Union Pacific 2002 Annual Report Download - page 42

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the reported amounts of revenues, expenses, assets, and liabilities. The Corporation bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. The following are the Corporation’s critical accounting policies that affect significant areas of the
Corporation’s operations and involve judgment and estimates. If these estimates differ materially from actual results, the
impact on the Consolidated Financial Statements may be material.
Depreciation – Provisions for depreciation are computed principally on the straight-line method based on estimated service
lives of depreciable property. The cost (net of salvage) of depreciable rail property retired or replaced in the ordinary course
of business is charged to accumulated depreciation. Various methods are used to estimate useful lives for each group of
depreciable property. Due to the capital intensive nature of the business and the large base of depreciable assets, variances
to those estimates could have a material effect on the Corporation’s Consolidated Financial Statements.
Environmental – The Corporation generates and transports hazardous and non-hazardous waste in its current and former
operations, and is subject to federal, state and local environmental laws and regulations. The Corporation has identified
approximately 433 sites at which it is or may be liable for remediation costs associated with alleged contamination or for
violations of environmental requirements. This includes 52 sites that are the subject of actions taken by the U.S. government,
27 of which are currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several
liability for the remediation of identified sites; consequently, the Corporation’s ultimate environmental liability may include
costs relating to activities of other parties, in addition to costs relating to its own activities at each site.
When an environmental issue has been identified with respect to the property owned, leased or otherwise used in the
conduct of the Corporation’s business, the Corporation and its consultants perform environmental assessments on such
property. The Corporation expenses the cost of the assessments as incurred. The Corporation accrues the cost of
remediation where its obligation is probable and such costs can be reasonably estimated.
The liability includes future costs for remediation and restoration of sites, as well as for ongoing monitoring costs, but
excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site,
financial viability of other potentially responsible parties, and existing technology, laws and regulations. The Corporation
believes that it has adequately accrued for its ultimate share of costs at sites subject to joint and several liability. However,
the ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties
involved, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by
various wastes, the scarcity and quality of volumetric data related to many of the sites, and/or the speculative nature of
remediation costs.
Income Taxes – The Corporation accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (FAS 109). The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity’s financial statements or tax returns. These expected future
tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws
are not anticipated. Future tax law changes, such as a change in the corporate tax rate, could have a material impact on the
Corporation’s financial position or its results of operations.
Pension and Postretirement Benefits – The Corporation incurs certain employment-related expenses associated with
pensions and postretirement health benefits. In order to measure the expense associated with these benefits, management
must make various estimates and assumptions, including discount rates used to value liabilities, assumed rates of return on
plan assets, compensation increases, employee turnover rates, anticipated mortality rates and expected future healthcare
costs. The estimates used by management are based on the Corporation’s historical experience as well as current facts and
circumstances. The Corporation uses third-party actuaries to assist management in properly measuring the expense and
liability associated with these benefits. Actual future results that vary from the previously mentioned assumptions could
have a material impact on the Consolidated Financial Statements.
Recent declines in the equity markets have caused the market value of the plan assets to decrease. As a result, a minimum
pension liability adjustment of $225 million, net of tax, was recorded in the fourth quarter of 2002 as a reduction to
shareholders’ equity (see note 7 to the Consolidated Financial Statements, Item 8). Also, during 2002, the Corporation
decreased its assumed long-term rate of return on pension plan assets from 10% to 9%. This assumption change resulted