Union Pacific 2005 Annual Report Download - page 45

Our personal injury claims activity was as follows:
Claims Activity 2005 2004 2003
Open claims, beginning balance ........................................... 4,028 4,085 4,116
New claims ........................................................... 4,584 4,366 4,494
Settled or dismissed claims ............................................... (4,415) (4,423) (4,525)
Open claims, ending balance at December 31 ................................ 4,197 4,028 4,085
Depreciation – The railroad industry is capital intensive. Properties are carried at cost. Provisions for
depreciation are computed principally on the straight-line method based on estimated service lives of depreciable
property. The lives are calculated using a separate composite annual percentage rate for each depreciable property
group, based on the results of a depreciation study. We are required to submit a report on depreciation studies
and proposed depreciation rates every three years for equipment property and every six years for road property to
the STB for review and approval. The cost (net of salvage) of depreciable railroad property retired or replaced in
the ordinary course of business is charged to accumulated depreciation, and no gain or loss is recognized. A gain
or loss is recognized in other income for all other property upon disposition because the gain or loss is not part of
rail operations. The cost of internally developed software is capitalized and amortized over a five-year period. An
obsolescence review of capitalized software is performed on a periodic basis.
Capital spending in recent years has increased the total value of our depreciable assets. Cash capital spending
totaled $2.2 billion for the year ended December 31, 2005. In 2003, we implemented depreciation studies,
approved by the STB, resulting in lower depreciation expense of $50 million for the year ended December 31,
2003, due to a reduction in depreciation rates for certain track assets (effective January 1, 2003), partially offset by
increased rates for locomotives and other assets (effective July 1, 2003). For the year ended December 31, 2005,
depreciation expense was $1.2 billion. Various methods are used to estimate useful lives for each group of
depreciable property. Due to the capital intensive nature of the business and the large base of depreciable assets,
variances to those estimates could have a material effect on our Consolidated Financial Statements. If the
estimated useful lives of all depreciable assets were increased by one year, annual depreciation expense would
decrease by approximately $40 million. If the estimated useful lives of all assets to be depreciated were decreased
by one year, annual depreciation expense would increase by approximately $43 million.
Income Taxes – As required under Financial Accounting Standards Board (FASB) Statement No. 109, Accounting
for Income Taxes, we account for income taxes by recording taxes payable or refundable for the current year and
deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our
financial statements or tax returns. These expected future tax consequences are measured based on provisions of
tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes,
such as a change in the corporate tax rate, could have a material impact on our financial condition or results of
operations. For example, a 1% increase in the federal income tax rate would increase our deferred tax liability by
approximately $240 million.
When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits
that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is
more likely than not that all or some portion of our deferred tax assets will not be realized, based in part on
management’s judgments regarding the best available evidence about future events. Based on that analysis, we
have recorded a valuation allowance of $5 million and $11 million against certain deferred tax assets as of
December 31, 2005 and 2004, respectively.
Insurance Subsidiaries – We have two consolidated, wholly-owned subsidiaries that provide insurance coverage
for certain risks, including physical loss or property damage and certain other claims that are subject to
reinsurance. At December 31, 2005, current accounts receivable and current accrued casualty costs included $65
million for reinsurance receivables and reinsured liability, respectively, held by one of our insurance subsidiaries
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