UPS 2008 Annual Report Download - page 67

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Goodwill and Intangible Assets
Costs of purchased businesses in excess of net assets acquired (goodwill), and intangible assets are
accounted for under the provisions of FASB Statement No. 142 “Goodwill and Other Intangible Assets” (“FAS
142”). Under FAS 142, we are required to test all goodwill for impairment at least annually, unless changes in
circumstances indicate an impairment may have occurred sooner. We are required to test goodwill on a
“reporting unit” basis. A reporting unit is the operating segment unless, for businesses within that operating
segment, discrete financial information is prepared and regularly reviewed by management, in which case such a
component business is the reporting unit.
A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the
amount, if any, by which the carrying amount of goodwill exceeds its fair value. We primarily determine the fair
value of our reporting units using a discounted cash flow model, and supplement this with observable valuation
multiples for comparable companies, as applicable.
Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, non-compete
agreements, and franchise rights are amortized on a straight-line basis over the estimated useful lives of the
assets, which range from 2 to 20 years. Capitalized software is amortized over periods ranging from 3 to 5 years.
Self-Insurance Accruals
We self-insure costs associated with workers’ compensation claims, automotive liability, health and welfare,
and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss
that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet
reported. Recorded balances are based on reserve levels, which incorporate historical loss experience and
judgments about the present and expected levels of cost per claim.
Income Taxes
Income taxes are accounted for under FASB Statement No. 109, “Accounting for Income Taxes”
(“FAS 109”). FAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in our financial
statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future
events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely
than not that a deferred tax asset will not be realized.
We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is
more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate
such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these
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