Financial Statements  2001

NOTES to the FINANCIAL statements

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

CURRENT VALUES OF FINANCIAL INSTRUMENTS

The current value of our debt is what it would cost us 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 $152 million at the end of 2001 and $173 million at the end of 2000.

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 $50 million in 2001, $49 million in 2000, and $59 million in 1999.

We depreciate buildings and equipment over their estimated useful lives, which range from 3 to 40 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 that the assets might be impaired. In accordance with FASB 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 2001, 2000 and 1999.

ESTIMATED PREPAID POSTAGE

This 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.

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 for the amount of retirement benefits payable in the future for our current 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 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 participation in a multi-employer plan arrangement.

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 participation in a multi-employer plan arrangement. Therefore, we expense the costs of our retiree health benefits as we incur them.

WORKER'S 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 fiscal year 2001. We base our estimate of the total costs of a claim 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. In our calculation of present value, we use a net discount rate of 1.4% for medical expenses and 3.0% for compensation claims.

RESEARCH AND DEVELOPMENT COSTS

We record research and development costs as expenses when we incur them. These costs were $29 million in 2001, $42 million in 2000, and $67 million in 1999.

ADVERTISING

We record advertising costs as expenses when we incur them. These costs were $146 million in 2001, $151 million in 2000, and $241 million in 1999.

RECLASSIFICATION OF PRIOR YEARS' AMOUNTS

Certain prior years' amounts have been reclassified to conform to the 2001 presentation.

We are the second largest employer in the country.

Our 776,000 career employees include 270,000 clerks, 240,000 city delivery carriers, 60,000 mail handlers, and 60,000 rural delivery carriers.