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plan assets (how much the fund was worth) is a somewhat objective measure, the PBO requires several assumptions which make it more subjective:
You can see that PepsiCo started 2003 with an estimated liability of $4,324, but the liability is increased by service and interest cost. Service cost is the additional liability created because another year has elapsed, for which all current employees get another year's credit for their service. Interest cost is the additional liability created because these employees are one year nearer to their benefit payouts.
The reason for and effect of the additional interest cost is easier to understand with an example. Let's assume that today is 2005 and the company owes $100 in five years, in the year 2010. If the discount rate is 10%, then the present value of this obligation is $62 ($100 ÷ 1.1^5 = $62). (For a review of this calculation, see "Understanding the Time Value of Money.") Now let one year elapse. Because at the start of 2006 the funds now have four years instead of five years to earn interest before 2010, the present value of the obligation as of 2006 increases to $68.3 ($100
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