United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2018

Accounting Changes and Error Corrections [Abstract]

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services ("Revenue from Contracts with Customers"). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner depicting the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. Effective January 1, 2018, we adopted the requirements of this ASU using the full retrospective method. See note 3 for required disclosures pertaining to the new ASU.

In November 2016, the FASB issued an ASU that is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows ("Restricted Cash"). Effective January 1, 2018, we adopted the requirements of this ASU retrospectively. As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost ("Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"). The update requires employers to report the current service cost component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented separately from service cost and outside of income from operations. Effective January 1, 2018, we adopted the requirements of this ASU retrospectively, as required. As a result of this update, the net amount of interest cost, prior service cost and expected return on plan assets is now presented as other income.

We have recast our consolidated financial statements from amounts previously reported due to the adoption of new revenue recognition, pension and restricted cash standards. Impacted consolidated balance sheet line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	December 31, 2017
	As previously reported		Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Assets:
Other current assets	$	1,133	$	170		$	—	$	—	$	1,303
Total current assets	15,548		170			—		—		15,718
Deferred income tax assets	265		1			—		—		266
Total Assets	$	45,403	$	171		$	—	$	—	$	45,574
Liabilities:
Accounts payable	$	3,872	$	62		$	—	$	—	$	3,934
Accrued wages and withholdings	2,521		87			—		—		2,608
Other current liabilities⁽¹⁾	905		29			—		—		934
Total current liabilities	12,708		178			—		—		12,886
Deferred income tax liabilities	757		(1		)	—		—		756
Shareowners' Equity:
Retained earnings	5,858		(6		)	—		—		5,852
Total Shareowners' Equity	1,030		(6		)	—		—		1,024
Total Liabilities and Shareowners' Equity	$	45,403	$	171		$	—	$	—	$	45,574

^{(1) The caption "Other current liabilities" was presented separately from "Hedge margin liabilities" of}^{$17 million}^{in the Form 10-K at December 31, 2017. These captions have been collapsed in the consolidated balance sheets as of September 30, 2018 and December 31, 2017 included within this Form 10-Q.}

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

The unaudited consolidated statement of operations, which reflects the adoption of the new ASUs, is as follows (in millions):



	Three months ended September 30, 2017
	As Previously Reported			Adjustments (a)			Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	15,978		$	195		$	—		$	—	$	16,173
Operating Expenses:
Compensation and benefits	8,221			—			216			—		8,437
Repairs and maintenance	398			1			—			—		399
Depreciation and amortization	572			—			—			—		572
Purchased transportation	2,652			180			—			—		2,832
Fuel	636			—			—			—		636
Other occupancy	282			—			—			—		282
Other expenses	1,182			21			—			—		1,203
Total Operating Expenses	13,943			202			216			—		14,361
Operating Profit	2,035			(7		)	(216		)	—		1,812
Other Income and (Expense):
Investment income and other	20			—			216			—		236
Interest expense	(111		)	—			—			—		(111		)
Total Other Income and (Expense)	(91		)	—			216			—		125
Income Before Income Taxes	1,944			(7		)	—			—		1,937
Income Tax Expense (Benefit)	680			(2		)	—			—		678
Net Income	$	1,264		$	(5	)	$	—		$	—	$	1,259
Basic Earnings Per Share	$	1.45		$	—		$	—		$	—	$	1.45
Diluted Earnings Per Share	$	1.45		$	(0.01	)	$	—		$	—	$	1.44

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}



	Nine months ended September 30, 2017
	As Previously Reported			Adjustments (a)		Adjustments (b)			Adjustments (c)		As Recast
Revenue	$	47,043		$	567	$	—		$	—	$	47,610
Operating Expenses:
Compensation and benefits	24,457			—		575			—		25,032
Repairs and maintenance	1,180			1		—			—		1,181
Depreciation and amortization	1,688			—		—			—		1,688
Purchased transportation	7,461			530		—			—		7,991
Fuel	1,873			—		—			—		1,873
Other occupancy	845			—		—			—		845
Other expenses	3,504			30		—			—		3,534
Total Operating Expenses	41,008			561		575			—		42,144
Operating Profit	6,035			6		(575		)	—		5,466
Other Income and (Expense):
Investment income and other	49			—		575			—		624
Interest expense	(324		)	—		—			—		(324		)
Total Other Income and (Expense)	(275		)	—		575			—		300
Income Before Income Taxes	5,760			6		—			—		5,766
Income Tax Expense (Benefit)	1,954			3		—			—		1,957
Net Income	$	3,806		$	3	$	—		$	—	$	3,809
Basic Earnings Per Share	$	4.36		$	0.01	$	—		$	—	$	4.37
Diluted Earnings Per Share	$	4.35		$	—	$	—		$	—	$	4.35

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

The unaudited impacted consolidated statement of cash flows line items, which reflect the adoption of the new ASUs, are as follows (in millions):



	Nine Months Ended September 30, 2017
	As Previously Reported			Adjustments (a)			Adjustments (b)		Adjustments (c)		As Recast
Net Income	$	3,806		$	3		$	—	$	—	$	3,809
Adjustments to reconcile net income to net cash from operating activities:
Deferred tax (benefit) expense	295			3			—		—		298
Other assets	185			(34		)	—		—		151
Accounts payable	(411		)	13			—		—		(398		)
Accrued wages and withholdings	117			17			—		—		134
Other liabilities	(580		)	(2		)	—		—		(582		)
Cash flows from operating activities	4,418			—			—		—		4,418
Purchase of marketable securities	(1,468		)	—			—		3		(1,465		)
Net cash used in investing activities	(3,618		)	—			—		3		(3,615		)
Net decrease in cash, cash equivalents and restricted cash	(58		)	—			—		3		(55		)
Cash, cash equivalents and restricted cash at the beginning of period	3,476			—			—		445		3,921
Cash, cash equivalents and restricted cash at the end of period	$	3,418		$	—		$	—	$	448	$	3,866

^{(a) Recast to reflect the adoption of}^{Revenue from Contracts with Customers.}

^{(b) Recast to reflect the adoption of}^{Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.}

^{(c) Recast to reflect the adoption of}^{Restricted Cash.}

In February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Effective January 1, 2018, we early adopted this ASU and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. This resulted in a $735 million increase to retained earnings and a $735 million decrease to AOCI. Our current accounting policy for releasing income tax effects from other comprehensive income is based on a portfolio approach.

Other accounting pronouncements adopted during the periods covered by the consolidated financial statements did not have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting Standards Issued But Not Yet Effective

In August 2017, the FASB issued an ASU to enhance recognition of the economic results of hedging activities in the financial statements. In addition, this update makes certain targeted improvements to simplify the application of hedge accounting guidance and increase transparency regarding the scope and results of hedging activities. The guidance will generally be applied prospectively and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We continue to evaluate this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2017, the FASB issued an ASU to require the premium on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the proposed update. Under U.S. GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. Only in cases when an entity has a large number of similar securities is it allowed to consider estimates of principal prepayments. Amortization of the premium over the contractual life of the instrument can result in losses being recorded for the unamortized premium if the issuer exercises the call feature prior to maturity. The standard will be effective for us in the first quarter of 2019, but early adoption is permitted. We continue to evaluate this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued an ASU to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard will be effective for us in the first quarter of 2020, but early adoption is permitted. We continue to evaluate this update to determine the full impact of its adoption but do not expect this ASU to have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued an ASU that requires lessees to recognize a right-of-use asset and lease liability on their balance sheet for all leases with terms beyond twelve months. Although the distinction between operating and finance leases will continue to exist under the new standard, the recognition and measurement of expenses and cash flows will not change significantly from the current treatment. The ASU requires a transition adoption election using either 1) a modified retrospective approach with periods prior to the adoption date being recast or 2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not restated. We anticipate adopting this standard on January 1, 2019 using the prospective adoption approach. We have reviewed and selected a new lease accounting system and are currently accumulating and processing lease data into the system. We are nearing completion of our efforts to compile a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply this update. We are currently assessing the impact of other arrangements for embedded leases. We plan to apply practical expedients provided in the update that allow, among other things, not to reassess contracts that commenced prior to the adoption. We also anticipate electing a policy not to recognize right of use assets and lease liabilities related to short-term leases. We continue to evaluate this update and subsequent amendments to the original update to determine the full impact of its adoption on our consolidated financial position, results of operations, cash flows and related disclosures, as well as the impact of adoption on policies, practices and systems. In addition, we are currently analyzing our internal control framework to determine if controls should be added or modified as a result of adopting this standard. Based on the preliminary evaluation of our lease portfolio, we believe the largest impact will be accounting for leases for real estate, as we have a large portfolio of leased properties that are currently accounted for as operating leases. As of December 31, 2017, we had $1.637 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheets. We expect material changes to our consolidated balance sheets as a result of the new standard and will apply these changes prospectively.

Other accounting pronouncements issued, but not effective until after September 30, 2018, are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.