Revenue Recognition/Deferred Revenue — Prepaid Postage

Deferred revenue — prepaid postage represents the estimate of postage that has been sold but has not yet been used by customers. Revenue is recognized when services are rendered. Because payments for postage are collected in advance of services being performed, revenue is deferred and reflected in the Balance Sheets as “Deferred revenue — prepaid postage”. We monitor postage sold. Two categories of postage sales account for the bulk of deferred revenue — prepaid postage: stamp sales and postage meters.

Stamp sales in 2010 totaled $8.8 billion. Deferred revenue on stamp sales is estimated using statistical samples of stamped mail exiting our system across the country. The estimated stamp usage is subtracted from stamp sales, with the difference representing our obligation to perform future services. We also include a provision for stamps sold that may never be used, either through loss, damage, or collecting activity. Changes in consumer stamp usage patterns can significantly impact the estimated liability related to stamp sales.

In contrast to postage paid for by purchasing stamps, metered postage is primarily used by businesses. Accordingly, the deferral amount is much smaller as a percentage of annual sales than for stamps, because business customers generally manage their cash flow much more closely. Metered postage receipts in 2010 totaled $16.3 billion. Deferred revenue related to meters is estimated by monitoring the actual usage of all postage meters that had postage added during the month preceding the financial measurement date. The information from the two most recent meter readings allows us to derive a deferral percentage, which is applied to all postage meters.

We also include in our estimate of deferred revenue — prepaid postage, an estimate for mail that is in-transit within the postal system. We do this because our earnings process is not considered complete until mail is delivered to the customer.

In 2009, we refined our estimation methodology to reflect changes in customer usage patterns of both Forever and denominated stamps demonstrated by newly available data. For the year ended September 30, 2009, the stamp portion of the deferred revenue-prepaid postage liability was increased by $846 million, $655 million of which is considered a change in estimate that was attributable to changes in consumer behavior that were not identifiable based on data available previously.

In Quarter III, 2010, the estimation technique was further refined to reflect new information concerning the amount of purchased Forever stamps that will never be used, commonly referred to as the “breakage factor”. This resulted in an increase of deferred revenue-prepaid postage by $112 million, $103 million of which is attributable to changes that were not identifiable based on data previously available.

These changes are both considered changes in accounting estimates under GAAP and, accordingly, the impact of the changes was reflected in the quarter that the estimate changes were made.