Union Pacific 2011 Annual Report Download - page 76

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are allocated using appropriate statistical bases. Total expense for repairs and maintenance incurred was
$2.2 billion for 2011, $2.0 billion for 2010, and $1.9 billion for 2009.
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the leased asset at the inception of the lease. Amortization expense is
computed using the straight-line method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
12. Accounts Payable and Other Current Liabilities
Dec. 31, Dec. 31,
Millions 2011 2010
Accounts payable $ 819 $ 677
Income and other taxes 482 337
Accrued wages and vacation 363 357
Dividends payable 284 183
Accrued casualty costs 249 325
Interest payable 197 200
Equipment rents payable 90 86
Other 624 548
Total accounts payable and other current liabilities $ 3,108 $ 2,713
13. Financial Instruments
Strategy and Risk – We may use derivative financial instruments in limited instances for other than
trading purposes to assist in managing our overall exposure to fluctuations in interest rates and fuel
prices. We are not a party to leveraged derivatives and, by policy, do not use derivative financial
instruments for speculative purposes. Derivative financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedging instrument and the item being
hedged, both at inception and throughout the hedged period. We formally document the nature and
relationships between the hedging instruments and hedged items at inception, as well as our risk-
management objectives, strategies for undertaking the various hedge transactions, and method of
assessing hedge effectiveness. Changes in the fair market value of derivative financial instruments that
do not qualify for hedge accounting are charged to earnings. We may use swaps, collars, futures, and/or
forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices; however, the
use of these derivative financial instruments may limit future benefits from favorable interest rate and fuel
price movements.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting
instruments with value fluctuations that highly correlate with the underlying hedged item. We manage
credit risk related to derivative financial instruments, which is minimal, by requiring high credit standards
for counterparties and periodic settlements. At December 31, 2011 and 2010, we were not required to
provide collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument
positions based upon current fair values as quoted by recognized dealers or the present value of
expected future cash flows.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by
adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given
period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted
amounts of each as debt matures or as we require incremental borrowings. We employ derivatives,
primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in
managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of
and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in
the debt’s fair value attributable to the changes in interest rates. We account for swaps as fair value