Notes to the Financial Statements

Cash - Restricted

We maintain a restricted cash account in conformity with statutes set forth in P.L.108-18 to set aside "savings" See Note 10, Retirement Programs for additional information. Restricted cash is reported as a non-current asset.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts on our outstanding receivables based on our collection history and an estimate of uncollectible accounts. In 2005 we re-evaluated our allowance for doubtful accounts methodology, based on our last five years of collection history. This change in estimate reduced our allowance from $111 million in 2004, to $50 million at the end of 2005. In 2006 our allowance was $48 million.

Supplies Inventory

Our inventory is comprised of motor vehicle repair parts and repair parts for mail processing equipment. We value our inventories at the lower of average cost or market price. Total inventories amounted to $125 million at the end of 2006 and $119 million at the end of 2005.

Property and Equipment

We record property and equipment at cost, including the interest we pay on the money we borrow to pay for the construction of major capital additions. See Note 5, Property and Equipment for additional information.

We depreciate buildings and equipment over their estimated useful lives, which range from 3 to 40 years, except buildings with historic status which are depreciated over 75 years, using the straight-line method.

Impaired Assets

We record losses on long-lived assets when events and circumstances indicate that the assets might be impaired. In accordance with Financial Accounting Standards Board (FASB) Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we write down our impaired assets to the lower of cost or fair value. See Note 5, Property and Equipment for additional information.

Asset Retirement Obligations

We account for our asset retirement obligations in accordance with Financial Accounting Standards Board Interpretation 47, Accounting for Conditional Asset Removal (FIN 47).

In March 2005, the FASB issued FIN 47, which requires a liability to be accrued if the reporting entity has a legal obligation to perform asset retirement activities and a reasonable estimate of the fair market value of the obligation can be made at year-end. FIN 47 also provides guidance as to when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We adopted the provisions of FIN 47 effective October 1, 2005. The adoption of FIN 47 had no effect on our financial statements.

Amortization of Leasehold Improvements

We amortize leasehold improvements over the period of the lease or the useful life of the improvement, whichever is shorter.

Leasehold improvements that are placed in service significantly after the start of the lease term are amortized over the shorter of the useful life of the asset or the lease term including expected renewal options.

Foreign Currency Translation

We have foreign currency risk related to the settlement of terminal dues and transit fees with foreign postal administrations for international mail. The majority of our international accounts are denominated in special drawing rights (SDRs). The SDR exchange rate fluctuates daily based on a basket of currencies comprised of the euro, Japanese yen, pound sterling and the U.S. dollar. Changes in the relative value of these currencies will increase or decrease the value of our settlement accounts and result in a gain or loss from revaluation reported in the results from operations. The actual currency used to settle accounts varies by country. See Note 6, Foreign Currency Translation for additional information.

Outstanding Postal Money Orders

We sell money orders to the general public at our retail locations. We charge a fee to the customer at the time of sale. The fee is recognized as revenue at the time of sale. We recognize a liability for money orders we expect to be presented for payment.

Valuation of Debt 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 notes.

Revenue Recognition/Deferred Revenue-Prepaid Postage

We recognize revenue when service is rendered. Deferred revenue-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.

Advertising Expenses

Advertising costs are expensed as incurred and are classified in other operating expenses. Advertising expenses were $138 million in 2006, $143 million in 2005 and $108 million in 2004.

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 and health benefits.

Workers' Compensation

We pay for workers' compensation costs under a program administered by the Department of Labor (DOL). These costs include employees' medical expenses, payments for continuation of wages and DOL administrative fees. We record these costs as an operating expense. See Note 11, Workers Compensation for additional information.