CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity
Under IFRS, an analyst is reviewing a defined benefit plan. A decrease in the discount rate used to measure the defined benefit obligation will most likely cause the present value of the obligation to:
The present value of the defined benefit obligation will most likely increase. The obligation is the discounted value of future benefit payments, and a lower discount rate makes each future payment worth more today, which raises the measured liability and can worsen the plan's funded status.
- AincreaseCorrect
- Bdecrease
- Cremain unchanged
Explanation
The obligation is the present value of expected future benefit payments. A lower discount rate raises the present value of those payments, so the obligation increases. A higher rate would reduce it.
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