US Postal Service 2015 Annual Report Download - page 36

2015 Report on Form 10-K United States Postal Service 34
Our transactional revenue systems in post offices, as well as on www.usps.com where customers pay for services with credit
and debit cards, were not affected by this incident. We believe that no customer credit or debit card information from retail
or online purchases was compromised.
During 2015 we incurred a total of approximately $9 million in expenses related to remediation efforts. We do not believe
that the cyber intrusion or the costs of responding to it have a material impact on our financial statements, our system of
internal control over financial reporting, results of operations or financial condition. Separate from the remediation expense,
we have invested $9 million to enhance our systems, recorded within Property and equipment, net in the accompanying
Balance Sheets.
Fair Value Measurements
We did not have any recognized gains as a result of fair valuation measurements in the years 2015, 2014 and 2013. 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, Notes to Financial
Statements, Note 13 - Fair Value Measurement for additional information.
Related Party Transactions
As disclosed throughout this report, we have significant transactions with other U.S. government entities, which are considered
related parties for reporting purposes. For a more detailed description, see Item 8. Financial Statements and Supplementary
Data, Notes to Financial Statements, Note 3 - Related Parties
Critical Accounting Policies and 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 in our accompanying 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 are matched to the expected duration of both the medical and compensation
payments. Expected inflation in compensation claim obligations are estimated using the CPI-U as forecast by Philadelphia
Fed Consensus Inflation Forecast. 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.