Federal contractors who use the accrual method for accounting for post retirement benefit (PRB) costs under their contracts will have a choice as to the criteria used to measure these costs.  Currently, the FAR requires that when a contractor uses an accrual basis to account for PRB costs, these costs must be measured based on the criteria set forth in the Financial Accounting Standard 106. However, the tax deductible amount that is contributed using the Internal Revenue Code 419 uses a different measurement criteria which usually results in a lower cost calculation. As a result, according to the new FAR rule, contractors who accrue PRB costs for government reimbursement face a dilemma: whether to fund the entire FAS 106 amount to obtain maximum government reimbursement, regardless of tax consequences, or fund only the tax deductible portion and not be reimbursed the entire FASB 106 amount. The new rule seeks to “alleviate this dilemma.” Under the new rule, FAR 31.205-6(o), compensation for personal services,  would be amended to give contractors the option of measuring accrued PRB costs using criteria based on IRC 419 or FAS 106.  The rule writers state this change would allow the contractor to fund the entire tax deductible amount without having a portion disallowed because it does not meet the FAR current measurement criteria under FASB 106.3.

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