Union Pacific 2010 Annual Report Download - page 57

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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
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.
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.
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 Postretirement Benefits – We incur certain employment-related expenses associated with
pensions and postretirement health benefits. In order to measure the expense associated with these
benefits, we must make various assumptions including discount rates used to value certain liabilities,
expected return on plan assets used to fund these expenses, salary increases, employee turnover rates,
anticipated mortality rates, and expected future health care costs. The assumptions used by us are based
on our historical experience as well as current facts and circumstances. We use an actuarial analysis to
measure the expense and liability associated with these benefits.
Personal Injury – The cost of injuries to employees and others on our property is charged to expense
based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis
to measure the expense and liability. Our personal injury liability is discounted to present value using
applicable U.S. Treasury rates. Legal fees and incidental costs are expensed as incurred.
Asbestos – We estimate a liability for asserted and unasserted asbestos-related claims based on an
assessment of the number and value of those claims. We use a statistical analysis to assist us in properly
measuring our potential liability. Our liability for asbestos-related claims is not discounted to present value
due to the uncertainty surrounding the timing of future payments. Legal fees and incidental costs are
expensed as incurred.
Environmental – When environmental issues have been identified with respect to property currently or
formerly owned, leased, or otherwise used in the conduct of our business, we and our consultants
perform environmental assessments on such property. We expense the cost of the assessments as
incurred. We accrue the cost of remediation where our obligation is probable and such costs can be
reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated
cash payments is not fixed or readily determinable. Legal fees and incidental costs are expensed as
incurred.
3. Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update No. 2009-16, Accounting for Transfers of
Financial Assets (ASU 2009-16). ASU 2009-16 limits the circumstances in which transferred financial
assets can be derecognized and requires enhanced disclosures regarding transfers of financial assets
and a transferor’s continuing involvement with transferred financial assets. We adopted the authoritative
accounting standard on January 1, 2010. As a result, we no longer account for the value of the
outstanding undivided interest held by investors under our receivables securitization facility as a sale. In
addition, transfers of receivables occurring on or after January 1, 2010, are reflected as debt issued in our
Consolidated Statements of Cash Flows and recognized as debt due after one year in our Consolidated
Statements of Financial Position. (See the discussion of our receivables securitization facility in Note 10.)