Union Pacific 2007 Annual Report Download - page 58

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The following table details the effect on net income and earnings per share had compensation expense for all
of our stock-based awards, including stock options, been recorded in the year ended December 31, 2005 based
on the fair value method under FASB Statement No. 123, Accounting for Stock-Based Compensation.
Pro Forma Stock-Based Compensation Expense
Millions of Dollars, Except Per Share Amounts 2005
Net income, as reported .................................................................................................................. $1,026
Stock-based employee compensation expense, reported in net income, net of tax..................... 13
Total stock-based employee compensation expense determined under fair value–based
method for all awards, net of tax [a]........................................................................................ (50)
Pro forma net income...................................................................................................................... $ 989
Earnings per share – basic, as reported........................................................................................... $ 3.89
Earnings per share – basic, pro forma ............................................................................................ $ 3.75
Earnings per share – diluted, as reported....................................................................................... $ 3.85
Earnings per share – diluted, pro forma......................................................................................... $ 3.71
[a] Stock options for executives granted in 2003 and 2002 included a reload feature. This reload feature allowed executives to exercise their
options using shares of Union Pacific Corporation common stock that they already owned and obtain a new grant of options in the
amount of the shares used for exercise plus any shares withheld for tax purposes. The reload feature of these option grants could only be
exercised if the price of our common stock increased at least 20% from the price at the time of the reload grant. During the year ended
December 31, 2005, reload option grants represented $19 million of the pro forma expense noted above. There were no reload option
grants during 2007 and 2006 as stock options exercised after January 1, 2006 are not eligible for the reload feature.
Earnings Per Share – Basic earnings per share are calculated on the weighted-average number of common
shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of
outstanding stock options and stock-based awards where the conversion of such instruments would be
dilutive.
Use of Estimates – Our Consolidated Financial Statements include estimates and assumptions regarding
certain assets, liabilities, revenue, and expenses and the disclosure of certain contingent assets and liabilities.
Actual future results may differ from such estimates.
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 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 our financial condition or results of
operations.
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.
When we have claimed tax benefits that may be challenged by a tax authority, these uncertain tax positions 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