How does the discount rate, or pension expense or compensation change the assumption of a plan

Cynical_Man · June 10, 2016, 12:04am

haha, didn’t see that comment, glad i was thinking about the right thing.

Peter13 · June 10, 2016, 12:09am

Haha yeah goof youre thinking in the same line. but all this is not in the curriculum

Cynical_Man · June 10, 2016, 12:12am

never hurts to go a little beyond the curriculum in some topics.

althogh, imho, DBP is not one of those probably. it is becoming less and less relevant anyway. like how many companies do still have DBPs? maybe in 10 years it won’t any longer be a part of the CFAI curriculum. Honestly, even MBS is more relevant than that, and they removed it this year

Peter13 · June 10, 2016, 12:15am

Haha, very true. Would make life a bit easier for future L2 candidates, certainly made ours easier when they removed MBS, hate that topic lol

S2000magician · June 10, 2016, 4:43am

Peter13:

S2000magician:

Peter13:

S2000magician:

Peter13:

It would not have any impact on ratios - hence the reason why this is not covered in the curriculum.

Of course it will have an impact on some ratios.

The PBO will change if you change any of the assumptions:

Length of service

Salary growth rate

Post-employment longevity

Discount rate

Probability of vesting

If the PBO changes, then either assets or liabilities will change.

Changing the assumptions will also change the annual pension expense, which will change net income.

So clearly some ratios will change:

(Net) profit margin

Asset turnover (possibly)

ROA

ROE

Financial leverage

and so on

Thanks for clarifying. However, I still do not see how Asset Turnover would be impacted as it does not have (Liabilities) in the ratio, and the Plan Asset is not impacted by an increase in the discount rate or an increase in Compensation, as only the PBO would be impacted (Liabilities)

ROA and ROE and net profit margin yes direct impact given that net income is impacted directly.

Usually you show only the net asset or liability, not the plan assets and PBO separately.

So, if you have an overfunded plan and change an assumption, then your total assets could change.

So lets say you have an underfunded plan, and your compensation rate increases (higher salaries) how would this impact the Asset Turnover?

It wouldn’t.

Which is exactly why I included “possibly” in parentheses.