Reading 24: Employee Compensation: Post-Employment and Share- impact, center, benefit, class

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Session 6: Financial Reporting and Analysis: Intercorporate Investments, Post-Employment and Share-Based Compensation, and Multinational Operations
Reading 24: Employee Compensation: Post-Employment and Share-Based

LOS d: Explain the impact of a defined benefit plan's assumptions on the defined benefit obligation and periodic expense.

 

 

The Board of Directors of Prime Bank has asked management to make changes in the accounting of its pension plan obligations in order to decrease the reported service cost. Management determines that there are two changes in actuarial assumptions that will result in a lower service cost. Which of the following pairs of changes in actuarial assumptions will best achieve the desired effect? Prime Bank can either:

A) decrease the rate of compensation growth or increase the expected rate of return.

B) increase the discount rate or decrease the rate of compensation growth.

C) decrease the discount rate or increase the expected rate of return.

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An increase in the discount rate will result in lower service cost. Using a lower rate of compensation growth will yield lower future pension benefits owed, and thus a lower service cost. The expected return has no impact on service cost.