Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock options as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. Peter Fried land, CFA, is an equity analyst concerned with earnings quality. He is particularly interested in whether the discretionary assumptions the company is making regarding
compensation plans are contributing to the recent earnings growth at Stereo Warehouse. He gathers information from the company’s regulatory fi lings regarding the pension plan assumptions in Exhibit 4 and the assumptions related to option valuation in Exhibit 5.
Compared to the assumptions Stereo Warehouse used to compute its periodic pension cost in 2008, earnings in 2009 were most favorably affected by the change in the:
A. discount rate.
B. estimated future salary increases.
C. expected long-term rate of return on plan assets.