UPS 2011 Annual Report Download - page 79

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 identifiable assets acquired (goodwill), and indefinite-lived
intangible assets are tested 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.
In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors,
including macroeconomic conditions, industry and market conditions, overall financial performance of the
reporting unit, changes in management, strategy or customers, and relevant reporting unit specific events such as
a change in the carrying amount of net assets, a more-likely-than-not expectation of selling or disposing all, or a
portion, of a reporting unit, and the testing for recoverability of a significant asset group within a reporting unit.
If this qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting
unit exceeds the carrying value, then no further testing is performed for that reporting unit.
If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting
unit, then we utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of
the applicable reporting unit with the aggregate carrying value, including goodwill, is performed. If the carrying
amount of a reporting unit exceeds its calculated fair value, then the second step is performed, and an impairment
charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied 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.
Pension and Postretirement Benefits
We incur certain employment-related expenses associated with pension and postretirement medical benefits.
These pension and postretirement medical benefit costs for company-sponsored benefit plans are calculated using
various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets,
health care cost trend rates, inflation, compensation increase rates, mortality rates, and other factors. Actuarial
assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement date for
any of our plans.
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