If our
recent pension accounting discussion didn’t
thrill you, it’s not likely that this article is going to float your
boat either. Two recent decisions by the U.S. Court of Federal Claims (CoFC), both issued by Judge Firestone on
April 29, 2010, appear to conclude that there is no Cost Accounting
Standard that covers accounting for post-retirement benefits other than
pensions (PRBs).
“What’s a PRB?” you may well be
asking. A PRB is a non-cash
benefit (other than a
pension distribution) that is provided to employees after retirement. Typically, PRBs include life and medical
insurance. But some PRB
plans include legal services, and even tuition credits. PRBs may be fully funded by a company,
or partially funded (with employees sharing the
rest of the costs). For GAAP purposes, companies
need to account for PRB liabilities in accordance with SFAS 106. Readers might notice that SFAS 106
was promulgated in 1990, far after the original CAS Board had finished
promulgating Cost Accounting Standards.
The
link above will allow you to review the SFAS 106 summary and learn
about its requirements. For purposes of this article, suffice to say the Statement requires
that an employer’s obligation for PRBs expected to be provided to an
employee “must be fully accrued by the date that the employee attains
full eligibility” for the benefits.
Importantly,
the FAS Board expressly acknowledged that the provisions of SFAS were
similar to provisions in Financial Accounting Statements governing
accounting for pensions (i.e., SFAS Nos. 87 and 88). In the words of
the FAS Board, “to the extent the promise to
provide pension benefits and the promise to provide postretirement
benefits are similar, the provisions of this Statement [SFAS 106] are
similar to those prescribed by Statements 87 and 88; different
accounting treatment is prescribed only when … there is a compelling
reason for different treatment.” Keep the FAS
Board’s linkage of the accounting for pensions and PRBs in mind as we
take a look at Judge Firestone’s decisions.
Raytheon Company v. The
United States
The complete decision can be found here. Raytheon was required to calculate a
segment-closing pension adjustment in accordance with CAS 413-50(c)(12). The company wanted to include
its PRB liabilities in that pension calculation.
Judge Firestone reviewed the history of ERISA and CAS, before opining on Raytheon’s PRB plans. In
particular, she quoted the CAS Board’s preamble to CAS 416—
The [CASB] believes that these standards provide
ample criteria for determining which standard is applicable to any given
cost. In particular, the question of whether a benefit, such as
insurance provided to retired persons, is an integral part of a pension
plan and thereby governed by CAS . . . 412 or is a part of an insurance
program and therefore governed by CAS 416 is a question of fact in each
given instance. Moreover, application of either standard to this element
would result in substantially the same amounts of allocable costs.
Judge Firestone also reviewed SFAS 106 and the proposed
Standard 419 (which would have expressly covered
PRBs), as well as the history of FAR 31.205-6(o)—which discusses the
allowability of PRB costs. (“… To be allowable,
PRB costs must be reasonable and incurred pursuant to law,
employer-employee agreement, or an established
policy of the contractor. In addition, to be allowable in the current
year, PRB costs must be paid …”)
Finally,
Judge Firestone concluded that Raytheon’s PRB plans were not “pension
plans” as that term is defined in CAS. She wrote, “… health benefits or
medical benefits, which clearly do not vest and are terminable at will,
are not ‘integral’ to a pension plan.” Raytheon’s PRB costs were not pension costs and could not be
included in its CAS 413 pension calculations. In
forming her decision, the Judge relied heavily on the CAS Board’s
published decision not to issue Standard 419. She wrote—
The court is mindful of established rules of
administrative law which provide that proposed regulations have no legal
effect and are not entitled to deference. The court is also mindful of
established rules of construction that caution against relying on the
views of a legislature to interpret the meaning of a law written by a
previous legislature. However, there are situations where policy
pronouncements are entitled to appropriate deference based on the
context of the pronouncement. The court finds that this is one of those
circumstances. (Citations omitted.)
Judge
Firestone gave the “highest degree of deference” to the FAR Councils’
comments when publishing FAR 31.205-6(o). The
rule requires that the government is entitled to an equitable share of
any previously funded PRB costs that “revert or inure” to the contractor
if it decides to terminate or reduce PRB benefits. However, the door
only swings one way: unlike pension plans, if a segment is closed with
unfunded PRB liabilities remaining, the contractor is not entitled to a segment-closing PRB adjustment.
But Judge Firestone did offer Raytheon (and other contractors)
a ray of hope. She wrote—
The
fact that Raytheon’s PRB costs are not included in the CAS 413.50(c)(12) segment closing adjustment does
not mean that Raytheon will not be able to recover its PRB costs from
the government following these segment closings. To the extent Raytheon
continues to fund its PRBs, it will be able to allocate its PRB costs
across all of its remaining segments under CAS 403.40(c), 48 C.F.R. §
9904.403-40(c) (2010). The government has agreed to allow contractors
that continue to generate PRB costs to allocate those costs to the
government as residual costs under other contracts following a segment
closing.
General Electric Company v. The United States
In her next decision, Judge
Firestone discussed GE’s “pay-as-you-go” (PAYG) PRB plans in related to
its segment-closing calculations. In PAYG plans, costs are recognized
for government contract cost accounting purposes only when they are
actually paid to employees (or retired employees).
We were interested to note that Judge Firestone entertained
the testimony of “experts” to help her understand
the interplay of the various regulatory requirements (which she
discussed at length in the Raytheon
decision). She said, “Due to the complexity of
the interrelationship of the various CAS and FAR provisions to the
measurement, allocation and payment of PRB costs, the court found it
beneficial to hold a hearing of experts to explain how these provisions
are applied in practice.”
Given her decision in Raytheon
(discussed at length above), it is hardly surprising that the Judge found against GE, deciding that its PRB costs could not be
included in its segment-closing pension adjustment calculations. She
noted that “… the reason that CAS 413.50(c)(12) does not extend to GE’s PAYG PRB costs is that CAS 413
provides a means to sort out actuarial gains and losses and does not
extend to situations where no such actuarial gains
and losses were ever allocated to government contracts. Actuarial gains
and losses only arise in the context of accrual accounting.” Moreover, she wrote—
Pension plans funded using PAYG accounting that do not have compellable
benefits have not been allocated to contracts based on actuarial
determinations. Accordingly, these non-compellable PAYG costs have not
been allocated to government contracts based on actuarial assumptions,
assumptions that, while meant to be as accurate as possible, inevitably
result in over or under payments. Because non-compellable PAYG costs
have been allocated to government contracts based only on the actual
payments made to retirees, no assumptions were used and no costs based
on actuarial gains or losses were allocated to government contracts. In
such circumstances, there are no ‘previously determined costs’ that need
to be adjusted in a CAS 413 segment closing adjustment.
Judge Firestone ran through several of the Standards, noting
how each did not cover PRBs—at least as GE had decided to account for
them. She also dispensed with GE’s argument that, by virtue of the
segment closing, the government had received an illegal “windfall” that
could only be corrected by permitting GE to reduce its otherwise payable
segment-closing pension adjustment.
To sum up,
Judge Firestone concluded that the Federal cost accounting rules that
cover pension plans do not extend to PRB plans, at least with respect to
the Raytheon and General Electric Companies. The only regulatory
coverage is to be found in the FAR, whose provisions are relatively
strict (at least from a contractor’s point of view).
It may seem forever to you by now, but remember back at the
beginning of this article, when we noted that the FAS Board expressly
called-out similarities between pension and PRB accounting? Accountants
may think that the similarities compel similar treatment—but Judge
Firestone was not persuaded.
