Union Pacific 2009 Annual Report Download - page 52

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lives of our assets and the accumulated depreciation associated with each asset class to ensure our
depreciation rates are appropriate.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a
gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is
unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified
through our depreciation studies. During the last three fiscal years, no gains or losses were recognized
due to the retirement of depreciable railroad properties. A gain or loss is recognized in other income
when we sell land or dispose of assets that are not part of our railroad operations.
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 current tax law; 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, results of operations, or liquidity. For example, a 1% increase in future income tax rates would
increase our deferred tax liability by approximately $280 million.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax
assets 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 using available evidence about future events. The valuation
allowance at December 31, 2009 was $8 million. There was no valuation allowance at December 31,
2008.
At times, we may claim tax benefits that may be challenged by a tax authority. 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 standards.
Pension and Other Postretirement Benefits – We use third-party actuaries to assist us in properly
measuring the liabilities and expenses associated with providing pension and defined contribution medical
and life insurance benefits (OPEB) to eligible employees. In order to use actuarial methods to value the
liabilities and expenses, we must make several assumptions. The critical assumptions used to measure
pension obligations and expenses are the discount rate and expected rate of return on pension assets. For
OPEB, the critical assumptions are the discount rate and healthcare cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the
following factors:
• Discount rate is based on a Mercer yield curve of high quality corporate bonds (rated AA by a
recognized rating agency) for which the timing and amount of cash flows matches our plans’
expected benefit payments.
• Expected return on plan assets is based on our asset allocation mix and our historical return,
taking into consideration current and expected market conditions.
• Healthcare cost trend rate is based on our historical rates of inflation and expected market
conditions.