Union Pacific 2007 Annual Report Download - page 44

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operations, financial condition, or liquidity after taking into account liabilities previously recorded for these
matters.
Indemnities – Our maximum potential exposure under indemnification arrangements, including certain tax
indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature
of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will
be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any
adverse liability or the total maximum exposure under these indemnification arrangements. We do not have
any reason to believe that we will be required to make any material payments under these indemnity
provisions.
Climate Change – Although climate change could have an adverse impact on our operations and financial
performance in the future (see Risk Factors under Item 1A), we are currently unable to predict the manner or
severity of such impact. However, we continue to take steps and explore opportunities to reduce the impact of
our operations on the environment, including investments in new technologies, using training programs to
reduce fuel consumption, and changing our operations to increase fuel efficiency.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of
these financial statements requires estimation and judgment that affect the reported amounts of revenue,
expenses, assets, and liabilities. We base our 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 critical accounting policies are a subset of our significant accounting policies described
in note 1 to the Financial Statements and Supplementary Data, Item 8. These critical accounting policies affect
significant areas of our financial statements and involve judgment and estimates. If these estimates differ
significantly from actual results, the impact on our Consolidated Financial Statements may be material.
Asbestos – We are a defendant in a number of lawsuits in which current and former employees and other
parties allege exposure to asbestos. During 2004, we engaged a third party with extensive experience in
estimating resolution costs for asbestos-related claims to assist us in assessing our potential liability. During
2007, we updated our potential liability to include actual claim experience since 2004. As a result of this
reassessment, we decreased our liability by $20 million in 2007 for both asserted and unasserted asbestos-
related claims through 2034. This liability excludes future defense and processing costs. The liability for
resolving both asserted and unasserted claims was based on the following assumptions:
• The number of future claims received would be consistent with historical averages.
• The number of claims filed against us will decline each year.
• The average settlement values for asserted and unasserted claims will be equivalent to historical averages.
• The percentage of claims dismissed in the future will be equivalent to historical averages.