost decreased when 
    redetermined under the projected unit credit method. Pursuant to 
    9904.412-50(a)(1)(vii), the contractor determines that an annual 
    installment credit of $20,000 will amortize the decrease in unfunded 
    actuarial liability (UAL) over ten years. The following pension costs 
    are determined under the projected unit credit method:
    
                          Projected Unit Credit Values                      
    ------------------------------------------------------------------------
                 Cost component                Year 1     Year 2     Year 3 
    ------------------------------------------------------------------------
    Normal cost............................    $80,000    $85,000    $90,000
    Amortization:                                                           
      Prior method.........................     50,000     50,000     50,000
      UAL decrease.........................   (20,000)   (20,000)   (20,000)
                                            --------------------------------
    Pension cost...........................    110,000    115,000    120,000
    ------------------------------------------------------------------------
    
        [[Page 16545]] (iii) The change in cost method is a change in 
    accounting method that decreased previously priced pension costs by 
    $40,000 per year. In accordance with 9903.302, Contractor E shall 
    adjust the cost of the firm fixed-price contract for the remaining 
    three years by $120,000 ($40,000 x 3 years).
        (6) Contractor F has a defined-benefit pension plan for its 
    employees. Prior to being subject to this Standard the contractor's 
    policy was to compute and fund as annual pension cost normal cost plus 
    only interest on the unfunded actuarial liability. Pursuant to 
    9904.412-40(a)(1), the components of pension cost for a cost accounting 
    period must now include not only the normal cost for the period and 
    interest on the unfunded actuarial liability, but also an amortized 
    portion of the unfunded actuarial liability. The amortization of the 
    liability and the interest equivalent on the unamortized portion of the 
    liability must be computed in equal annual installments.
        (b) Measurement of pension cost. (1) Contractor G has a pension 
    plan whose costs are assigned to cost accounting periods by use of an 
    actuarial cost method that does not separately identify actuarial gains 
    and losses or the effect on pension cost resulting from changed 
    actuarial assumptions. Contractor G's method is not an immediate-gain 
    cost method and does not comply with the provisions of 9904.412-
    50(b)(1).
        (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 valuation interest 
    rate assumption is $5,000. Since the plan does not meet the criteria 
    set forth in 9904.412-50(c)(3)(ii), pension cost must be accounted for 
    using the pay-as-you-go cost method. Pursuant to 9904.412-50(b)(3), the 
    amount of assignable cost allocable to cost objectives of that period 
    is $29,000, which is the sum of the amount of benefits actually paid in 
    that period ($24,000) plus the second annual installment to amortize 
    the prior year's lump sum settlements ($5,000).
        (3) Contractor I has two qualified defined-benefit pension plans 
    that provide for fixed dollar payments to hourly employees. Under the 
    first plan, the contractor's actuary believes that the contractor will 
    be required to increase the level of benefits by specified percentages 
    over the next several years. In calculating pension costs, the 
    contractor may not assume future benefits greater than that currently 
    required by the plan. With regard to the second plan, a collective 
    bargaining agreement negotiated with the employees' labor union 
    provides that pension benefits will increase by specified percentages 
    over the next several years. Because the improved benefits are required 
    to be made, the contractor can consider such increased benefits in 
    computing pension costs for the current cost accounting period in 
    accordance with 9904.412-50(b)(5).
        (4) In addition to the facts of 9904.412-60(b)(3), assume that 
    Contractor I was required to contribute at a higher level for ERISA 
    purposes because the plan was underfunded. To compute pension costs 
    that are closer to the funding requirements of ERISA, Contractor I 
    decides to ``fresh start'' the unfunded actuarial liability being 
    amortized pursuant to 9904.412-50(a)(1); i.e., treat the entire amount 
    as a newly established portion of unfunded actuarial liability, which 
    is amortized over 10 years in accordance with 9904.412-50(a)(1)(ii). 
    Because the contractor has changed the periods for amortizing the 
    unfunded actuarial liability established pursuant to 9904.412-50(a)(3), 
    the contractor has made a change in accounting practice subject to the 
    provisions of Cost Accounting Standard 9903.302.
        (c) Assignment of pension cost. (1) Contractor J maintains a 
    qualified defined-benefit pension plan. 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 1996, 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 1996 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, 1997, Contractor K computes an unfunded actuarial 
    liability of $4 million. Contractor K has not changed his actuarial 
    assumptions nor amended the provisions of his pension plan. Contractor 
    K has not had any pension costs disallowed or unfunded in prior 
    periods. Contractor K must treat the entire $4 million of unfunded 
    actuarial liability as an actuarial loss to be amortized over fifteen 
    years beginning in 1997 in accordance with 9904.412-50(c)(2)(ii)(C).
        (3) Assume the same facts shown in illustration 9904.412-60(c)(2), 
    except that in 1995, 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 1995 and 1996, and was brought forward to 1996 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 1996. The next year, 1997, 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 1996 pension cost computed 
    for Contractor K's qualified defined-benefit pension plan is $1.5 
    million and the assignable cost limitation is $1.7 
    [[Page 16546]] million. However, because of the ERISA limitation on 
    tax-deductible contributions, Contractor K cannot fund more than $1 
    million without incurring an excise tax, which 9904.412-50(a)(5) does 
    not permit to be a component of pension cost. In accordance with the 
    provisions of 9904.412-50(c)(2)(iii), Contractor K's assignable pension 
    cost for the period is limited to $1 million. The $500,000 ($1.5 
    million-$1 million) of pension cost not funded is reassigned to the 
    next ten cost accounting periods beginning in 1997 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, Contractor K can 
    apply $500,000 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), Contractor K's assignable pension 
    cost for the period is the full $1.5 million ($1 million+$500,000) 
    computed for the period. The $200,000 of remaining accumulated value of 
    prepayment credits ($700,000-$500,000) is adjusted for interest at the 
    valuation rate and carried forward until needed in future accounting 
    periods in accordance with 9904.412-50(a)(4).
        (6) Assume the same facts for Contractor K in 9904.412-60(c)(4), 
    except that the 1996 assignable cost limitation is $1.3 million. 
    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 subparagraph 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.
        (7) Contractor L is currently amortizing a large decrease in 
    unfunded actuarial liability over a period of ten years. A similarly 
    large increase in unfunded actuarial liability is being amortized over 
    30 years. The absolute value of the resultant net amortization credit 
    is greater than the normal cost so that the pension cost computed for 
    the period is a negative $200,000. Contractor L first applies the 
    provisions of 9904.412-50(c)(2)(i) and determines the assignable 
    pension cost is $0. The negative pension cost of $200,000 is assigned 
    to the next ten cost accounting periods as an assignable cost credit in 
    accordance with 9904.412-50(a)(1)(vi). However, when Contractor L 
    applies the provisions of 9904.412-50(c)(2)(ii), the assignable cost 
    limitation is also $0. Because the assignable cost of $0 determined 
    under 9904.412-50(c)(2)(i) is equal to the assignable cost limitation, 
    the assignable cost credit of $200,000 is considered fully amortized 
    along with all other portions of unfunded actuarial liability being 
    amortized pursuant to 9904.412-50(a)(1). Conversely, if the assignable 
    cost limitation had been greater than zero, the assignable cost credit 
    of $200,000 would have carried-forward and amortized in future periods.
        (8) Contractor M has a qualified defined-benefit pension plan which 
    is funded through a funding agency. It computes $1 million of pension 
    cost for a cost accounting period. However, pursuant to a waiver 
    granted under the provisions of ERISA, Contractor M is required to fund 
    only $800,000. Under the provisions of 9904.412-50(c)(5), the remaining 
    $200,000 shall be accounted for as an assignable cost deficit and 
    assigned to the next five cost accounting periods in accordance with 
    the terms of the waiver.
        (9) Contractor N has a company-wide defined-benefit pension plan, 
    wherein benefits are calculated on one consistently applied formula. 
    That part of the formula defining benefits within ERISA limits is 
    administered and reported as a qualified plan and funded through a 
    funding agency. The remainder of the benefits are considered to be a 
    supplemental or excess plan which, while it meets the criteria at 
    9904.412-50(c)(3)(iii) as to nonforfeitability and communication, is 
    not funded. The costs of the qualified portion of the plan shall be 
    comprised of those elements of costs delineated at 9904.412-40(a)(1), 
    while the supplemental or excess portion of the plan shall be accounted 
    for and assigned to cost accounting periods under the pay-as-you-go 
    cost method provided at 9904.412-40(a)(3) and 9904.412-50(c)(4).
        (10) Assuming the same facts as in 9904.412-60(c)(9), except that 
    Contractor N funds its supplemental or excess plan using a so-called 
    ``Rabbi Trust'' vehicle. Because the nonqualified plan is funded, the 
    plan meets the criteria set forth at 9904.412-50(c)(3)(ii). Contractor 
    N may account for the supplemental or excess plan in the same manner as 
    its qualified plan, if it elects to do so pursuant to 9904.412-
    50(c)(3)(i).
        (11) Assuming the same facts as in 9904.412-60(c)(10), except that 
    under the nonqualified portion of the pension plan a former employee 
    will forfeit his pension benefit if the employee goes to work for a 
    competitor within three years of terminating employment. Since the 
    right to a benefit cannot be affected by the unilateral action of the 
    contractor, the right to a benefit is considered to be nonforfeitable 
    for purposes of 9904.412-30(a)(17). The nonqualified plan still meets 
    the criteria set forth at 9904.412-50(c)(3)(iii), and Contractor N may 
    account for the supplemental or excess plan in the same manner as its 
    qualified plan, if it elects to do so.
        (12) Assume the same facts as in 9904.412-60(c)(11), except that 
    Contractor N, while maintaining a ``Rabbi Trust'' funding vehicle 
    elects to have the plan accounted for under the pay-as-you-go cost 
    method so as to have greater latitude in annual funding decisions. It 
    may so elect pursuant to 9904.412-50(c)(3)(i).
        (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 of excess contribution as a prepayment credit 
    in accordance with 9904.412-50(a)(4).
        (d) Allocation of pension cost. (1) Assume the same set of facts 
    for Contractor M in 9904.412-60(c)(8) except there was no ERISA waiver; 
    i.e., only $800,000 was funded against $1 million of assigned pension 
    cost for the period. Under the provisions of 9904.412-50(d)(1), only 
    $800,000 may be allocated to Contractor M's intermediate and final cost 
    objectives. The remaining $200,000 of assigned cost, which has not been 
    funded, shall be separately identified and maintained in accordance 
    with 9904.412-50(a)(2) so [[Page 16547]] that it will not be reassigned 
    to any future accounting periods.
        (2) Contractor P has a nonqualified defined-benefit pension plan 
    which covers benefits in excess of the ERISA limits. Contractor P has 
    elected to account for this plan in the same manner as its qualified 
    plan and, therefore, has established a ``Rabbi Trust'' as the funding 
    agency. For the current cost accounting period, the contractor computes 
    and assigns $100,000 as pension cost. The contractor funds $65,000, 
    which is equivalent to a funding level equal to the complement of the 
    highest published Federal corporate income tax rate of 35%. Under the 
    provisions of 9904.412-50(d)(2), the entire $100,000 is allocable to 
    cost objectives of the period.
        (3) Assume the set of facts in 9904.412-60(d)(2), except that 
    Contractor P's contribution to the Trust is $59,800. In that event, the 
    provisions of 9904.412-50(d)(2)(i) would limit the amount of assigned 
    cost allocable within the cost accounting period to the percentage of 
    cost funded (i.e., $59,800/$65,000 = 92%). This results in allocable 
    cost of $92,000 (92% of $100,000) for the cost accounting period. Under 
    the provisions of 9904.412-40(c) and 9904.412-50(d)(2)(i), 
    respectively, the unallocable $8,000 may not be assigned to any future 
    cost accounting period. In addition, in accordance with 9904.412-
    50(a)(2), the $8,000 must be separately identified and no amount of 
    interest on such separately identified $8,000 shall be a component of 
    pension cost in any future cost accounting period.
        (4) Again, assume the set of facts in 9904.412-60(d)(2) except 
    that, Contractor P's contribution to the Trust is $105,000 based on a 
    valuation interest assumption of 8%. Under the provisions of 9904.412-
    50(d)(2) the entire $100,000 is allocable to cost objectives of the 
    period. In accordance with the provisions of 9904.412-50(c)(1) 
    Contractor P has funded $5,000 ($105,000--$100,000) in excess of the 
    assigned pension cost for the period. The $5,000 shall be accounted for 
    as a prepayment credit. Pursuant to 9904.412-50(a)(4), the $5,000 shall 
    be adjusted for interest at the 8% valuation rate of interest and 
    excluded from the actuarial value of assets used to compute the next 
    year's pension cost computations. The accumulated value of prepayment 
    credits of $5,400 (5,000  x  1.08) may be used to fund the next year's 
    assigned pension cost, if needed.
        (5) Contractor Q maintains a nonqualified defined-benefit pension 
    plan which satisfies the requirements of 9904.412-50(c)(3). As of the 
    valuation date, the reported funding agency balance is $3.4 million 
    excluding any accumulated value of prepayment credits. When the 
    adjusted funding agency balance is added to the accumulated value of 
    permitted unfunded accruals of $1.6 million, the market value of assets 
    equals $5.0 million ($3.4 million + $1.6 million) in accordance with 
    9904.412-30(a)(13). During the plan year, retirees receive monthly 
    benefits totalling $350,000. Pursuant to 9904.412-50(d)(2)(ii)(A), at 
    least 32% ($1.6 million divided by $5 million) of these benefit 
    payments shall be made from sources other than the funding agency. 
    Contractor Q, therefore, draws $238,000 from the funding agency assets 
    and pays the remaining $112,000 using general corporate funds.
        (6) Assume the same facts as 9904.412-60(d)(5), except that by the 
    time Contractor Q receives its actuarial valuation it has paid 
    retirement benefits equalling $288,000 from funding agency assets. The 
    contractor has made deposits to the funding agency equal to the tax 
    complement of the $500,000 assignable pension cost for the period. 
    Pursuant to 9904.412-50(d)(2)(ii)(B), the assignable $500,000 shall be 
    reduced by the $50,000 ($288,000--$238,000) of benefits paid from the 
    funding agency in excess of the permitted $238,000, unless the 
    contractor makes a deposit to replace the $50,000 inadvertently drawn 
    from the funding agency. If this corrective action is not taken within 
    the time permitted by 9904.412-50(d)(4), Contractor Q shall allocate 
    only $450,000 ($500,000-$50,000) to final cost objectives. Furthermore, 
    the $50,000, which was thereby attributed to benefit payments instead 
    of funding, must be separately identified and maintained in accordance 
    with 9904.412-50(a)(2).
        (7) Contractor R has a nonqualified defined-benefit plan that meets 
    the criteria of 9904.412-50(c)(3). For 1996, the funding agency balance 
    was $1,250,000 and the accumulated value of permitted unfunded accruals 
    was $600,000. During 1996 the earnings and appreciation on the assets 
    of the funding agency equalled $125,000, benefit payments to 
    participants totalled $300,000, and administrative expenses were 
    $60,000. All transactions occurred on the first day of the period. In 
    accordance with 9904.412-50(d)(2)(ii)(A), $200,000 of benefits were 
    paid from the funding agency and $100,000 were paid directly from 
    corporate assets. Pension cost of $400,000 was assigned to 1996. Based 
    on the current corporate tax rate of 35%, $260,000 ($400,000  x  (1-
    35%)) was deposited into the funding agency at the beginning of 1996. 
    For 1997 the funding agency balance is $1,375,000 ($1,250,000 + 
    $260,000 + $125,000--$200,000--$60,000). The actual annual earnings 
    rate of the funding agency was 10% for 1996. Pursuant to 9904.412-
    50(d)(2)(iii), the accumulated value of permitted unfunded accruals is 
    updated from 1996 to 1997 by: (i) adding $140,000 (35%  x  $400,000), 
    which is the unfunded portion of the assigned cost; (ii) subtracting 
    the $100,000 of benefits paid directly by the contractor; and (iii) 
    increasing the value of the assets by $64,000 for imputed earnings at 
    10% (10%  x  ($600,000 + $140,000--$100,000)). The accumulated value of 
    permitted unfunded accruals for 1997 is $704,000 ($600,000 + $140,000--
    $100,000 + $64,000).
        7. Subsection 9904.412-63 is revised to read as follows:
    
    
    9904.412-63  Effective date.
    
        (a) This Standard is effective as of March 30, 1995.
        (b) This Standard shall be followed by each contractor on or after 
    the start of its next cost accounting period beginning after the 
    receipt of a contract or subcontract to which this Standard is 
    applicable.
        (c) Contractors with prior CAS-covered contracts with full coverage 
    shall continue to follow the Standard in 9904.412 in effect prior to 
    March 30, 1995, until this Standard, effective March 30, 1995, becomes 
    applicable following receipt of a contract or subcontract to which this 
    Standard applies.
        8. A new subsection 9904.412-64 is added to read as follows:
    
    
    9904.412-64  Transition method.
    
        To be acceptable, any method of transition from compliance with 
    Standard 9904.412 in effect prior to March 30, 1995, to compliance with 
    the Standard effective March 30, 1995, must follow the equitable 
    principle that costs, which have been previously provided for, shall 
    not be redundantly provided for under revised methods. Conversely, 
    costs that have not previously been provided for must be provided for 
    under the revised method. This transition subsection is not intended to 
    qualify for purposes of assignment or allocation, pension costs which 
    have previously been disallowed for reasons other than ERISA tax-
    deductibility limitations. The sum of all portions of unfunded 
    actuarial liability identified pursuant to Standard 9904.412, effective 
    March 30, 1995, including such portions of unfunded actuarial liability 
    determined for transition purposes, is subject to the 
    [[Page 16548]] provisions of 9904.412-40(c) on requirements for 
    assignment. The method, or methods, employed to achieve an equitable 
    transition shall be consistent with the provisions of Standard 
    9904.412, effective March 30, 1995, and shall be approved by the 
    contracting officer. Examples and illustrations of such transition 
    methods include, but are not limited to, the following:
        (a) Reassignment of certain prior unfunded accruals.
        (1) Any portion of pension cost for a qualified defined-benefit 
    pension plan, assigned to a cost accounting period prior to [insert 
    date of publication in the Federal Register], which was not funded 
    because such cost exceeded the maximum tax-deductible amount, 
    determined in accordance with ERISA, shall be assigned to subsequent 
    accounting periods, including an adjustment for interest, as an 
    assignable cost deficit. However, such costs shall be assigned to 
    periods on or after March 30, 1995, only to the extent that such costs 
    have not previously been allocated as cost or price to contracts 
    subject to this Standard.
        (2) Alternatively, the transition method described in paragraph (d) 
    of this subsection may be applied separately to costs subject to 
    paragraph (a)(1) of this subsection.
        (b) Reassignment of certain prior unallocated credits.
        (1) Any portion of pension cost for a defined-benefit pension plan, 
    assigned to a cost accounting period prior to March 30, 1995, which was 
    not allocated as a cost or price credit to contracts subject to this 
    Standard because such cost was less than zero, shall be assigned to 
    subsequent accounting periods, including an adjustment for interest, as 
    an assignable cost credit.
        (2) Alternatively, the transition method described in paragraph (d) 
    of this subsection may be applied separately to costs subject to 
    paragraph (b)(1) of this subsection.
        (c) Accounting for certain prior allocated unfunded accruals. Any 
    portion of unfunded pension cost for a nonqualified defined-benefit 
    pension plan, assigned to a cost accounting period prior to March 30, 
    1995, that was allocated as cost or price to contracts subject to this 
    Standard, shall be recognized in subsequent accounting periods, 
    including adjustments for imputed interest and benefit payments, as an 
    accumulated value of permitted unfunded accruals.
        (d) ``Fresh start'' alternative transition method. The transition 
    methods of paragraphs (a)(1), (b)(1), and (c) of this subsection may be 
    implemented using the so-called ``fresh start'' method whereby a 
    portion of the unfunded actuarial liability of a defined-benefit 
    pension plan, which occurs in the first cost accounting period after 
    March 30, 1995, shall be treated in the same manner as an actuarial 
    gain or loss. Such portion of unfunded actuarial liability shall 
    exclude any portion of unfunded actuarial liability that must continue 
    to be separately identified and maintained in accordance with 9904.412-
    50(a)(2), including interest adjustments. If the contracting officer 
    already has approved a different amortization period for the fresh 
    start amortization, then such amortization period shall continue.
        (e) Change to pay-as-you-go method. A change in accounting method 
    subject to 9903.302 will have occurred whenever costs of a nonqualified 
    defined-benefit pension plan have been accounted for on an accrual 
    basis prior to March 30, 1995, and the contractor must change to the 
    pay-as-you-go cost method because the plan does not meet the 
    requirement of 9904.412-50(c)(3), either by election or otherwise. In 
    such case, any portion of unfunded pension cost, assigned to a cost 
    accounting period prior to March 30, 1995 that was allocated as cost or 
    price to contracts subject to this Standard, shall be assigned to 
    future accounting periods, including adjustments for imputed interest 
    and benefit payments, as an accumulated value of permitted unfunded 
    accruals. Costs computed under the pay-as-you-go cost method shall be 
    charged against such accumulated value of permitted unfunded accruals 
    before such costs may be allocated to contracts.
        (f) Actuarial assumptions. The actuarial assumptions used to 
    calculate assignable cost deficits, assignable cost credits, or 
    accumulated values of permitted unfunded accruals for transition 
    purposes shall be consistent with the long term assumptions used for 
    valuation purposes for such prior periods unless the contracting 
    officer has previously approved the use of other reasonable 
    assumptions.
        (g) Transition illustrations. Unless otherwise noted, paragraphs 
    (g) (1) through (9) of this subsection address pension costs and 
    transition amounts determined for the first cost accounting period 
    beginning on or after the date this revised Standard becomes applicable 
    to a contractor. For purposes of these illustrations an interest 
    assumption of 7% is presumed to be in effect for all periods.
        (1) For the cost accounting period immediately preceding the date 
    this revised Standard was applicable to a contractor, Contractor S 
    computed and assigned pension cost of $1 million for a qualified 
    defined-benefit pension plan. The contractor made a contribution equal 
    to the maximum tax-deductible amount of $800,000 for the period leaving 
    $200,000 of assigned cost unfunded for the period. Except for this 
    $200,000, no other assigned pension costs have ever been unfunded or 
    otherwise disallowed. Using the transition method of paragraph (a)(1) 
    of this subsection, the contractor shall establish an assignable cost 
    deficit equal to $214,000 ($200,000  x  1.07), which is the prior 
    unfunded assigned cost plus interest. If this assignable cost deficit 
    amount, plus all other portions of unfunded actuarial liability 
    identified in accordance with 9904.412-50(a) (1) and (2), equal the 
    total unfunded actuarial liability, pension cost may be assigned to the 
    current period.
        (2) Assume that Contractor S in 9904.412-64(g)(1) priced the entire 
    $1 million into firm fixed-price contracts. In this case, no assignable 
    cost deficit amount may be established. In addition, the $214,000 
    ($200,000  x  1.07) shall be separately identified and maintained in 
    accordance with 9904.412-50(a)(2). If all portions of unfunded 
    actuarial liability identified in accordance with 9904.412-50(a) (1) 
    and (2), equal the total unfunded actuarial liability, pension cost may 
    be assigned to the period.
        (3) Assume the same facts as in 9904.412-64(g)(1), except 
    Contractor S only funded and allocated $500,000. The $300,000 of 
    assigned cost that was not funded, but could have been funded without 
    exceeding the tax-deductible maximum, may not be recognized as an 
    assignable cost deficit. Instead, the $300,000 must be separately 
    identified and maintained in accordance with 9904.412-50(a)(2). If the 
    $321,000 ($300,000  x  1.07) plus the $214,000 already identified as an 
    assignable cost deficit plus all other portions of unfunded actuarial 
    liability identified in accordance with 9904.412-50(a) (1) and (2), 
    equal the total unfunded actuarial liability, pension cost may be 
    assigned to the period.
        (4) Assume that, for Contractor S in 9904.412-64(g)(3), the only 
    portion of unfunded actuarial liability that must be identified under 
    9904.412-50(a)(2) is the $321,000. If Contractor S chooses to use the 
    ``fresh start'' transition method, the $321,000 of unfunded assigned 
    cost must be subtracted from the total unfunded actuarial liability in 
    accordance with 9904.412-63(d). The net amount of unfunded actuarial 
    liability shall then be amortized over a [[Page 16549]] period of 
    fifteen years as an actuarial loss in accordance with 9904.412-
    50(a)(1)(v) and Cost Accounting Standard 9904.413.
        (5) For the cost accounting period immediately preceding the date 
    this revised Standard becomes applicable to a contractor, Contractor T 
    computed and assigned pension cost of negative $400,000 for a qualified 
    defined-benefit plan. Because the contractor could not withdraw assets 
    from the trust fund, the contracting officer agreed that instead of 
    allocating a current period credit to contracts, the negative costs 
    would be carried forward, with interest, and offset against future 
    pension costs allocated to the contract. Using the transition method of 
    paragraph (b)(1) of this subsection, the contractor shall establish an 
    assignable cost credit equal to $428,000 ($400,000  x  1.07). If this 
    assignable cost credit amount, plus all other portions of unfunded 
    actuarial liability identified in accordance with 9904.412-50(a) (1) 
    and (2), equals the total unfunded actuarial liability, pension cost 
    may be assigned to the period.
        (6) Assume that in 9904.412-64(g)(5), following guidance issued by 
    the contracting agency the contracting officer had deemed the cost for 
    the prior period to be $0. In order to satisfy the requirements of 
    9904.412-40(c) and assign pension cost to the current period, 
    Contractor S must account for the prior period negative accruals that 
    have not been specifically identified. Following the transition method 
    of paragraph (b)(1) of this subsection, the contractor shall identify 
    $428,000 as an assignable cost credit.
        (7) Assume the facts of 9904.412-64(g)(5), except Contractor S uses 
    the ``fresh start'' transition method. In addition, for the current 
    period the plan is overfunded since the actuarial value of the assets 
    is greater than the actuarial accrued liability. In this case, an 
    actuarial gain equal to the negative unfunded actuarial liability; 
    i.e., actuarial surplus, is recognized since there are no portions of 
    unfunded actuarial liability that must be identified under 9904.412-
    50(a)(2).
        (8) Since March 28, 1989 Contractor U has computed, assigned, and 
    allocated pension costs for a nonqualified defined-benefit plan on an 
    accrual basis. The value of these past accruals, increased for imputed 
    interest at 7% and decreased for benefits paid by the contractor, is 
    equal to $2 million as of the beginning of the current period. 
    Contractor U elects to establish a ``Rabbi trust'' and the plan meets 
    the other criteria at 9904.412-50(c)(3). Using the transition method of 
    paragraph (c) of this subsection, Contractor U shall recognize the $2 
    million as the accumulated value of permitted unfunded accruals, which 
    will then be included in the market value and actuarial value of the 
    assets. Because the accumulated value of permitted unfunded accruals is 
    exactly equal to the current period market value of the assets, 100% of 
    benefits for the current period must be paid from sources other than 
    the funding agency in accordance with 9904.412-50(d)(2)(ii).
        (9) Assume that Contractor U in 9904.412-64(g)(8) establishes a 
    funding agency, but elects to use the pay-as-you-go method for current 
    and future pension costs. Furthermore, plan participants receive 
    $500,000 in benefits on the last day of the current period. Using the 
    transition method of paragraph (e) of this subsection to ensure prior 
    costs are not redundantly provided for, the contractor shall establish 
    assets; i.e., an accumulated value of permitted unfunded accruals, of 
    $2 million. Since these assets are sufficient to provide for the 
    current benefit payments, no pension costs can be allocated in this 
    period. Furthermore, previously priced contracts subject to this 
    Standard shall be adjusted in accordance with 9903.302. The accumulated 
    value of permitted unfunded accruals shall be carried forward to the 
    next period by adding $140,000 (7% x $2 million) of imputed interest, 
    and subtracting the $500,000 of benefit payments made by the 
    contractor. The accumulated value of permitted unfunded accruals for 
    the next period equals $1,640,000 ($2 million + $140,000--$500,000).
    
    
    9904.413  [Amended]
    
        9. Subsection 9904.413-30 is amended by revising paragraph (a) to 
    read as follows:
    
    
    9904.413-30  Definitions.
    
        (a) The following are definitions of terms which are prominent in 
    this Standard. Other terms defined elsewhere in this chapter 99 shall 
    have the meaning ascribed to them in those definitions unless paragraph 
    (b) of this subsection requires otherwise.
        (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 inception 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.)
        (2) Actuarial accrued liability means pension cost attributable, 
    under the actuarial cost method in use, to years prior to the current 
    period considered by a particular actuarial valuation. As of such date, 
    the actuarial accrued liability represents the excess of the present 
    value of future benefits and administrative expenses over the present 
    value of future normal costs for all plan participants and 
    beneficiaries. The excess of the actuarial accrued liability over the 
    actuarial value of the assets of a pension plan is the Unfunded 
    Actuarial Liability. The excess of the actuarial value of the assets of 
    a pension plan over the actuarial accrued liability is an actuarial 
    surplus and is treated as a negative unfunded actuarial liability.
        (3) Actuarial assumption means an estimate of future conditions 
    affecting pension cost; for example, mortality rate, employee turnover, 
    compensation levels, earnings on pension plan assets, changes in values 
    of pension plan assets.
        (4) Actuarial cost method means a technique which uses actuarial 
    assumptions to measure the present value of future pension benefits and 
    pension plan administrative expenses, and which assigns the cost of 
    such benefits and expenses to cost accounting periods. The actuarial 
    cost method includes the asset valuation method used to determine the 
    actuarial value of the assets of a pension plan.
        (5) Actuarial gain and loss means the effect on pension cost 
    resulting from differences between actuarial assumptions and actual 
    experience.
        (6) Actuarial valuation means the determination, as of a specified 
    date, of the normal cost, actuarial accrued liability, actuarial value 
    of the assets of a pension plan, and other relevant values for the 
    pension plan.
        (7) Curtailment of benefits means an event; e.g., a plan amendment, 
    in which the pension plan is frozen and no further material benefits 
    accrue. Future service may be the basis for vesting of nonvested 
    benefits existing at the time of the curtailment. The plan may hold 
    assets, pay benefits already accrued, and receive additional 
    contributions for unfunded benefits. Employees may or may not continue 
    working for the contractor.
        (8) Funding agency means an organization or individual which 
    provides facilities to receive and [[Page 16550]] accumulate assets to 
    be used either for the payment of benefits under a pension plan, or for 
    the purchase of such benefits, provided such accumulated assets form a 
    part of a pension plan established for the exclusive benefit of the 
    plan participants and their beneficiaries. The fair market value of the 
    assets held by the funding agency as of a specified date is the Funding 
    Agency Balance as of that date.
        (9) Immediate-gain actuarial cost method means any of the several 
    cost methods under which actuarial gains and losses are included as 
    part of the unfunded actuarial liability of the pension plan, rather 
    than as part of the normal cost of the plan.
        (10) Market value of the assets means the sum of the funding agency 
    balance plus the accumulated value of any permitted unfunded accruals 
    belonging to a pension plan. The Actuarial Value of the Assets means 
    the value of cash, investments, permitted unfunded accruals, and other 
    property belonging to a pension plan, as used by the actuary for the 
    purpose of an actuarial valuation.
        (11) Normal cost means the annual cost attributable, under the 
    actuarial cost method in use, to current and future years as of a 
    particular valuation date, excluding any payment in respect of an 
    unfunded actuarial liability.
        (12) Pension plan means a deferred compensation plan established 
    and maintained by one or more employers to provide systematically for 
    the payment of benefits to plan participants after their retirement, 
    provided that the benefits are paid for life or are payable for life at 
    the option of the employees. Additional benefits such as permanent and 
    total disability and death payments, and survivorship payments to 
    beneficiaries of deceased employees may be an integral part of a 
    pension plan.
        (13) Pension plan participant means any employee or former employee 
    of an employer, or any member or former member of an employee 
    organization, who is or may become eligible to receive a benefit from a 
    pension plan which covers employees of such employer or members of such 
    organization who have satisfied the plan's participation requirements, 
    or whose beneficiaries are receiving or may be eligible to receive any 
    such benefit. A participant whose employment status with the employer 
    has not been terminated is an active participant of the employer's 
    pension plan.
        (14) Pension plan termination means an event; i.e., plan amendment, 
    in which either the pension plan ceases to exist and all benefits are 
    settled by purchase of annuities or other means, or the trusteeship of 
    the plan is assumed by the Pension Benefit Guarantee Corporation or 
    other conservator. The plan may or may not be replaced by another plan.
        (15) Permitted unfunded accruals means the amount of pension cost 
    for nonqualified defined-benefit pension plans that is not required to 
    be funded under 9904.412-50(d)(2). The Accumulated Value of Permitted 
    Unfunded Accruals means the value, as of the measurement date, of the 
    permitted unfunded accruals adjusted for imputed earnings and for 
    benefits paid by the contractor.
        (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 interest at the valuation rate and decreased for 
    amounts used to fund pension costs or liabilities, whether assignable 
    or not.
        (17) Projected benefit cost method means either (i) any of the 
    several actuarial cost methods which distribute the estimated total 
    cost of all of the employees' prospective benefits over a period of 
    years, usually their working careers, or (ii) a modification of the 
    accrued benefit cost method that considers projected compensation 
    levels.
        (18) Qualified pension plan means a pension plan comprising a 
    definite written program communicated to and for the exclusive benefit 
    of employees which meets the criteria deemed essential by the Internal 
    Revenue Service as set forth in the Internal Revenue Code for 
    preferential tax treatment regarding contributions, investments, and 
    distributions. Any other plan is a nonqualified pension plan.
        (19) Segment means one of two or more divisions, product 
    departments, plants, or other subdivisions of an organization reporting 
    directly to a home office, usually identified with responsibility for 
    profit and/or producing a product or service. The term includes 
    Government-owned contractor-operated (GOCO) facilities, and joint 
    ventures and subsidiaries (domestic and foreign) in which the 
    organization has a majority ownership. The term also includes those 
    joint ventures and subsidiaries (domestic and foreign) in which the 
    organization has less than a majority ownership, but over which it 
    exercises control.
        (20) Segment closing means that a segment has (i) been sold or 
    ownership has been otherwise transferred, (ii) discontinued operations, 
    or (iii) discontinued doing or actively seeking Government business 
    under contracts subject to this Standard.
        (21) Termination of employment gain or loss means an actuarial gain 
    or loss resulting from the difference between the assumed and actual 
    rates at which plan participants separate from employment for reasons 
    other than retirement, disability, or death.
        (b) * * *
        10. Subsection 9904.413-40 is amended by revising paragraphs (b) 
    and (c) to read as follows:
    
    
    9904.413-40  Fundamental requirement.
    
        (a) * * *
        (b) Valuation of the assets of a pension plan. The actuarial value 
    of the assets of a pension plan shall be determined under an asset 
    valuation method which takes into account unrealized appreciation and 
    depreciation of the market value of the assets of the pension plan, 
    including the accumulated value of permitted unfunded accruals, and 
    shall be used in measuring the components of pension costs.
        (c) Allocation of pension cost to segments. Contractors shall 
    allocate pension costs to each segment having participants in a pension 
    plan. A separate calculation of pension costs for a segment is required 
    when the conditions set forth in 9904.413-50(c)(2) or (3) are present. 
    When these conditions are not present, allocations may be made by 
    calculating a composite pension cost for two or more segments and 
    allocating this cost to these segments by means of an allocation base. 
    When pension costs are separately computed for a segment or segments, 
    the provisions of Cost Accounting Standard 9904.412 regarding the 
    assignable cost limitation shall be based on the assets and liabilities 
    for the segment or segments for purposes of such computations. In 
    addition, the amount of pension cost assignable to a segment or 
    segments shall not exceed the maximum tax-deductible amount computed 
    for the plan as a whole and apportioned among the segment(s).
        11. Subsection 9904.413-50 is revised to read as follows:
    
    
    9904.413-50  Techniques for application.
    
        (a) Assignment of actuarial gains and losses. (1) In accordance 
    with the provisions of Cost Accounting Standard 9904.412, actuarial 
    gains and losses shall be identified separately from other unfunded 
    actuarial liabilities.
        (2) Actuarial gains and losses determined under a pension plan 
    whose [[Page 16551]] costs are measured by an immediate-gain actuarial 
    cost method shall be amortized over a 15 year period in equal annual 
    installments, beginning with the date as of which the actuarial 
    valuation is made. The installment for a cost accounting period shall 
    consist of an element for amortization of the gain or loss plus an 
    element for interest on the unamortized balance at the beginning of the 
    period. If the actuarial gain or loss determined for a cost accounting 
    period is not material, the entire gain or loss may be included as a 
    component of the current or ensuing year's pension cost.
        (3) Pension plan terminations and curtailments of benefits shall be 
    subject to adjustment in accordance with 9904.413-50(c)(12).
        (b) Valuation of the assets of a pension plan. (1) The actuarial 
    value of the assets of a pension plan shall be used:
        (i) In measuring actuarial gains and losses, and
        (ii) For purposes of measuring other components of pension cost.
        (2) The actuarial value of the assets of a pension plan may 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. However, the actuarial 
    value of the assets produced by the method used shall fall within a 
    corridor from 80 to 120 percent of the market value of the assets, 
    determined as of the valuation date. If the method produces a value 
    that falls outside the corridor, the actuarial value of the assets 
    shall be adjusted to equal the nearest boundary of the corridor.
        (3) The method selected for valuing pension plan assets shall be 
    consistently applied from year to year within each plan.
        (4) The provisions of paragraphs (b) (1) through (3) of this 
    subsection are not applicable to plans that are treated as defined-
    contribution plans in accordance with 9904.412-50(a)(6).
        (5) The market and actuarial values of the assets of a pension plan 
    shall not be adjusted for any fee, reserve charge, or other investment 
    charge for withdrawals from or termination of an investment contract, 
    trust agreement, or other funding arrangement, unless such fee is 
    determined in an arm's length transaction, and actually incurred and 
    paid.
        (c) Allocation of pension cost to segments. (1) For contractors who 
    compute a composite pension cost covering plan participants in two or 
    more segments, the base to be used for allocating such costs shall be 
    representative of the factors on which the pension benefits are based. 
    For example, a base consisting of salaries and wages shall be used for 
    pension costs that are calculated as a percentage of salaries and 
    wages; a base consisting of the number of participants shall be used 
    for pension costs that are calculated as an amount per participant. If 
    pension costs are separately calculated for one or more segments, the 
    contractor shall make a distribution among the segments for the maximum 
    tax-deductible amount and the contribution to the funding agency as 
    follows:
        (i) When apportioning the maximum tax-deductible amount, which is 
    determined for a qualified defined-benefit pension plan as a whole 
    pursuant to the Employee Retirement Income Security Act of 1974 
    (ERISA), 29 U.S.C. 1001 et seq., as amended, to segments, the 
    contractor shall use a base that considers the otherwise assignable 
    pension costs or the funding levels of the individual segments.
        (ii) When apportioning amounts deposited to a funding agency to 
    segments, contractors shall use a base that is representative of the 
    assignable pension costs, determined in accordance with 9904.412-50(c) 
    for the individual segments. However, for qualified defined-benefit 
    pension plans, the contractor may first apportion amounts funded to the 
    segment or segments subject to this Standard.
        (2) Separate pension cost for a segment shall be calculated 
    whenever any of the following conditions exist for that segment, 
    provided that such condition(s) materially affect the amount of pension 
    cost allocated to the segment:
        (i) There is a material termination of employment gain or loss 
    attributable to the segment,
        (ii) The level of benefits, eligibility for benefits, or age 
    distribution is materially different for the segment than for the 
    average of all segments, or
        (iii) The appropriate actuarial assumptions are, in the aggregate, 
    materially different for the segment than for the average of all 
    segments. Calculations of termination of employment gains and losses 
    shall give consideration to factors such as unexpected early 
    retirements, benefits becoming fully vested, and reinstatements or 
    transfers without loss of benefits. An amount may be estimated for 
    future reemployments.
        (3) Pension cost shall also be separately calculated for a segment 
    under circumstances where--
        (i) The pension plan for that segment becomes merged with that of 
    another segment, or the pension plan is divided into two or more 
    pension plans, and in either case,
        (ii) The ratios of market value of the assets to actuarial accrued 
    liabilities for each of the merged or separated plans are materially 
    different from one another after applying the benefits in effect after 
    the pension plan merger or pension plan division.
        (4) For a segment whose pension costs are required to be calculated 
    separately pursuant to paragraphs (c) (2) or (3) of this subsection, 
    such calculations shall be prospective only; pension costs need not be 
    redetermined for prior years.
        (5) For a segment whose pension costs are either required to be 
    calculated separately pursuant to paragraph (c)(2) or (c)(3) of this 
    subsection or calculated separately at the election of the contractor, 
    there shall be an initial allocation of a share in the undivided market 
    value of the assets of the pension plan to that segment, as follows:
        (i) If the necessary data are readily determinable, the funding 
    agency balance to be allocated to the segment shall be the amount 
    contributed by, or on behalf of, the segment, increased by income 
    received on such assets, and decreased by benefits and expenses paid 
    from such assets. Likewise, the accumulated value of permitted unfunded 
    accruals to be allocated to the segment shall be the amount of 
    permitted unfunded accruals assigned to the segment, increased by 
    interest imputed to such assets, and decreased by benefits paid from 
    sources other than the funding agency; or
        (ii) If the data specified in paragraph (c)(5)(i) of this 
    subsection are not readily determinable for certain prior periods, the 
    market value of the assets of the pension plan shall be allocated to 
    the segment as of the earliest date such data are available. Such 
    allocation shall be based on the ratio of the actuarial accrued 
    liability of the segment to the plan as a whole, determined in a manner 
    consistent with the immediate gain actuarial cost method or methods 
    used to compute pension cost. Such assets shall be brought forward as 
    described in paragraph (c)(7) of this subsection.
        (iii) The actuarial value of the assets of the pension plan shall 
    be allocated to the segment in the same proportion as the market value 
    of the assets.
        (6) If, prior to the time a contractor is required to use this 
    Standard, it has been calculating pension cost separately for 
    individual segments, the amount of assets previously allocated to those 
    segments need not be changed.
        (7) After the initial allocation of assets, the contractor shall 
    maintain a record of the portion of subsequent 
    [[Page 16552]] contributions, permitted unfunded accruals, income, 
    benefit payments, and expenses attributable to the segment and paid 
    from the assets of the pension plan: Income and expenses shall include 
    a portion of any investment gains and losses attributable to the assets 
    of the pension plan. Income and expenses of the pension plan assets 
    shall be allocated to the segment in the same proportion that the 
    average value of assets allocated to the segment bears to the average 
    value of total pension plan assets 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, determined using the accrued benefit cost method, 
    transferred.
        (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, 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 plus 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.
        (10) Where pension cost is separately calculated for one or more 
    segments, the actuarial cost method used for a plan shall be the same 
    for all segments. Unless a separate calculation of pension cost for a 
    segment is made because of a condition set forth in paragraph 
    (c)(2)(iii) of this subsection, the same actuarial assumptions may be 
    used for all segments covered by a plan.
        (11) If a pension plan has participants in the home office of a 
    company, the home office shall be treated as a segment for purposes of 
    allocating the cost of the pension plan. Pension cost allocated to a 
    home office shall be a part of the costs to be allocated in accordance 
    with the appropriate requirements of Cost Accounting Standard 9904.403.
        (12) If a segment is closed, if there is a pension plan 
    termination, or if there is a curtailment of benefits, the contractor 
    shall determine the difference between the actuarial accrued liability 
    for the segment and the market value of the assets allocated to the 
    segment, irrespective of whether or not the pension plan is terminated. 
    The difference between the market value of the assets and the actuarial 
    accrued liability for the segment represents an adjustment of 
    previously-determined pension costs.
        (i) The determination of the actuarial accrued liability shall be 
    made using the accrued benefit cost method. The actuarial assumptions 
    employed shall be consistent with the current and prior long term 
    assumptions used in the measurement of pension costs. If there is a 
    pension plan termination, the actuarial accrued liability shall be 
    measured as the amount paid to irrevocably settle all benefit 
    obligations or paid to the Pension Benefit Guarantee Corporation.
        (ii) In computing the market value of assets for the segment, if 
    the contractor has not already allocated assets to the segment, such an 
    allocation shall be made in accordance with the requirements of 
    paragraphs (c)(5) (i) and (ii) of this subsection. The market value of 
    the assets shall be reduced by the accumulated value of prepayment 
    credits, if any. Conversely, the market value of the assets shall be 
    increased by the current value of any unfunded actuarial liability 
    separately identified and maintained in accordance with 9904.412-
    50(a)(2).
        (iii) The calculation of the difference between the market value of 
    the assets and the actuarial accrued liability shall be made as of the 
    date of the event (e.g., contract termination, plan amendment, plant 
    closure) that caused the closing of the segment, pension plan 
    termination, or curtailment of benefits. If such a date is not readily 
    determinable, or if its use can result in an inequitable calculation, 
    the contracting parties shall agree on an appropriate date.
        (iv) Pension plan improvements adopted within 60 months of the date 
    of the event which increase the actuarial accrued liability shall be 
    recognized on a prorata basis using the number of months the date of 
    adoption preceded the event date. Plan improvements mandated by law or 
    collective bargaining agreement are not subject to this phase-in.
        (v) If a segment is closed due to a sale or other transfer of 
    ownership to a successor in interest in the contracts of the segment 
    and all of the pension plan assets and actuarial accrued liabilities 
    pertaining to the closed segment are transferred to the successor 
    segment, then no adjustment amount pursuant to this paragraph (c)(12) 
    is required. If only some of the pension plan assets and actuarial 
    accrued liabilities of the closed segment are transferred, then the 
    adjustment amount required under this paragraph (c)(12) shall be 
    determined based on the pension plan assets and actuarial accrued 
    liabilities remaining with the contractor. In either case, the effect 
    of the transferred assets and liabilities is carried forward and 
    recognized in the accounting for pension cost at the successor 
    contractor.
        (vi) The Government's share of the adjustment amount determined for 
    a segment shall be the product of the adjustment amount and a fraction. 
    The adjustment amount shall be reduced for any excise tax imposed upon 
    assets withdrawn from the funding agency of a qualified pension plan. 
    The numerator of such fraction shall be the sum of the pension plan 
    costs allocated to all contracts and subcontracts (including Foreign 
    Military Sales) subject to this Standard during a period of years 
    representative of the Government's participation in the pension plan. 
    The denominator of such fraction shall be the total pension costs 
    assigned to cost accounting periods during those same years. This 
    amount shall represent an adjustment of contract prices or cost 
    allowance as appropriate. The adjustment may be recognized by modifying 
    a single contract, several but not all contracts, or all contracts, or 
    by use of any other suitable technique.
        (vii) The full amount of the Government's share of an adjustment is 
    allocable, without limit, as a credit or charge during the cost 
    accounting period in which the event occurred and contract prices/costs 
    will be adjusted accordingly. However, if the contractor continues to 
    perform Government contracts, the contracting parties may negotiate an 
    amortization schedule, [[Page 16553]] including interest adjustments. 
    Any amortization agreement shall consider the magnitude of the 
    adjustment credit or charge, and the size and nature of the continuing 
    contracts.
        12. Subsection 9904.413-60 is revised 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. Any actuarial gains or losses measured 
    must be separately amortized over a 15-year period beginning with the 
    period for which the actuarial valuation is made in accordance with 
    9904.413-50(a) (1) and (2).
        (b)(1) Valuation of the assets of a pension plan. Contractor B has 
    a qualified defined-benefit pension plan, the assets of which are 
    invested in equity securities, debt securities, and real property. The 
    contractor, whose cost accounting period is the calendar year, has an 
    annual actuarial valuation of the pension plan assets in June of each 
    year; the effective date of the valuation is the beginning of that 
    year. The contractor's method for valuing the assets of the pension 
    plan is as follows: debt securities expected to be held to maturity are 
    valued on an amortized basis running from initial cost at purchase to 
    par value at maturity; land and buildings are valued at cost less 
    depreciation taken to date; all equity securities and debt securities 
    not expected to be held to maturity are valued on the basis of a five-
    year moving average of market values. In making an actuarial valuation, 
    the contractor must compare the values reached under the asset 
    valuation method used with the market value of all the assets as 
    required by 9904.413-40(b). In this case, the assets are valued as of 
    January 1 of that year. The contractor established the following values 
    as of the valuation date.
    
    ------------------------------------------------------------------------
                                                       Asset                
                                                     valuation      Market  
                                                       method               
    ------------------------------------------------------------------------
    Cash..........................................     $100,000      100,000
    Equity securities.............................    6,000,000    7,800,000
    Debt securities, expected to be held to                                 
     maturity.....................................      550,000      600,000
    Other debt securities.........................      600,000      750,000
    Land and Buildings, net of depreciation.......      400,000      750,000
                                                   -------------------------
          Total...................................    7,650,000   10,000,000
    ------------------------------------------------------------------------
    
        (2) Section 9904.413-50(b)(2) requires that the actuarial value of 
    the assets of the pension plan fall within a corridor from 80 to 120 
    percent of market. The corridor for the plan's assets as of January 1 
    is from $12 million to $8 million. Because the asset value reached by 
    the contractor, $7,650,000, falls outside that corridor, the value 
    reached must be adjusted to equal the nearest boundary of the corridor: 
    $8 million. In subsequent years the contractor must continue to use the 
    same method for valuing assets in accordance with 9904.413-50(b)(3). If 
    the value produced falls inside the corridor, such value shall be used 
    in measuring pension costs.
        (c) Allocation of pension costs to segments. (1) Contractor C has a 
    defined-benefit pension plan covering employees at five segments. 
    Pension cost is computed by use of an immediate-gain actuarial cost 
    method. One segment (X) is devoted primarily to performing work for the 
    Government. During the current cost accounting period, Segment X had a 
    large and unforeseeable reduction of employees because of a contract 
    termination at the convenience of the Government and because the 
    contractor did not receive an anticipated follow-on contract to one 
    that was completed during the period. The segment does continue to 
    perform work under several other Government contracts. As a consequence 
    of this termination of employment gain, a separate calculation of the 
    pension cost for Segment X would result in materially different 
    allocation of costs to the segment than would a composite calculation 
    and allocation by means of a base. Accordingly, pursuant to 9904.413-
    50(c)(2), the contractor must calculate a separate pension cost for 
    Segment X. In doing so, the entire termination of employment gain must 
    be assigned to Segment X and amortized over fifteen years. If the 
    actuarial assumptions for Segment X continue to be substantially the 
    same as for the other segments, the termination of employment gain may 
    be separately amortized and allocated only to Segment X; all other 
    Segment X computations may be included as part of the composite 
    calculation. After the termination of employment gain is amortized, the 
    contractor is no longer required to separately calculate the costs for 
    Segment X unless subsequent events require each separate calculation.
        (2) Contractor D has a defined-benefit pension plan covering 
    employees at ten segments, all of which have some contracts subject to 
    this Standard. The contractor's calculation of normal cost is based on 
    a percentage of payroll for all employees covered by the plan. One of 
    the segments (Segment Y) is entirely devoted to Government work. The 
    contractor's policy is to place junior employees in this segment. The 
    salary scale assumption for employees of the segment is so different 
    from that of the other segments that the pension cost for Segment Y 
    would be materially different if computed separately. Pursuant to 
    9904.413-50(c)(2)(iii), the contractor must compute the pension cost 
    for Segment Y as if it were a separate pension plan. Therefore, the 
    contractor must allocate a portion of the market value of pension 
    plan's assets to Segment Y in accordance with 9904.413-50(c)(5). 
    Memorandum records may be used in making the allocation. However, 
    because the necessary records only exist for the last five years, 
    9904.413-50(c)(5)(ii) permits an initial allocation to be made as of 
    the earliest date such records are available. The initial allocation 
    must be made on the basis of the immediate gain actuarial cost method 
    or methods used to calculate prior years' pension cost for the plan. 
    Once the assets have been allocated, they shall be brought forward to 
    the current period as described in 9904.413-50(c)(7). A portion of the 
    undivided actuarial value of assets shall then be allocated to the 
    segment based on the segment's proportion of the market value of assets 
    in accordance with 9904.413-50(c)(5)(iii). In future cost accounting 
    periods, the contractor shall make separate pension cost calculations 
    for Segment Y based on the appropriate salary scale assumption. Because 
    the factors comprising pension cost for the other nine segments are 
    relatively equal, the contractor may compute pension cost for these 
    nine segments by using composite factors. As required by 9904.413-
    50(c)(1), the base to be used for allocating such costs shall be 
    representative of the factors on which the pension benefits are based.
        (3) Contractor E has a defined-benefit pension plan which covers 
    employees at twelve segments. The contractor uses composite actuarial 
    assumptions to [[Page 16554]] develop a pension cost for all segments. 
    Three of these segments primarily perform Government work; the work at 
    the other nine segments is primarily commercial. Employee turnover at 
    the segments performing commercial work is relatively stable. However, 
    employment experience at the Government segments has been very 
    volatile; there have been large fluctuations in employment levels and 
    the contractor assumes that this pattern of employment will continue to 
    occur. It is evident that separate termination of employment 
    assumptions for the Government segments and the commercial segments 
    will result in materially different pension costs for the Government 
    segments. Therefore, the cost for these segments must be separately 
    calculated, using the appropriate termination of employment assumptions 
    for these segments in accordance with 9904.413-50(c)(2)(iii).
        (4) Contractor F has a defined-benefit pension plan covering 
    employees at 25 segments. Twelve of these segments primarily perform 
    Government work; the remaining segments perform primarily commercial 
    work. The contractor's records show that the termination of employment 
    experience and projections for the twelve segments are so different 
    from that of the average of all of the segments that separate pension 
    cost calculations are required for these segments pursuant to 9904.413-
    50(c)(2). However, because the termination of employment experience and 
    projections are about the same for all twelve segments, Contractor F 
    may calculate a composite pension cost for the twelve segments and 
    allocate the cost to these segments by use of an appropriate allocation 
    base in accordance with 9904.413-50(c)(1).
        (5) After this Standard becomes applicable to Contractor G, it 
    acquires Contractor H and makes it Segment H. Prior to the merger, each 
    contractor had its own defined-benefit pension plan. Under the terms of 
    the merger, Contractor H's pension plan and plan assets were merged 
    with those of Contractor G. The actuarial assumptions, current salary 
    scale, and other plan characteristics are about the same for Segment H 
    and Contractor G's other segments. However, based on the same benefits 
    at the time of the merger, the plan of Contractor H had a 
    disproportionately larger unfunded actuarial liability than did 
    Contractor G's plan. Any combining of the assets and actuarial 
    liabilities of both plans would result in materially different pension 
    cost allocation to Contractor G's segments than if pension cost were 
    computed for Segment H on the basis that it had a separate pension 
    plan. Accordingly, pursuant to 9904.413-50(c)(3), Contractor G must 
    allocate to Segment H a portion of the assets of the combined plan. The 
    amount to be allocated shall be the market value of Segment H's pension 
    plan assets at the date of the merger determined in accordance with 
    9904.413-50(c)(5), and shall be adjusted for subsequent receipts and 
    expenditures applicable to the segment in accordance with 9904.413-
    50(c)(7). Pursuant to 9904.413-40(b)(1) and 9904.413-50(c)(5)(iii), 
    Contractor G must use these amounts of assets as the basis for 
    determining the actuarial value of assets used for calculating the 
    annual pension cost applicable to Segment H.
        (6) Contractor I has a defined-benefit pension plan covering 
    employees at seven segments. The contractor has been making a composite 
    pension cost calculation for all of the segments. However, the 
    contractor determines that, pursuant to this Standard, separate pension 
    costs must be calculated for one of the segments. In accordance with 
    9904.413-50(c)(9), the contractor elects to allocate pension plan 
    assets only for the active participants of that segment. The contractor 
    must then create a segment to accumulate the assets and actuarial 
    accrued liabilities for the plan's inactive participants. When active 
    participants of a segment become inactive, the contractor must transfer 
    assets to the segment for inactive participants equal to the actuarial 
    accrued liabilities for the participants that become inactive.
        (7) Contractor J has a defined-benefit pension plan covering 
    employees at ten segments. The contractor makes a composite pension 
    cost calculation for all segments. The contractor's records show that 
    the termination of employment experience for one segment, which is 
    performing primarily Government work, has been significantly different 
    from the average termination of employment experience of the other 
    segments. Moreover, the contractor assumes that such different 
    experience will continue. Because of this fact, and because the 
    application of a different termination of employment assumption would 
    result in significantly different costs being charged the Government, 
    the contractor must develop separate pension cost for that segment. In 
    accordance with 9904.413-50(c)(2)(ii), the amount of pension cost must 
    be based on an acceptable termination of employment assumption for that 
    segment; however, as provided in 9904.413-50(c)(10), all other 
    assumptions for that segment may be the same as those for the remaining 
    segments.
        (8) Contractor K has a five-year contract to operate a Government-
    owned facility. The employees of that facility are covered by the 
    contractor's overall qualified defined-benefit pension plan which 
    covers salaried and hourly employees at other locations. At the 
    conclusion of the five-year period, the Government decides not to renew 
    the contract. Although some employees are hired by the successor 
    contractor, because Contractor K no longer operates the facility, it 
    meets the 9904.413-30(a)(20)(i) definition of a segment closing. 
    Contractor K must compute the actuarial accrued liability for the 
    pension plan for that facility using the accrued benefit cost method as 
    of the date the contract expired in accordance with 9904.413-
    50(c)(12)(i). Because many of Contractor K's employees are terminated 
    from the pension plan, the Internal Revenue Service considers it to be 
    a partial plan termination, and thus requires that the terminated 
    employees become fully vested in their accrued benefits to the extent 
    such benefits are funded. Taking this mandated benefit improvement into 
    consideration in accordance with 9904.413-50(c)(12)(iv), the actuary 
    calculates the actuarial accrued liability to be $12.5 million. The 
    contractor must then determine the market value of the pension plan 
    assets allocable to the facility, in accordance with 9904.413-50(c)(5), 
    as of the date agreed to by the contracting parties pursuant to 
    9904.413-50(c)(12)(iii), the date the contract expired. In making this 
    determination, the contractor is able to do a full historical 
    reconstruction of the market value of the assets allocated to the 
    segment. In this case, the market value of the segment's assets 
    amounted to $13.8 million. Thus, for this facility the value of pension 
    plan assets exceeded the actuarial accrued liability by $1.3 million. 
    Pursuant to 9904.413-50(c)(12)(vi), this amount indicates the extent to 
    which the Government over-contributed to the pension plan for the 
    segment and, accordingly, is the amount of the adjustment due to the 
    Government.
        (9) Contractor L operated a segment over the last five years during 
    which 80% of its work was performed under Government CAS-covered 
    contracts. The Government work was equally divided each year between 
    fixed-price and cost-type contracts. The employees of the facility are 
    covered by a funded nonqualified defined-benefit pension plan accounted 
    for in accordance with 9904.412-50(c)(3). For each of the last five 
    years the highest Federal corporate income tax rate has been 30%. 
    Pension costs of $1 million per year were [[Page 16555]] computed using 
    a projected benefit cost method. Contractor L funded at the complement 
    of the tax rate ($700,000 per year). The pension plan assets held by 
    the funding agency earned 8% each year. At the end of the five-year 
    period, the funding agency balance; i.e., the market value of invested 
    assets, was $4.4 million. As of that date, the accumulated value of 
    permitted unfunded accruals; i.e., the current value of the $300,000 
    not funded each year, is $1.9 million. As defined by 9904.413-
    30(a)(20)(i), a segment closing occurs when Contractor L sells the 
    segment at the end of the fifth year. Thus, for this segment, the 
    market value of the assets of the pension plan determined in accordance 
    with 9904.413-30(a)(10) is $6.3 million, which is, the sum of the 
    funding account balance ($4.4 million) and the accumulated value of 
    permitted unfunded accruals ($1.9 million). Pursuant to 9904.413-
    50(c)(12)(i), the contractor uses the accrued benefit cost method to 
    calculate an actuarial accrued liability of $5 million as of that date. 
    There is no transfer of plan assets or liabilities to the buyer. The 
    difference between the market value of the assets and the actuarial 
    accrued liability for the segment is $1.3 million ($6.3 million--$5 
    million). Pursuant to 9904.413-50(c)(12)(vi), the adjustment due the 
    Government for its 80% share of previously-determined pension costs for 
    CAS-covered contracts is $1.04 million (80% times $1.3 million). 
    Because contractor L has no other Government contracts the $1.04 
    million is a credit due to the Government.
        (10) Assume the same facts as in 9904.413-60(c)(9), except that 
    Contractor L continues to perform substantial Government contract work 
    through other segments. After considering the amount of the adjustment 
    and the current level of contracts, the contracting officer and the 
    contractor establish an amortization schedule so that the $1.04 million 
    is recognized as credits against ongoing contracts in five level annual 
    installments, including an interest adjustment based on the interest 
    assumption used to compute pension costs for the continuing contracts. 
    This amortization schedule satisfies the requirements of 9904.413-
    50(c)(12))(vii).
        (11) Assume the same facts as in 9904.413-60(c)(9). As part of the 
    transfer of ownership, Contractor L also transfers all pension 
    liabilities and assets of the segment to the buyer. Pursuant to 
    9904.413-50(c)(12)(v), the segment closing adjustment amount for the 
    current period is transferred to the buyer and is subsumed in the 
    future pension cost accounting of the buyer. If the transferred 
    liabilities and assets of the segment are merged into the buyer's 
    pension plan which has a different ratio of market value of pension 
    plan assets to actuarial accrued liabilities, then pension costs must 
    be separately computed in accordance with 9904.413-50(c)(3).
        (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 assets to the new plan. In 
    determining the segment closing adjustment under 9904.413-12(c)(12) the 
    actuarial accrued liability and the market value of assets are reduced 
    by the amounts transferred to the buyer by the sale. The adjustment 
    amount, which is the difference between the remaining assets ($2 
    million) and the remaining actuarial liability ($0), is $2 million.
        (13) Contractor N has three segments that perform primarily 
    government work and has been separately calculating pension costs for 
    each segment. As part of a corporate reorganization, the contractor 
    closes the production facility for Segment A and transfers all of that 
    segment's contracts and employees to Segments B and C, the two 
    remaining government segments. The pension assets from Segment A are 
    allocated to the remaining segments based on the actuarial accrued 
    liability of the transferred employees. Because Segment A has 
    discontinued operations, a segment closing has occurred pursuant to 
    9904.413-30(a)(20)(ii). However, because all pension assets and 
    liabilities have been transferred to segments that are the successors 
    in interest of the contracts of Segment A, an immediate period 
    adjustment is not required if Contractor N and the cognizant Federal 
    official negotiate an amortization schedule pursuant to 9904.413-
    50(c)(12)(vii).
        (14) Contractor O does not renew its government contract and 
    decides to not seek additional government contracts for the affected 
    segment. The contractor reduces the work force of the segment that had 
    been dedicated to the government contract and converts the segment's 
    operations to purely commercial work. In accordance with 9904.413-
    30(a)(20)(iii), the segment has closed. Immediately prior to the end of 
    the contract the market value of the segment's assets was $20 million 
    and the actuarial accrued liability determined under the actuarial cost 
    method in use was $22 million. An actuarial accrued liability of $16 
    million is determined using the accrued benefit cost method as required 
    by 9904.413-50(c)(12)(i). The segment closing adjustment is $4 million 
    ($20 million--$16 million).
        (15) Contractor P terminated its underfunded defined-benefit 
    pension plan for hourly employees. The market value of the assets for 
    the pension plan is $100 million. Although the actuarial accrued 
    liability exceeds the $100 million of assets, the termination liability 
    for benefits guaranteed by the Pension Benefit Guarantee Corporation 
    (PBGC) is only $85 million. Therefore, the $15 million of assets in 
    excess of the liability for guaranteed benefits are allocated to plan 
    participants in accordance with PBGC regulations. The PBGC does not 
    impose an assessment for unfunded guaranteed benefits against the 
    contractor. The adjustment amount determined under 9904.413-50(c)(12) 
    is zero.
        (16) Assume the same facts as 9904.413-60(c)(17), except that the 
    termination liability for benefits guaranteed by the Pension Benefit 
    Guarantee Corporation (PBGC) is $120 million. The PBGC imposes a $20 
    million ($120 million--$100 Million) assessment against Contractor P 
    for the unfunded guaranteed benefits. The contractor then determines 
    the Government's share of the pension plan termination adjustment 
    charge of $20 million in accordance with 9904.413-50(c)(12)(vi). In 
    accordance with 9904.413-50(c)(12)(vii), the cognizant Federal official 
    may negotiate an amortization schedule based on the contractor's 
    schedule of payments to the PBGC.
        (17) Assume the same facts as in 9904.413-60(c)(16), except that 
    pursuant to 9904.412-50(a)(2) Contractor P has an unassignable portion 
    of unfunded actuarial liability for prior unfunded pension costs which 
    equals $8 million. The $8 million represents the value of assets that 
    would have been available had all assignable costs been funded and, 
    therefore, must be added to the assets used to determine the pension 
    plan termination adjustment in accordance with 9904.413-50(c)(12)(ii). 
    In this case, the adjustment charge is determined to be $12 million 
    ($20 million-$8 million).
        (18) Contractor Q terminates its qualified defined-benefit pension 
    plan without establishing a replacement plan. At termination, the 
    market value [[Page 16556]] of assets are $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, ERISA 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, without limitation, as a credit to CAS-covered contracts.
        (19) Assume that, in addition to the facts of 9904.413-60(c)(18), 
    Contractor Q has an accumulated value of prepayment credits of $10 
    million. Contractor Q has $3 million of unfunded actuarial liability 
    separately identified and maintained pursuant to 9904.412-50(a)(2). The 
    assets used to determine the adjustment amount equal $78 million. This 
    amount is determined as the market value of assets ($85 million) minus 
    the accumulated value of prepayment credits ($10 million) plus the 
    portion of unfunded actuarial liability maintained pursuant to 
    9904.412-50(a)(2) ($3 million). Therefore, the difference between the 
    assets and the actuarial liability is $23 million ($78 million-$55 
    million). In accordance with 9904.413-50(c)(12)(vi), the $23 million 
    adjustment is reduced by the $15 million excise tax to equal $8 
    million. The contracting officer determines that the pension cost data 
    of the most recent eight years reasonably reflects the government's 
    participation in the pension plan. The sum of costs allocated to fixed-
    price and cost-type contracts subject to this Standard over the eight-
    year period is $21 million. The sum of costs assigned to cost 
    accounting periods during the last eight years equals $42 million. 
    Therefore, the government's share of the net adjustment is 50% ($21 
    million divided by $42 million) of the $8 million and equals $4 
    million.
        (20) Contractor R maintains a qualified defined-benefit pension 
    plan. Contractor R amends the pension plan to eliminate the earning of 
    any future benefits; however the participants do continue to earn 
    vesting service. Pursuant to 9904.413-30(a)(7), a curtailment of 
    benefits has occurred. An actuarial accrued liability of $78 million is 
    determined under the accrued benefit cost method using the interest 
    assumption used for the last four actuarial valuations. The market 
    value of assets, determined in accordance with 9904.413-50(c)(12)(ii), 
    is $90 million. Contractor R shall determine the Government's share of 
    the adjustment in accordance with 9904.413-50(c)(12)(vi). The 
    contractor then shall allocate that share of the $12 million adjustment 
    ($90 million-$78 million) determined under 9904.413-50(c)(12) to CAS-
    covered contracts. The full amount of adjustment shall be made without 
    limitation in the current cost accounting period unless arrangements to 
    amortize the adjustment are permitted and negotiated pursuant to 
    9904.413-50(c)(12)(vii).
        (21) Contractor S amends its qualified defined-benefit pension plan 
    to ``freeze'' all accrued benefits at their current level. Although not 
    required by law, the amendment also provides that all accrued benefits 
    are fully vested. Contractor S must determine the adjustment for the 
    curtailment of benefits. Fifteen months prior to the date of the plan 
    amendment freezing benefits, Contractor S voluntarily amended the plan 
    to increase benefits. This voluntary amendment resulted in an overall 
    increase of over 10%. All actuarial accrued liabilities are computed 
    using the accrued benefit cost method. The actuarial accrued liability 
    for all accrued benefits is $1.8 million. The actuarial accrued 
    liability for vested benefits immediately prior to the current plan 
    amendment is $1.6 million. The actuarial accrued liability determined 
    for vested benefits based on the plan provisions before the voluntary 
    amendment is $1.4 million. The $1.4 million actuarial liability is 
    based on benefit provisions that have been in effect for six years and 
    is fully recognized. However, the $200,000 increase in liability due to 
    the voluntary benefit improvement adopted 15 months ago must be phased-
    in on a prorata basis over 60 months. Therefore, only 25% (15 months 
    divided by 60 months) of the $200,000 increase, or $50,000, can be 
    included in the curtailment liability. The current amendment 
    voluntarily increasing vesting was just adopted and, therefore, none of 
    the associated increase in actuarial accrued liability can be included. 
    Accordingly, in accordance with 9904.413-50(c)(12)(iv), Contractor S 
    determines the adjustment for the curtailment of benefits using an 
    actuarial accrued liability of $1.45 million ($1.4 million plus 
    $50,000).
        (22) Contractor T has maintained separate qualified defined-benefit 
    plans for Segments A and B and has separately computed pension costs 
    for each segment. Both segments perform work under contracts subject to 
    this Standard. On the first day of the current cost accounting period, 
    Contractor T merges the two pension plans so that segments A and B are 
    now covered by a single pension plan. Because the ratio of assets to 
    liabilities for each plan is materially different from that of the 
    merged plan, the contractor continues the separate computation of 
    pension costs for each segment pursuant to 9904.413-50(c)(3). After 
    considering the assignable cost limitations for each segment, 
    Contractor T determines the potentially assignable pension cost is 
    $12,000 for Segment A and $24,000 for Segment B. The maximum tax-
    deductible amount for the merged plan is $30,000, which is $6,000 less 
    than the sum of the otherwise assignable costs for the segments 
    ($36,000). To determine the portion of the total maximum tax-deductible 
    amount applicable to each segment on a reasonable basis, the contractor 
    prorates the $30,000 by the pension cost determined for each segment 
    after considering the assignable cost limitations for each segment. 
    Therefore, in accordance with 9904.413-50(c)(1)(i), the assignable 
    pension cost is $10,000 for Segment A ($30,000 times $12,000 divided by 
    $36,000) and $20,000 for Segment B ($30,000 times $24,000 divided by 
    $36,000). Contractor T funds the full $30,000 and allocates the 
    assignable pension cost for each segment to final cost objectives.
        (23) Assume the same facts as in 9904.413-60(c)(22), except that 
    the tax-deductible maximum is $40,000 and the ERISA minimum funding 
    requirement is $18,000. Since funding of the accrued pension cost is 
    not constrained by tax-deductibility, Contractor T determines the 
    assignable pension cost to be $12,000 for Segment A and $24,000 for 
    Segment B. If the contractor funds $36,000, the full assigned pension 
    cost of each segment can be allocated to final cost objectives. 
    However, because the contractor funds only the ERISA minimum of 
    $18,000, the contractor must apportion the $18,000 contribution to each 
    segment on a basis that reflects the assignable pension cost of each 
    segment in accordance with 9904.413-50(c)(1)(ii). To measure the 
    funding level of each segment, Contractor T uses an ERISA minimum 
    funding requirement separately determined for each segment, as if the 
    segment were a separate plan. On this basis, the allocable pension cost 
    is determined to be $8,000 for Segment A and $10,000 for 
    [[Page 16557]] Segment B. In accordance with 9904.412-50(a)(2), 
    Contractor T must separately identify, and eliminate from future cost 
    computations, $4,000 ($12,000-$8,000) for Segment A and $14,000 
    ($24,000-$10,000) for Segment B.
        (24) Assume the same facts as in 9904.413-60(c)(23), except that 
    Segment B performs only commercial work. As permitted by 9904.413-
    50(c)(1)(ii), the contractor first applies $12,000 of the contribution 
    amount to Segment A, which is performing work under Government 
    contracts, for purposes of 9904.412-50(d)(i). The remaining $6,000 is 
    applied to Segment B. The full assigned pension cost of $12,000 for 
    Segment A is funded and such amount is allocable to CAS-covered 
    contracts. Pursuant to 9904.412-50(a)(2), the contractor separately 
    identifies, and eliminates from future pension costs, the $18,000 
    ($24,000-$6,000) of unfunded assigned cost for Segment B.
        (25) Contractor U has a qualified defined-benefit pension plan 
    covering employees at two segments that perform work on contracts 
    subject to this Standard. The ratio of the actuarial value of assets to 
    actuarial accrued liabilities is significantly different between the 
    two segments. Therefore, Contractor U is required to compute pension 
    cost separately for each segment. The actuarial value of assets 
    allocated to Segment A exceeds the actuarial accrued liability by 
    $50,000. Segment B has an unfunded actuarial liability of $20,000. 
    Thus, the pension plan as a whole has an actuarial surplus of $30,000. 
    Pension cost of $5,000 is computed for Segment B and is less than 
    Segment B's assignable cost limitation of $9,000. The tax-deductible 
    maximum is $0 for the plan as whole and, therefore, $0 for each 
    segment. Contractor U will deem all existing amortization bases 
    maintained for Segment A to be fully amortized in accordance with 
    9904.412-50(c)(2)(ii). For Segment B, the amortization of existing 
    portions of unfunded actuarial liability continues unabated. 
    Furthermore, pursuant to 9904.412-50(c)(2)(iii), the contractor 
    establishes an additional amortization base for Segment B for the 
    assignable cost deficit of $5,000.
        13. Subsection 9904.413-63 is revised to read as follows:
    
    
    9904.413-63  Effective date.
    
        (a) This Standard is effective as of March 30, 1995.
        (b) This Standard shall be followed by each contractor on or after 
    the start of its next cost accounting period beginning after the 
    receipt of a contract or subcontract to which this Standard is 
    applicable.
        (c) Contractors with prior CAS-covered contracts with full coverage 
    shall continue to follow Standard 9904.413 in effect prior to March 30, 
    1995, until this Standard, effective March 30, 1995, becomes applicable 
    following receipt of a contract or subcontract to which this revised 
    Standard applies.
        14. A new subsection 9904.413-64 is added to read as follows:
    
    
    9904.413-64  Transition method.
    
        (a) To be acceptable, any method of transition from compliance with 
    Standard 9904.413 in effect prior to March 30, 1995, to compliance with 
    Standard 9904.413 in effect as of March 30, 1995, must follow the 
    equitable principle that costs, which have been previously provided 
    for, shall not be redundantly provided for under revised methods. 
    Conversely, costs that have not previously been provided for must be 
    provided for under the revised method. This transition subsection is 
    not intended to qualify for purposes of assignment or allocation, 
    pension costs which have previously been disallowed for reasons other 
    than ERISA funding limitations.
        (b) The sum of all portions of unfunded actuarial liability 
    identified pursuant to Standard 9904.413, effective March 30, 1995, 
    including such portions of unfunded actuarial liability determined for 
    transition purposes, is subject to the requirements for assignment of 
    9904.412-40(c).
        (c) Furthermore, this Standard, effective March 30, 1995, 
    clarifies, but is not intended to create, rights of the contracting 
    parties, and specifies techniques for determining adjustments pursuant 
    to 9904.413-50(c)(12). These rights and techniques should be used to 
    resolve outstanding issues that will affect pension costs of contracts 
    subject to this Standard.
        (d) The method, or methods, employed to achieve an equitable 
    transition shall be consistent with the provisions of this Standard and 
    shall be approved by the contracting officer.
        (e) All adjustments shall be prospective only. However, costs/
    prices of prior and existing contracts not subject to price adjustment 
    may be considered in determining the appropriate transition method or 
    adjustment amount for the computation of costs/prices of contracts 
    subject to this Standard.
    
    [FR Doc. 95-7555 Filed 3-29-95; 8:45 am]
    BILLING CODE 3110-01-P
    
    

Document Information

Effective Date:
3/30/1995
Published:
03/30/1995
Department:
Federal Procurement Policy Office
Entry Type:
Rule
Action:
Final rule.
Document Number:
95-7555
Dates:
March 30, 1995.
Pages:
16534-16557 (24 pages)
PDF File:
95-7555.pdf
CFR: (2)
48 CFR 9903
48 CFR 9904