UPS 2011 Annual Report Download - page 82

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
us to estimate and measure the tax benefit as the largest amount that is more likely than not 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 uncertain tax positions on a quarterly basis. This
evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law,
effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement could
result in the recognition of a tax benefit or an additional charge to the tax provision.
Foreign Currency Translation
We translate the results of operations of our foreign subsidiaries using average exchange rates during each
period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance
sheet currency translation adjustments are recorded in AOCI. Net currency transaction gains and losses included
in other operating expenses were pre-tax gains (losses) of $(1), $7 and $(45) million in 2011, 2010 and 2009,
respectively.
Stock-Based Compensation
All share-based awards to employees are measured based on their fair values and expensed over the period
during which an employee is required to provide service in exchange for the award (the vesting period). We issue
employee share-based awards under the UPS Incentive Compensation Plan that are subject to specific vesting
conditions; generally, the awards cliff vest or vest ratably over a five year period, “the nominal vesting period,”
or at the date the employee retires (as defined by the plan), if earlier. Compensation cost is recognized
immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the
date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period.
Fair Value Measurements
Our financial assets and liabilities measured at fair value on a recurring basis have been categorized based
upon a fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.
Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities,
and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are
developed from unobservable data reflecting our own assumptions, and include situations where there is little or
no market activity for the asset or liability.
Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including
property, plant, and equipment, goodwill and intangible assets. These assets are not measured at fair value on a
recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there
is evidence of an impairment. A general description of the valuation methodologies used for assets and liabilities
measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation
hierarchy, is included in each footnote with fair value measurements present.
Derivative Instruments
All financial derivative instruments are recorded on our consolidated balance sheets at fair value.
Derivatives not designated as hedges must be adjusted to fair value through income. If a derivative is designated
as a hedge, depending on the nature of the hedge, changes in its fair value that are considered to be effective, as
defined, either offset the change in fair value of the hedged assets, liabilities or firm commitments through
income, or are recorded in AOCI until the hedged item is recorded in income. Any portion of a change in a
derivative’s fair value that is considered to be ineffective, or is excluded from the measurement of effectiveness,
is recorded immediately in income.
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