UPS 2006 Annual Report Download - page 70

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment
income, along with interest and dividends. The cost of securities sold is based on the specific identification
method; realized gains and losses resulting from such sales are included in investment income.
Investment securities are reviewed for impairment in accordance with FASB Statement No. 115
“Accounting for Certain Investments in Debt and Equity Securities” and FASB Staff Position (FSP) 115-1 “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” We periodically
review our investments for indications of other than temporary impairment considering many factors, including
the extent and duration to which a security’s fair value has been less than its cost, overall economic and market
conditions, and the financial condition and specific prospects for the issuer. Impairment of investment securities
results in a charge to income when a market decline below cost is other than temporary.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and amortization are provided by the
straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles—3 to 15 years;
Aircraft—12 to 30 years; Buildings—20 to 40 years; Leasehold Improvements—terms of leases; Plant
Equipment—6 to 10 years; Technology Equipment—3 to 5 years. The costs of major airframe and engine
overhauls, as well as routine maintenance and repairs, are charged to expense as incurred. During 2006, we
reevaluated the anticipated service lives of our Boeing 757, Boeing 767, and Airbus A300 fleets, and as a result
of this evaluation, increased the depreciable lives from 20 to 30 years and reduced the residual values from 30%
to 10% of original cost. This change did not have a material effect on our results of operations.
Interest incurred during the construction period of certain property, plant and equipment is capitalized until
the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-
line, over the estimated useful lives of the related assets. Capitalized interest was $48, $32, and $25 million for
2006, 2005, and 2004, respectively.
Impairment of Long-Lived Assets
In accordance with the provisions of FASB Statement No. 144 “Accounting for the Impairment or Disposal
of Long-Lived Assets,” we review long-lived assets for impairment when circumstances indicate the carrying
amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the
carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair
values are determined based on quoted market values, discounted cash flows, or external appraisals, as
applicable. We review long-lived assets for impairment at the individual asset or the asset group level for which
the lowest level of independent cash flows can be identified.
In December 2004, we permanently removed from service a number of Boeing 727, 747 and McDonnell
Douglas DC-8 aircraft. As a result of the actual and planned retirement of these aircraft, we conducted an
impairment evaluation, which resulted in a $110 million impairment charge during the fourth quarter for these
aircraft (including the related engines and parts), $91 million of which impacted the U.S. domestic package
segment and $19 million of which impacted the international package segment.
This charge is included in the caption “Other expenses”. UPS continues to operate all of its other aircraft
and continues to experience positive cash flow, and no impairments of aircraft were recognized in 2006 or 2005.
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