Federal Express 2011 Annual Report Download - page 29

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Included in the table above within the caption entitled “Non–capital
purchase obligations and other” is our estimate of the current portion of
the liability ($1 million) for uncertain tax positions. We cannot reason-
ably estimate the timing of the long–term payments or the amount by
which the liability will increase or decrease over time; therefore, the
long–term portion of the liability ($68 million) is excluded from the table.
See Note 11 of the accompanying consolidated financial statements for
further information.
The amounts reflected in the table above for interest on long–term debt
represent future interest payments due on our long–term debt, all of
which are fixed rate.
Investing Activities
The amounts reflected in the table above for capital purchase obliga-
tions represent noncancelable agreements to purchase capital–related
equipment. Such contracts include those for certain purchases of
aircraft, aircraft modifications, vehicles, facilities, computers and other
equipment. Commitments to purchase aircraft in passenger configura-
tion do not include the attendant costs to modify these aircraft for
cargo transport unless we have entered into noncancelable commit-
ments to modify such aircraft.
Financing Activities
We have certain financial instruments representing potential com-
mitments, not reflected in the table above, that were incurred in the
normal course of business to support our operations, including surety
bonds and standby letters of credit. These instruments are required
under certain U.S. self–insurance programs and are also used in the
normal course of international operations. The underlying liabilities
insured by these instruments are reflected in our balance sheets,
where applicable. Therefore, no additional liability is reflected for the
surety bonds and letters of credit themselves.
The amounts reflected in the table above for long–term debt represent
future scheduled payments on our long–term debt. We currently have
no scheduled debt payments in 2012.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires manage-
ment to make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be
used. We maintain a thorough process to review the application of our
accounting policies and to evaluate the appropriateness of the many
estimates that are required to prepare the financial statements of a
complex, global corporation. However, even under optimal circum-
stances, estimates routinely require adjustment based on changing
circumstances and new or better information.
The estimates discussed below include the financial statement ele-
ments that are either the most judgmental or involve the selection or
application of alternative accounting policies and are material to our
financial statements. Management has discussed the development
and selection of these critical accounting estimates with the Audit
Committee of our Board of Directors and with our independent regis-
tered public accounting firm.
RETIREMENT PLANS
OVERVIEW. We sponsor programs that provide retirement benefits to
most of our employees. These programs include defined benefit pen-
sion plans, defined contribution plans and postretirement healthcare
plans.
Pension benefits for most employees are accrued under a cash balance
formula we call the Portable Pension Account. Under the Portable
Pension Account, the retirement benefit is expressed as a dollar
amount in a notional account that grows with annual credits based
on pay, age and years of credited service, and interest on the notional
account balance. The Portable Pension Account benefit is payable as a
lump sum or an annuity at retirement at the election of the employee.
The plan interest credit rate varies from year to year based on a U.S.
Treasury index. Prior to 2009, certain employees earned benefits using
a traditional pension formula (based on average earnings and years
of service); however, benefits under this formula were capped on
May 31, 2008.
The current rules for pension accounting are complex and can produce
tremendous volatility in our results, financial condition and liquidity.
Our pension expense is primarily a function of the value of our plan
assets and the discount rate used to measure our pension liabilities at
a single point in time at the end of our fiscal year (the measurement
date). Both of these factors are significantly influenced by the stock
and bond markets, which in recent years have experienced substantial
volatility.
In addition to expense volatility, we are required to record year–end
adjustments to our balance sheet on an annual basis for the net
funded status of our pension and postretirement healthcare plans.
These adjustments have fluctuated significantly over the past several
years and like our pension expense, are a result of the discount rate
and value of our plan assets at the measurement date. The funded
status of our plans also impacts our liquidity, as current funding laws
require increasingly aggressive funding levels for our pension plans.
However, the cash funding rules operate under a completely differ-
ent set of assumptions and standards than those used for financial
reporting purposes, so our actual cash funding requirements can differ
materially from our reported funded status.