Federal Express 2009 Annual Report Download - page 49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
47
actuarial gains resulted primarily from a 19-basis-point increase
in the discount rate for our primary pension plan and an increase
in plan assets at June 1, 2008.
Our defi ned benefi t plans are measured using actuarial tech-
niques that refl ect management’s assumptions for discount rate,
expected long-term investment returns on plan assets, salary
increases, expected retirement, mortality, employee turnover and
future increases in healthcare costs. We determine the discount
rate (which is required to be the rate at which the projected ben-
efi t obligation could be effectively settled as of the measurement
date) with the assistance of actuaries, who calculate the yield
on a theoretical portfolio of high-grade corporate bonds (rated
Aa or better) with cash fl ows that generally match our expected
benefi t payments in future years. A calculated-value method is
employed for purposes of determining the expected return on the
plan asset component of net periodic pension cost for our quali-
fi ed U.S. pension plans. We generally do not fund defi ned benefi t
plans when such funding provides no current tax deduction or
when such funding would be deemed current compensation to
plan participants.
At May 31, 2009, in accordance with the provisions of SFAS 158,
we recorded a decrease to equity through OCI of $1.2 billion (net
of tax) based primarily on mark-to-market adjustments related to
unrealized losses in our pension plan assets during 2009.
INCOME 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 fi nancial statements. The liabil-
ity method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate expected to
be in effect when the taxes are paid.
On June 1, 2007, we adopted Financial Accounting Standards
Board (“FASB”) Interpretation No. (“ FIN” ) 48, “ Accounting for
Uncertainty in Income Taxes.” The cumulative effect of adop-
tion was immaterial. We follow FIN 48 guidance to record
uncertainties and make judgments in the application of complex
tax regulations.
We recognize liabilities for uncertain income tax positions based
on a two-step process. The fi rst step is to evaluate the tax posi-
tion 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 out-
comes. We reevaluate these uncertain tax positions on a quarterly
basis or when new information becomes available to manage-
ment. 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 tax accrual.
We classify interest related to income tax liabilities as inter-
est expense, and if applicable, penalties are recognized as a
component 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
interest and penalties are presented as noncurrent liabilities
because payment of cash is not anticipated within one year of
the balance sheet date. These noncurrent income tax liabilities
are recorded in the caption “ Other liabilities” in our consolidated
balance sheets.
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 benefi ts.
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
limits 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
We lease certain aircraft, facilities, equipment and vehicles
under capital and operating leases. 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. In addition to minimum rental payments,
certain leases provide for contingent rentals based on equip-
ment usage principally related to aircraft leases at FedEx Express
and copier usage at FedEx Offi ce. Rent expense associated with
contingent rentals is recorded as incurred. Certain of our leases
contain fl uctuating or escalating payments and rent holiday peri-
ods. 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 accompa-
nying consolidated balance sheets. The cumulative excess of
rent expense over rent payments is accounted for as a deferred
lease obligation. 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 fl uctuations on transactions denominated
in a currency other than the local currency are included in the
caption “Other, net” in the accompanying consolidated state-
ments of income and were immaterial for each period presented.
Cumulative net foreign currency translation gains in accumulated