Union Pacific 2009 Annual Report Download - page 63

Download and view the complete annual report

Please find page 63 of the 2009 Union Pacific annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

63
We periodically use derivative financial instruments, for other than trading purposes, to manage risk
related to changes in fuel prices and interest rates.
Fair Value Measurements – We use a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within
which the fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. These levels include:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have applied fair value measurements to our pension plan assets (see Note 5) and to our interest rate
fair value hedges (see Note 12).
Stock-Based Compensation – We have several stock-based compensation plans under which employees
and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units.
We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to
issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when
retention shares vest.
We measure and recognize compensation expense for all stock-based awards made to employees and
directors, including stock options. Compensation expense is based on the calculated fair value of the
awards as measured at the grant date and is expensed ratably over the service period of the awards
(generally the vesting period). The fair value of retention awards is the closing stock price on the date of
grant, while the fair value of stock options is determined by using the Black-Scholes option pricing
model.
Information regarding stock-based compensation appears in the table below:
Millions of Dollars 2009 2008 2007
Stock-based compensation, before tax:  
Stock options $ 19 $ 25 $ 21
Retention awards 39 40 23
Total stock-based compensation, before tax $ 58 $ 65 $ 44
Total stock-based compensation, after tax $ 36 $ 40 $ 27
Excess tax benefits from equity compensation plans $ 10 $ 54 $ 76
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 – 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