- 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
CFA Practice Question
For its year-end 2011 statements, Alex Company increased the pension discount rate from 8.5% to 9.5% and the assumed rate of compensation from 4% to 5%. The effect of these changes is to
A. Increase the difference between the ABO and the PBO.
B. Increase the service cost element of pension costs in 2011.
C. Decrease the deferred experience gains or increase the deferred experience losses.
Explanation: The effect of these changes increases the difference between the ABO and the PBO.
User Contributed Comments 5
| User | Comment |
|---|---|
| HenryQ | ABO is not impacted, but PBO changes. |
| treakj | Discount rate affects both, compensation only PBO. |
| dblueroom | agree with treakj, but the difference in compensation is large btw ABO and PBO in this case. |
| yxten1 | But why is B wrong? |
| tim2 | B is wrong because increasing the discount rate reduces not increases service cost (see reading 22 sec 4) |