UPS 2015 Annual Report Download - page 69

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Depreciation, Residual Value and Impairment of Fixed Assets
As of December 31, 2015, we had $18.352 billion of net fixed assets, the most significant category of which is aircraft. In
accounting for fixed assets, we make estimates about the expected useful lives and the expected residual values of the assets,
and the potential for impairment based on the fair values of the assets and the cash flows generated by these assets.
In estimating the lives and expected residual values of aircraft, we have relied upon actual experience with the same or
similar aircraft types. Subsequent revisions to these estimates could be caused by changes to our maintenance program, changes
in the utilization of the aircraft, governmental regulations on aging aircraft and changing market prices of new and used aircraft
of the same or similar types. We periodically evaluate these estimates and assumptions, and adjust the estimates and
assumptions as necessary. Adjustments to the expected lives and residual values are accounted for on a prospective basis
through depreciation expense.
We review long-lived assets for impairment when circumstances indicate the carrying 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. The circumstances that would indicate potential
impairment may include, but are not limited to, a significant change in the extent to which an asset is utilized and operating or
cash flow losses associated with the use of the asset. In estimating cash flows, we project future volume levels for our different
air express products in all geographic regions in which we do business. Adverse changes in these volume forecasts, or a
shortfall of our actual volume compared with our projections, could result in our current aircraft capacity exceeding current or
projected demand. This situation would lead to an excess of a particular aircraft type, resulting in an aircraft impairment charge
or a reduction of the expected life of an aircraft type (thus resulting in increased depreciation expense).
There were no impairment charges on our property, plant and equipment during 2015, 2014 and 2013.
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, pension assets, 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 “Quantitative and Qualitative
Disclosures about Market Risk” section of this report.
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a
market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments
to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.