Which component is specifically the cumulative effect of changes in accounting principles?

• A. Change in unrealized capital gains (+)
• B. Cumulative effect of changes in accounting principles (+)
• C. Change in nonadmitted assets (-)
• D. Change in provision for reinsurance (-)

Answer: (B)

When a company adopts a new accounting principle, the impact of applying that change to prior periods is shown as a separate adjustment called the cumulative effect of changes in accounting principles. This item sits in the surplus or equity section and represents the retroactive adjustment to prior years, not the result of current-year operations. It can move surplus up or down depending on whether the new principle increases or decreases reported values compared with the old one. The other items—unrealized capital gains, nonadmitted assets, and changes in the provision for reinsurance—reflect valuation changes or liability estimates, not the retroactive effect of changing accounting principles. So the line item that specifically captures the cumulative effect of changes in accounting principles is that cumulative adjustment itself.