- CFA Exams
- CFA Level I Exam
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 14. Employee Compensation: Post-Employment and Share-Based
- Subject 2. Accounting for Defined Benefit Plans

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**CFA Practice Question**

Which of the following statements is (are) true with respect to the interest costs associated in pension computations?

A. Higher interest costs imply that annual pension costs for the firm will be higher.

B. The higher the beginning of period pension obligation, the lower will be the interest cost associated for the year.

C. The benchmark upon which interest cost is computed is the Accumulated Benefit Obligation (ABO).

**Explanation:**Interest Cost = Last Year's PBO x Discount Rate used to calculate last year's PBO

B is incorrect because according to the formula, as last year's PBO (or the beginning PBO for the current period) increases, the interest costs increase as well.

C is incorrect. As can be seen from the formula, the benchmark upon which interest cost is computed is the Projected Benefit Obligation (PBO).

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