Guidance on CAS 412 and 413 Pension Harmonization

The Cost Accounting Standard Board (CAS) Board issued a final rule on December 27, 2011 to harmonize CAS 412 and 413 with the Pension Protection Act (PPA). The PPA was enacted by Congress to help ensure that promised pensions obligations would be adequately funded to pay workers their promised retirement benefits. As part of the PPA, Congress instructed the Cost Accounting Standards Board (CASB) to “harmonize” its standards for measuring Pension Costs (CAS 412/413) with the PPA to avoid undue hardship on contractors that could arise from the faster funding required by the PPA.

Prior to the CAS 412 and 413 revision, the CAS Board had adopted and required a policy that defined benefit pension costs to be measured using long term assumptions that reflect that pensions are earned over the entire working life of an employee. In contrast, the PPA requires funding using short term assumptions that consider that a company may encounter economic difficulties that may endanger the pension plan long before a vested employee’s scheduled retirement. Thus, the main prior difference in the two methodologies is the interest rate assumption – short term vs long term.

All pension plan calculations of costs under CASB rules, Employee Retirement Income Security Act before and as amended by the PPA, and financial reporting rules use interest rate assumptions. Over the life of the pension plan, they all recognize approximately the same total costs based on dollars adjusted for the effects of compound interest. The difference is the timing of the cost recognition and associated funding of the plan.

The PPA and the CAS 412/413 harmonization move costs that would have been recognized and funded in future years to nearer term years. Thus, the increase in the near team costs will be offset by lower recognized costs in the future. The recent change to the CASB rules have introduced a comparison of the long term calculation and the short term calculation with the contractor recognizing the higher of the two cost amounts as the cost for the year. The cost effects of new CAS 412 and 413 final rules are being phased in with the first portion of the increase in cost (if any) taking place for 2014 and full recognition of the increased costs in 2017.

Use the links below to learn more information about the CASB changes to 412 and 413:

For more information on the CAS Board, us the link below:

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