ok… made a mistake. (seems to be treated as discount rate is also treated as a actuarial assumption) – though technically it would be something management has more discretion over.
We had a thread last week discussing the change in the discount rate, if it is an actuarial assumption change or not, and the effects of a change in discount rate when it comes to the calculus of the interest cost. I guess you though of that discussion.
change in discount rate – effect on interest cost - interest cost is based on a beginning of period pbo balance - and the pbo balance is higher. the ending balance would reduce. So usual effect will be that even though interest cost might reduce marginally - the effect of the PBO increase would overall increase pension expense.
It actually has no effect, because interest cost is calculated using the previous year’s discount rate assumption - the one used in building the beginning PBO (end of last year PBO), if the assumption changed in the current year.
To clarify (I seem to be doing this lately), Interest cost is beginning PBO*discount rate as you mention. Assuming the plan isn’t mature, if your discount rate reduces, your ending PBO is higher, but your interest cost for that period will be lower. The actuarial change of discount comes into play because of the followng: your PBO changes right away from the discount amendment (PBO is higher now), but your pension expense for the period represents lower interest cost. Your liability goes up (assuming no change in FV of assets) but your equity is overstated (since your expenses are too low,) so to balance A = L + E, the actuarial loss (which increased PBO) flows to accumulated pension gain/loss in other comprehensive income. Eventually, this accumulation will need to be amortized over the service life of the correponding employees, which will cause an overall increase in pension expense. Please don’t tell me this is wrong or I will probably start crying…
Ok map1, thank for the clarification. I hope this is driving everyone crazy
Actually, I found the video is not too bad. I got totally lost when reading the notes. And I think I am on top of it after viewing the video twice and finish a dozen of questions. Thanks for summary anyway.
I don’t know if they changed anything for '09 (took the '08 exam) but I think Schweser did a great job in explaining pensions. Pensions is a boring read no matter how you slice it. I would honestly stick with it.
Slash Wrote: ------------------------------------------------------- > I don’t know if they changed anything for '09 > (took the '08 exam) but I think Schweser did a > great job in explaining pensions. Pensions is a > boring read no matter how you slice it. I would > honestly stick with it. I think they do an ok job for people who learn by memorizing. Poor job for those of us who learn by understanding… Anyways, I am unaware of the differences between 08 and 09…
Just sent it out. Check your junk mail…
*Bump* I found this to be very helpful and I hope others get a chance to see it again.