PRB Costs Allowable Whether Measured Under FAS 106 or IRS Criteria

To address the "catch-22" confronted by contractors using the accrual method of calculating post-retirement benefit (PRB) costs for financial reporting purposes who have had to choose either to fund the entire amount of PRB costs measured in accordance with Financial Accounting Standard (FAS) 106 in order to be reimbursed for the costs on Government contracts, or to fund only the amount of PRB costs deductible under the Internal Revenue Code (IRC) and thereby forgo reimbursement of the full FAS 106 amount, the FAR has been amended, under a final rule effective January 11, 2010, to allow contractors the option to measure accrued post-retirement benefit (PRB) costs using either the criteria in FAS 106 or the criteria in IRC 419. The final rule also (1) addresses the transition period when a change is made from one accrual accounting method to another by requiring the contractor to treat the change in unfunded accumulated PRB obligation as a gain or loss and demonstrate that there will be no duplicate recovery of costs as a result of the change; (2) expressly states that any prior period unfunded accrual is unallowable under either method of accrual accounting; and (3) clarifies that use of a health care assumption for measurement of costs is required unless prohibited by IRC welfare benefit fund rules.