Union Pacific 2012 Annual Report Download - page 41

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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.
Sensitivity Analyses – The sensitivity analyses that follow illustrate the economic effect that hypothetical
changes in interest rates could have on our results of operations and financial condition. These
hypothetical changes do not consider other factors that could impact actual results.
At December 31, 2012, we had variable-rate debt representing approximately 3.4% of our total debt. If
variable interest rates average one percentage point higher in 2013 than our December 31, 2012 variable
rate, which was approximately 1.1%, our interest expense would increase by approximately $3 million.
This amount was determined by considering the impact of the hypothetical interest rate on the balances
of our variable-rate debt at December 31, 2012.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a
hypothetical one percentage point decrease in interest rates as of December 31, 2012, and amounts to
an increase of approximately $1 billion to the fair value of our debt at December 31, 2012. We estimated
the fair values of our fixed-rate debt by considering the impact of the hypothetical interest rates on quoted
market prices and current borrowing rates.
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
hedges using the short-cut method as allowed by the Derivatives and Hedging Topic of the Financial
Accounting Standards Board (FASB) ASC; therefore, we do not record any ineffectiveness within our
Consolidated Financial Statements. As of December 31, 2012 and 2011, we had no interest rate fair
value hedges outstanding.
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in
accumulated other comprehensive loss until the hedged item affects earnings. At December 31, 2012 and
2011, we had reductions of $1 million and $2 million, respectively, recorded as an accumulated other
comprehensive loss that is being amortized on a straight-line basis through September 30, 2014. As of
December 31, 2012 and 2011, we had no interest rate cash flow hedges outstanding.
Accounting Pronouncements – On January 1, 2012, we adopted 2011-05, Comprehensive Income
(Topic 220): Presentation of Comprehensive Income (ASU 2011-05) which requires presentation of the
components of net income and other comprehensive income either as one continuous statement or as
two consecutive statements and eliminates the option to present components of other comprehensive
income as part of the statement of changes in shareholders’ equity. The standard does not change the
items that must be reported in other comprehensive income, how such items are measured or when they
must be reclassified to net income. Also, in December of 2011, the FASB issued Accounting Standards
Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of
Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05 (ASU 2011-12). On February 5, 2013, the FASB issued Accounting Standards
Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,
which adds additional disclosure requirements for items reclassified out of accumulated other
comprehensive income. This ASU will be effective for the first interim reporting period in 2013.
Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of
our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our
consolidated results of operations, financial condition, or liquidity; however, to the extent possible, where
asserted and unasserted claims are considered probable and where such claims can be reasonably
estimated, we have recorded a liability. We do not expect that any known lawsuits, claims, environmental
costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our