Union Pacific 2009 Annual Report Download - page 82

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82
Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of
homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital
program for the replacement of assets and for the acquisition or construction of assets that enable us to
enhance our operations or provide new service offerings to customers. Assets purchased or constructed
throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties
and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service
lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines
except for those subject to abandonment, yard and switching tracks, and electronic yards), which are
measured in millions of gross tons per mile of track. We use the group method of depreciation in which
all items with similar characteristics, use, and expected life are grouped together in asset classes, and are
depreciated using composite depreciation rates. The group method of depreciation treats each asset class
as a pool of resources, not as singular items. We currently have more than 60 depreciable asset classes,
and we may increase or decrease the number of asset classes due to changes in technology, asset
strategies, or other factors.
We determine the estimated service lives of depreciable railroad assets by means of depreciation studies.
We perform depreciation studies at least every three years for equipment and every six years for track
assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation
studies take into account the following factors:
• Statistical analysis of historical patterns of use and retirements of each of our asset classes;
• Evaluation of any expected changes in current operations and the outlook for continued use of the
assets;
• Evaluation of technological advances and changes to maintenance practices; and
• Expected salvage to be received upon retirement.
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per
mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely
correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on
rail weight, rail condition, (e.g., new or secondhand), and rail type (e.g., straight or curve). Our
depreciation studies for rail in high density traffic corridors consider each of these factors in determining
the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates
annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and
empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the
estimated service lives of the rail measured in millions of gross tons per mile. For all other depreciable
assets, we compute depreciation based on the estimated service lives of our assets as determined from the
analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related
depreciation rates are implemented prospectively.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or
replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is
recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by
the Bureau of Labor Statistics and (ii) the estimated useful life of the assets as determined by our
depreciation studies. The indices were selected because they closely correlate with the major costs of the
properties comprising the applicable track asset classes. Because of the number of estimates inherent in
the depreciation and retirement processes and because it is impossible to precisely estimate each of these
variables until a group of property is completely retired, we continually monitor the estimated service
lives of our assets and the accumulated depreciation associated with each asset class to ensure our
depreciation rates are appropriate.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a
gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is