# Higher Discount Rate has no impact on CFO?

Hello all,

CFA Accounting section EOC Question 15, it states that higher dicound rate for the situation, but cash flow from operating activities should not be affected by the change.

Why CFO is not affected by the higher discount rate?

Thanks

Why would CFO be affected by a dicount rate? A discount rate on what?

I’ll counter with a question of my own: Why do you think that a higher discount rate would affect CFO?

What specific cash flow would be affected?

Sorry I didnt not state the deatils in the question. This is what I am confused.

1. If the contribution exceed its total periodic pension cost , the CFO will increase while the CFF will decrease.

2. At the same time, if the discount rat e is increasing, total periodic pension cost will decrease.

If I combine the first two together, higher discount rate -> lower total period pension cost -> higher CFO

Maybe these two things are not connected but I just cannot see why.

Thanks!

contribution > periodic pension cost -> CFO will increase while CFF will decrease - is if I am not mistaken coming from the analyst adjustments to pension cashflows … (or something like that).

discount rate increases - total pension cost decreases - is mechanics of how total pension cost is computed - PV of cash flows – when Rate increases PV decreases.

you are also doing the 3rd big sin - confusing, combining two different sections of the curriculum and making generalizations when no such thing exists.

Like you mentioned. We use discount rate to calculate the PV of cash flows (total pension cost). Why can’t we use this calculated number to find out the adjustment amount for CFO and CFF?

I still dont see the reason why we can’t put these two things together. Can you explina a little more, please?

Thanks!

If you increase the discount rate, total periodic pension cost decreases because current service cost decreases.

Current service cost is not a cash flow. The cash flows are the employer contributions, the payments to beneficiaries, the cash flows from buying and selling plan assets, and any cash expenses (e.g., portfolio management fees).

I think you are unnecessarily complicating issues.Just asking WHY (or asking to explain) does not make it answerable.

Pension cost calculation by discounting the salary paid to the employees - HAPPENS ALL THE TIME with the DB Plan.

The analyst adjustment to CFO (or CFF) - when contributions exceed pension costs - is done to compare companies - and need not happen all the time.