Contractor's Segment-Closing Interest Rate Assumption Was Proper

A contractor's decision not to use a Financial Accounting Standard to determine the interest rate assumption for a segment-closing calculation was proper, according to the Court of Federal Claims, because the FAS used different criteria for setting the interest rate and the FAS and Cost Accounting Standard 412 served different purposes. The parties filed cross-motions for partial summary judgment on the issue of what interest rate assumption a contractor with a fully-funded pension plan must use to perform a segment-closing calculation. Under CAS 413.50(c)(12), when a business segment is closed, the contractor must "determine the difference between the actuarial liability for the segment and the market value of the assets allocated to the segment, irrespective of whether or not the pension plan is terminated." To make this calculation, the contractor must use an interest rate to discount the pension liabilities to present value. For purposes of the CAS 413.50(c)(12) segment-closing calculation, a contractor must use an interest rate assumption that is properly arrived at and represents, as required by CAS 412.40(b)(2), the contractor's "best estimate" of future earnings under the plan. Both parties agreed that the CAS 412 rate must be used for a CAS 413 segment-closing adjustment.
Different Purposes
The government argued that for contractors with over-funded pension plans, the CAS 412 rate, as a matter of law, must be identical to the interest rate identified by the contractor on its financial disclosure statements under FAS No. 87 as the pension plan's expected long-term rate of return. However, the regulatory history of CAS 412 shows that the financial accounting and cost accounting of pension costs serve different purposes and, therefore, financial accounting principles do not necessarily apply to cost accounting. Moreover, the plain language of CAS 412 indicates that the criteria used for setting interest rate assumptions differ from the criteria used under FAS 87. CAS 412 actuarial assumptions are to be based on the contractor's "past experience" as well as "reasonable expectations" for the future (CAS 412.40(b)(2)). In contrast, the FAS 87 rate is to be based on "the returns being earned by the plan assets in the fund and the rates of return expected to be available for reinvestment." Thus, the focus of the FAS 87 rate determination is on the plan's current returns, while CAS 412 is focused on rates that were obtained in the past. In addition, CAS 412 is used for different purposes than FAS 87. While CAS 412 was designed to discount pension liabilities to present value, FAS 87 was not. Under the financial accounting rules, a separate discount rate is used for pension liability discounting purposes. Also, the FAS 87 rate is tied to investment decisions regarding a company's potential pension benefit liability, while the CAS 412 rate is concerned with protecting the health of the pension fund and is tied to pension funding decisions. (General Electric Co. v. U.S., FedCl, 53 CCF ś79,034)

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