UPS 2007 Annual Report Download - page 71

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $67, $48, and $32 million for
2007, 2006, and 2005, 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.
As a result of business changes that occurred in the first quarter of 2007, including capacity-optimization
programs in our domestic and international air freight forwarding business as well as changes to our aircraft
orders and planned delivery dates, we began a review process of our aircraft fleet types to ensure that we
maintain the optimum mix of aircraft types to service our international and domestic package businesses. The
review was completed in March 2007, and based on the results of our evaluation, we accelerated the planned
retirement of certain Boeing 727 and 747 aircraft, and recognized an impairment and obsolescence charge of
$221 million for the aircraft and related engines and parts in 2007. This charge is included in the caption “Other
expenses” in the Statement of Consolidated Income, of which $159 million impacted our U.S. Domestic Package
segment and $62 million impacted our International Package segment.
UPS continues to operate all of its other aircraft and continues to experience positive cash flow. No
impairments of aircraft or other long-lived assets were recognized in 2006 or 2005.
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