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Basic Question 13 of 17
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.
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 |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios;
interpret pension plan note disclosures including cash flow related information;
CFA® 2025 Level II Curriculum, Volume 2, Module 11.