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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: October 5, 2000

FROM: Barry McVay, CPCM

SUBJECT: Cost Accounting Standards Board; Accounting for the Costs of Post-Retirement Benefit Plans

SOURCE: Federal Register, October 5, 2000, Vol. 65, No. 194, page 59503

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

ACTION: Advanced Notice of Proposed Rulemaking

SYNOPSIS: The CASB is inviting public comments on a proposed Cost Accounting Standard (CAS) 419, Cost Accounting Standard for Measurement, Assignment, Allocation, and Adjustment of Post-Retirement Benefit Cost, which is intended to "provide criteria for measuring the costs of post-retirement benefit plans, assigning the measured costs to cost accounting periods, allocating the assigned costs to segments of an organization...[and] provide the basis on which segments shall allocate assigned post-retirement benefit costs to their intermediate and final cost objectives."

EDITOR'S NOTE: Currently, there are 19 CAS which apply to large contractors performing large contracts. They are in Chapter 99 of Title 48 of the Code of Federal Regulations (CFR), Part 9904, Cost Accounting Standards and are included as an appendix to the paper-version of the Federal Acquisition Regulation (FAR) for information purposes. The CAS are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html. Proposed CAS 419, should it be adopted, would be 48 CFR 9904.419.

DATES: Comments must be submitted no later than December 19, 2000.

ADDRESSES: Address comments to Eric Shipley, Project Director, Cost Accounting Standards Board, Office of Federal Procurement Policy, 725 17th Street, NW, Room 9013, Washington, DC 20503, Attn: CASB Docket No. 96-02A. Include an electronic copy of your comments in a format readable by MS Word.

FOR FURTHER INFORMATION CONTACT: Eric Shipley, 410-786-6381 or e-mail: EShipley@hcfa.gov; or Rein Abel, Director of Research, Cost Accounting Standards Board, 202-395-3254.

SUPPLEMENTAL INFORMATION: Post-retirement benefits are specified benefits, such as health care, tuition assistance, or legal services, that are provided to retirees as the need arises (such as certain health care benefits), or they may be defined in terms of monetary amounts that become payable on the occurrence of a specified event (such as life insurance benefits not provided through a pension plan). They have existed for many years, sometimes as an adjunct to a company's pension plan.

Over the years, the CASB has received numerous public comments recommending that it establish a case concerning the measurement, assignment, and allocation of the costs of post-retirement benefit plans. The CASB began work in 1995, and in 1996 it published a Staff Discussion Paper identifying the cost accounting issues related to post-retirement benefit plans, and requested comments on whether an Interpretation should be published, or a current CAS be amended, or a new CAS be developed. When the CASB analyzed the comments, it realized that there were strongly held opposing positions on liability issues and funding. Therefore, in 1999, the CASB sent a letter to all those submitting comments on the Staff Discussion Paper asking them to elaborate on their opinions and positions.

Most of the respondents believed that post-retirement benefits could be adequately addressed in amendments to CAS 412, Cost Accounting Standard for Composition and Measurement of Pension Cost); CAS 413, Adjustment and Allocation of Pension Cost; and/or CAS 416, Accounting for Insurance Costs. Nevertheless, the CASB states in the lengthy introductory material to the proposed rule that "while accounting for post-retirement benefits has some similarities with pension accounting, the Board has concluded that post-retirement benefit costs should be treated distinctly from pension costs...Post-retirement benefits, pensions, and insurance are each intrinsically complex and technical subjects. The Board has determined that it would be extremely difficult, if not impossible, to effectively and efficiently interleave coverage for post-retirement benefit costs into either the pension or insurance standards...The Board's proposal will eliminate the existing confusion as to which standard, if any, addresses the contract cost accounting for post-retirement benefits."

CAS 419 would consist of the following sections:

      9904.419-10, (Reserved)
      9904.419-20, Purpose
      9904.419-30, Definitions
      9904.419-40, Fundamental Requirements
      9904.419-50, Techniques for Application
      9904.419-60, Illustrations
      9904.419-61, Interpretation (Reserved)
      9904.419-62, Exemptions
      9904.419-63, Effective Date
      9904.419-64, Transition Method

Sections 9904.419-40, 9904.419-50, and 9904.419-60 are each divided into six subsections which address the following: (a) the recognition and identification of post-retirement benefit costs; (b) the measurement and period assignment of post-retirement benefit costs; (c) the allocation of post-retirement benefit costs to segments; (d) the allocation of post-retirement benefit costs from segments to the intermediate and final cost objectives of a segment; (e) the adjustment of the contractor's records when there is a curtailment, settlement, or granting of special termination benefits; and (f) the adjustment of contract pricing when a segment is closed.

Essentially, the proposed CAS would require accrual accounting for post-retirement benefits that are documented in writing, communicated to employees, nonforfeitable once earned, and legally enforceable. The cost of any post-retirement benefits that fail to meet these criteria would have to be accounted using the pay-as-you-go method.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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