Federal Express 2009 Annual Report Download - page 34

FEDEX CORPORATION
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advance of our capacity needs. These activities create risks
that asset capacity may exceed demand and that an impair-
ment of our assets may occur. Aircraft purchases (primarily
aircraft in passenger confi guration) that have not been placed
in service totaled $130 million at May 31, 2009 and $127 million
at May 31, 2008. We plan to modify these assets in the future and
place them into operations.
The accounting test for whether an asset held for use is impaired
involves fi rst comparing the carrying value of the asset with its
estimated future undiscounted cash fl ows. If the cash fl ows do
not exceed the carrying value, the asset must be adjusted to its
current fair value. We operate integrated transportation networks
and, accordingly, cash fl ows for most of our operating assets are
assessed at a network level, not at an individual asset level for
our analysis of impairment. Further, decisions about capital invest-
ments are evaluated based on the impact to the overall network
rather than the return on an individual asset. We make decisions
to remove certain long-lived assets from service based on pro-
jections of reduced capacity needs or lower operating costs of
newer aircraft types, and those decisions may result in an impair-
ment charge. Assets held for disposal must be adjusted to their
estimated fair values when the decision is made to dispose of the
asset and certain other criteria are met. The fair value determi-
nations for such aircraft may require management estimates, as
there may not be active markets for some of these aircraft. Such
estimates are subject to revision from period to period.
During the fourth quarter of 2009, we recorded $202 million in
property and equipment impairment charges. These charges
are primarily related to our April 2009 decision to permanently
remove from service 10 Airbus A310-200 aircraft and four Boeing
MD10-10 aircraft owned by the company, along with certain
excess aircraft engines at FedEx Express. This decision resulted
in an impairment charge of $191 million, which was recorded in
the fourth quarter of 2009. A limited amount of our total aircraft
capacity remains temporarily grounded because of network
overcapacity due to the current economic environment. There
were no material property and equipment impairment charges
recognized in 2008 or 2007.
Leases. We utilize operating leases to fi nance certain of our
aircraft, facilities and equipment. Such arrangements typically
shift the risk of loss on the residual value of the assets at the end
of the lease period to the lessor. As disclosed in “Contractual
Cash Obligations” and Note 7 to the accompanying consolidated
financial statements, at May 31, 2009 we had approximately
$15 billion (on an undiscounted basis) of future commitments for
payments under operating leases. The weighted-average remain-
ing lease term of all operating leases outstanding at May 31, 2009
was approximately six years.
The future commitments for operating leases are not refl ected as
a liability in our balance sheet under U.S. accounting rules. The
determination of whether a lease is accounted for as a capital
lease or an operating lease requires management to make esti-
mates primarily about the fair value of the asset and its estimated
economic useful life. In addition, our evaluation includes ensuring
we properly account for build-to-suit lease arrangements and
making judgments about whether various forms of lessee involve-
ment during the construction period make the lessee an agent
for the owner-lessor or, in substance, the owner of the asset
during the construction period. We believe we have well-defi ned
and controlled processes for making these evaluations, including
obtaining third-party appraisals for material transactions to assist
us in making these evaluations.
Goodwill. We have $2.2 billion of goodwill in our balance sheet
from our acquisitions, representing the excess of cost over the
fair value of the net assets we have acquired. Several factors
give rise to goodwill in our acquisitions, such as the expected
benefi t from synergies of the combination and the existing work-
force of the acquired entity.
In accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” a two-step impairment test is performed on goodwill. In
the fi rst step, a comparison is made of the estimated fair value
of a reporting unit to its carrying value. If the carrying value of a
reporting unit exceeds the estimated fair value, the second step
of the impairment test is required. In the second step, an estimate
of the current fair values of all assets and liabilities is made to
determine the amount of implied goodwill and consequently the
amount of any goodwill impairment.
Our annual evaluation of goodwill impairment requires man-
agement judgment and the use of estimates and assumptions
to determine the fair value of our reporting units. Fair value is
estimated using standard valuation methodologies (principally
the income or market approach) incorporating market partici-
pant considerations and management’s assumptions on revenue
growth rates, operating margins, discount rates and expected
capital expenditures. Estimates used by management can sig-
nifi cantly affect the outcome of the impairment test. Each year,
independent of our goodwill impairment test, we update the
calculation of our weighted-average cost of capital (“WACC”)
and perform a long-range planning analysis to project expected
results of operations. Using this data, we complete a separate
fair value analysis for each of our reporting units. Changes in
forecasted operating results and other assumptions could materi-
ally affect these estimates. We perform our annual impairment
test in the fourth quarter unless circumstances indicate the need
to accelerate the timing of the test.
In connection with our annual impairment testing of goodwill and
other intangible assets conducted in the fourth quarter of 2009
in accordance with SFAS 142, we recorded a charge of $900 mil-
lion for impairment of the value of goodwill. This charge included
an $810 million charge related to reduction of the value of the
goodwill recorded as a result of the February 2004 acquisition of
Kinko’s, Inc. (now known as FedEx Offi ce) and a $90 million charge
related to reduction of the value of the goodwill recorded as a
result of the September 2006 acquisition of the U.S. and Canadian
less-than-truckload freight operations of Watkins Motor Lines
and certain affi liates (now known as FedEx National LTL).
FedEx Offi ce Goodwill. In 2008, despite several management
changes and strategic actions focused on growing revenues
and profi tability at FedEx Offi ce, we recorded a charge of $891
million in connection with our annual impairment testing. The
charge predominantly related to a $515 million impairment of
the Kinko’s trade name and a $367 million impairment of good-
will. This charge was a result of the decision to phase out the
use of the Kinko’s trade name and reduced profi tability at FedEx
Offi ce over the forecast period. Additional discussion of the key