Federal Express 2006 Annual Report Download - page 73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
71
INTANGIBLE ASSETS
Amortizable intangible assets include customer relationships,
technology assets and contract-based intangibles acquired
in business combinations. Amortizable intangible assets are
amortized over periods ranging from 2 to 15 years, either on a
straight-line basis or an accelerated basis depending upon the pat-
tern in which the economic benefits are realized. Non-amortizing
intangible assets consist of the Kinko’s trade name. Non-amortizing
intangibles are reviewed at least annually for impairment. Unless
circumstances otherwise dictate, we perform our annual impair-
ment testing in the fourth quarter.
INCOM E TAXES
Deferred income taxes are provided for the tax effect of tempo-
rary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. The lia-
bility method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate in effect when
the taxes are paid.
We have not recognized deferred taxes for U.S. federal income
taxes on foreign subsidiaries’ earnings that are deemed to be
permanently reinvested and any related taxes associated with
such earnings are not material. Pretax earnings of foreign oper-
ations were approximately $606 million in 2006, $636 million in
2005 and $430 million in 2004, which represent only a portion of
total results associated with international shipments.
SELF-INSURANCE ACCRUALS
We are primarily self-insured for workers’ compensation claims,
vehicle accidents and general liabilities, benefits paid under
employee healthcare programs and long-term disability benefits.
Accruals are primarily based on the actuarially estimated, undis-
counted cost of claims, which includes incurred-but-not-reported
claims. Current workers’ compensation claims, vehicle and gen-
eral liability, employee healthcare claims and long-term disability
are included in accrued expenses. We self-insure up to certain lim-
its that vary by operating company and type of risk. Periodically,
we evaluate the level of insurance coverage and adjust insurance
levels based on risk tolerance and premium expense.
LEASES
Certain of our aircraft, facility and retail location leases contain
fluctuating or escalating payments and rent holiday periods. The
related rent expense is recorded on a straight-line basis over the
lease term. The cumulative excess of rent payments over rent
expense is accounted for as a deferred lease asset and recorded
in “ Intangible and other assets” in the balance sheets. The cumu-
lative excess of rent expense over rent payments is accounted
for as a deferred lease obligation. In addition to minimum rental
payments, certain leases provide for contingent rentals based on
equipment usage principally related to aircraft leases at FedEx
Express and copier usage at FedEx Kinko’s. Rent expense
associated with contingent rentals is recorded as incurred. The
commencement date of all leases is the earlier of the date we
become legally obligated to make rent payments or the date we
may exercise control over the use of the property. Leasehold
improvements associated with assets utilized under capital or
operating leases are amortized over the shorter of the asset’s
useful life or the lease term.
DEFERRED GAINS
Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized ratably over the life
of the lease as a reduction of rent expense. Substantially all of
these deferred gains are related to aircraft transactions.
FOREIGN CURRENCY TRANSLATION
Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and
reported, net of applicable deferred income taxes, as a compo-
nent of accumulated other comprehensive loss within common
stockholders’ investment. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated in
a currency other than the local currency are included in results of
operations. Cumulative net foreign currency translation gains and
(losses) in accumulated other comprehensive loss were $43 mil-
lion at May 31, 2006, $14 million at May 31, 2005 and ($13) million
at May 31, 2004.
AIRLINE STABILIZATION ACT CHARGE
During the second quarter of 2005, the United States Department
of Transportation (“ DOT”) issued a final order in its administra-
tive review of the FedEx Express claim for compensation under
the Air Transportation Safety and System Stabilization Act
(“ Act”). Under its interpretation of the Act, the DOT determined
that FedEx Express was entitled to $72 million of compensation.
Because we had previously received $101 million under the Act,
the DOT demanded repayment of $29 million, which was made in
December 2004. Because we could no longer conclude that col-
lection of the entire $119 million recorded in 2002 was probable,
we recorded a charge of $48 million in the second quarter of 2005,
representing the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable.
EM PLOYEES UNDER COLLECTIVE BARGAINING
ARRANGEM ENTS
The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004. These negotiations are ongoing and are being medi-
ated through the National Mediation Board. We cannot estimate
the financial impact, if any, the results of these negotiations may
have on our future results of operations.