UPS 2008 Annual Report Download - page 52

Contingencies—As discussed in Note 9 to our consolidated financial statements, we are involved in various
legal proceedings and contingencies. We have recorded liabilities for these matters in accordance with Statement
of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“FAS 5”). FAS 5 requires a liability
to be recorded based on our estimate of the probable cost of the resolution of a contingency. The actual resolution
of these contingencies may differ from our estimates. If a contingency is settled for an amount greater than our
estimate, a future charge to income would result. Likewise, if a contingency is settled for an amount that is less
than our estimate, a future credit to income would result.
The events that may impact our contingent liabilities are often unique and generally are not predictable. At
the time a contingency is identified, we consider all relevant facts as part of our FAS 5 evaluation. We record a
liability for a loss that meets the recognition criteria of FAS 5. These criteria require recognition of a liability
when the loss is probable of occurring and reasonably estimable. Events may arise that were not anticipated and
the outcome of a contingency may result in a loss to us that differs from our previously estimated liability. These
factors could result in a material difference between estimated and actual operating results. Contingent losses that
meet the recognition criteria under FAS 5, excluding those related to income taxes and self insurance which are
discussed further below, were not material to the Company’s financial position as of December 31, 2008. In
addition, we have certain contingent liabilities that have not been recognized as of December 31, 2008, because a
loss is not reasonably estimable.
Goodwill and Intangible Impairment—We account for goodwill in accordance with Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which requires annual
impairment testing of goodwill for each of our reporting units. Our reporting units are comprised of the Europe,
Asia, and Americas reporting units in the International Package reporting segment, and the Forwarding &
Logistics, UPS Freight, MBE / UPS Store, and UPS Capital reporting units in the Supply Chain & Freight
reporting segment. Our annual goodwill impairment testing date is October 1st for each reporting unit. The
impairment test involves a two-step process. First, a comparison of the fair value of the applicable reporting unit
with the aggregate carrying values, including goodwill, is performed. If the carrying amount of a reporting unit
exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine
the amount of impairment loss. The second step includes comparing the implied fair value of the affected
reporting unit’s goodwill with the carrying value of that goodwill.
We primarily determine the fair value of our reporting units using a discounted cash flow model (“DCF
model”), and supplement this with observable valuation multiples for comparable companies, as applicable. The
completion of the DCF model requires that we make a number of significant assumptions to produce an estimate
of future cash flows. These assumptions include projections of future revenue, costs and working capital changes.
In addition, we make assumptions about the estimated cost of capital and other relevant variables, as required, in
estimating the fair value of our reporting units. The projections that we use in our DCF model are updated
annually and will change over time based on the historical performance and changing business conditions for
each of our reporting units. The determination of whether goodwill is impaired involves a significant level of
judgment in these assumptions, and changes in our business strategy, government regulations, or market
conditions could significantly impact these judgments. We will continue to monitor market conditions and other
factors to determine if interim impairment tests are necessary in future periods. If impairment indicators are
present in future periods, the resulting impairment charges could have a material impact on our results of
operations.
In the fourth quarter of 2008, we completed our annual goodwill impairment testing and determined that our
UPS Freight reporting unit, which was formed through the acquisition of Overnite Corporation in 2005, had a
goodwill impairment of $548 million. This impairment charge resulted from several factors, including a lower
cash flow forecast due to a longer estimated economic recovery time for the LTL sector, and significant
deterioration in equity valuations for other similar LTL industry participants. At the time of acquisition of
Overnite Corporation, LTL equity valuations were higher and the economy was significantly stronger. We
invested in operational improvements and technology upgrades to enhance service and performance, as well as
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