Notes to the Financial Statements

Note 3 – Recent pronouncements

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

Note 4 – Postal Accountability and Enhancement Act, Public Law 109-435 (P.L.109-435)

P.L.109-435, enacted December 20, 2006, made significant reforms in the governance of the Postal Service and significantly altered some of our financial responsibilities, particularly in respect to the funding of CSRS benefits and retiree health benefits. The legislation does not change our parent-subsidiary type relationship as an “independent establishment of the executive branch of the Government of the United States.” Our employees and retirees continue to participate in all federally-sponsored retirement and health benefit plans. Therefore we continue to account for our participation in U.S. government sponsored health benefit and retirement plans using multiemployer plan accounting rules in accordance with FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions and FAS 87, Employers’ Accounting for Pensions.

A number of major provisions of P.L.109-435 directly impact our financial statements and are discussed below. For a complete understanding of the new law, one must consult the full text, which can be found at www.thomas.gov.

P.L.109-435 returned to the U.S. Treasury the obligation to fund the portion of the CSRS retirement benefit earned while serving in the military by participants who retire as postal employees. This funding obligation, originally estimated by the OPM in 2003 at $27 billion, was transferred from the U.S. Treasury to us in 2003 with the enactment of Public Law 108-18 (P.L.108-18). With the return of this funding requirement to the U.S. Treasury, it has been estimated by OPM that we have fully funded our CSRS pension obligation as of September 30, 2006. Recognizing this, the law suspends our employer contribution to CSRS that would otherwise be required under Title 5, Section 8334(a) (1), of the United States Code until 2017. At that time, OPM will determine whether additional funding is required to pay the benefits of postal retirees. This provision was effective October 14, 2006. See Note 10, Retirement programs, in the Notes to the Financial Statements for more information on our retirement obligations.

Under P.L.109-435, OPM was required by June 15, 2007 to determine the CSRS surplus or “supplemental liability” attributable to Postal employees as of September 30, 2006. OPM determined that this CSRS surplus was $17.1 billion as of September 30, 2006. The surplus amount was transferred to the newly created PSRHBF, which is held by the U.S. Treasury and controlled by OPM, on June 29, 2007.

The PSRHBF will be used, commencing in 2017, to pay our share of the health insurance premiums for our current and future Postal Service retirees. Beginning in 2007, P.L.109-435 requires us to make annual payments into the PSRHBF. The payment schedule in the law requires us to pay, on average, $5.6 billion per year into the fund for ten years, which began in 2007. This is in addition to our regularly allocated cost of premiums for current retirees, which will continue to be payable through 2016. After these annual payments are complete, OPM will make an actuarial valuation and determine whether any further payments into the PSRHBF are required. In 2007 we paid into the PSRHBF and expensed $5.4 billion.

P.L.109-435 repealed the escrow provisions of P.L.108-18, which required us to place into an escrow account by September 2006, any “savings” from the change in the retirement provisions created by P.L.108-18. OPM calculated the savings at $2,958 million as of September 30, 2006. These escrowed funds were shown as restricted cash on our September 30, 2006 balance sheet. P.L.109-435 required that we pay the 2006 escrowed “savings” to the PSRHBF. In 2007 we expensed the entire amount payable to the PSRHBF. On April 6, 2007, these “savings” were transferred to the PSRHBF.

The following table summarizes the impacts of the new legislation on our statement of operations for 2007.