Union Pacific 2002 Annual Report Download - page 67

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41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Corporation and Subsidiary Companies
Significant Accounting Policies
Principles of Consolidation – The Consolidated Financial Statements include the accounts of Union Pacific Corporation
(UPC or the Corporation) and all of its subsidiaries. Investments in affiliated companies (20% to 50% owned) are
accounted for using the equity method of accounting. All significant intercompany transactions are eliminated.
Cash and Temporary Investments – Temporary investments are stated at cost which approximates fair value and consist of
investments with original maturities of three months or less.
Inventories – Inventories consist of materials and supplies carried at the lower of average cost or market.
Property and Depreciation – Properties are carried at cost. 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. A gain or loss is
recognized in other income for all other property upon disposition. The cost of internally developed software is capitalized
and amortized over a five-year period. An obsolescence review of capitalized software is performed on a periodic basis.
Impairment of Long-lived Assets – The Corporation reviews long-lived assets, including identifiable intangibles, for
impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the
long-lived assets, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows.
Revenue Recognition – The Corporation recognizes transportation revenues on a percentage-of-completion basis as freight
moves from origin to destination. Other revenue is recognized as service is performed or contractual obligations are met.
Translation of Foreign Currency – The Corporation’s portion of the assets and liabilities related to foreign investments are
translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at
the average rates of exchange prevailing during the year. The resulting translation adjustments are reflected within
shareholders’ equity as accumulated other comprehensive income or loss. Transaction gains and losses related to
intercompany accounts are not significant.
Financial Instruments – The carrying value of the Corporation’s non-derivative financial instruments approximates fair
value. The fair value of financial instruments is generally determined by reference to market values as quoted by recognized
dealers or developed based upon the present value of expected future cash flows discounted at the applicable U.S. Treasury
rate,London Interbank Offered Rates (LIBOR) or swap spread.
The Corporation periodically uses derivative financial instruments, for other than trading purposes, to manage risk
related to changes in fuel prices and interest rates.
Stock-Based Compensation – At December 31, 2002, the Corporation has several stock-based employee compensation
plans, which are described more fully in note 8. The Corporation accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations.
No stock-based employee compensation expense, related to stock option grants, is reflected in net income as all options
granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of
grant. Stock-based employee compensation expense related to restricted stock and other incentive plans is reflected in net
income. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the
fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based
employee compensation.