US Postal Service 2008 Annual Report Download - page 29

2008 Annual Report United States Postal Service | 29
The three critical accounting policies that we believe are
either the most judgmental or involve the selection or ap-
plication of alternative accounting policies, and are material
to our financial statements, are those relating to workers’
compensation costs, deferred revenue for prepaid postage,
and contingent liabilities. Workers’ compensation costs are
highly sensitive to the estimates of inflation and the length
of time recipients stay on the compensation rolls. Deferred
revenue for prepaid postage is challenging to estimate be-
cause of the difficulty in estimating stamp postage that has
been purchased but has not yet been used. Contingent li-
abilities require significant judgment in estimating potential
losses for legal claims. In addition, retirement and health
benefits costs for our employees and retirees represent a
significant portion of our expenses. Any changes in laws
or regulations affecting the amounts, timing, or administra-
tion of these benefits could have a material effect on our
financial position and results of operations. For additional
information, see Note 2, Summary of significant accounting
policies, in the Notes to the Financial Statements.
We recognize revenue when services are rendered. Be-
cause we collect payment in advance of services being per-
formed, we defer the revenue as an estimated liability. This
liability is classified as deferred revenue–prepaid postage
on our balance sheets. In Quarter III of the current year, we
improved the model used to estimate the deferred revenue
for prepaid postage for stamps. This change was made
necessary because the introduction of the Forever Stamp
in April 2007, combined with the May 2008 price increase,
resulted in a change in consumer behavior regarding the
purchase and usage of stamps that was not measurable
using our prior estimation techniques. This change more
accurately captures trends in stamp usage. The change
to a new estimation model is considered a change in ac-
counting estimate under Generally Accepted Accounting
Principles (GAAP).
As required by GAAP, the impact of the change was re-
corded in Quarter III, 2008. For the year-ended 2008, we in-
creased the stamp portion of the deferred revenue–prepaid
postage liability by $477 million, $230 million of which is
considered a cumulative change in estimate and $247 mil-
lion of which is attributable to changes in consumer be-
havior during the last two quarters of the year. For further
information, see Note 2 to the financial statements.
Results of Operations
In 2008, we had an operating loss of $2,806 million, as
compared to a $5,327 million loss in 2007. Operating reve-
nues of $74,932 million for 2008 were 0.2%, or $154 million
greater than the $74,778 million earned in 2007. Despite
the May 2007 and May 2008 price increases, revenues
were negatively impacted by a decline in volume of 9.5 bil-
lion pieces. The volume drop was mainly due to the dete-
riorating economy, which adversely impacted almost every
category of mail.
Operating Statistics 2008 2007 2006
(Dollars in millions)
Operating Revenue $ 74,932 $ 74,778 $ 72,650
Operating (Loss) /
Income $ (2,806) $ (5,327) $ 969
Net (Loss) / Income $ (2,806) $ (5,142) $ 900
Operating Margin (3.7%) (7.1%) 1.3%
Avg Volume per Day
(Pieces in millions)
667 705 703
Our 2008 expenses were impacted by high energy pric-
es, COLAs, and the large percentage of our costs which
are fixed. Operating expenses of $77,738 million were
$2,367 million less than the $80,105 million incurred in
2007. As discussed later in this section, operating expenses
included a decrease in retiree health benefits of $2,677 mil-
lion and a decrease in compensation and benefits expense
of $601 million, which were partially offset by increases in
transportation expenses of $459 million and other expense,
of $452 million.
The operating loss for 2007 was $5,327 million, as com-
pared to operating income of $969 million in 2006, a de-
crease of $6,296 million. This change was largely due
to the additional retiree health benefit expenses incurred
upon the enactment of P.L.109-435. On April 6, 2007, we
transferred $2,958 million, representing the entire amount
of funds held in escrow, as required by P.L.108-18, to the
Postal Service Retiree Health Benefits Fund (PSRHBF).
Since we no longer held these funds, there was a 22%
decrease in interest income for the second half of 2007 and
this continued into 2008, where interest income declined
82% compared to 2007.