Union Pacific 2009 Annual Report Download - page 45

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45
At December 31, 2009, we had variable-rate debt representing approximately 4% of our total debt. If
variable interest rates average one percentage point higher in 2010 than our December 31, 2009 variable
rate, which was approximately 2%, our interest expense would increase by approximately $4 million.
This amount was determined by considering the impact of the hypothetical interest rate on the balances of
our variable-rate debt at December 31, 2009.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a
hypothetical one percentage point decrease in interest rates as of December 31, 2009, and amounts to an
increase of approximately $774 million to the fair value of our debt at December 31, 2009. We estimated
the fair values of our fixed-rate debt by considering the impact of the hypothetical interest rates on quoted
market prices and current borrowing rates.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by
adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given
period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted
amounts of each as debt matures or as we require incremental borrowings. We employ derivatives,
primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in
managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of
and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in
the debt’ s fair value attributable to the changes in interest rates. We account for swaps as fair value
hedges using the short-cut method as allowed by the Derivatives and Hedging Topic of the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC); therefore, we do not
record any ineffectiveness within our Consolidated Financial Statements.
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in
accumulated other comprehensive income/loss until the hedged item affects earnings. At December 31,
2009 and 2008, we had reductions of $3 million and $4 million, respectively, recorded as an accumulated
other comprehensive income/loss that is being amortized on a straight-line basis through September 30,
2014. As of December 31, 2009 and 2008, we had no interest rate cash flow hedges outstanding.
Accounting Pronouncements – In January 2010, the FASB issued Accounting Standards Update No.
2010-06, Improving Disclosures about Fair Value Measurements. The Update provides amendments to
FASB ASC 820-10 that require entities to disclose separately the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition
the Update requires entities to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level
3). The disclosures related to Level 1 and Level 2 fair value measurements are effective for us in 2010
and the disclosures related to Level 3 fair value measurements are effective for us in 2011. The Update
requires new disclosures only, and will have no impact on our consolidated financial position, results of
operations, or cash flows.
In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets—an
amendment of FASB Statement No. 140 (FAS 166). FAS 166 limits the circumstances in which
transferred financial assets can be derecognized and requires enhanced disclosures regarding transfers of
financial assets and a transferor’ s continuing involvement with transferred financial assets. In addition,
the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes.
Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards)
should be evaluated for consolidation by reporting entities on and after the effective date in accordance
with the applicable consolidation guidance. FAS 166 will be effective for us beginning in 2010. After
adoption, transfers of undivided interests in accounts receivable to investors under our sale of receivables
program will no longer qualify for sale treatment, but rather will be accounted for as secured borrowings