Question
In its 2012 annual report, United Parcel Service, Inc. (UPS), a global package delivery company, reported the following performance data: Financial Highlights 2012 2011 2010
In its 2012 annual report, United Parcel Service, Inc. (UPS), a global package delivery company, reported the following performance data:
Financial Highlights | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenue | $ | 54,127 | $ | 53,105 | $ | 49,545 | |||||
Operating expenses | 52,784 | 47,025 | 43,904 | ||||||||
Net income | 807 | 3,804 | 3,338 | ||||||||
Source: Amounts excerpted from United Parcel Service, Inc. 2012 Form 10-K.
As an analyst, you are trying to determine whether the significant drop in Net income between the end of 2011 and the end of 2012 is due to fundamental changes in business operations or the business environment.
At the beginning of 2012, UPS reported it was changing its accounting relating to its employee pension plans.
Historically, UPS would:
- Record gains and losses related to over- or underperforming pension plan investments in Accumulated other comprehensive income (AOCI).
- When cumulative gains or losses in AOCI exceeded a threshold, UPS would spread a portion of the gains and losses into net income over a period of several years.
Under the new policy, UPS will:
- Record gains and losses related to over- or underperforming pension plan investments in Accumulated other comprehensive income (AOCI).
- When cumulative gains or losses in AOCI exceed a threshold, UPS will recognize a portion of the gains and losses all in the current period.
Required:
1. What are the implications of UPSs change in accounting policy on its reported Net income?
2. Why might an analyst care about this change in accounting policy if she is trying to assess potential fundamental changes in business operations or the business environment?
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