Union Pacific 2011 Annual Report Download - page 47

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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 tax legislation are not anticipated. Future tax
legislation, 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 $320 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 for purposes of estimating whether future
taxable income will be sufficient to realize a deferred tax asset. In 2011 and 2010, there were no valuation
allowances.
We recognize tax benefits 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 an actuarial analysis to measure the liabilities
and expenses associated with providing pension and 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 health care 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.
 Health care cost trend rate is based on our historical rates of inflation and expected market
conditions.
The following tables present the key assumptions used to measure net periodic pension and OPEB
cost/(benefit) for 2011 and the estimated impact on 2011 net periodic pension and OPEB cost/(benefit)
relative to a change in those assumptions:
Assumptions Pension OPEB
Discount rate 5.35% 5.01%
Expected return on plan assets 7.50% N/A
Compensation increase 4.48% N/A
Health care cost trend rate:
Pre-65 current N/A 7.07%
Pre-65 level in 2028 N/A 4.50%