Basis of Accounting and Use of Estimates
We maintain our accounting records and prepare our financial statements on the accrual basis of accounting. This basis conforms to accounting principles generally accepted in the United States. Following these principles, we made estimates and assumptions that affect the amounts we report in the financial statements and notes. Actual results may differ from our estimates.

Cash Equivalents
Cash equivalents are securities that mature within 90 days or less from the date we buy them. We recognize checks outstanding as a current liability until presented for payment.

Current Values of Financial Instruments
The current value of our debt is what it would cost to pay off the debt if we used the current yield on equivalent U.S. Treasury debt.

Supplies, Advances and Prepayments
Supplies, advances and prepayments are primarily composed of our inventories of supplies, motor vehicle parts, repairable parts for mail processing equipment and advances to employees for annual leave. We value our inventories at the lower of average cost or current market price. Total inventories amounted to $136 million at the end of 2002 and $152 million at the end of 2001.

Property and Equipment
We record property and equipment at what it costs us to acquire the assets, including the interest we pay on the money we borrow to pay for the construction of major capital additions. This interest amounted to $23 million in 2002, $50 million in 2001 and $49 million in 2000.

We depreciate buildings and equipment over their estimated useful lives, which range from 3 to 75 years, using the straight-line method. We amortize leasehold improvements over the period of the lease or the useful life of the improvement, whichever time is shorter.

Impaired Assets
We record losses on long-lived assets when events and circumstances indicate it is probable that the assets are impaired. In accordance with FAS Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of, we have written down our impaired assets to the lower of cost or fair value. No material impairments were recorded in 2002, 2001 or 2000.

Revenue Recognition/Estimated Prepaid Postage
We recognize revenue when service is rendered. Estimated prepaid postage is the amount of cash we estimate that we collected by the end of the year for services that we will perform in the following year. In 2002 after extensive analysis, we changed our estimate of the sampling period for meter customers from 92 days to 30 days to more closely reflect the meter resetting practices of our customers. The impact of this change in estimate is a $113 million reduction of the liability in 2002.

Compensation and Benefits Payable
This is the salaries and benefits we owe to current and retired employees, including the amounts employees have earned but have not yet been paid, current workers’ compensation, unemployment costs, health benefits and the current portion of the amounts payable for retirement benefits.

Deferred Retirement Benefits and Costs
This is the present value of our estimated legal obligation to the Civil Service Retirement and Disability Fund (CSRDF) for the amount of retirement benefits payable in the future for our current Civil Service Retirement System (CSRS) employees’ retirement and our present retirees and their survivors. The present value of our benefits payable for our current CSRS employees increases when management increases basic pay.

The present value of our benefits payable also increases when cost of living adjustments (COLAs) are granted by Congress to our CSRS retirees or their survivors. We capitalize as deferred retirement costs the amounts due and payable in future years. We expense and pay these costs over periods of 30 years for amounts attributable to current employees and 15 years for amounts attributable to retirees, at 5% interest. We account for our participation in the U.S. government sponsored retirement plans as a participant in a multi-employer plan arrangement in accordance with FAS Statement No. 87, Employer’s Accounting For Pension Costs. See Note 6 for additional information.

Post-Retirement Health Benefits
Retiree health benefits costs are our obligation to pay a portion of the health insurance premiums of those retirees and their survivors who participate in the Federal Employees Health Benefits Program (FEHBP). We account for our participation in FEHBP as a participant in a multi-employer plan arrangement. Therefore, the costs of retiree health benefits are expensed as we incur them. See Note 4 for additional information.

Workers’ Compensation Costs
We are self-insured for workers’ compensation costs under a program administered by the Department of Labor (DOL). We record these costs, which include the employees’ medical expenses and payment for continuation of wages, as an operating expense.

At the end of the year, our liability represents the estimated present value of the total amounts we expect to pay in the future for postal workers injured through the end of 2002. In our calculation of present value, a net discount rate of 1.4% for medical expenses and 3.0% for compensation claims is used.

The estimate of the total costs of a claim is based upon the severity of the injury, the age of the injured employee, the assumed life expectancy of the employee, the trend of our experience with such an injury, and other factors. See Note 3 for additional information.

Emergency Preparedness Appropriations
Emergency preparedness appropriations are the funds received from the federal government to help fund costs to keep the mail, postal employees and postal customers safe. Upon receipt of the funds, we establish a liability. Upon use of the funds, we recognize non-operating revenue to the extent of the expenditure. For capital equipment, we recognize non-operating revenue over the estimated useful life of the equipment when placed into service. See Note 10 for additional information.

New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued FAS Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 referred to above and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 is effective for years beginning after December 15, 2001. We are currently assessing the impact of this statement on the Postal Service. However, we do not anticipate this statement will have a material impact on the financial position or results of our operations.