Union Pacific 2005 Annual Report Download - page 57

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.
Pension and Postretirement Benefits – We incur certain employment-related expenses associated with pensions
and postretirement health benefits. In order to measure the expense associated with these benefits, we must make
various assumptions including discount rates used to value certain liabilities, expected return on plan assets used
to fund these expenses, salary increases, employee turnover rates, anticipated mortality rates, and expected future
healthcare costs. The assumptions used by us are based on our historical experience as well as current facts and
circumstances. We use third-party actuaries to assist us in properly measuring the expense and liability associated
with these benefits.
Personal Injury – The cost of injuries to employees and others on our property is charged to expense based on
estimates of the ultimate cost and number of incidents each year. We use third-party actuaries to assist us in
properly measuring the expense and liability. Legal fees are expensed as incurred.
Environmental – When environmental issues have been identified with respect to property currently or formerly
owned, leased, or otherwise used in the conduct of our business, we and our consultants perform environmental
assessments on such property. We expense the cost of the assessments as incurred. We accrue the cost of
remediation where our obligation is probable and such costs can be reasonably estimated. We do not discount our
environmental liabilities when the timing of the anticipated cash payments is not fixed or readily determinable.
Legal fees are expensed as incurred.
Asbestos – We estimate a liability for asserted and unasserted asbestos-related claims based on an assessment of
the number and value of those claims. We use an external consulting firm to assist us in properly measuring the
expense and liability. Our liability for asbestos-related claims is not discounted to present value due to the
uncertainty surrounding the timing of future payments. Legal fees are expensed as incurred.
Differences in Securities and Exchange Commission (SEC) and Surface Transportation Board (STB)
Accounting – STB accounting rules require that railroads accrue the cost of removing track structure over the
expected useful life of these assets. Railroads historically used this prescribed accounting for reports filed with
both the STB and SEC. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (FAS 143). This statement was effective for us beginning January 1, 2003, and prohibits the accrual of
removal costs unless there is a legal obligation to remove the track structure at the end of its life. We concluded
that we did not have a legal obligation to remove the track structure, and under generally accepted accounting
principles we could not accrue the cost of removal in advance. As a result, reports filed with the SEC reflect the
expense of removing these assets in the period in which they are removed.
Change in Presentation – Certain prior year amounts have been reclassified to conform to the 2005 Consolidated
Financial Statement presentation. These reclassifications were not material, individually or in aggregate, with the
exception of reclassifications made to appropriately reflect the discontinued operations as discussed in note 13.
1. Operations and Segmentation
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although
revenue is analyzed by commodity, we analyze the net financial results of the Railroad as one segment due to the
integrated nature of the rail network. The Consolidated Financial Statements for 2003 also include discontinued
trucking operations, consisting of Overnite Transportation Company (OTC) and Motor Cargo Industries, Inc.
(Motor Cargo) (see note 13 of the Consolidated Financial Statements regarding the reclassification of our
trucking segment as a discontinued operation).
Continuing Operations – UPRR is a Class I railroad that operates in the United States. We have 32,426 route
miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways and
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