Federal Express 2011 Annual Report Download - page 47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Substantially all property and equipment have no material residual
values. The majority of aircraft costs are depreciated on a straight–
line basis over 15 to 18 years. We periodically evaluate the estimated
service lives and residual values used to depreciate our property and
equipment. This evaluation may result in changes in the estimated
lives and residual values. Such changes did not materially affect
depreciation expense in any period presented. Depreciation expense,
excluding gains and losses on sales of property and equipment used in
operations, was $1.9 billion in 2011 and 2010, and $1.8 billion in 2009.
Depreciation and amortization expense includes amortization of assets
under capital lease.
CAPITALIZED INTEREST. Interest on funds used to finance the
acquisition and modification of aircraft, including purchase deposits,
construction of certain facilities, and development of certain software
up to the date the asset is ready for its intended use is capitalized and
included in the cost of the asset if the asset is actively under construc-
tion. Capitalized interest was $71 million in 2011, $80 million in 2010
and $71 million in 2009.
IMPAIRMENT OF LONG–LIVED ASSETS. Long–lived assets are
reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be
held and used, an impairment is recognized when the estimated undis-
counted cash flows associated with the asset or group of assets is less
than their carrying value. If impairment exists, an adjustment is made
to write the asset down to its fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values are
determined based on quoted market values, discounted cash flows
or internal and external appraisals, as applicable. Assets to be
disposed of are carried at the lower of carrying value or estimated
net realizable value.
We operate integrated transportation networks, and accordingly, cash
flows for most of our operating assets are assessed at a network
level, not at an individual asset level, for our analysis of impairment.
In 2011, we incurred asset impairment charges of $29 million related
to the combination of our LTL operations at FedEx Freight (see “FedEx
Freight Network Combination” below for additional information).
There were no material property and equipment impairment charges
recognized in 2010. During 2009, we recorded $202 million in property
and equipment impairment charges. These charges were primarily
related to our decision to permanently remove from service certain
aircraft, along with certain excess aircraft engines, at FedEx Express.
GOODWILL. Goodwill is recognized for the excess of the purchase
price over the fair value of tangible and identifiable intangible net
assets of businesses acquired. Several factors give rise to goodwill
in our acquisitions, such as the expected benefit from synergies of
the combination and the existing workforce of the acquired entity.
Goodwill is reviewed at least annually for impairment by comparing
the fair value of each reporting unit with its carrying value (including
attributable goodwill). Fair value for our reporting units is determined
using an 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. Fair value determinations may include both internal and
third–party valuations. Unless circumstances otherwise dictate, we
perform our annual impairment testing in the fourth quarter.
INTANGIBLE ASSETS. Intangible assets include customer relation-
ships, technology assets and contract–based intangibles acquired in
business combinations. Intangible assets are amortized over periods
ranging from 3 to 12 years, either on a straight–line basis or an
accelerated basis depending upon the pattern in which the economic
benefits are realized.
PENSION AND POSTRETIREMENT HEALTHCARE PLANS. Our defined
benefit plans are measured using actuarial techniques that reflect
management’s assumptions for discount rate, expected long–term
investment returns on plan assets, salary increases, expected retire-
ment, 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 benefit obligation could be effectively
settled as of the measurement date) with the assistance of actuar-
ies, who calculate the yield on a theoretical portfolio of high–grade
corporate bonds (rated Aa or better) with cash flows that are designed
to match our expected benefit 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
tax–qualified U.S. domestic pension plans (“U.S. Pension Plans”).
The accounting guidance related to employers’ accounting for defined
benefit pension and other postretirement plans requires recognition
in the balance sheet of the funded status of defined benefit pension
and other postretirement benefit plans, and the recognition in other
comprehensive income (“OCI”) of unrecognized gains or losses and
prior service costs or credits. Additionally, the guidance requires the
measurement date for plan assets and liabilities to coincide with the
plan sponsor’s year end.
At May 31, 2011, we recorded a decrease to equity through OCI of
$350 million (net of tax) based primarily on year–end adjustments
related to increases in our projected benefit obligation due to a
decrease in the discount rate used to measure the liability at May 31,
2011. At May 31, 2010, we recorded a decrease to equity through
OCI of $1.0 billion (net of tax) based primarily on year–end adjust-
ments related to increases in our projected benefit obligation due to a
decrease in the discount rate used to measure the liability at
May 31, 2010.
Net Book Value at May 31,
Range 2011 2010
Wide–body aircraft and
related equipment 15 to 30 years $ 6,536 $ 5,897
Narrow–body and feeder
aircraft and related equipment 5 to 18 years 1,517 1,049
Package handling and ground
support equipment 3 to 30 years 1,985 1,895
Vehicles 3 to 15 years 1,076 1,095
Computer and electronic
equipment 2 to 10 years 776 649
Facilities and other 2 to 40 years 3,653 3,800