US Postal Service 2015 Annual Report Download - page 37

2015 Report on Form 10-K United States Postal Service 35
The recording of Contingent liabilities requires 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 noncurrent 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 adjusted for resolutions or revisions to prior estimates. Estimates of loss can therefore change as individual claims
develop and additional information becomes available. We disclose the range of amounts for pending claims and litigations
that are deemed to be reasonably possible of an unfavorable outcome. No provisions for these reasonably possible losses are
accrued for or included in the financial statements.
For further information, see Item 8. Financial Statements and Supplementary Data, Notes to Financial Statements, Note 1 -
Organization and Summary of Significant Accounting Policies, Note 11 - Workers' Compensation and Note 8 - Commitments
and Contingencies.
Recent Accounting Standards
See Item 8. Financial Statements and Supplementary Data, Notes to Financial Statements, Note 1 - Organization and Summary
of Significant Accounting Policies, Summary of Significant Accounting Policies, Recent Accounting Standards for a description
of recently adopted accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market rate risks we encounter are primarily related to foreign currency exchange rate fluctuations, interest rates and
commodity prices. Historically, we have not entered into derivatives contracts or commodity instruments for trading or
speculative purposes or to manage market risks.
Foreign Exchange Risk
While we operate outside of the U.S., and foreign currency fluctuations may favorably or unfavorably impact our reported
earnings, we believe that foreign exchange risk is not a material amount since the vast majority of our business transactions
are denominated in U.S. dollars. Because of this, we estimate that a 1% increase or decrease in foreign exchange rates would
not have a material impact on our financial statements.
Interest Rate Risk
We are impacted by changes in interest rates in the normal course of our business operations as a result of our ongoing investing
and financing activities which include our revolving credit line facilities and floating note purchase agreements as well as our
cash and cash equivalents. We assess our interest rate risks on a regular basis and currently estimate that a 1% increase in
interest rates would have resulted in approximately a $41 million increase in interest expense.
We currently have no significant exposure to changing interest rates on our noncurrent debt as interest rates are fixed on such
debt. As disclosed in the accompanying notes to the financial statements, see Item 8. Financial Statements and Supplementary
Data, Notes to Financial Statements, Note 13 - Fair Value Measurement, the fair value of our noncurrent debt, exclusive of
capital leases, was $5.4 billion and $5.6 billion for the years ended September 30, 2015, and 2014, respectively. The underlying
fair value of our noncurrent debt was estimated using prices provided by the FFB.
We also have interest rate risk associated with our workers’ compensation liability, which is highly sensitive to changes in
discount rates. An increase of 1% in the interest rates would decrease the September 30, 2015, liability and 2015 expense by
approximately $2.0 billion. A decrease of 1% would increase the September 30, 2015, liability and 2015 expense by
approximately $2.4 billion. See Item 8. Financial Statements and Supplementary Data, Notes to Financial Statements, Note
11 - Workers' Compensation for further explanation.
Commodity Prices Risk
We currently have market risk for changes in fuel and natural gas costs. As of September 30, 2015, we estimated that a 1%
increase in fuel and natural gas would have resulted in a $23 million increase in expense.