Notes to the 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 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 2008, 2007, and 2006.
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 services are rendered. Because we collect payment in advance of services being performed, we defer the revenue until the services are performed. This is classified as a liability, Deferred revenue–prepaid postage, on our balance sheets. In Quarter III of the current year, we changed the methodology used to estimate the deferred revenue for prepaid postage for stamps. This update was made necessary because the introduction of the Forever Stamp in April 2007, combined with the May 2008 price increase, resulted in a change in consumer behavior regarding the purchase and usage of stamps that was not measurable using our prior estimation techniques. We developed a new approach that more accurately captures trends in stamp usage. The change to a new estimation technique is considered a change in the accounting estimate under GAAP.
As required by FAS 154, the impact of the change was recorded in Quarter III, 2008. For the year ended September 30, 2008, we increased the stamp portion of the deferred revenue–prepaid postage liability by $477 million, $230 million of which is considered a cumulative change in estimate and $247 million of which is attributable to changes in consumer behavior during the last two quarters of the year.
Advertising Expenses
Advertising costs are expensed as incurred and are classified in other operating expenses. Advertising expenses were $106 million in 2008, $121 million in 2007, and $138 million in 2006.
Compensation and Benefits Payable
Compensation and Benefits Payable 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, compensation for wages lost, 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
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. In accordance with our parent-subsidiary type relationship with the federal government, 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), the law 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.