Union Pacific 2005 Annual Report Download - page 42

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Accounting Pronouncements – In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment.
The statement requires that we recognize compensation expense equal to the fair value of stock options or other
share-based payments starting January 1, 2006. We adopted the statement on a modified prospective basis, using
the Black-Scholes option-pricing model to calculate the fair value of stock options. We expect that the
incremental, full-year compensation expense in 2006 related to the adoption of the statement will be
approximately $13 million for new awards granted after January 1, 2006 and an additional $2 million for the
unvested portion of awards granted in prior years. The expense for awards granted after implementation of the
statement will be based upon their grant-date fair value. The expense for those awards will be based on the
estimated number of awards that are expected to vest. That estimate will be revised if subsequent information
indicates that the actual number of awards to vest will differ from the estimate. The estimate does not materially
impact our calculation of compensation expense.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations – an interpretation of FASB Statement No. 143 (FIN 47). This interpretation clarifies that the term
conditional asset retirement obligations, as used in FASB Statement No. 143, refers to a legal obligation to
perform an asset retirement activity in which the timing or method of settlement, or both, are conditional on a
future event that may or may not be within the control of the entity. An entity must recognize a liability for the
fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated.
We assessed the impact of the interpretation on our financial statements, determined that we have a legal
obligation to properly dispose of asbestos-containing materials, and recorded a $5 million liability at
December 31, 2005, for the fair value of this obligation.
In May 2005, the FASB issued FAS 154, Accounting Changes and Error Corrections, a Replacement of APB
Opinion No. 20 and FASB Statement No. 3. This statement requires retrospective application to prior periods’
financial statements of changes in accounting principle, unless it is impracticable to determine either the period-
specific effects or the cumulative effect of the change. It carries forward without change the previous guidance for
reporting the correction of an error and a change in accounting estimate. FAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In July 2005, the FASB issued an exposure draft, Accounting for Uncertain Tax Positions, an Interpretation of
FASB Statement No. 109. As drafted, the interpretation would require companies to recognize the best estimate of
the impact of a tax position only if that position is probable of being sustained during a tax audit. However, in
November 2005 the FASB voted to replace the probable threshold with a more-likely-than-not criterion when
determining if the impact of a tax position should be recorded. The FASB expects to issue a final interpretation in
the first quarter of 2006. When it is available, we will review the final interpretation to determine the impact it
may have on our Consolidated Financial Statements.
In September 2005, the FASB issued an exposure draft, Earnings per Share, an Amendment of FASB Statement
No. 128. The draft clarifies guidance for the treasury stock method, contracts that may be settled in cash or shares,
and contingently issuable shares. The FASB expects to issue a final statement in the first quarter of 2006. We are
currently reviewing this proposed exposure draft to determine the impact it may have on our calculation of
earnings per share.
In December 2005, the FASB deliberated issues relating to the limited-scope, first phase of its project to
reconsider the accounting for postretirement benefits, including pensions. The FASB decided that the objectives
and scope of this phase include, among other items, recognizing the overfunded or underfunded status of defined
benefit postretirement plans as an asset or a liability in the statement of financial position. The FASB expects to
issue an exposure draft for the initial phase in the first quarter of 2006. In the second multi-year phase of the
project, the FASB expects to comprehensively consider a variety of issues related to the accounting for
postretirement benefits, including expense recognition, obligation measurement, and whether postretirement
benefit trusts should be consolidated by the plan sponsor. We will review the proposed standards when they are
available to determine the impact they may have on our Consolidated Financial Statements.
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