UPS 2006 Annual Report Download - page 55

make estimates about the expected useful lives and the expected residual values of the assets, and the potential
for impairment based on the fair values of the assets and the cash flows generated by these assets.
In estimating the lives and expected residual values of aircraft, we have relied upon actual experience with
the same or similar aircraft types. Subsequent revisions to these estimates could be caused by changes to our
maintenance program, changes in the utilization of the aircraft, governmental regulations on aging aircraft, and
changing market prices of new and used aircraft of the same or similar types. We periodically evaluate these
estimates and assumptions, and adjust the estimates and assumptions as necessary. Adjustments to the expected
lives and residual values are accounted for on a prospective basis through depreciation expense.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144 “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), we review long-lived assets for impairment
when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted
future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-
down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows,
or external appraisals, as applicable. We review long-lived assets for impairment at the individual asset or the
asset group level for which the lowest level of independent cash flows can be identified. The circumstances that
would indicate potential impairment may include, but are not limited to, a significant change in the extent to
which an asset is utilized, a significant decrease in the market value of an asset, and operating or cash flow losses
associated with the use of the asset. In estimating cash flows, we project future volume levels for our different air
express products in all geographic regions in which we do business. Adverse changes in these volume forecasts,
or a shortfall of our actual volume compared with our projections, could result in our current aircraft capacity
exceeding current or projected demand. This situation would lead to an excess of a particular aircraft type,
resulting in an aircraft impairment charge or a reduction of the expected life of an aircraft type (thus resulting in
increased depreciation expense).
During 2006, we reevaluated the anticipated service lives of our Boeing 757, Boeing 767, and Airbus A300
fleets, and as a result of this evaluation, increased the depreciable lives from 20 to 30 years and reduced the
residual values from 30% to 10% of original cost. This change did not have a material effect on our results of
operations.
In December 2004, we permanently removed from service a number of Boeing 727, 747 and McDonnell
Douglas DC-8 aircraft. As a result of the actual and planned retirement of these aircraft, we conducted an
impairment evaluation, which resulted in a $110 million impairment charge during the fourth quarter of 2004 for
these aircraft (including the related engines and parts), $91 million of which impacted the U.S. domestic package
segment and $19 million of which impacted the international package segment. This charge was classified in the
caption “other expenses” on the income statement. UPS continues to operate all of its other aircraft and continues
to experience positive cash flow, and no impairments of aircraft were recognized in 2006 or 2005.
Income Taxes—We operate in numerous countries around the world and are subject to income taxes in
many jurisdictions. We estimate our annual effective income tax rate based on statutory income tax rates in these
jurisdictions and take into consideration items that are treated differently for financial reporting and tax purposes.
The process of estimating our effective income tax rate involves judgments related to tax planning and
expectations regarding future events, including the impact of adjustments, if any, resulting from the resolution of
audits of open tax years by the Internal Revenue Service or other taxing authorities.
We recognize deferred tax assets for items that will generate tax deductions or credits in future years.
Realization of deferred tax assets requires sufficient future taxable income (subject to any carry-forward
limitations) in the applicable jurisdictions. We make judgments regarding the realizability of deferred tax assets
based, in part, on estimates of future taxable income. A valuation allowance is recognized if, based on the weight
of the available evidence, it is more likely than not (likelihood of more than 50 percent) that some portion, or all,
of the deferred tax asset will not be realized. Income tax related contingency matters also affect our effective
income tax rate. In this regard, we make judgments related to the identification and quantification of income tax
related contingency matters.
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