- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Employee Compensation: Post-Employment and Share-Based
- Subject 3. Analysis of Pension Plan Disclosures
CFA Practice Question
Aggressive actuarial assumptions can be detected if a company's ______ is much higher than that of its competitors.
II. expected rate of return on plan assets.
III. rate of compensation increases.
I. discount rate.
II. expected rate of return on plan assets.
III. rate of compensation increases.
Correct Answer: I and II
A high rate of compensation increases actually increases PBO.
User Contributed Comments 7
| User | Comment |
|---|---|
| niti | discount rate also increases pension expense..? |
| Xiaochao | but higher discount rate decrease the present value of the defined future benefits. |
| bananabun2 | the company needs to pay for the interst cost = discount rate x PBO. higher discount rate = higher funding requirement. the answer seems to be II |
| lortola | Why discount rate? a higher discount rate is more conservative than a lower one. Aggressive companies will have higher expected rate of retuen on plan assets and lower discount rate (which over- estimates the PV of plan assets) |
| charlie | Although the effect on the service cost is offset in part by the interest cost effect, the effect on the service cost is normally much greater. Thus, in most cases, a higher discount rate reduces reported pension cost. |
| czar | Agree with Charlie, this is a great question! I did not think of taking the pension costs into considieration for aggressiveness. @Lotola: aggressive here, refers to putting aside less for future pension benefits, hence higher discount rate reduces the pv of future obligation. Hope this helps |
| quanttrader | higher discount rate decreases service cost more than the increase in interest expense and hence pension expense will overall decrease |