Problem $5-3$ Change in accounting policy $($LO $5-1)$

In its $2012$ annual report, United Parcel Service, Inc. $($UPS$),$ a global package delivery company, reported the following performance data:

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Financial Highlights$201220112010$Revenue$$54,127$$$53,105$$$49,545$Operating expenses$52,78447,02543,904$Net income$8073,8043,338$

Source:$$Amounts excerpted from United Parcel Service, Inc. $2012$ Form $10-$K$.$

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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.

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At the beginning of $2012,$ UPS reported it was changing its accounting relating to its employee pension plans.

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Historically, UPS would:

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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.

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Under the new policy, UPS will:

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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.

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Required:

$1.$ What are the implications of UPS$$s change in accounting policy on its reported Net income?

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$2.$ 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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