Defined Benefit Obligations and Discount Rate Impacts

Very Hard Employee Compensation Defined Benefit Plans

ABC Corporation offers a defined benefit plan to its employees, which guarantees a specified retirement benefit based on a formula that considers years of service and average salary during the final years of employment. The company has recently experienced changes that affect its pension obligations, including an increase in the discount rate used to calculate the present value of future pension obligations. Furthermore, the company has decided to alter its policy regarding cost-of-living adjustments (COLAs) for retirees from a fixed percentage increase to a consumer price index (CPI) adjustment.

Considering these changes, which of the following statements reflects the correct accounting treatment or understanding of the defined benefit plan's impact on ABC Corporation's financial statements?

An increase in the discount rate will decrease the present value of the defined benefit obligation, while switching from fixed COLAs to CPI adjustments will increase this present value.

The alteration in COLA policy will not affect the present value of future pension obligations as it is an administrative change and does not impact the cash flows.

An increase in the discount rate will reduce the defined benefit obligation, and switching to CPI-based COLAs may increase future cash flows if inflation surpasses historical averages.

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