[an error occurred while processing this directive]

Notes to the Financial Statements

Note 2 – Summary of significant accounting policies

Basis of Accounting and Use of Estimates

We conform to accounting principles generally accepted in the United States. We maintain our accounting records and prepare our financial statements on the accrual basis of accounting. Following these principles, we make estimates and assumptions that affect the amounts we report in the Financial Statements and Notes. Actual results may differ from our estimates.

Segment Information

We operate in one segment throughout the United States, its possessions, territories and internationally.


Certain comparative prior year amounts that we have determined are immaterial to the Financial Statements and accompanying Notes have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported operating income and net income.

Cash and Cash Equivalents

We consider securities that mature within 90 days or less from the date that we buy them to be cash equivalents.

Cash - Restricted

In 2006 we established a restricted cash account in conformity with provisions set forth in P.L.108-18 to set aside “savings”. See Note 10, Retirement programs, in the Notes to the Financial Statements for additional information. Restricted cash was reported as a noncurrent asset. With the passage of P.L.109-435, the balance we held in restricted cash was to be paid into the new Postal Service Retiree Health Benefit Fund (PSRHBF). The $2,958 million balance reported as of September 30, 2006 was transferred to the PSRHBF on April 6, 2007.

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.

Supplies and Repair Parts

Our supplies and repair parts consist of repair parts for mail processing equipment. We value these at average cost. Total supplies and repair parts amounted to $119 million at the end of 2007 and $125 million at the end of 2006. A majority of our motor vehicle spare parts are supplied on consignment through agreements with our vendors.

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 6, Property and equipment, in the Notes to the Financial Statements 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 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 6, Property and equipment, in the Notes to the Financial Statements 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). Under the provisions of FIN 47, we have accrued $40 million as of September 30, 2007, and $25 million as of September 30, 2006, in asset retirement obligations under “Noncurrent Liabilities, Contingent liabilities and other” on our balance sheet.

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 settlements 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. The impacts on our financial statements from foreign currency fluctuations were insignificant for 2007, 2006 and 2005.

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.

Revenue Recognition/Deferred Revenue-Prepaid Postage

We recognize revenue when service is rendered. Deferred revenue-prepaid postage is our estimate of the amount of cash we have collected by the end of the year for services that we will perform in a future year.

Advertising Expenses

Advertising costs are expensed as incurred and are classified in other operating expenses. Advertising expenses were $121 million in 2007, $138 million in 2006 and $143 million in 2005.

Compensation and Benefits Payable

These are 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, in the Notes to the Financial Statements for additional information.

Retiree Benefits

In accordance with our parent-subsidiary type relationship with the federal government, our employees are eligible to participate in the federal government retirement programs, including pension and retiree health benefits. We are required to provide funding for those plans as determined by the administrator of the plan, the Office of Personnel Management (OPM). We cannot direct the costs, benefits, or funding requirements of these federally-sponsored plans. We account for our participation in these plans using multiemployer plan accounting rules in accordance with Financial Accounting Standards Board Statement (FAS) 87, Employers Accounting for Pension Costs and FAS 106 Employers Accounting for Postretirement Benefits Other than Pensions. We account for the cost of our employees’ participation in these programs as an expense in the period our contribution is due and payable. As more fully described in Note 4, Postal Accountability and Enhancement Act, Public Law 109-435 ( P.L.109-435), significantly impacted our 2007 costs associated with these programs. See also Note 9, Health benefit programs, and Note 10, Retirement programs, in the Notes to the Financial Statements for additional information.

Revenue Forgone Appropriation

Revenue Forgone is an appropriation from Congress, which covers our cost of providing free and reduced rate mailing service to groups designated by Congress. The amount of expense estimated by the Postal Service is submitted to Congress annually. Congress subsequently approves or alters the amount and funds the necessary appropriation. See Note 12, Revenue forgone, in the Notes to the Financial Statements for additional information.

Emergency Preparedness Appropriation

Emergency preparedness appropriations are funds we received from the federal government to help pay the costs of keeping the mail, postal employees and postal customers safe and are restricted for such use. These funds were accounted for as deferred revenue upon receipt and were largely utilized to procure capital equipment. We recognize revenue for emergency preparedness appropriations at the same time we recognize depreciation expense for capital equipment purchased with these appropriations. The emergency preparedness appropriations revenue recognized during the years ended September 30 were $76 million in 2007, $85 million in 2006, and $45 million in 2005.

Appropriations that have not been recognized as revenue during the years ended September 30 were $611 million in 2007, $687 million in 2006 and $772 million in 2005. The current portion is included in prepaid box rent and other deferred revenue, and the long-term portion is in deferred appropriations and other revenue on our balance sheets.

[an error occurred while processing this directive]