UPS 2012 Annual Report Download - page 62

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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None of the reporting units incurred any goodwill impairment charges in 2012, 2011 or 2010. Changes in our forecasts
could cause carrying values of our reporting units to exceed their fair values in future periods, potentially resulting in a
goodwill impairment charge. A 10% decrease in the estimated fair value of our reporting units as of our most recent goodwill
testing date (October 1, 2012) would not result in a goodwill impairment charge.
Licenses with a carrying value of $5 million as of December 31, 2012 are deemed to be indefinite-lived intangibles, and
therefore are not amortized. Impairment tests for indefinite-lived intangibles are performed on an annual basis. All of our
remaining recorded intangible assets are deemed to be finite-lived intangibles, and are thus amortized over their estimated
useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that indicates that
the carrying value of the intangible may not be recoverable based on the undiscounted future cash flows of the intangible. If the
carrying amount of the intangible is determined not to be recoverable, a write-down to fair value is recorded. Fair values are
determined based on a DCF model. No impairments of indefinite-lived or finite-lived intangible assets were recognized in
2012, 2011 or 2010.
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. Trends in actual experience are a significant factor in the determination of such reserves. We believe our estimated
reserves for such claims are adequate, but actual experience in claim frequency and/or severity could materially differ from our
estimates and affect our results of operations.
Workers’ compensation, automobile liability and general liability insurance claims may take several years to completely
settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims.
A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in health
care costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in a
prior year at a rate that differs from previous actuarial projections. Changes in state legislation with respect to workers'
compensation can affect the adequacy of our self-insurance accruals. All of these factors can result in revisions to prior
actuarial projections and produce a material difference between estimated and actual operating results.
We sponsor a number of health and welfare insurance plans for our employees. These liabilities and related expenses are
based on estimates of the number of employees and eligible dependents covered under the plans, anticipated medical usage by
participants and overall trends in medical costs and inflation. Actual results may differ from these estimates and, therefore,
produce a material difference between estimated and actual operating results.
Fair Value Measurements
In the normal course of business, we hold and issue financial instruments that contain elements of market risk, including
derivatives, marketable securities, finance receivables, other investments and debt. Certain of these financial instruments are
required to be recorded at fair value, principally derivatives, marketable securities, pension assets and certain other
investments. Fair values are based on listed market prices, when such prices are available. To the extent that listed market
prices are not available, fair value is determined based on other relevant factors, including dealer price quotations. Certain
financial instruments, including over-the-counter derivative instruments, are valued using pricing models that consider, among
other factors, contractual and market prices, correlations, time value, credit spreads and yield curve volatility factors. Changes
in the fixed income, equity, foreign exchange and commodity markets will impact our estimates of fair value in the future,
potentially affecting our results of operations. A quantitative sensitivity analysis of our exposure to changes in commodity
prices, foreign currency exchange rates, interest rates and equity prices is presented in the “Market Risk” section of this report.