I know that changes in discount rate and wage rate will: increase/decrease service cost Increase/decrease Interest cost for both PBO and Pension Expense. these are recognized IMMEDIATELY i believe. However, Schweser says on page 161 near the bottom that a separate section in the PBO called “Changes in Actuarial Assumptions” are gains and losses from variables such as morality, employee turnover, and DISCOUNT RATE. these are DEFERRED i believe. This is confusing because the discount rate is mentioned in two places, so i cant tell if its recognized immediately through changes in service cost or deferred. When Schweser says “Changes in Actuarial assumptions” are they talking about the Service cost and interest cost, or is this a separate section on the PBO??
bump, this is a good question. I believe that interest cost is recognized right away through pension expense, so a change in discount rate is not amortized. It’s considered an actuarial assumption but is not amortized like other actuarial gains/losses (like changes in mortality rate) since in this case, the change in PBO due to a change in discount rate would be recognized immediately and reconciled through periodic pension expense This is a very interesting potential mistake that you’ve found, but CFAI also puts change of discount rates as part of actuarial assumptions. Can anyone give light to this question?
And is interest cost = PBO x discount rate?
CFAi text, volume 2, page 97, right under the example, it says: “The discount rate used in calculating the obligation is also used to calculate the following year’s interest component on the periodic benefit-related expense (calculated as the discount rate times the obligation at the beginning of the year).” It goes further saying that, even if the discount rate increased, the decrease in the PBO would be (in % terms) greater than the increase in the discount rate, and therefore the interest cost will decrease, even if the rate increased. So, I take that even if the company changes assumptions, the interest cost is calculated as Beginning of the year PBO*discount rate used last year. There is no deferring of this expense, since this is an expense occurring in the current year (pay the interest on the contributions entrusted by the employees), and we go by the matching principle of accrual accounting, right?
that was my understanding as well. Beginning PBO * Beginning Discount Rate = Interest Expense (which is part of Pension Expense). Change in rate will become effective one year later…
This may help (e.g.): Discount rate as of 12/31/07 will increase/decrease PBO which flows into g/l and is amortized in the FY2008 pension cost. That discount rate is then used to calculate the interest cost for FY2008 Changes in discount rate is a change in act. assumptions which is lumped together with other assumptions (like mortality etc…)