UPS 2006 Annual Report Download - page 54

estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage
by participants and overall trends in medical costs and inflation. Actual results may differ from these estimates
and, therefore, produce a material difference between estimated and actual operating results.
Pension and Postretirement Medical Benefits—As discussed in Note 5 to our consolidated financial
statements, we maintain several defined benefit and postretirement benefit plans. Our pension and other
postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed
by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and Statement
of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions.” These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors. Actual results that differ from our
assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized
expense and recorded obligation in such future periods. We believe that the assumptions utilized in recording the
obligations under our plans are reasonable based on input from our outside actuaries and other advisors and
information as to historical experience and performance. Differences in actual experience or changes in
assumptions may affect our pension and other postretirement obligations and future expense. A 25 basis point
change in the assumed discount rate, expected return on assets, and health care cost trend rate for the pension and
postretirement benefit plans would result in the following increases (decreases) on the Company’s costs and
obligations for the year 2006 (in millions):
25 Basis Point
Increase
25 Basis Point
Decrease
Pension Plans
Discount Rate:
Effect on net periodic benefit cost .......................... $ (67) $ 68
Effect on projected benefit obligation ....................... (571) 595
Return on Assets:
Effect on net periodic benefit cost .......................... (31) 31
Postretirement Medical Plans
Discount Rate:
Effect on net periodic benefit cost .......................... (7) 7
Effect on projected benefit obligation ....................... (83) 86
Health Care Cost Trend Rate:
Effect on net periodic benefit cost .......................... 3 (2)
Effect on projected benefit obligation ....................... 17 (16)
Financial Instruments—As discussed in Notes 2, 3, 8, and 15 to our consolidated financial statements, and
in the “Market Risk” section of this report, we hold and issue financial instruments that contain elements of
market risk. Certain of these financial instruments are required to be recorded at fair value. Fair values are based
on listed market prices, when such prices are available. To the extent that listed market prices are not available,
fair value is determined based on other relevant factors, including dealer price quotations. Certain financial
instruments, including over-the-counter derivative instruments, are valued using pricing models that consider,
among other factors, contractual and market prices, correlations, time value, credit spreads, and yield curve
volatility factors. Changes in the fixed income, equity, foreign exchange, and commodity markets will impact our
estimates of fair value in the future, potentially affecting our results of operations. A quantitative sensitivity
analysis of our exposure to changes in commodity prices, foreign currency exchange rates, interest rates, and
equity prices is presented in the “Market Risk” section of this report.
Depreciation, Residual Value, and Impairment of Fixed Assets—As of December 31, 2006, we had $16.779
billion of net fixed assets, the most significant category of which is aircraft. In accounting for fixed assets, we
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