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Pension Liabilities Transferred to Segment Buyer Were Unallowable


The government's payment obligation to a contractor under a Cost Accounting Standard 413 segment closing calculation was limited to the government's share of the pension deficit retained by the contractor because the Allowable Cost and Payment clause and the application of cost principles in FAR Part 31 prevented the contractor from seeking pension costs attributable to pension liabilities transferred to the segment buyer. After the contractor sold a business segment performing defense-related services, the closing calculation revealed the segment's pension assets were not sufficient to meet its pension liabilities and therefore the segment had a pension deficit. At issue on cross-motions for summary judgment was the scope of the segment closing adjustment, as well as the government's payment obligation under CAS 413. The contractor argued the government was liable to it for the government's share of the pension deficit that the contractor both retained and transferred to the segment buyer. The government contended the contractor could only seek reimbursement for the portion of the pension deficit the contractor retained after the segment's sale.

Allowability Requirements


Following precedent, the court determined the CAS 413 segment closing calculation must include all of the pension assets and liabilities of the segment at the time of the segment closing for pension costs attributable to contracts subject to original CAS 413, including assets and liabilities that were transferred to the segment buyer. However, the contractor was entitled to seek pension costs from the government only for the portion of the pension deficit it retained. The government's payment obligation was governed by the Allowable Cost and Payment clause (FAR 52.216-7), which obligates the government to make payments to a contractor only for allowable amounts. Thus, a contractor selling a segment must still establish that the pension costs it seeks are allowable. Under FAR 31.201-2(a), a cost is allowable only when the cost complies with CAS, if applicable, or generally accepted accounting principles. Here, the contractor could not meet the allowability requirements of either CAS or GAAP. Accordingly, the contractor was not entitled to reimbursement of costs attributable to pension liabilities transferred to the segment buyer. (CBS Corp. v. U.S., FedCl, 54 CCF 79,231)














 






 

 

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

     
  
 

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