If a company estimates that its expected return on pension plan assets will increase to 9.5% from 9.0% this would be considered ________.
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A. B. C. D.B
Such a change is a change in accounting estimate and disclosure is required of the effect on both net income and income before extraordinary items for the current period.
The correct answer is B. a change in accounting estimate.
A change in accounting estimate occurs when a company revises its estimates for an item in its financial statements due to new information or a change in circumstances. In this case, the company is revising its expected return on pension plan assets from 9.0% to 9.5%.
Pension plan assets refer to the investments held by a company to fund its pension obligations to employees. The expected return on these assets is an estimate made by the company based on various factors such as historical performance, market conditions, and investment strategy.
By increasing the expected return on pension plan assets from 9.0% to 9.5%, the company is revising its estimate of how much return it expects to earn on these assets in the future. This revision may be influenced by factors such as changes in market conditions or adjustments to the investment portfolio.
The change in the estimated return on pension plan assets is a result of an adjustment to the company's assumptions and estimates. It does not represent an extraordinary gain, which typically refers to a non-recurring event or transaction that is unusual in nature and is not expected to happen regularly in the normal course of business (option A).
It is also not a prior period adjustment (option C), which is a correction of an error in the financial statements of a prior period that arises from mathematical mistakes, mistakes in applying accounting principles, or oversight.
Lastly, it is not a change in accounting principle (option D), which occurs when a company changes the method of accounting for a particular item or transaction. The change in the expected return on pension plan assets does not involve a change in the accounting method but rather a change in the estimate associated with that item.
Therefore, the correct answer is B. a change in accounting estimate, as the company is revising its estimate of the expected return on pension plan assets from 9.0% to 9.5% based on new information or changed circumstances.