The interest cost in calculationg PO is “the increase in the PV of DBO due to the passage of time.” as per CFAI.
I dont seem to fully grasp the concept of Interest cost and why it is added to arrive at PO ending balance.
Any help is appreciated. Thanks
Employees earn their pensions as they work, but those earnings aren’t paid until years later. When you owe money to someone but don’t pay it for years, don’t they charge you interest until you pay it?
OHHH YES!!!
Thanks a lot magician. Pension has left me invalid to the point that I can’t follow plain language.
Thanks again.
PS: Can you also assist me in undertanding how expected return on plan assets reduce PPC (GAAP)
The PPC is an expense while the expected return on plan assets is a “gain” so it reduces the overall expense
Expected return on plan assets DOES NOT AFFECT THE PBO (which is simply the PV of benefits earned to date - whether vested or not). Expected return also does not affect the fair value of plan assets. Only impact is on the periodic pension cost in the income statement.
Or in OCI.