Union Pacific 2007 Annual Report Download - page 47

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Our personal injury claims activity was as follows:
2007 2006 2005
Open claims, beginning balance ............................................................ 4,126 4,197 4,028
New claims.............................................................................................. 4,133 4,190 4,584
Settled or dismissed claims .................................................................... (4,175) (4,261) (4,415)
Open claims, ending balance at December 31 ...................................... 4,084 4,126 4,197
Depreciation – The railroad industry is capital intensive. 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 lives are calculated using a separate composite annual percentage rate for each
depreciable property group, based on the results of internal depreciation studies. We are required to submit a
report on depreciation studies and proposed depreciation rates to the STB for review and approval every three
years for equipment property and every six years for road property. The cost (net of salvage) of depreciable
railroad property retired or replaced in the ordinary course of business is charged to accumulated
depreciation, and no gain or loss is recognized. A gain or loss is recognized in other income for all other
property upon disposition because the gain or loss is not part of rail operations. The cost of internally
developed software is capitalized and amortized based on estimated service lives of the software.
Significant capital spending in recent years increased the total value of our depreciable assets. Cash capital
spending totaled $2.5 billion for the year ended December 31, 2007. For the year ended December 31, 2007,
depreciation expense was $1.3 billion. We use various methods 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 our Consolidated Financial Statements. If
the estimated useful lives of all depreciable assets were increased by one year, annual depreciation expense
would decrease by approximately $47 million. If the estimated useful lives of all assets to be depreciated were
decreased by one year, annual depreciation expense would increase by approximately $50 million.
Income Taxes – As required under FASB Statement No. 109, Accounting for Income Taxes, we account for
income taxes by recording taxes payable or refundable for the current year and deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in our financial
statements or tax returns. These expected future consequences are measured based on provisions of tax law as
currently enacted; the effects of future changes in tax law are not anticipated. Future tax law changes, such as a
change in the corporate tax rate, could have a material impact on our financial condition or results of
operations. For example, a 1% increase in the federal income tax rate would increase our deferred tax liability
by approximately $250 million.
When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that
may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is
more likely than not that all or some portion of our deferred tax assets will not be realized, based on
management’s judgments regarding the best available evidence about future events. Based on that analysis,
there was no valuation allowance at December 31, 2007 or 2006.
When we have claimed tax benefits that may be challenged by a tax authority, these uncertain tax benefits are
accounted for under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (FIN 48). We adopted FIN 48 beginning January 1, 2007. Prior to 2007, income tax
contingencies were accounted for under FASB Statement No. 5, Accounting for Contingencies.
Under FIN 48, we recognize tax benefits only for tax positions that are more likely than not to be sustained
upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that
is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is
recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement