Union Pacific 2007 Annual Report Download - page 56

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Corporation and Subsidiary Companies
For purposes of this report, unless the context otherwise requires, all references herein to the “Corporation”,
“UPC”, “we”, “us”, and “our” mean Union Pacific Corporation and its subsidiaries, including Union Pacific
Railroad Company, which will be separately referred to herein as “UPRR” or the “Railroad”.
1. Significant Accounting Policies
Principles of Consolidation – The Consolidated Financial Statements include the accounts of Union Pacific
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. The Corporation evaluates its less than majority-owned investments for consolidation pursuant to
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised 2003), Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46(R)). We currently have no
less than majority-owned investments that require consolidation under FIN 46(R).
Cash and Cash Equivalents – Cash equivalents consist of investments with original maturities of three months
or less.
Materials and Supplies – Materials and supplies are 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, 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
purchased and internally developed software is capitalized and amortized based on estimated service lives of
the software.
Impairment of Long-lived Assets – We review 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 – We recognize commodity revenue on a percentage-of-completion basis as freight
moves from origin to destination. The allocation of revenue between reporting periods is based on the relative
transit time in each reporting period with expenses recognized as incurred. Other revenue is recognized as
service is performed or contractual obligations are met. Customer incentives, which are primarily provided for
shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to
operating revenue based on actual or projected future customer shipments.
Translation of Foreign Currency – Our 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. Revenue and expenses are
translated at the average rates of exchange prevailing during the year. Unrealized adjustments are reflected
within common shareholders’ equity as accumulated other comprehensive income or loss.
Financial Instruments – The carrying value of our 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.
We periodically use derivative financial instruments, for other than trading purposes, to manage risk related to
changes in fuel prices and interest rates.