Cost Accounting Standards Pension Harmonization

Cost Accounting Standard (“CAS”) 412, Composition and Measurement of Pension Cost and CAS 413, Adjustment and Allocation of Pension Cost, were revised by the Office of Federal Procurement Policy (“OFPP”) and the CAS Board in their final rule on December 27, 2011. Known as the “Pension Harmonization Rule” the revisions “will harmonize the measurement and period assignment of pension cost allocable to Government contract and the minimum required contribution under the Employee Retirement Income Security Act of 1974 (ERISA).” The six (6) changes to CAS 412 and CAS 413 are:

1. Recognition of a “minimum actuarial liability” and “minimum normal cost” – The final rule requires “that pension cost be determined using the minimum actuarial liability and minimum normal cost if the sum of the minimum actuarial liability and the minimum normal cost exceed the sum of actuarial liability and normal cost.”
2. Accelerated Gain and Loss Amortization – The amortization period of actuarial gains and losses is decreased from fifteen (15) to ten (10) years.  This change occurs in the first accounting period when the rule is applicable to the contractor.
3. Mandatory Cessation of Benefit Accruals – “The final rule exempts any curtailment of benefit accrual required by ERISA from immediate adjustment.”
4. Projection of Flat Dollar Benefits – “The projection of increases in specific dollar benefits granted under collective bargaining agreements” is allowed under the final rule. “The recognition of such increases is limited to the average increase in such benefits over the preceding six years.
5. Present Value of Contributions Receivable – “The final rule discounts contributions attributable to the prior accounting period but made after the asset valuation date.  The assumed interest rate is used to adjust amounts not yet funded.”
6. Interest on Prepayment Credits – If a business were to pre-pay their pension cost the extra funds should “share equally in the fund’s investment results…investment earnings and administrative expenses on the same basis as all other invested monies.”

The final “Pension Harmonization Rule Transition Period” permits the gradual phase-in of the cost impact over a five (5) accounting period time-frame. The schedule for recognizing the difference is as follows:

• 0% of the difference will be recognized in the First Cost Accounting Period
• 25% in the Second Cost Accounting Period
• 50% in the Third Cost Accounting Period
• 75% in the Fourth Cost Accounting Period
• 100% in the Fifth Cost Accounting Period

It is important to note “while 0% of the difference is recognized in the First Cost Accounting Period, there will be other incremental differences, e.g., the change to ten-year amortization of gains and losses” which will be effective immediately, and is applicable for cost accounting periods after the implementation date of June 30, 2012.

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