UPS 2006 Annual Report Download - page 69

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statements and Business Activities
The accompanying financial statements include the accounts of United Parcel Service, Inc., and all of its
consolidated subsidiaries (collectively “UPS” or the “Company”). All intercompany balances and transactions
have been eliminated.
UPS concentrates its operations in the field of transportation services, primarily domestic and international
letter and package delivery. Through our Supply Chain & Freight subsidiaries, we are also a global provider of
specialized transportation, logistics, and financial services.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
U.S. Domestic and International Package Operations—Revenue is recognized upon delivery of a letter or
package, in accordance with EITF 91-9 “Revenue and Expense Recognition for Freight Services in Process”.
Forwarding and Logistics—Freight forwarding revenue and the expense related to the transportation of
freight is recognized at the time the services are performed in accordance with EITF 99-19 “Reporting Revenue
Gross as a Principal Versus Net as an Agent”. Material management and distribution revenue is recognized upon
performance of the service provided. Customs brokerage revenue is recognized upon completing documents
necessary for customs entry purposes.
Freight—Revenue is recognized upon delivery of a less-than-truckload (“LTL”) or truckload (“TL”)
shipment, in accordance with EITF 91-9.
Financial Services—Income on loans and direct finance leases is recognized on the effective interest
method. Accrual of interest income is suspended at the earlier of the time at which collection of an account
becomes doubtful or the account becomes 90 days delinquent. Income on operating leases is recognized on the
straight-line method over the terms of the underlying leases.
During 2006, we began classifying deferred revenue and cost on our consolidated balance sheet as
reductions of accounts receivable, accounts payable, and accrued wages and withholdings. Previously, deferred
revenue and cost had been included in other current liabilities and other current assets in our consolidated
balance sheet. We reclassified 2005 balance sheet line items for consistent presentation. This reclassification had
the effect of reducing reported 2005 accounts receivable by $207 million, other current assets by $68 million,
accounts payable by $27 million, accrued wages and withholdings by $41 million, and other current liabilities by
$207 million.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments that are readily convertible into cash. We
consider securities with maturities of three months or less, when purchased, to be cash equivalents. The carrying
amount of these securities approximates fair value because of the short-term maturity of these instruments.
Marketable Securities and Short-Term Investments
Marketable securities are classified as available-for-sale and are carried at fair value, with related unrealized
gains and losses reported, net of tax, as accumulated other comprehensive income (“AOCI”), a separate
component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of
F-9