UPS 2012 Annual Report Download - page 63

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
51
Pension and Postretirement Medical Benefits
Our pension and other postretirement benefit costs are calculated using various actuarial assumptions and methodologies.
These assumptions include discount rates, health care cost trend rates, inflation, compensation increase rates, expected returns
on plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent
our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as
well as other factors that might cause future expectations to differ from past trends.
Differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations
and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate
used to value pension and postretirement benefit obligations as of the measurement date and (2) differences between the
expected and the actual return on plan assets.
We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as
10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) in pension expense annually at
December 31st each year. The remaining components of pension expense, primarily service and interest costs and the expected
return on plan assets, are recorded on a quarterly basis.
The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate, expected
return on assets, and health care cost trend rate for our pension and postretirement benefit plans, and the resulting increase
(decrease) on our obligations and expense (excluding the impact of actuarial gains and losses recognized outside of the
corridor) as of, and for the year ended, December 31, 2012 (in millions).
25 Basis Point
Increase
25 Basis Point
Decrease
Pension Plans
Discount Rate:
Effect on ongoing net periodic benefit cost $ (50) $ 50
Effect on projected benefit obligation (1,427) 1,496
Return on Assets:
Effect on ongoing net periodic benefit cost (58) 58
Postretirement Medical Plans
Discount Rate:
Effect on ongoing net periodic benefit cost — —
Effect on accumulated postretirement benefit obligation (119) 124
Health Care Cost Trend Rate:
Effect on ongoing net periodic benefit cost 1 (1)
Effect on accumulated postretirement benefit obligation 14 (17)
Expense is expected to increase in 2013 compared with 2012, due primarily to the decline in the discount rate used to
determine expense from 5.58% for 2012 to 4.38% for 2013. This is partially offset by the contributions to the plans in 2012,
that increased the expected return on assets used for expense calculation purposes.
Depreciation, Residual Value and Impairment of Fixed Assets
As of December 31, 2012, we had $17.894 billion of net fixed assets, the most significant category of which is aircraft. In
accounting for fixed assets, we 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.