Union Pacific 2005 Annual Report Download - page 56

Stock-Based Compensation – We have several stock-based employee compensation plans, which are described
more fully in note 7 of the Consolidated Financial Statements. We have accounted for those plans under the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based employee compensation expense related to stock
option grants is reflected in net income, as all options granted under those plans had a grant price equal to the
market value of our common stock on the date of grant. Stock-based compensation expense related to retention
shares, stock units, and other incentive plans is reflected in net income. The following table illustrates the effect on
net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation (FAS 123), to stock-based employee compensation. See note 11
to the Consolidated Financial Statements for discussion of FASB Statement No. 123 (R), Share-Based Payment
(FAS 123(R)), related to the treatment of stock options. See note 8 of the Consolidated Financial Statements for
reconciliation between basic earnings per share and diluted earnings per share.
Year Ended December 31,
Millions of Dollars, Except Per Share Amounts 2005 2004 2003
Net income, as reported ................................................. $1,026 $ 604 $1,585
Stock-based employee compensation expense included in reported net income, net
oftax .............................................................. 13 13 28
Total stock-based employee compensation expense determined under fair value-
based method for all awards, net of tax [a] ................................ (50) (35) (50)
Pro forma net income ................................................... $ 989 $582 $1,563
EPS – basic, as reported ................................................. $ 3.89 $2.33 $ 6.23
EPS – basic, pro forma .................................................. $ 3.75 $2.25 $ 6.14
EPS – diluted, as reported ................................................ $ 3.85 $2.30 $ 6.04
EPS – diluted, pro forma ................................................. $ 3.71 $2.22 $ 5.96
[a] Stock options for executives granted in 2003 and 2002 included a reload feature. This reload feature allowed executives to exercise their options
using shares of Union Pacific Corporation common stock that they already owned and obtain a new grant of options in the amount of the
shares used for exercise plus any shares withheld for tax purposes. The reload feature of these option grants could only be exercised if the price of
our common stock increased at least 20% from the price at the time of the reload grant. During the year ended December 31, 2005, reload
option grants represented $19 million of the pro forma expense noted above. There were no reload options exercised during 2004 or 2003 and
no pro forma expense for reload option grants in 2004 or 2003. Stock options exercised after the January 1, 2006 effective date of FAS 123(R)
will not be eligible for the reload feature.
Earnings Per Share – Basic earnings per share (EPS) are calculated on the weighted-average number of common
shares outstanding during each period. Diluted EPS include shares issuable upon exercise of outstanding stock
options, stock-based awards, and the potential conversion of the preferred securities where the conversion of such
instruments would be dilutive.
Use of Estimates – Our Consolidated Financial Statements include estimates and assumptions regarding certain
assets, liabilities, revenues, and expenses and the disclosure of certain contingent assets and liabilities. Actual
future results may differ from such estimates.
Income Taxes – As required under 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.
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