US Postal Service 2014 Annual Report Download - page 39

2014 Report on Form 10-K United States Postal Service 35
Legal Matters and Contingent Liabilities
We are subject to various legal proceedings and claims in the normal course of conducting our operations. Contingent liabilities
are difficult to measure, as their measurements are subject to a multitude of factors that are not easily predicted or projected
about the future. An estimated loss contingency is accrued in our financial statements when we deem the outcome is probable
that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly review loss contingencies
to determine the adequacy of our accruals and related disclosures. The amount of the actual losses may differ significantly from
our estimates.
A material claim, in a matter captioned McConnell v. Donahoe, has been outstanding since 2010 (first instituted in 2006 as
McConnell v. Potter). For a description of the pending proceedings, see Item 3. Legal Proceedings.
Fair Value Measurements
In 2014 and 2013 our financial statements contain fair value disclosures required by U.S. GAAP. We did not have any
recognized gains as a result of these valuation measurements in the years 2014, 2013 and 2012. All recognized losses have been
incorporated into our financial statements and the unrecognized gains and losses are not considered to have a significant impact
upon our operations. See Item 8. Financial Statements and Supplementary Data, Note 11- Fair Value Measurement for
additional information.
Significant Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make significant judgments and
estimates to develop certain 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 accounting
policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements.
Management discusses the development and selection of these accounting policies and estimates with the Audit and Finance
Committee of the Board. However, even under optimal circumstances, estimates routinely require adjustment based on
changing circumstances and new or better information.
The three accounting policies that are considered either the most judgmental, or involve the selection or application of
alternative accounting policies, and are material to the financial statements, are those related to the recording of workers’
compensation costs, deferred revenue-prepaid postage and contingent liabilities.
Workers’ compensation costs are highly sensitive to discount and inflation rates and the length of time recipients are expected to
stay on the compensation rolls. However, the total annual cash payment for claims is relatively stable and predictable. The
workers’ compensation costs reflected on our Statements of Operations are subject to actuarial estimates of future claim
payments based upon past claim payment experience. Changes in the actuarial and inflation rate estimates and discount rates
can significantly impact reported results from period to period. Inflation and discount rates are updated on a quarterly basis.
The discount rate reflects the current rate at which the workers’ compensation liabilities could be effectively settled at the
measurement date (e.g., the end of the accounting period). In setting the discount rates, we use the current yield, as of the
measurement date, on U.S. Treasury securities that is matched to the expected duration of both the medical and compensation
payments. Expected inflation in compensation claim obligations is estimated using the CPI-U as forecasted by IHS Global
Insight. For medical claims, we use the average rate of medical cost increases experienced by our workers’ compensation
claimants over the past five years as an estimate for future medical inflation. Workers’ compensation liabilities are recorded in
the Balance Sheets as “Workers’ compensation costs” with both current and noncurrent components.
Deferred revenue-prepaid postage is an estimate of postage that has been sold, but not yet used by customers. Revenue is
recognized only when services are rendered. Because payments for postage are collected in advance of services being
performed, revenue is deferred and reflected in the Balance Sheets as “Deferred revenue-prepaid postage.” The deferred
revenue estimate is developed and validated through complex mathematical and statistical methods, including regression
analysis of stamp usage trends. Small differences in inputs can lead to significant differences in the estimate of the liability. Two
categories of postage sales account for the majority of deferred revenue-prepaid postage: stamp sales and metered postage.
Contingent liabilities require significant judgment in estimating potential losses for legal and other claims. Each quarter,
significant new claims and litigation are evaluated for the probability of an adverse outcome. Liabilities are recorded in the
Balance Sheets in “Trade payables and accrued expenses” and “Other non-current liabilities” when amounts are deemed both
probable and estimable. In addition, any prior claims and litigation are reviewed and, when necessary, the liability balances are