The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop certain amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large organization. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.
The three critical accounting policies that we believe are either the most judgmental or involve the selection or application of alternative accounting policies, and are material to financial statements, are those relating to workers’ compensation costs, deferred revenue for prepaid postage and contingent liabilities. Workers’ compensation costs are highly sensitive to the estimates of discount and inflation rates and the length of time recipients stay on the compensation rolls, and reported financial results may be volatile. However the annual cash payment is relatively stable and therefore predictable. Workers’ compensation costs are also subject to actuarial estimates of future pay-outs, based upon prior claims data. These estimates can change significantly from period to period.
Deferred revenue for prepaid postage represents our estimate of postage that has been sold but has not yet been used by the customers. We track postage sold from our sales records. Postage used is estimated via statistical samples of counts across the country. Changes in consumer hold patterns can significantly impact our estimates.
Contingent liabilities require significant judgment in estimating potential losses for legal claims. Each quarter, we review significant new claims and litigation for the probability of an adverse outcome. Estimates can change as individual claims develop. In addition, retirement and health benefit costs for employees and retirees represent a significant portion of expenses. Any changes in laws or regulations affecting the amounts, timing or administration of these benefits could have a material effect on our financial position and results of operations. For additional information, see Note 3, Summary of Significant Accounting Policies, in the Notes to the Financial Statements.
We recognize revenue when services are rendered. Because we collect payment in advance of services being performed, we defer the revenue as an estimated liability. This liability is classified as deferred revenue–prepaid postage on our balance sheets. In 2008, we improved the model used to estimate the deferred revenue for prepaid postage for stamps. This change 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 prior estimation techniques. This new estimation methodology provides more refined estimates of the trends in stamp usage. We further refined this estimation methodology in Quarter IV of 2009 to reflect changes in customer usage patterns of both Forever and denominated stamps demonstrated during 2009. The 2008 change to a new estimation model and 2009 refinement are both considered changes in accounting estimates under Generally Accepted Accounting Principles (GAAP).
For further information, see Note 3 to the financial statements.
