- This is the increase in the projected benefit obligation (PBO) due to the passage of time. Interest on the liability.
- Anticipated payments to employees were discounted to arrive at the PBO.
- Since one period of time has now passed you must add the effect of time (increase the PBO).
- Interest cost is the discount rate applied to the beginning PBO. (Both beginning PBO and discount factor are provided by actuaries.)
- Companies must use a discount (settlement) rate at which its obligations could be effectively settled.