Federal Express 2009 Annual Report Download - page 36

FEDEX CORPORATION
34
In 2008, the estimated value of the FedEx National LTL reporting
unit was attributable to its long-term cash-generating capa-
bilities, and the forecasts used to value the reporting unit were
prepared prior to the severe impact of the U.S. recession on its
business. Although the forecast used in the valuation assumes
long-term profi tability resulting from the elimination of excess
capacity from the market, recent operating losses combined with
projected near-term operating losses for the FedEx National LTL
reporting unit, resulted in a signifi cant reduction in the value of
this business from 2008. Accordingly, we recorded an impair-
ment charge of $90 million during the fourth quarter of 2009. This
charge represented substantially all of the goodwill resulting
from this acquisition. The goodwill impairment charge is included
in operating expenses in the accompanying consolidated state-
ments of income and is included in the results of the FedEx
Freight segment.
Other Reporting Units Goodwill. Our remaining reporting units
with signifi cant recorded goodwill (excluding FedEx Offi ce and
FedEx National LTL) include our FedEx Express reporting unit
and our FedEx Freight reporting unit. We evaluated our remain-
ing reporting units during the fourth quarter of 2009, and while
the estimated fair value of these reporting units declined from
2008, the estimated fair value of each of our other reporting units
signifi cantly exceeded their carrying values in 2009. As a result,
no additional testing or impairment charges were necessary.
CONTINGENCIES
We are subject to various loss contingencies, including tax
proceedings and litigation, in connection with our operations.
Contingent liabilities are diffi cult to measure, as their measure-
ment is subject to multiple factors that are not easily predicted
or projected. Further, additional complexity in measuring these
liabilities arises due to the various jurisdictions in which these
matters occur, which makes our ability to predict their outcome
highly uncertain. Moreover, different accounting rules must be
employed to account for these items based on the nature of the
contingency. Accordingly, signifi cant management judgment is
required to assess these matters and to make determinations
about the measurement of a liability, if any. Our material pending
loss contingencies are described in Note 17 to our consolidated
fi nancial statements. In the opinion of management, the aggre-
gate liability, if any, of individual matters or groups of matters not
specifi cally described in Note 17 is not expected to be material
to our fi nancial position, results of operations or cash fl ows. The
following describes our method and associated processes for
evaluating these matters.
Tax Contingencies. We are subject to income and operating tax
rules of the U.S., and its states and municipalities, and of the
foreign jurisdictions in which we operate. Signifi cant judgment is
required in determining income tax provisions, as well as deferred
tax asset and liability balances, due to the complexity of these
rules and their interaction with one another. We account for
income taxes under SFAS 109, “ Accounting for Income Taxes,” by
recording both current taxes payable and deferred tax assets and
liabilities. Our provision for income taxes is based on domestic
and international statutory income tax rates in the jurisdictions in
which we operate, applied to taxable income, reduced by appli-
cable tax credits.
We account for operating taxes based on multi-state, local and
foreign taxing jurisdiction rules in those areas in which we oper-
ate. Provisions for operating taxes are estimated based upon
these rules, asset acquisitions and disposals, historical spend
and other variables. These provisions are consistently evaluated
for reasonableness against compliance and risk factors.
Tax contingencies arise from uncertainty in the application of
tax rules throughout the many jurisdictions in which we operate.
These tax contingencies are impacted by several factors, includ-
ing tax audits, appeals, litigation, changes in tax laws and other
rules, and their interpretations, and changes in our business,
among other things, in the various federal, state, local and foreign
tax jurisdictions in which we operate. We regularly assess the
potential impact of these factors for the current and prior years
to determine the adequacy of our tax provisions. We continu-
ally evaluate the likelihood and amount of potential adjustments
and adjust our tax positions, including the current and deferred
tax liabilities, in the period in which the facts that give rise to
a revision become known. In addition, management considers
the advice of third parties in making conclusions regarding
tax consequences.
Effective June 1, 2007, we began to measure and record income
tax contingency accruals in accordance with FIN 48. The cumula-
tive effect of adopting FIN 48 was immaterial.
Under FIN 48, we recognize liabilities for uncertain income tax
positions based on a two-step process. The fi rst step is to evalu-
ate the tax position for recognition by determining if the weight
of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefi t as the largest
amount that is more than 50% likely to be realized upon ultimate
settlement. It is inherently diffi cult and subjective to estimate
such amounts, as we must determine the probability of various
possible outcomes. We reevaluate these uncertain tax positions
on a quarterly basis or when new information becomes avail-
able to management. These reevaluations are based on factors
including, but not limited to, changes in facts or circumstances,
changes in tax law, successfully settled issues under audit and
new audit activity. Such a change in recognition or measurement
could result in the recognition of a tax benefi t or an increase to
the related provision.
We classify interest related to income tax liabilities as interest
expense, and if applicable, penalties are recognized as a com-
ponent of income tax expense. The income tax liabilities and
accrued interest and penalties that are due within one year of
the balance sheet date are presented as current liabilities. The
remaining portion of our income tax liabilities and accrued inter-
est and penalties are presented as noncurrent liabilities. These
noncurrent income tax liabilities are recorded in the caption
“ Other liabilities” in our consolidated balance sheets.
We measure and record operating tax contingency accruals in
accordance with SFAS 5, “Accounting for Contingencies.” As
discussed below, SFAS 5 requires an accrual of estimated loss
from a contingency, such as a tax or other legal proceeding or
claim, when it is probable that a loss will be incurred and the
amount of the loss can be reasonably estimated.