Item 8. Financial Statements and Supplementary Data

Table of Contents

Report of Independent Registered Public Accounting Firm	65
Consolidated Balance Sheets	66
Statements of Consolidated Income	67
Statements of Consolidated Comprehensive Income	67
Statements of Consolidated Cash Flows	68
Notes to Consolidated Financial Statements	69
Note 1—Summary of Accounting Policies	69
Note 2—Cash and Investments	75
Note 3—Property, Plant and Equipment	80
Note 4—Company-Sponsored Employee Benefit Plans	80
Note 5—Multiemployer Employee Benefit Plans	91
Note 6—Goodwill and Intangible Assets	96
Note 7—Business Acquisitions	98
Note 8—Debt and Financing Arrangements	100
Note 9—Legal Proceedings and Contingencies	105
Note 10—Shareowners’ Equity	107
Note 11—Stock-Based Compensation	111
Note 12—Segment and Geographic Information	115
Note 13—Income Taxes	118
Note 14—Earnings Per Share	122
Note 15—Derivative Instruments and Risk Management	122
Note 16—Quarterly Information (Unaudited)	129

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareowners

United Parcel Service, Inc.

Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of United Parcel Service, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related statements of consolidated income, consolidated comprehensive income, and consolidated cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of United Parcel Service, Inc. and subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 20, 2017

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)

	December 31,
	2016				2015
ASSETS
Current Assets:
Cash and cash equivalents	$	3,476			$	2,730
Marketable securities	1,091				1,996
Accounts receivable, net	7,695				7,134
Other current assets	1,587				1,348
Total Current Assets	13,849				13,208
Property, Plant and Equipment, Net	18,800				18,352
Goodwill	3,757				3,419
Intangible Assets, Net	1,758				1,549
Investments and Restricted Cash	476				473
Deferred Income Tax Assets	591				255
Other Non-Current Assets	1,146				1,055
Total Assets	$	40,377			$	38,311
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and commercial paper	$	3,681			$	3,018
Accounts payable	3,042				2,587
Accrued wages and withholdings	2,317				2,253
Hedge margin liabilities	575				717
Self-insurance reserves	670				657
Accrued group welfare and retirement plan contributions	598				525
Other current liabilities	847				939
Total Current Liabilities	11,730				10,696
Long-Term Debt	12,394				11,316
Pension and Postretirement Benefit Obligations	12,694				10,638
Deferred Income Tax Liabilities	112				115
Self-Insurance Reserves	1,794				1,831
Other Non-Current Liabilities	1,224				1,224
Shareowners’ Equity:
Class A common stock (180 and 194 shares issued in 2016 and 2015)	2				2
Class B common stock (689 and 693 shares issued in 2016 and 2015)	7				7
Additional paid-in capital	—				—
Retained earnings	4,879				6,001
Accumulated other comprehensive loss	(4,483		)		(3,540		)
Deferred compensation obligations	45				51
Less: Treasury stock (1 share in 2016 and 2015)	(45		)		(51		)
Total Equity for Controlling Interests	405				2,470
Noncontrolling Interests	24				21
Total Shareowners’ Equity	429				2,491
Total Liabilities and Shareowners’ Equity	$	40,377			$	38,311

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(In millions, except per share amounts)

	Years Ended December 31,
	2016				2015				2014
Revenue	$	60,906			$	58,363			$	58,232
Operating Expenses:
Compensation and benefits	34,770				31,028				32,045
Repairs and maintenance	1,538				1,400				1,371
Depreciation and amortization	2,224				2,084				1,923
Purchased transportation	9,129				8,043				8,460
Fuel	2,118				2,482				3,883
Other occupancy	1,037				1,022				1,044
Other expenses	4,623				4,636				4,538
Total Operating Expenses	55,439				50,695				53,264
Operating Profit	5,467				7,668				4,968
Other Income and (Expense):
Investment income and other	50				15				22
Interest expense	(381		)		(341		)		(353		)
Total Other Income and (Expense)	(331		)		(326		)		(331		)
Income Before Income Taxes	5,136				7,342				4,637
Income Tax Expense	1,705				2,498				1,605
Net Income	$	3,431			$	4,844			$	3,032
Basic Earnings Per Share	$	3.89			$	5.38			$	3.31
Diluted Earnings Per Share	$	3.87			$	5.35			$	3.28

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(In millions)

	Years Ended December 31,
	2016				2015				2014
Net Income	$	3,431			$	4,844			$	3,032
Change in foreign currency translation adjustment, net of tax	(119		)		(440		)		(331		)
Change in unrealized gain (loss) on marketable securities, net of tax	—				(1		)		1
Change in unrealized gain (loss) on cash flow hedges, net of tax	(112		)		6				280
Change in unrecognized pension and postretirement benefit costs, net of tax	(712		)		489				(3,084		)
Comprehensive Income (Loss)	$	2,488			$	4,898			$	(102	)

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(In millions)

	Years Ended December 31,
	2016				2015				2014
Cash Flows From Operating Activities:
Net income	$	3,431			$	4,844			$	3,032
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	2,224				2,084				1,923
Pension and postretirement benefit expense	3,725				1,189				3,040
Pension and postretirement benefit contributions	(2,668		)		(1,229		)		(1,258		)
Settlement of postretirement benefit obligation	—				—				(2,271		)
Self-insurance reserves	(21		)		(80		)		(201		)
Deferred tax expense	123				540				385
Stock compensation expense	591				574				536
Other (gains) losses	(198		)		(185		)		218
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	(704		)		(452		)		(523		)
Other current assets	(14		)		414				112
Accounts payable	461				(147		)		276
Accrued wages and withholdings	109				(63		)		106
Other current liabilities	(561		)		(6		)		317
Other operating activities	(25		)		(53		)		34
Net cash from operating activities	6,473				7,430				5,726
Cash Flows From Investing Activities:
Capital expenditures	(2,965		)		(2,379		)		(2,328		)
Proceeds from disposals of property, plant and equipment	88				26				53
Purchases of marketable securities	(4,816		)		(7,415		)		(3,525		)
Sales and maturities of marketable securities	5,724				6,388				3,106
Net decrease in finance receivables	9				5				44
Cash paid for business acquisitions	(547		)		(1,904		)		(88		)
Other investing activities	(59		)		(30		)		(63		)
Net cash used in investing activities	(2,566		)		(5,309		)		(2,801		)
Cash Flows From Financing Activities:
Net change in short-term debt	(88		)		2,529				—
Proceeds from long-term borrowings	5,927				3,783				1,525
Repayments of long-term borrowings	(3,805		)		(2,724		)		(1,694		)
Purchases of common stock	(2,678		)		(2,702		)		(2,695		)
Issuances of common stock	245				249				274
Dividends	(2,643		)		(2,525		)		(2,366		)
Other financing activities	(98		)		(175		)		(205		)
Net cash used in financing activities	(3,140		)		(1,565		)		(5,161		)
Effect Of Exchange Rate Changes On Cash And Cash Equivalents	(21		)		(117		)		(138		)
Net Increase (Decrease) In Cash And Cash Equivalents	746				439				(2,374		)
Cash And Cash Equivalents:
Beginning of period	2,730				2,291				4,665
End of period	$	3,476			$	2,730			$	2,291
Cash Paid During The Period For:
Interest (net of amount capitalized)	$	373			$	345			$	366
Income taxes	$	2,064			$	1,913			$	1,524

See notes to consolidated financial statements.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statements and Business Activities

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include the accounts of United Parcel Service, Inc., and all of its consolidated subsidiaries (collectively “UPS” or the “Company”). All intercompany balances and transactions have been eliminated.

UPS concentrates its operations in the field of transportation services, primarily domestic and international letter and package delivery. Through our Supply Chain & Freight subsidiaries, we are also a global provider of specialized transportation, logistics and financial services.

Use of Estimates

The preparation of our consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingencies. Estimates have been prepared on the basis of the most current and best information, and actual results could differ materially from those estimates.

Revenue Recognition

U.S. Domestic and International Package Operations—Revenue is recognized upon delivery of a letter or package.

Forwarding and Logistics—Freight forwarding revenue and the expense related to the transportation of freight are recognized at the time the services are completed. Truckload freight brokerage revenue and related transportation costs are recognized upon delivery of the shipment by a third-party carrier. Material management and distribution revenue is recognized upon performance of the service provided. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes.

UPS Freight—Revenue is recognized upon delivery of a less-than-truckload (“LTL”) or truckload (“TL”) shipment.

In our transportation businesses, we utilize independent contractors and third-party carriers in the performance of some transportation services. In situations where we act as principal party to the transaction, we recognize revenue on a gross basis; in circumstances where we act as an agent, we recognize revenue net of the cost of the purchased transportation.

Financial Services—Income on loans and direct finance leases is recognized on the effective interest method. Accrual of interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days delinquent. Income on operating leases is recognized on the straight-line method over the terms of the underlying leases.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments that are readily convertible into cash. We consider securities with maturities of three months or less, when purchased, to be cash equivalents. The carrying amount of these securities approximates fair value because of the short-term maturity of these instruments.

Investments

Marketable securities are either classified as trading or available-for-sale securities and are carried at fair value. Unrealized gains and losses on trading securities are reported as investment income and other on the statements of consolidated income. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive income (“AOCI”), a separate component of shareowners’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income and other, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in investment income and other.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We periodically review our available-for-sale investments for indications of other-than-temporary impairment considering many factors, including the extent and duration to which a security’s fair value has been less than its cost, overall economic and market conditions and the financial condition and specific prospects for the issuer. Impairment of available-for-sale securities results in a charge to income when a market decline below cost is other-than-temporary.

Accounts Receivable

Losses on accounts receivable are recognized when they are incurred, which requires us to make our best estimate of the probable losses inherent in our customer receivables at each balance sheet date. These estimates require consideration of historical loss experience, adjusted for current conditions, trends in customer payment frequency, and judgments about the probable effects of relevant observable data, including present economic conditions and the financial health of specific customers and market sectors. Our risk management process includes standards and policies for reviewing major account exposures and concentrations of risk.

Our total allowance for doubtful accounts as of December 31, 2016 and 2015 was $102 and $118 million, respectively. Our total provision for doubtful accounts charged to expense during the years ended December 31, 2016, 2015 and 2014 was $116, $121 and $143 million, respectively.

Inventories

Fuel and other materials and supplies inventories are recognized as inventory when purchased, and then charged to expense when used in our operations. Jet fuel, diesel and unleaded gasoline inventories are valued at the lower of average cost or market. Total inventories were $342 and $308 million as of December 31, 2016 and 2015, respectively, and are included in “other current assets” on the consolidated balance sheets.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the assets, which are as follows: Vehicles—3 to 15 years; Aircraft—12 to 30 years; Buildings—20 to 40 years; Leasehold Improvements—lesser of asset useful life or lease term; Plant Equipment—3 to 20 years; Technology Equipment—3 to 5 years. The costs of major airframe and engine overhauls, as well as routine maintenance and repairs, are charged to expense as incurred.

Interest incurred during the construction period of certain property, plant and equipment is capitalized until the underlying assets are placed in service, at which time amortization of the capitalized interest begins, straight-line, over the estimated useful lives of the related assets. Capitalized interest was $14, $13 and $11 million for 2016, 2015, and 2014, respectively.

We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows, or external appraisals, as appropriate. We review long-lived assets for impairment at the individual asset or the asset group level for which the lowest level of independent cash flows can be identified.

Goodwill and Intangible Assets

Costs of purchased businesses in excess of net identifiable assets acquired (goodwill), and indefinite-lived intangible assets are tested for impairment at least annually, unless changes in circumstances indicate an impairment may have occurred sooner. We are required to test goodwill on a “reporting unit” basis. A reporting unit is the operating segment unless, for businesses within that operating segment, discrete financial information is prepared and regularly reviewed by management, in which case such a component business is the reporting unit.

In assessing goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We consider several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers, and relevant reporting unit-specific events such as a change in the carrying amount of net assets, a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit, and the testing for recoverability of a significant asset group within a reporting unit. If this qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is performed. If the carrying amount of a reporting unit exceeds its calculated fair value, then the second step is performed, and an impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. We primarily determine the fair value of our reporting units using a discounted cash flow model and supplement this with observable valuation multiples for comparable companies, as appropriate.

A trade name with a carrying value of $200 million and licenses with a carrying value of $4 million as of December 31, 2016 are considered to be indefinite-lived intangibles, and therefore are not amortized. Indefinite-lived intangible assets are reviewed for impairment at least annually. We determined that the income approach, specifically the relief from royalty method, is the most appropriate valuation method to estimate the fair value of the Coyote trade name. The estimated fair value of the trade name is compared to the carrying value of the asset. If the carrying value of the trade name exceeds its estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value.

Finite-lived intangible assets, including trademarks, licenses, patents, customer lists, non-compete agreements and franchise rights are amortized on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 22 years. Capitalized software is amortized over 5 years.

Self-Insurance Accruals

We self-insure costs associated with workers’ compensation claims, automotive liability, health and welfare, and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. Recorded balances are based on reserve levels, which incorporate historical loss experience and judgments about the present and expected levels of cost per claim.

Pension and Postretirement Benefits

We incur certain employment-related expenses associated with pension and postretirement medical benefits. These pension and postretirement medical benefit costs for company-sponsored benefit plans are calculated using various actuarial assumptions and methodologies, including discount rates, expected returns on plan assets, healthcare cost trend rates, inflation, compensation increase rates, mortality rates and coordination of benefits with plans not sponsored by UPS. Actuarial assumptions are reviewed on an annual basis, unless circumstances require an interim remeasurement date for any of our plans.

We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of a corridor (defined as 10% of the greater of the fair value of plan assets or the plans' projected benefit obligations) in pension expense annually at December 31st each year. The remaining components of pension expense, primarily service and interest costs and the expected return on plan assets, are recorded on a quarterly basis.

Effective July 1, 2016, the UPS Retirement Plan was closed to new non-union participants. For eligible employees hired after July 1, 2016, UPS contributes annually to a defined contribution plan. We recognize expense for the required contribution quarterly, and we recognize a liability for any contributions due and unpaid (included in “other current liabilities”).

We participate in a number of trustee-managed multiemployer pension and health and welfare plans for employees covered under collective bargaining agreements. Our contributions to these plans are determined in accordance with the respective collective bargaining agreements. We recognize expense for the contractually required contribution for each period, and we recognize a liability for any contributions due and unpaid (included in “other current liabilities”).

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

Income taxes are accounted for on an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than proposed changes in the tax law or rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset will not be realized.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. Once it is determined that the position meets the recognition threshold, the second step requires us to estimate and measure the the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement. The difference between the amount of recognizable tax benefit and the total amount of tax benefit from positions filed or to be filed with the tax authorities is recorded as a liability for uncertain tax benefits. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision.

Foreign Currency Translation and Remeasurement

We translate the results of operations of our foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Balance sheet currency translation adjustments are recorded in AOCI. Pre-tax foreign currency transaction gains from remeasurement, net of hedging, included in other operating expenses, investment income and interest expense were $5, $7 and $14 million in 2016, 2015 and 2014, respectively.

Stock-Based Compensation

All share-based awards to employees are measured based on their fair values and expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period). We issue employee share-based awards under the UPS Incentive Compensation Plan that are subject to specific vesting conditions; including service conditions, where the awards cliff vest or vest ratably over a three or five year period (the "nominal vesting period”) or at the date the employee retires (as defined by the plan), if earlier. Compensation cost is generally recognized immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period.

Fair Value Measurements

Our financial assets and liabilities measured at fair value on a recurring basis have been categorized based upon a fair value hierarchy. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting our own assumptions, and include situations where there is little or no market activity for the asset or liability.

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis, including property, plant, and equipment, goodwill and intangible assets. These assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of an impairment. A general description of the valuation methodologies used for assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy, is included in each footnote with fair value measurements present.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Derivative Instruments

All financial derivative instruments are recorded on our consolidated balance sheets at fair value. Derivatives not designated as hedges must be adjusted to fair value through income. If a derivative is designated as a hedge, changes in its fair value that are considered to be effective, as defined, either (depending on the nature of the hedge) offset the change in fair value of the hedged assets, liabilities or firm commitments through income, or are recorded in AOCI until the hedged item is recorded in income. Any portion of a change in a hedge’s fair value that is considered to be ineffective, or is excluded from the measurement of effectiveness, is recorded immediately in income.

Adoption of New Accounting Standards

In November 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that simplifies the presentation of deferred tax assets and liabilities. The update removes the requirement to separate deferred tax liabilities and assets into current and non-current amounts in a classified statement of financial position. The update permits the entity to present deferred tax liabilities and assets as non-current in a classified statement of financial position. We adopted this standard on a retrospective basis in the fourth quarter of 2015. This accounting standards update did not have a material impact on our consolidated financial position or results of operations.

In September 2015, the FASB issued an accounting standards update that simplifies the accounting for measurement-period adjustments related to business combinations. This update removes the requirement to retrospectively apply adjustments made to estimated amounts recognized in a business combination. This update permits the purchaser to adjust the estimated amounts in the reporting period in which the adjustment amounts are determined. This new guidance would have become effective for us in the first quarter of 2016; however, we elected to early adopt this standard in the third quarter of 2015. This accounting standards update did not have a material impact on our consolidated financial position or results of operations.

In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update amends existing guidance to require the presentation of debt issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the associated debt liability instead of a deferred charge. In August 2015, the FASB issued updated guidance pertaining to the presentation of debt issuance costs related to line-of-credit arrangements. This update allows an entity to defer and present debt issuance costs as an asset, subsequently amortizing the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We elected to early adopt this standard in the fourth quarter of 2015 on a retrospective basis. This accounting standards update did not have a material impact on our consolidated financial position or results of operations.

In May 2015, the FASB issued an accounting standards update that changes the disclosure requirement for reporting investments at fair value. This update removes the requirement to categorize investments for which fair value is measured using the net asset value (“NAV”) per share practical expedient within the fair value hierarchy. These disclosures are limited to investments for which the entity has elected to measure fair value using the practical expedient. Substantially all of our Level 3 pension and postretirement benefit plan assets were measured using NAV as a practical expedient. This guidance became effective for us in the first quarter of 2016 and did not have a material impact on our consolidated financial position or results of operations.

In June 2014, the FASB issued an accounting standards update for companies that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This guidance became effective for us in the first quarter of 2015 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting Standards Issued But Not Yet Effective

In November 2016, the FASB issued an accounting standards update 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. The guidance in this update should be applied retrospectively and becomes effective for us in the first quarter of 2018, but early adoption is permitted. As a result of this update, restricted cash will be included within cash and cash equivalents on our statements of consolidated cash flows. As of December 31, 2016 and 2015, we had $445 and $442 million in self-insurance investments and restricted cash, respectively.

In August 2016, the FASB issued an accounting standards update that addresses the classification and presentation of specific cash flow issues that currently result in diverse practices. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and becomes effective for us in the first quarter of 2018, but early adoption is permitted. We are currently evaluating the impact of this standard on our statements of consolidated cash flows, but do not expect this standard to have a material impact.

In March 2016, the FASB issued an accounting standards update that simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This new guidance becomes effective for us in the first quarter of 2017. We have evaluated adoption of this update and determined that the impact to income tax expense in the statements of consolidated income, for the first quarter of 2017, will be a benefit of approximately $60 million, which will result in a reclassification of approximately $60 million from net cash from financing activities to net cash from operating activities in the statements of consolidated cash flows.

In February 2016, the FASB issued an accounting standards update that requires lessees to recognize a right-of-use asset and lease liability on the 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. This new guidance requires modified retrospective application and becomes effective for us in the first quarter of 2019, but early adoption is permitted. We are currently evaluating this 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. As of December 31, 2016, we have $1.470 billion of future minimum operating lease commitments that are not currently recognized on our consolidated balance sheet (see note 8). Therefore, we expect material changes to our consolidated balance sheets.

In January 2016, the FASB issued an accounting standards update which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The amendment will be effective for us beginning the first quarter of 2018. At this time, we do not expect this accounting standards update to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued an accounting standards update that changes the revenue recognition for companies that enter into contracts with customers to transfer goods or services. 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. We are planning to adopt the standard on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach to adopt this standard. We are currently evaluating this standard and the related updates, including which transition approach to use as well as the impact of adoption on policies, practices and systems.

At this stage in the evaluation, we expect that revenue recognition will be accelerated for the transportation businesses as the standard requires revenue to be recognized as control is transferred to the customer over time rather than upon delivery. We are currently quantifying the impact of this change to the statements of consolidated income.

The standard also requires us to evaluate whether our businesses promise to transfer services to the customer itself (as a principal) or to arrange for services to be provided by another party (as an agent). To make that determination, the standard uses a control model rather than the risks-and-rewards model in current U.S. GAAP. Based on our evaluation of the control model, we determined that certain Supply Chain & Freight businesses act as the principal rather than the agent within their revenue arrangements. This change will require the affected businesses to report transportation revenue gross of associated purchase transportation costs rather than net of such amounts within the statements of consolidated income. We are currently quantifying the amount of revenue impacted by this change. Additionally, contract reviews are ongoing, and more businesses could be impacted by the adoption of the standard.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in Presentation

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on our financial position or results of operations.

NOTE 2. CASH AND INVESTMENTS

The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2016 and 2015 (in millions):

	Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
2016
Current trading marketable securities:
Corporate debt securities	$	427			$	—			$	—			$	427
Carbon credit investments(1)	80				10				—				90
Total trading marketable securities	507				10				—				517
Current available-for-sale marketable securities:
U.S. government and agency debt securities	$	314			$	—			$	(2	)		$	312
Mortgage and asset-backed debt securities	90				1				—				91
Corporate debt securities	167				—				(1		)		166
Equity securities	2				—				—				2
Non-U.S. government debt securities	3				—				—				3
Total available-for-sale marketable securities	576				1				(3		)		574
Total current marketable securities	$	1,083			$	11			$	(3	)		$	1,091
	Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
2015
Current trading marketable securities:
Corporate debt securities	$	715			$	—			$	—			$	715
Non-U.S. government debt securities(1)	363				—				—				363
Carbon credit investments(1)	347				9				(5		)		351
Total trading marketable securities	1,425				9				(5		)		1,429
Current available-for-sale marketable securities:
U.S. government and agency debt securities	$	341			$	—			$	(1	)		$	340
Mortgage and asset-backed debt securities	74				1				(1		)		74
Corporate debt securities	147				—				(1		)		146
U.S. state and local municipal debt securities	2				—				—				2
Equity securities	2				—				—				2
Non-U.S. government debt securities	3				—				—				3
Total available-for-sale marketable securities	569				1				(3		)		567
Total current marketable securities	$	1,994			$	10			$	(8	)		$	1,996
(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See Note 15 for offsetting statement of consolidated income impact.

Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $572 and $564 million at December 31, 2016 and 2015, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gross realized gains on sales of available-for-sale securities totaled $1, $1 and $1 million in 2016, 2015, and 2014, respectively. The gross realized losses on sales of available-for-sale securities totaled $1, $1 and $0 million in 2016, 2015, and 2014, respectively.

There were no material impairment losses recognized on marketable securities during 2016, 2015 or 2014.

Investment Other-Than-Temporary Impairments

We have concluded that no material other-than-temporary impairment losses existed as of December 31, 2016. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Unrealized Losses

The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2016 (in millions):

	Less Than 12 Months								12 Months or More								Total
	Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. government and agency debt securities	$	206			$	(2	)		$	—			$	—			$	206			$	(2	)
Mortgage and asset-backed debt securities	—				—				—				—				—				—
Corporate debt securities	68				(1		)		—				—				68				(1		)
Equity securities	—				—				—				—				—				—
Non-U.S. government debt securities	—				—				—				—				—				—
Total marketable securities	$	274			$	(3	)		$	—			$	—			$	274			$	(3	)

The unrealized losses for the U.S. government and agency debt securities are primarily due to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the cost basis.

Maturity Information

The amortized cost and estimated fair value of marketable securities at December 31, 2016, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

	Cost				Estimated Fair Value
Due in one year or less	$	463			$	462
Due after one year through three years	450				449
Due after three years through five years	16				16
Due after five years	72				72
	1,001				999
Equity and carbon credit investment securities	82				92
	$	1,083			$	1,091

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Current Investments and Restricted Cash

Investments and Restricted Cash is primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in money market funds and corporate and municipal bonds. Collateral provided is reflected in "other investing activities" in the statements of consolidated cash flows. At December 31, 2016 and 2015, we had $445 and $442 million in self-insurance investments and restricted cash, respectively.

We held an $18 and $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2016 and 2015, respectively. The quarterly change in investment fair value is recognized in "investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $13 and $12 million at December 31, 2016 and 2015, respectively.

The amounts described above are classified as “investments and restricted cash” in the consolidated balance sheets.

Fair Value Measurements

Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.

We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other non-current investments” in the tables below, and as “other non-current assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 8.06% and 8.22% as of December 31, 2016 and 2015, respectively. These inputs and the resulting fair values are updated on a quarterly basis.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2016 and 2015, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
2016
Marketable securities:
U.S. government and agency debt securities	$	312			$	—			$	—			$	312
Mortgage and asset-backed debt securities	—				91				—				91
Corporate debt securities	—				593				—				593
Equity securities	—				2				—				2
Non-U.S. government debt securities	—				3				—				3
Carbon credit investments	90				—				—				90
Total marketable securities	402				689				—				1,091
Other non-current investments	18				—				13				31
Total	$	420			$	689			$	13			$	1,122
	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
2015
Marketable securities:
U.S. government and agency debt securities	$	340			$	—			$	—			$	340
Mortgage and asset-backed debt securities	—				74				—				74
Corporate debt securities	—				861				—				861
U.S. state and local municipal debt securities	—				2				—				2
Equity securities	—				2				—				2
Non-U.S. government debt securities	—				366				—				366
Carbon credit investments	351				—				—				351
Total marketable securities	691				1,305				—				1,996
Other non-current investments	19				—				32				51
Total	$	710			$	1,305			$	32			$	2,047

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years ended December 31, 2016 and 2015 (in millions).

	Marketable Securities				Other Investments				Total
Balance on January 1, 2015	$	—			$	64			$	64
Transfers into (out of) Level 3	—				—				—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—				(32		)		(32		)
Included in accumulated other comprehensive income (pre-tax)	—				—				—
Purchases	—				—				—
Settlements	—				—				—
Balance on December 31, 2015	$	—			$	32			$	32
Transfers into (out of) Level 3	—				—				—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—				(19		)		(19		)
Included in accumulated other comprehensive income (pre-tax)	—				—				—
Purchases	—				—				—
Settlements	—				—				—
Balance on December 31, 2016	$	—			$	13			$	13

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including both owned assets as well as assets subject to capital leases, consists of the following as of December 31 (in millions):

	2016				2015
Vehicles	$	8,638			$	8,111
Aircraft	15,653				15,815
Land	1,397				1,263
Buildings	3,439				3,280
Building and leasehold improvements	3,612				3,450
Plant equipment	8,430				8,026
Technology equipment	1,741				1,670
Equipment under operating leases	29				30
Construction-in-progress	735				273
	43,674				41,918
Less: Accumulated depreciation and amortization	(24,874		)		(23,566		)
	$	18,800			$	18,352

We continually monitor our aircraft fleet utilization in light of current and projected volume levels, aircraft fuel prices and other factors. Additionally, we monitor our other property, plant and equipment categories for any indicators that the carrying value of the assets may not be recoverable. No impairment charges on property, plant and equipment were recorded in 2016, 2015 or 2014.

NOTE 4. COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover our employees worldwide.

U.S. Pension Benefits

In the U.S. we maintain the following single-employer defined benefit pension plans: The UPS Retirement Plan, the UPS Pension Plan, the UPS IBT Pension Plan and the UPS Excess Coordinating Benefit Plan, a non-qualified plan.

The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic subsidiaries who are not members of a collective bargaining unit, as well as certain employees covered by a collective bargaining agreement. This plan generally provides for retirement benefits based on average compensation levels earned by employees prior to retirement. Benefits payable under this plan are subject to maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed by the Internal Revenue Service (“IRS”).

The UPS Retirement Plan was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, begin receiving a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS will contribute 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants who are employed on December 31st of each calendar year.

The UPS Excess Coordinating Benefit Plan is a non-qualified plan that provides benefits to certain participants in the UPS Retirement Plan for amounts that exceed the benefit limits described above.

The UPS Pension Plan is noncontributory and includes certain eligible employees of participating domestic subsidiaries and members of collective bargaining units that elect to participate in the plan. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The UPS IBT Pension Plan is noncontributory and includes employees that were previously members of the Central States Pension Fund, a multiemployer pension plan, in addition to other eligible employees who are covered under certain collective bargaining agreements. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

During the fourth quarter of 2016, certain former U.S. employees were offered the option to receive a one-time payment of their vested pension benefit. Approximately 22,000 participants accepted this option, accelerating $685 million in benefit payments during 2016 while reducing the number of participants who are due future payments from U.S. pension plans. As the cost of these settlements did not exceed the plans' service cost and interest cost for the year, the impact of the settlement was not recognized in earnings.

International Pension Benefits

We also sponsor various defined benefit plans covering certain of our international employees. The majority of our international obligations are for defined benefit plans in Canada and the United Kingdom. In addition, many of our international employees are covered by government-sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of government-sponsored plans.

U.S. Postretirement Medical Benefits

We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our retirees who meet certain eligibility requirements and who are not otherwise covered by multiemployer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a Company-sponsored plan pursuant to collective bargaining agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a portion of the total cost of the coverage.

Defined Contribution Plans

We also sponsor several defined contribution plans for all employees not covered under collective bargaining agreements, and for certain employees covered under collective bargaining agreements. The Company matches, in shares of UPS common stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $111, $104 and $95 million for 2016, 2015 and 2014, respectively.

Effective July 1, 2016, the UPS Retirement Plan was closed to new non-union participants. The UPS 401(k) Savings Plan was amended so that employees who previously would have been eligible for participation in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, begin receiving a UPS Retirement Contribution. Contributions associated with this amendment charged to expense were $4 million for 2016.

Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $82, $83 and $82 million for 2016, 2015 and 2014, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Periodic Benefit Cost

Information about net periodic benefit cost for the company-sponsored pension and postretirement benefit plans is as follows (in millions):

	U.S. Pension Benefits												U.S. Postretirement Medical Benefits												International Pension Benefits
	2016				2015				2014				2016				2015				2014				2016				2015				2014
Net Periodic Benefit Cost:
Service cost	$	1,412			$	1,527			$	1,137			$	28			$	34			$	62			$	49			$	48			$	43
Interest cost	1,828				1,694				1,604				124				117				152				41				44				49
Expected return on assets	(2,516		)		(2,489		)		(2,257		)		(6		)		(17		)		(25		)		(58		)		(61		)		(61		)
Amortization of:
Transition obligation	—				—				—				—				—				—				—				—				—
Prior service cost	166				168				169				5				5				—				1				1				1
Actuarial (gain) loss	2,520				70				991				17				17				767				114				31				48
Curtailment and settlement loss	—				—				—				—				—				356				—				—				—
Other	—				—				—				—				—				—				—				—				4
Net periodic benefit cost	$	3,410			$	970			$	1,644			$	168			$	156			$	1,312			$	147			$	63			$	84

The curtailment and settlement loss in 2014 for the U.S. postretirement medical benefit plans is discussed further in note 5 under the section entitled "Accounting Impact of Health and Welfare Plan Changes".

Actuarial Assumptions

The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost.

	U.S. Pension Benefits									U.S. Postretirement Medical Benefits									International Pension Benefits
	2016			2015			2014			2016			2015			2014			2016			2015			2014
Discount rate	4.86	%		4.40	%		5.32	%		4.79	%		4.18	%		4.89	%		3.51	%		3.56	%		4.35	%
Rate of compensation increase	4.29	%		4.29	%		4.29	%		N/A			N/A			N/A			3.04	%		3.08	%		3.22	%
Expected return on assets	8.75	%		8.75	%		8.75	%		8.75	%		8.75	%		8.75	%		5.73	%		6.03	%		6.29	%

The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our plans.

	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2016			2015			2016			2015			2016			2015
Discount rate	4.41	%		4.86	%		4.23	%		4.79	%		2.75	%		3.51	%
Rate of compensation increase	4.27	%		4.29	%		N/A			N/A			3.17	%		3.04	%

A discount rate is used to determine the present value of our future benefit obligations. To determine our discount rate for our U.S. pension and postretirement benefit plans, we use a bond matching approach to select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach reflects the process we would employ to settle our pension and postretirement benefit obligations. For our international plans, the discount rate is determined by matching the expected cash flows of a sample plan of similar duration to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. These assumptions are updated each measurement date, which is typically annually.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2016, the impact of each basis point change in the discount rate on the projected benefit obligation of the pension and postretirement medical benefit plans is as follows (in millions):

	Increase (Decrease) in the Projected Benefit Obligation
	Pension Benefits				Postretirement Medical Benefits
One basis point increase in discount rate	$	(67	)		$	(2	)
One basis point decrease in discount rate	$	71			$	3

The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best estimate of mortality for U.S. plans. In October 2016, the SOA published an updated improvement scale which reduced expected mortality improvements from previously published scales. Based on our perspective of future longevity, we updated the mortality assumptions to incorporate this updated scale for purposes of measuring pension and other postretirement benefit obligations at December 31, 2016.

Assumptions for the expected return on plan assets are used to determine a component of net periodic benefit cost for the fiscal year. The assumption for our U.S. plans was developed using a long-term projection of returns for each asset class, and taking into consideration our target asset allocation. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations.

For plans outside the U.S., consideration is given to local market expectations of long-term returns. Strategic asset allocations are determined by plan based on the nature of liabilities and considering the demographic composition of the plan participants.

Actuarial Assumptions - Central States Pension Fund

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.

The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.

The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as well as the effect of discount rates and various other actuarial assumptions.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multi-employer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2016 does not incorporate this solution. Rather, our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will make another MPRA filing to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2016 is that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as these uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.

Other Actuarial Assumptions

Healthcare cost trends are used to project future postretirement benefits payable from our plans. For year-end 2016 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual increase of 7.0%, decreasing to 4.5% by the year 2021 and with consistent annual increases at those ultimate levels thereafter.

Assumed healthcare cost trends can have a significant effect on the amounts reported for our postretirement medical plans. A one percent change in assumed healthcare cost trend rates would have had the following effects on 2016 results (in millions):

	1% Increase				1% Decrease
Effect on total of service cost and interest cost	$	3			$	(3	)
Effect on postretirement benefit obligation	$	71			$	(76	)

Funded Status

The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance sheets as of December 31st (in millions):

	U.S. Pension Benefits								U.S. Postretirement Medical Benefits								International Pension Benefits
	2016				2015				2016				2015				2016				2015
Funded Status:
Fair value of plan assets	$	31,215			$	28,887			$	15			$	130			$	1,092			$	1,014
Benefit obligation	(41,069		)		(36,846		)		(2,730		)		(2,673		)		(1,425		)		(1,219		)
Funded status recognized at December 31	$	(9,854	)		$	(7,959	)		$	(2,715	)		$	(2,543	)		$	(333	)		$	(205	)
Funded Status Recognized in our Balance Sheet:
Other non-current assets	$	—			$	—			$	—			$	—			$	28			$	48
Other current liabilities	(17		)		(16		)		(216		)		(98		)		(3		)		(3		)
Pension and postretirement benefit obligations	(9,837		)		(7,943		)		(2,499		)		(2,445		)		(358		)		(250		)
Net liability at December 31	$	(9,854	)		$	(7,959	)		$	(2,715	)		$	(2,543	)		$	(333	)		$	(205	)
Amounts Recognized in AOCI:
Unrecognized net prior service cost	$	(1,074	)		$	(954	)		$	(36	)		$	(26	)		$	(3	)		$	(4	)
Unrecognized net actuarial gain (loss)	(4,107		)		(3,263		)		(80		)		32				(150		)		(103		)
Gross unrecognized cost at December 31	(5,181		)		(4,217		)		(116		)		6				(153		)		(107		)
Deferred tax assets (liabilities) at December 31	1,948				1,585				44				(2		)		37				26
Net unrecognized cost at December 31	$	(3,233	)		$	(2,632	)		$	(72	)		$	4			$	(116	)		$	(81	)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accumulated benefit obligation for our pension plans as of the measurement dates in 2016 and 2015 was $39.488 and $35.320 billion, respectively.

Benefit payments under the pension plans include $22 million paid from employer assets in 2016 and in 2015. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $98 and $111 million paid from employer assets in 2016 and 2015, respectively. Such benefit payments from employer assets are also categorized as employer contributions.

At December 31, 2016 and 2015, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):

	Projected Benefit Obligation Exceeds the Fair Value of Plan Assets								Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
2016				2015				2016				2015
U.S. Pension Benefits:
Projected benefit obligation	$	41,069			$	36,846			$	41,069			$	36,846
Accumulated benefit obligation	38,194				34,210				38,194				34,210
Fair value of plan assets	31,215				28,887				31,215				28,887
International Pension Benefits:
Projected benefit obligation	$	1,370			$	493			$	1,365			$	477
Accumulated benefit obligation	1,238				416				1,234				401
Fair value of plan assets	1,020				247				1,016				232

The accumulated postretirement benefit obligation exceeds plan assets for all of our U.S. postretirement medical benefit plans.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Benefit Obligations and Fair Value of Plan Assets

The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets as of the respective measurement dates in each year (in millions).

	U.S. Pension Benefits								U.S. Postretirement Medical Benefits								International Pension Benefits
	2016				2015				2016				2015				2016				2015
Benefit Obligations:
Projected benefit obligation at beginning of year	$	36,846			$	37,521			$	2,673			$	2,883			$	1,219			$	1,274
Service cost	1,412				1,527				28				34				49				48
Interest cost	1,828				1,694				124				117				41				44
Gross benefits paid	(1,885		)		(1,056		)		(264		)		(261		)		(28		)		(30		)
Plan participants’ contributions	—				—				27				21				3				3
Plan amendments(1)	285				—				15				—				—				(2		)
Actuarial (gain)/loss	2,583				(2,840		)		126				(120		)		208				13
Foreign currency exchange rate changes	—				—				—				—				(67		)		(138		)
Curtailments and settlements	—				—				—				—				(3		)		(3		)
Other	—				—				1				(1		)		3				10
Projected benefit obligation at end of year	$	41,069			$	36,846			$	2,730			$	2,673			$	1,425			$	1,219
(1) Resulting from a new labor contract with the Independent Pilots Association. See "Status of Collective Bargaining Agreements" in note 5.
	U.S. Pension Benefits								U.S. Postretirement Medical Benefits								International Pension Benefits
	2016				2015				2016				2015				2016				2015
Fair Value of Plan Assets:
Fair value of plan assets at beginning of year	$	28,887			$	28,828			$	130			$	259			$	1,014			$	1,042
Actual return on plan assets	1,735				67				3				—				108				43
Employer contributions	2,478				1,048				119				111				71				70
Plan participants’ contributions	—				—				27				21				3				3
Gross benefits paid	(1,885		)		(1,056		)		(264		)		(261		)		(28		)		(30		)
Foreign currency exchange rate changes	—				—				—				—				(73		)		(113		)
Curtailments and settlements	—				—				—				—				(3		)		(3		)
Other	—				—				—				—				—				2
Fair value of plan assets at end of year	$	31,215			$	28,887			$	15			$	130			$	1,092			$	1,014

Pension and Postretirement Plan Assets

Under the governance of plan trustees, the Investment Committee establishes investment guidelines and strategies and regularly monitors the performance of investments and investment managers. The investment guidelines address items such as establishing appropriate governance provisions; defining investment objectives; determining strategic asset allocation; monitoring and reporting the investments on a regular basis; appointing/dismissing investment managers, custodians, consultants, advisors; risk management; determining/defining the mandates for investment managers; rebalancing of assets; and determining investment restrictions/prohibited investments.

Pension assets are invested in accordance with applicable laws and regulations. The primary long-term investment objectives for pension assets are to: (1) provide for a reasonable amount of long-term growth of capital given prudent levels of risk exposure while minimizing permanent loss of capital; (2) generate investment results that meet or exceed the long-term rate of return assumption for the plans; and (3) match the duration of the liabilities and assets of the plans to reduce the need for large employer contributions in the future. In furtherance of these objectives, investment managers are engaged to actively manage assets within the guidelines and strategies set forth by the Investment Committee. Active managers are monitored regularly and their performance is compared to applicable benchmarks.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

Pension assets utilizing Level 1 inputs include equity investments, corporate debt instruments, and U.S. government securities. Fair values were determined by closing prices for those securities traded on national stock exchanges, while securities traded in the over-the-counter market and listed securities for which no sale was reported on the valuation date are valued at the mean between the last reported bid and asked prices.

Level 2 assets include certain bonds that are valued based on yields currently available on comparable securities of other issues with similar credit ratings, mortgage-backed securities that are valued based on cash flow and yield models using acceptable modeling and pricing conventions, and certain investments that are pooled with other investments in a commingled fund. We value our investments in commingled funds by taking the percentage ownership of the underlying assets, each of which has a readily determinable fair value.

Fair value estimates for certain investments are based on unobservable inputs that are not corroborated by observable market data and are thus classified as Level 3.

Investments that do not have a readily determinable fair value, and which provide a NAV (or its equivalent) developed consistent with FASB measurement principles, are valued using NAV as a practical expedient. These investments are not classified in Levels 1, 2, or 3 of the fair value hierarchy, but are included in the totals in the tables shown below. These investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds are valued using reported NAVs as of December 31st. These assets are primarily invested in a portfolio of diversified, direct investments, and funds of hedge funds. Real estate investments, private debt and private equity funds are valued using fair values per the most recent partnership audited financial reports, adjusted, as appropriate, for any lag between the date of the financial reports and December 31st. The fair values may, due to the inherent uncertainty of valuation for those alternative investments, differ significantly from the values that would have been used had a ready market for the alternative investments existed, and any differences could be material. These investments are described further below:

•

Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. At December 31, 2016, unfunded commitments to hedge funds totaling approximately $5 million are expected to be contributed over the remaining investment period, typically ranging between two and four years.

•

Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity, interest rates, credit, and commodities. These funds allow for monthly redemptions with only a brief notification period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2016.

•

Real Estate, Private Debt and Private Equity Funds: Plan assets are invested in limited partnership interests in various private equity, private debt and real estate funds. Limited provision exists for the redemption of these interests by the limited partners that invest in these funds until the end of the term of the partnerships, typically ranging between 10 and 15 years from the date of inception. An active secondary market exists for similar partnership interests, although no particular value (discount or premium) can be guaranteed. At December 31, 2016, unfunded commitments to such limited partnerships totaling approximately $1.908 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2016 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.

	Total Assets(1)				Level 1				Level 2				Level 3				Percentage of Plan Assets - 2016			Target Allocation 2016
Asset Category (U.S. Plans):
Cash and cash equivalents	$	304			$	102			$	202			$	—			1.0	%		0-5
Equity Securities:
U.S. Large Cap	4,883				2,327				2,556				—
U.S. Small Cap	542				393				149				—
Emerging Markets	1,396				1,236				160				—
Global Equity	2,603				2,555				48				—
International Equity	3,026				2,197				829				—
Total Equity Securities	12,450				8,708				3,742				—				39.9			35-55
Fixed Income Securities:
U.S. Government Securities	6,173				5,821				352				—
Corporate Bonds	4,492				—				4,492				—
Global Bonds	161				—				59				—
Municipal Bonds	24				—				24				—
Total Fixed Income Securities	10,850				5,821				4,927				—				34.6			25-35
Other Investments:
Hedge Funds	2,867				—				763				—				9.2			5-15
Private Equity	1,716				—				—				—				5.5			1-10
Private Debt	496				—				—				—				1.6			1-10
Real Estate	1,734				122				144				—				5.6			1-10
Structured Products(2)	492				—				492				—				1.6			0-5
Risk Parity Funds	321				—				—				—				1.0			1-10
Total U.S. Plan Assets	$	31,230			$	14,753			$	10,270			$	—			100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	54			$	37			$	17			—				4.9			0-15
Equity Securities:
Local Markets Equity	188				—				188				—
U.S. Equity	20				—				20				—
Emerging Markets	26				26				—				—
International / Global Equity	288				141				147				—
Total Equity Securities	522				167				355				—				47.7			50-65
Fixed Income Securities:
Local Government Bonds	84				22				62				—
Corporate Bonds	158				51				107				—
Total Fixed Income Securities	242				73				169				—				22.2			15-35
Other Investments:
Real Estate	93				—				57				—				8.5			0-17
Other	181				—				175				—				16.7			0-20
Total International Plan Assets	$	1,092			$	277			$	773			$	—			100.0	%
Total Plan Assets	$	32,322			$	15,030			$	11,043			$	—

(1) In accordance with ASU No. 2015-07, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.

(2) Represents mortgage and asset-backed securities.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2015 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.

	Total Assets(1)				Level 1				Level 2				Level 3				Percentage of Plan Assets - 2015			Target Allocation 2015
Asset Category (U.S. Plans):
Cash and cash equivalents	$	811			$	716			$	95			$	—			2.8	%		0-5
Equity Securities:
U.S. Large Cap	4,246				2,542				1,704				—
U.S. Small Cap	352				310				42				—
Emerging Markets	1,426				1,271				155				—
Global Equity	2,935				2,935				—				—
International Equity	3,089				2,308				781				—
Total Equity Securities	12,048				9,366				2,682				—				41.5			35-55
Fixed Income Securities:
U.S. Government Securities	3,469				3,257				212				—
Corporate Bonds	3,961				—				3,682				6
Global Bonds	733				—				147				—
Municipal Bonds	36				—				36				—
Total Fixed Income Securities	8,199				3,257				4,077				6				28.2			25-35
Other Investments:
Hedge Funds	3,617				—				—				—				12.5			5-15
Private Equity	1,415				—				—				—				4.9			1-10
Real Estate	1,848				126				155				—				6.4			1-10
Structured Products(2)	324				—				324				—				1.1			0-5
Risk Parity Funds	755				—				—				—				2.6			1-10
Total U.S. Plan Assets	$	29,017			$	13,465			$	7,333			$	6			100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	25			$	9			$	16			—				2.5			0-5
Equity Securities:
Local Markets Equity	240				133				107				—
U.S. Equity	16				16				—				—
Emerging Markets	16				16				—				—
International / Global Equity	176				84				92				—
Total Equity Securities	448				249				199				—				44.1			50-65
Fixed Income Securities:
Local Government Bonds	72				72				—				—
Corporate Bonds	149				56				93				—
Total Fixed Income Securities	221				128				93				—				21.8			15-35
Other Investments:
Real Estate	111				—				69				—				10.9			0-17
Other	209				—				160				49				20.7			0-20
Total International Plan Assets	$	1,014			$	386			$	537			$	49			100.0	%
Total Plan Assets	$	30,031			$	13,851			$	7,870			$	55

(1) In accordance with ASU No. 2015-07, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.

(2) Represents mortgage and asset-backed securities.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments classified in prior years as Level 2 and Level 3 that are measured at fair value using the NAV per share (or its equivalent) practical expedient have been removed from the fair value hierarchy in accordance with retrospective adoption of Accounting Standards Update No. 2015-07. As a result, a reclassification has been made within the prior year's plan asset classification table to conform to the current year's presentation.

The following table presents the changes in the Level 3 instruments measured on a recurring basis for the years ended December 31, 2016 and 2015 (in millions).

	Corporate Bonds				Other				Total(1)
Balance on January 1, 2015	$	8			$	53			$	61
Actual Return on Assets:
Assets Held at End of Year	(1		)		(4		)		(5		)
Assets Sold During the Year	—				—				—
Purchases	3				—				3
Sales	(4		)		—				(4		)
Transfers Into (Out of) Level 3	—				—				—
Balance on December 31, 2015	$	6			$	49			$	55
Actual Return on Assets:
Assets Held at End of Year	—				—				—
Assets Sold During the Year	—				(49		)		(49		)
Purchases	—				—				—
Sales	(6		)		—				(6		)
Transfers Into (Out of) Level 3	—				—				—
Balance on December 31, 2016	$	—			$	—			$	—

(1) Investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have been removed from the fair value hierarchy in accordance with retrospective adoption of Accounting Standards Update No. 2015-07.

There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2016 or December 31, 2015.

Accumulated Other Comprehensive Income

The estimated amounts of prior service cost in AOCI expected to be amortized and recognized as a component of net periodic benefit cost in 2017 are as follows (in millions):

	U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
Prior service cost / (benefit)	$	192			$	7			$	1

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expected Cash Flows

Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):

	U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
Expected Employer Contributions:
2017 to plan trusts	$	2,291			$	154			$	66
2017 to plan participants	17				87				3
Expected Benefit Payments:
2017	$	1,180			$	239			$	23
2018	1,292				235				23
2019	1,412				236				26
2020	1,542				232				29
2021	1,680				225				34
2022-2026	10,627				986				235

Our funding policy for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations, or to directly fund payments to plan participants, as applicable. International plans will be funded in accordance with local regulations. Additional discretionary contributions may be made when deemed appropriate to meet the long-term obligations of the plans. Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.

NOTE 5. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS

We contribute to a number of multiemployer defined benefit plans under the terms of collective bargaining agreements that cover our union-represented employees. These plans generally provide for retirement, death and/or termination benefits for eligible employees within the applicable collective bargaining units, based on specific eligibility/participation requirements, vesting periods and benefit formulas. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:

•	Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

•	If we negotiate to cease participating in a multiemployer plan, we may be required to pay that plan an amount based on our allocable share of its underfunded status, referred to as a "withdrawal liability". However, cessation of participation in a multiemployer plan and subsequent payment of any withdrawal liability is subject to the collective bargaining process.

•

If any of the multiemployer pension plans in which we participate enter critical status, and our contributions are not sufficient to satisfy any rehabilitation plan funding schedule, we could be required under the Pension Protection Act of 2006 to make additional surcharge contributions to the multiemployer pension plan in the amount of five to ten percent of the existing contributions required by our labor agreement. Such surcharges would cease upon the ratification of a new collective bargaining agreement, and could not recur unless a plan re-entered critical status at a later date.

The discussion that follows sets forth the financial impact on our results of operations and cash flows for the years ended December 31, 2016, 2015 and 2014 from our participation in multiemployer benefit plans. As part of the overall collective bargaining process for wage and benefit levels, we have agreed to contribute certain amounts to the multiemployer benefit plans during the contract period. The multiemployer benefit plans set benefit levels and are responsible for benefit delivery to participants. Future contribution amounts to multiemployer benefit plans are determined only through collective bargaining, and we have no additional legal or constructive obligation to increase contributions beyond the agreed-upon amounts (except potential surcharges under the Pension Protection Act of 2006 as described above).

The number of employees covered by our multiemployer pension plans has remained consistent over the past three years, and there have been no significant changes that affect the comparability of 2016, 2015 and 2014 contributions. We recognize expense for the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Status of Collective Bargaining Agreements

As of December 31, 2016, we had approximately 268,000 employees employed under a national master agreement and various supplemental agreements with local unions affiliated with the Teamsters. During 2014, the Teamsters ratified a new national master agreement (“NMA”) with UPS that will expire on July 31, 2018. The economic provisions in the NMA included wage rate increases, as well as increased contribution rates for healthcare and pension benefits. Most of these economic provisions were retroactive to August 1, 2013, which was the effective date of the NMA. In 2014 and 2015, we remitted $278 and $53 million, respectively, for these retroactive economic benefits; this payment had an immaterial impact on net income, as these retroactive economic benefits had been accrued since the July 31, 2013 expiration of the prior agreement.

In addition to the retroactive economic provisions of the NMA, there were certain changes to the delivery of healthcare benefits that were effective at various dates. These changes impact approximately 36,000 full-time and 73,000 part-time active employees covered by the NMA and the UPS Freight collective bargaining agreement (collectively referred to as the “NMA Group”), as well as approximately 16,000 employees covered by other collective bargaining agreements (the “Non-NMA Group”). These provisions are discussed further below in the "Changes to the Delivery of Active and Postretirement Healthcare Benefits" section.

We have approximately 2,600 pilots who are employed under a collective bargaining agreement with the Independent Pilots Association ("IPA"), which became amendable at the end of 2011. On August 31, 2016, the IPA members voted to ratify a new five-year labor contract. Terms of the agreement became effective September 1, 2016 and run through September 1, 2021. The economic provisions in the agreement included pay increases, a signing bonus and enhanced pension benefits.

Our airline mechanics are covered by a collective bargaining agreement with Teamsters Local 2727, which became amendable November 1, 2013. We are currently in negotiations with Teamsters Local 2727. In addition, approximately 3,000 of our auto and maintenance mechanics who are not employed under agreements with the Teamsters are employed under collective bargaining agreements with the International Association of Machinists and Aerospace Workers (“IAM”) that will expire on July 31, 2019.

Multiemployer Pension Plans

The following table outlines our participation in multiemployer pension plans for the periods ended December 31, 2016, 2015 and 2014, and sets forth our calendar year contributions and accruals for each plan. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three-digit plan number. The most recent Pension Protection Act zone status available in 2016 and 2015 relates to the plans’ two most recent fiscal year-ends. The zone status is based on information that we received from the plans’ administrators and is certified by each plan’s actuary. Among other factors, plans certified in the red zone are generally less than 65% funded, plans certified in the orange zone are both less than 80% funded and have an accumulated funding deficiency or are expected to have a deficiency in any of the next six plan years, plans certified in the yellow zone are less than 80% funded, and plans certified in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicates whether a financial improvement plan (“FIP”) for yellow/orange zone plans, or a rehabilitation plan (“RP”) for red zone plans, is either pending or has been implemented. As of December 31, 2016, all plans that have either a FIP or RP requirement have had the respective FIP or RP implemented.

Our collectively-bargained contributions satisfy the requirements of all implemented FIPs and RPs and do not currently require the payment of any surcharges. In addition, minimum contributions outside of the agreed upon contractual rate are not required. For the plans detailed in the following table, the expiration date of the associated collective bargaining agreements is July 31, 2018, with the exception of the Automotive Industries Pension Plan and the IAM National Pension Fund / National Pension Plan which both have a July 31, 2019 expiration date. For all plans detailed in the following table, we provided more than 5% of the total plan contributions from all employers for 2016, 2015 and 2014 (as disclosed in the Form 5500 for each respective plan).

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain plans have been aggregated in the “all other multiemployer pension plans” line in the following table, as the contributions to each of these individual plans were not material.

	EIN / Pension Plan		Pension Protection Act Zone Status				FIP / RP Status Pending /		(in millions) UPS Contributions and Accruals												Surcharge
Pension Fund	Number		2016		2015		Implemented		2016				2015				2014				Imposed
Alaska Teamster-Employer Pension Plan	92-6003463-024		Red		Red		Yes/Implemented		$	5			$	5			$	5			No
Automotive Industries Pension Plan	94-1133245-001		Red		Red		Yes/Implemented		4				4				5				No
Central Pennsylvania Teamsters Defined Benefit Plan	23-6262789-001		Green		Green		No		38				36				33				No
Eastern Shore Teamsters Pension Fund	52-0904953-001		Green		Green		No		5				4				4				No
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund	55-6021850-001		Red		Red		Yes/Implemented		11				11				10				No
Hagerstown Motor Carriers and Teamsters Pension Fund	52-6045424-001		Red		Red		Yes/Implemented		7				7				6				No
I.A.M. National Pension Fund / National Pension Plan	51-6031295-002		Green		Green		No		31				29				27				No
International Brotherhood of Teamsters Union Local No. 710 Pension Fund	36-2377656-001		Green		Green		No		107				106				89				No
Local 705, International Brotherhood of Teamsters Pension Plan	36-6492502-001		Red		Red		Yes/Implemented		88				91				69				No
Local 804 I.B.T. & Local 447 I.A.M.—UPS Multiemployer Retirement Plan	51-6117726-001		Red		Red		Yes/Implemented		103				97				92				No
Milwaukee Drivers Pension Trust Fund	39-6045229-001		Green		Green		No		36				35				32				No
New England Teamsters & Trucking Industry Pension Fund	04-6372430-001		Red		Red		Yes/Implemented		114				110				108				No
New York State Teamsters Conference Pension and Retirement Fund	16-6063585-074		Red		Red		Yes/Implemented		91				86				81				No
Teamster Pension Fund of Philadelphia and Vicinity	23-1511735-001		Yellow		Yellow		Yes/Implemented		56				53				50				No
Teamsters Joint Council No. 83 of Virginia Pension Fund	54-6097996-001		Yellow		Yellow		Yes/Implemented		61				57				52				No
Teamsters Local 639—Employers Pension Trust	53-0237142-001		Green		Green		No		51				48				45				No
Teamsters Negotiated Pension Plan	43-6196083-001		Green		Green		No		31				30				27				No
Truck Drivers and Helpers Local Union No. 355 Retirement Pension Plan	52-6043608-001		Yellow		Yellow		Yes/Implemented		19				17				16				No
United Parcel Service, Inc.—Local 177, I.B.T. Multiemployer Retirement Plan	13-1426500-419		Red		Red		Yes/Implemented		83				83				85				No
Western Conference of Teamsters Pension Plan	91-6145047-001		Green		Green		No		694				646				604				No
Western Pennsylvania Teamsters and Employers Pension Fund	25-6029946-001		Red		Red		Yes/Implemented		28				26				24				No
All Other Multiemployer Pension Plans									56				42				53
							Total Contributions		$	1,719			$	1,623			$	1,517

Agreement with the New England Teamsters and Trucking Industry Pension Fund

In 2012, we reached an agreement with the New England Teamsters and Trucking Industry Pension Fund ("NETTI Fund"), a multiemployer pension plan in which UPS is a participant, to restructure the pension liabilities for approximately 10,200 UPS employees represented by the Teamsters. As of December 31, 2016 and 2015, we had $866 and $872 million, respectively, recognized in "other non-current liabilities" on our consolidated balance sheets representing the remaining balance of the NETTI Fund withdrawal liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of December 31, 2016 and 2015 was $861 and $841 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Multiemployer Health and Welfare Plans

We also contribute to several multiemployer health and welfare plans that cover both active and retired employees. Health care benefits are provided to participants who meet certain eligibility requirements as covered under the applicable collective bargaining unit. The following table sets forth our calendar year plan contributions and accruals. Certain plans have been aggregated in the “all other multiemployer health and welfare plans” line in the table, as the contributions to each of these individual plans are not material.

	(in millions) UPS Contributions and Accruals
Health and Welfare Fund	2016				2015				2014
Central States, South East & South West Areas Health and Welfare Fund	$	2,268			$	2,081			$	1,306
Teamsters Western Region & Local 177 Health Care Plan	571				515				239
Health & Welfare Insurance Fund Teamsters Local 653	6				6				5
Bay Area Delivery Drivers	35				34				32
Central Pennsylvania Teamsters Health & Pension Fund	25				23				21
Delta Health Systems—East Bay Drayage Drivers	27				27				24
Employer—Teamster Local Nos. 175 & 505	11				10				9
Joint Council #83 Health & Welfare Fund	33				28				26
Local 191 Teamsters Health Fund	12				11				11
Local 401 Teamsters Health & Welfare Fund	8				7				7
Local 804 Welfare Trust Fund	79				75				70
Milwaukee Drivers Pension Trust Fund—Milwaukee Drivers Health and Welfare Trust Fund	36				34				32
Montana Teamster Employers Trust	8				7				7
New York State Teamsters Health & Hospital Fund	56				53				51
North Coast Benefit Trust	8				8				9
Northern California General Teamsters (DELTA)	116				108				96
Northern New England Benefit Trust	47				42				39
Oregon / Teamster Employers Trust	34				31				29
Teamsters 170 Health & Welfare Fund	16				15				15
Teamsters Benefit Trust	43				36				40
Teamsters Local 251 Health & Insurance Plan	14				13				12
Teamsters Local 404 Health & Insurance Plan	7				7				7
Teamsters Local 638 Health Fund	40				39				35
Teamsters Local 639—Employers Health & Pension Trust Funds	27				26				26
Teamsters Local 671 Health Services & Insurance Plan	17				15				14
Teamsters Union 25 Health Services & Insurance Plan	50				46				44
Teamsters Union Local 677 Health Services & Insurance Plan	10				10				9
Truck Drivers and Helpers Local 355 Baltimore Area Health & Welfare Fund	16				15				15
Utah-Idaho Teamsters Security Fund	26				25				22
Washington Teamsters Welfare Trust	47				44				36
All Other Multiemployer Health and Welfare Plans	68				95				64
Total Contributions	$	3,761			$	3,486			$	2,352

The increases in 2015 contributions to the Central States, South East & South West Areas Health and Welfare Fund and to the Teamsters Western Region & Local 177 Health Care Plan are related to the changes to the delivery of active and postretirement healthcare benefits described below.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes to the Delivery of Active and Postretirement Healthcare Benefits

Prior to ratification, the NMA Group and Non-NMA Group employees received their healthcare benefits through UPS-sponsored active and postretirement health and welfare benefit plans. Effective June 1, 2014, we ceased providing healthcare benefits to active NMA Group employees through these UPS-sponsored benefit plans, and the responsibility for providing healthcare benefits for active employees was assumed by three separate multiemployer healthcare funds (the “Funds”). The responsibility for providing healthcare benefits for the active Non-NMA Group employees was also assumed by the Funds on various dates up to January 1, 2015, depending on the ratification date of the applicable collective bargaining agreement. We will make contributions to the Funds based on negotiated fixed hourly or monthly contribution rates for the duration of the NMA and other applicable collective bargaining agreements.

Additionally, the Funds assumed the obligation to provide postretirement healthcare benefits to the employees in the NMA Group who retire on or after January 1, 2014. The postretirement healthcare benefit obligation for the employees in the Non-NMA Group was assumed by the Funds for employees retiring on or after January 1, 2014 or January 1, 2015, depending on the applicable collective bargaining agreement. In exchange for the assumption of the obligation to provide postretirement healthcare benefits to the NMA Group and Non-NMA Group, we transferred cash totaling $2.271 billion to the Funds in the second quarter of 2014. UPS-sponsored health and welfare benefit plans retained responsibility for providing postretirement healthcare coverage for employees in the NMA Group who retired from UPS prior to January 1, 2014, and for employees in the Non-NMA Group who retired from UPS prior to the January 1, 2014 or January 1, 2015 effective date in the applicable collective bargaining agreement.

Accounting Impact of Health and Welfare Plan Changes

Income Statement Impact:

We recorded a pre-tax charge of $1.066 billion ($665 million after-tax) in the second quarter of 2014 for the health and welfare plan changes described above. The components of this charge, which was included in "compensation and benefits" expense in the statement of consolidated income, are as follows:

•	Partial Plan Curtailment: We recorded a $112 million pre-tax curtailment loss due to the elimination of future service benefit accruals. This curtailment loss represents the accelerated recognition of unamortized prior service costs.

•	Remeasurement of Postretirement Obligation: We recorded a $746 million pre-tax loss due to the remeasurement of the postretirement benefit obligations of the affected UPS-sponsored health and welfare benefit plans.

•	Settlement: We recorded a $208 million pre-tax settlement loss, which represents the recognition of unamortized actuarial losses associated with the postretirement obligation for the NMA Group.

We recorded an additional pre-tax charge of $36 million ($22 million after-tax) in the fourth quarter of 2014 upon ratification of the collective bargaining agreements covering the Non-NMA Group, related to the remeasurement and settlement of the postretirement benefit obligation associated with those employees.

Balance Sheet and Cash Flow Impact:

During 2014, as part of the health and welfare plan changes described previously, we transferred cash totaling $2.271 billion to the Funds, which was accounted for as a settlement of our postretirement benefit obligations. We received approximately $854 million of cash tax benefits (through reduced U.S. Federal and state quarterly income tax payments) in 2014.

For NMA Group employees who retired prior to January 1, 2014 and remained with the UPS-sponsored health and welfare plans, the changes to the contributions, benefits and cost sharing provisions in these plans resulted in an increase in the postretirement benefit obligation and a corresponding decrease in pre-tax AOCI of $13 million upon ratification.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

The following table indicates the allocation of goodwill by reportable segment (in millions):

	U.S. Domestic Package				International Package				Supply Chain & Freight				Consolidated
Balance on January 1, 2015	$	6			$	449			$	1,729			$	2,184
Acquired	709				—				585				1,294
Currency / Other	—				(24		)		(35		)		(59		)
Balance on December 31, 2015	$	715			$	425			$	2,279			$	3,419
Acquired	—				—				359				359
Currency / Other	—				(18		)		(3		)		(21		)
Balance on December 31, 2016	$	715			$	407			$	2,635			$	3,757

2016 Goodwill Activity:

The goodwill acquired in the Supply Chain & Freight segment is related to our December 2016 acquisition of Maze 1 Limited ("Marken"). See note 7 for further discussion of this acquisition.

The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition.

2015 Goodwill Activity:

The goodwill acquired in the U.S. Domestic Package segment was related to our August 2015 acquisition of Coyote Logistics Midco, Inc ("Coyote"). The goodwill acquired in the Supply Chain & Freight segment was related to our March 2015 acquisition of Poltraf Sp. z.o.o. ("Poltraf"), our May 2015 acquisition of Parcel Pro, Inc. ("Parcel Pro"), our June 2015 acquisition of the Insured Parcel Services division of G4S International Logistics ("IPS") and our August 2015 acquisition of Coyote.

Goodwill Impairment

We test our goodwill for impairment annually, as of October 1st, on a reporting unit basis which we own at the testing date. Our reporting units are comprised of the U.S. Domestic Package reporting unit, the Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) reporting units in the International Package reporting segment and the Forwarding, Logistics, UPS Mail Innovations, UPS Freight, The UPS Store, UPS Capital, Coyote Logistics and Marken reporting units in the Supply Chain & Freight reporting segment.

In assessing our goodwill for impairment, we initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then we utilize a two-step process to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is performed. We primarily determine the fair value of our reporting units using a discounted cash flow model, and supplement this with observable valuation multiples for comparable companies, as applicable. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step includes comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

In 2016, we utilized a qualitative assessment to determine that it was more likely than not that the reporting unit fair value exceeded the carrying value for our Europe, Asia, Americas, ISMEA, The UPS Store and UPS Capital reporting units. For the remaining reporting units owned at the annual goodwill impairment testing date, we utilized the two-step process to test goodwill for impairment. We did not have any goodwill impairment charges in 2016, 2015 or 2014. Cumulatively, our Supply Chain & Freight reporting segment has recorded $622 million of goodwill impairment charges, while our International and U.S. Domestic Package segments have not recorded any goodwill impairment charges.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

The following is a summary of intangible assets at December 31, 2016 and 2015 (in millions):

	Gross Carrying Amount				Accumulated Amortization				Net Carrying Value				Weighted- Average Amortization Period (in years)
December 31, 2016
Capitalized software	$	2,933			$	(2,157	)		$	776			5.0
Licenses	131				(70		)		61				4.1
Franchise rights	128				(90		)		38				20.0
Customer relationships	724				(85		)		639				10.8
Trade name	200				—				200				NA
Trademarks, patents and other	67				(23		)		44				6.9
Total Intangible Assets, Net	$	4,183			$	(2,425	)		$	1,758			6.5
December 31, 2015
Capitalized software	$	2,739			$	(2,026	)		$	713
Licenses	189				(116		)		73
Franchise rights	125				(83		)		42
Customer relationships	511				(35		)		476
Trade name	200				—				200
Trademarks, patents and other	61				(16		)		45
Total Intangible Assets, Net	$	3,825			$	(2,276	)		$	1,549

A trade name and licenses with a carrying value of $200 and $4 million, respectively, as of December 31, 2016 are deemed to be indefinite-lived intangible assets, and therefore are not amortized. Impairment tests for indefinite-lived intangible assets are performed on an annual basis. All of our other recorded intangible assets are deemed to be finite-lived intangibles, and are thus amortized over their estimated useful lives. Impairment tests for these intangible assets are only performed when a triggering event occurs that may indicate that the carrying value of the intangible may not be recoverable. There were no impairments of any finite-lived or indefinite-lived intangible assets in 2016 or 2015.

Amortization of intangible assets was $321, $261 and $195 million during 2016, 2015 and 2014, respectively. Expected amortization of finite-lived intangible assets recorded as of December 31, 2016 for the next five years is as follows (in millions): 2017—$378; 2018—$304; 2019—$249; 2020—$186; 2021—$126. Amortization expense in future periods will be affected by business acquisitions, software development, licensing agreements, franchise rights purchases and other factors.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. BUSINESS ACQUISITIONS

In December 2016, we acquired Marken, a global provider of supply chain solutions to the life sciences industry and leader in clinical trials material storage and distribution, which was added to our Supply Chain & Freight reporting segment. The financial results of the acquired business were not material to our results of operations.

The estimates of fair value of assets acquired and liabilities assumed are subject to change based on completion of our purchase accounting. The purchase price allocation for acquired companies can be modified for up to one year from the date of acquisition. The acquisition was funded using cash from operations.

The following table summarizes the estimated fair values of the Marken assets acquired and liabilities assumed at the acquisition date (in millions):

Marken Assets Acquired and (Liabilities) Assumed
Cash and cash equivalents	$	26
Accounts receivable	36
Other current assets	3
Deferred tax assets	4
Property, plant, and equipment	7
Goodwill	359
Intangible assets	233
Accounts payable and other current liabilities	(31		)
Deferred tax liability	(67		)
Total purchase price	$	570

The goodwill recognized of approximately $359 million is attributable to expected synergies from future growth of Marken. None of the goodwill is deductible for income tax purposes.

The intangible assets acquired of approximately $233 million primarily consist of $216 million of customer relationships (amortized over 12 years), $10 million of trade name (amortized over 3 years), $6 million capitalized software (amortized over 3-5 years) and $1 million agent network (amortized over 4 years). The carrying value of accounts receivable approximates fair value.

We recognized approximately $8 million of acquisition related costs that were expensed in 2016. These costs are included in "other expenses" within the statements of consolidated income.

In March 2015, we acquired Poltraf, a Polish-based pharmaceutical logistics company recognized for its temperature-sensitive warehousing and transportation solutions. In May 2015 and June 2015, we acquired Parcel Pro and IPS, respectively. These businesses provide services and insurance coverage for the transport of high value luxury goods. These acquisitions were funded with cash from operations. These acquisitions were not material to our consolidated balance sheets.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2015, we acquired Coyote, a U.S.-based truckload freight brokerage company for $1.829 billion. This acquisition allows us to expand our existing portfolio by adding large scale truckload freight brokerage and transportation management services to our Supply Chain & Freight reporting segment. In addition, we benefit from synergies in purchased transportation, backhaul utilization, cross-selling to customers, as well as technology systems and industry best practices. The acquisition was funded using cash from operations and issuances of commercial paper.

The following table summarizes the fair values of the Coyote assets acquired and liabilities assumed at the acquisition date (in millions):

Coyote Assets Acquired and (Liabilities) Assumed
Cash and cash equivalents	$	18
Accounts receivable	249
Other current assets	1
Property, plant, and equipment	17
Goodwill	1,241
Intangible assets	664
Other non-current assets	2
Accounts payable and other current liabilities	(132		)
Other non-current liabilities	(11		)
Deferred tax liability	(212		)
Total purchase price	$	1,837

The goodwill recognized of approximately $1.241 billion is attributable to synergies anticipated from more efficient usage of our existing transportation networks and the assembled workforce of Coyote. We have allocated $709 and $532 million of the recognized goodwill to the U.S. Domestic Package and Supply Chain & Freight segments, respectively. None of the goodwill is deductible for income tax purposes.

The intangible assets acquired of approximately $664 million primarily consist of $426 million of customer relationships (amortized over 10 years), $27 million of non-compete agreements (amortized over 4 years), and $200 million of trade name, which has an indefinite useful life. The carrying value of acquired accounts receivable approximated fair value.

We recognized approximately $17 million of acquisition related costs that were expensed in 2015. These costs are included in "other expenses" within the statements of consolidated income.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. DEBT AND FINANCING ARRANGEMENTS

The following table sets forth the principal amount, maturity or range of maturities, as well as the carrying value of our debt obligations, as of December 31, 2016 and 2015 (in millions). The carrying value of these debt obligations can differ from the principal amount due to the impact of unamortized discounts or premiums and valuation adjustments resulting from interest rate swap hedging relationships.

	Principal						Carrying Value
	Amount				Maturity		2016				2015
Commercial paper	$	3,250			2017		$	3,250			$	2,965
Fixed-rate senior notes:
1.125% senior notes	375				2017		374				372
5.50% senior notes	750				2018		769				787
5.125% senior notes	1,000				2019		1,043				1,064
3.125% senior notes	1,500				2021		1,584				1,613
2.45% senior notes	1,000				2022		986				991
2.40% senior notes	500				2026		497				—
6.20% senior notes	1,500				2038		1,481				1,481
4.875% senior notes	500				2040		489				489
3.625% senior notes	375				2042		367				367
3.40% senior notes	500				2046		491				—
8.375% Debentures:
8.375% debentures	424				2020		461				474
8.375% debentures	276				2030		282				282
Pound Sterling Notes:
5.50% notes	82				2031		76				92
5.125% notes	560				2050		535				638
Euro Senior Notes:
1.625% notes	738				2025		732				759
1.000% notes	527				2028		523				—
Floating rate senior notes	527				2020		525				544
Floating rate senior notes	833				2049 – 2066		824				600
Capital lease obligations	447				2017– 3005		447				475
Facility notes and bonds	320				2029 – 2045		319				319
Other debt	20				2017 – 2022		20				22
Total debt	$	16,004					16,075				14,334
Less: current maturities							(3,681		)		(3,018		)
Long-term debt							$	12,394			$	11,316

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Issuances

On October 19, 2016, we issued U.S. and Euro senior rate notes in two separate transactions. These senior notes consist of three separate series, as follows:

•

Two series of notes, each in the principal amount of $500 million, were issued. These notes bear interest at 2.4% and 3.4% fixed rates and are due November 2026 and November 2046, respectively. Interest on these notes is payable semi-annually, in each case beginning in May 2017. Each note is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date at a benchmark treasury yield plus 10 and 15 basis points, respectively, and accrued interest.

•

Notes in the principal amount of €500 million ($549 million) were issued. These notes bear interest at a 1.0% fixed rate and are due November 2028. Interest on these notes is payable annually, beginning in November 2017. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points and accrued interest.

Commercial Paper

We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. We had the following amounts outstanding under these programs as of December 31, 2016: $2.406 billion with an average interest rate of 0.49% and €801 million ($844 million) with an average interest rate of -0.36%. The amount of commercial paper outstanding under these programs in 2017 is expected to fluctuate.

Fixed Rate Senior Notes

We have completed several offerings of fixed rate senior notes. All of the notes pay interest semiannually, and allow for redemption of the notes by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on these notes, including the impact of the interest rate swaps, for 2016 and 2015, respectively, were as follows:

	Principal						Average Effective Interest Rate
	Value				Maturity		2016			2015
1.125% senior notes	$	375			2017		1.04	%		0.68	%
5.50% senior notes	$	750			2018		2.94	%		2.54	%
5.125% senior notes	$	1,000			2019		2.49	%		2.06	%
3.125% senior notes	$	1,500			2021		1.40	%		1.04	%
2.45% senior notes	$	1,000			2022		1.26	%		0.87	%

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.375% Debentures

The 8.375% debentures consist of two separate tranches, as follows:

•

$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.

•	$424 million of the debentures have a maturity of April 1, 2020. These debentures are not subject to redemption prior to maturity.

Interest is payable semiannually in April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2016 and 2015 was 5.43% and 5.04%, respectively.

Floating Rate Senior Notes

The floating rate senior notes bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2016 and 2015 was 0.21% and 0.01%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after 10 years at a stated percentage of par value. The notes have maturities ranging from 2049 through 2066.

In March, June and August 2016, we issued floating rate senior notes in principal balances of $118, $74 and $35 million, respectively. These notes bear interest at three-month LIBOR less 30 basis points and mature in 2066.

Capital Lease Obligations

We have certain property, plant and equipment subject to capital leases. Some of the obligations associated with these capital leases have been legally defeased. The recorded value of our property, plant and equipment subject to capital leases is as follows as of December 31 (in millions):

	2016				2015
Vehicles	$	68			$	74
Aircraft	2,291				2,289
Buildings	190				207
Accumulated amortization	(896		)		(849		)
Property, plant and equipment subject to capital leases	$	1,653			$	1,721

These capital lease obligations have principal payments due at various dates from 2017 through 3005.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Facility Notes and Bonds

We have entered into agreements with certain municipalities to finance the construction of, or improvements to, facilities that support our U.S. Domestic Package and Supply Chain & Freight operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by the municipalities, as follows:

•	Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2016 and 2015 were 0.37% and 0.03%, respectively.

•	Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2016 and 2015 were 0.36% and 0.02%, respectively.

•	Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.

•

Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. The bonds, which were due in December 2015, had a variable interest rate, and the average interest rates for 2016 and 2015 were 0.00% and 0.02%, respectively. As of December 2015, these $100 million bonds were repaid in full.

•

In September 2015, we entered into an agreement with the Delaware County, Pennsylvania Industrial Development Authority, associated with our Philadelphia, Pennsylvania airport facilities, for bonds issued with a principal balance of $100 million. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2016 and 2015 was 0.40% and 0.00%, respectively.

Pound Sterling Notes

The Pound Sterling notes consist of two separate tranches, as follows:

•	Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.

•

Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points and accrued interest.

Euro Senior Notes

The euro senior notes consist of two separate issuances, as follows:

•	Notes with a principal amount of €500 million accrue interest at a variable rate equal to three-month EURIBOR plus 43 basis points and are due in July 2020. Interest is payable quarterly on the notes, commencing in April 2016. These notes are not callable. The senior notes bear interest at a variable rate, and the average interest rates for 2016 and 2015 were 0.19% and 0.34%, respectively.

•

Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes, commencing in November 2016. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payout of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points and accrued interest.

Contractual Commitments

We lease certain aircraft, facilities, land, equipment and vehicles under operating leases, which expire at various dates through 2038. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $686, $669 and $676 million for 2016, 2015 and 2014, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the aggregate minimum lease payments under capital and operating leases, the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions).

Year	Capital Leases				Operating Leases				Debt Principal				Purchase Commitments
2017	$	72			$	368			$	3,635			$	1,358
2018	70				302				756				1,151
2019	62				221				1,001				758
2020	56				168				528				286
2021	39				111				1,501				17
After 2021	370				300				8,136				45
Total	669				$	1,470			$	15,557			$	3,615
Less: imputed interest	(222		)
Present value of minimum capitalized lease payments	447
Less: current portion	(46		)
Long-term capitalized lease obligations	$	401

As of December 31, 2016, we had outstanding letters of credit totaling approximately $1.890 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2016, we had $730 million of surety bonds written.

Available Credit

We maintain two credit agreements with a consortium of banks. One of these agreements provides revolving credit facilities of $1.5 billion, and expires on March 24, 2017. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75%. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0.00%). We are also able to request advances under this facility based on competitive bids for the applicable interest rate. There were no amounts outstanding under this facility as of December 31, 2016.

The second agreement provides revolving credit facilities of $3.0 billion, and expires on March 21, 2021. Generally, amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) JPMorgan Chase Bank’s publicly announced prime rate, (2) the Federal Funds effective rate plus 0.50%, and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion. In each case, the applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our 1-year credit default swap spread, interpolated for a period from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of this facility then in effect (but not less than a period of one year). The minimum applicable margin rate is 0.10% and the maximum applicable margin rate is 0.75% per annum. The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not less than 0.00%). We are also able to request advances under this facility based on competitive bids. There were no amounts outstanding under this facility as of December 31, 2016.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Covenants

Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2016 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2016, 10% of net tangible assets is equivalent to $2.313 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.

Fair Value of Debt

Based on the borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $17.134 and $15.524 billion as of December 31, 2016 and 2015, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.

NOTE 9. LEGAL PROCEEDINGS AND CONTINGENCIES

We are involved in a number of judicial proceedings and other matters arising from the conduct of our business activities.

Although there can be no assurance as to the ultimate outcome, we have generally denied, or believe we have a meritorious defense and will deny, liability in all litigation pending against us, including (except as otherwise noted herein) the matters described below, and we intend to defend vigorously each case. We have accrued for legal claims when, and to the extent that, amounts associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims.

For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. For matters in this category, we have indicated in the descriptions that follow the reasons that we are unable to estimate the possible loss or range of loss.

Judicial Proceedings

We are a defendant in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage-and-hour laws. At this time, we do not believe that any loss associated with these matters would have a material adverse effect on our financial condition, results of operations or liquidity.

UPS and our subsidiary The UPS Store, Inc., are defendants in Morgate v. The UPS Store, Inc. et al., an action in the Los Angeles Superior Court brought on behalf of a certified class of all franchisees who chose to rebrand their Mail Boxes Etc. franchises to The UPS Store in March 2003. Plaintiff alleges that UPS and The UPS Store, Inc. misrepresented and omitted facts to the class about the market tests that were conducted before offering the class the choice of whether to rebrand to The UPS Store. Trial is scheduled for mid-2017.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from the remaining aspects of this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious legal defenses; and (2) it remains uncertain what evidence of damages, if any, plaintiffs will be able to present. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In AFMS LLC v. UPS and FedEx Corporation, a lawsuit filed in federal court in the Central District of California in August 2010, the plaintiff asserts that UPS and FedEx violated U.S. antitrust law by conspiring to refuse to negotiate with third-party negotiators retained by shippers and by individually imposing policies that prevent shippers from using such negotiators. The Court granted summary judgment motions filed by UPS and FedEx, entered judgment in favor of UPS and FedEx, and dismissed the case. Plaintiff appealed to the Court of Appeals for the Ninth Circuit, briefing is complete and oral argument has been scheduled for March 2017. The Antitrust Division of the U.S. Department of Justice (“DOJ”) opened a civil investigation of our policies and practices for dealing with third-party negotiators. We have cooperated with this investigation. We deny any liability with respect to these matters and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from these matters including: (1) the DOJ investigation is pending; (2) the Court granted our motion for summary judgment; and (3) the appeal remains pending. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from these matters or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

We are a defendant in Ryan Wright and Julia Zislin v. United Parcel Service Canada Ltd., an action brought on behalf of a certified class of customers in the Superior Court of Justice in Ontario, Canada. Plaintiffs filed suit in February 2007, alleging inadequate disclosure concerning the existence and cost of brokerage services provided by us under applicable provincial consumer protection legislation and infringement of interest restriction provisions under the Criminal Code of Canada. Partial summary judgment was granted to us and the plaintiffs by the Ontario motions court in August 2011, when it dismissed plaintiffs' complaint under the Criminal Code and granted plaintiffs' complaint of inadequate disclosure. We appealed the Court's decision pertaining to inadequate disclosure in September 2011 and continue to vigorously defend all other allegations. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter, including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; and (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In February 2015, the State and City of New York filed suit against UPS in the U.S. District Court for the Southern District of New York, arising from alleged shipments of cigarettes to New York State and City residents. The complaint asserts claims under various federal and state laws. The complaint also includes a claim that UPS violated the Assurance of Discontinuance it entered into with the New York Attorney General in 2005 concerning cigarette deliveries. Trial was held in September 2016, and closing arguments were held in November 2016. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this case, including: (1) we are vigorously defending ourselves and believe we have a number of meritorious factual and legal defenses; and (2) it remains uncertain how the Court will resolve the State and City’s various claims and our defenses. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.

In May 2016, a purported shareowner derivative suit was filed in the Delaware Court of Chancery naming certain of UPS’s current and former officers and directors as defendants, alleging that they breached their fiduciary duties by failing to monitor UPS’s compliance with the Assurance of Discontinuance and other federal and state laws relating to cigarette deliveries. The Company’s and individual defendants’ motion to dismiss was heard in October 2016. On January 19, 2017, the Court of Chancery dismissed the plaintiffs' suit in its entirety.

We are a defendant in various other lawsuits that arose in the normal course of business. We do not believe that the eventual resolution of these other lawsuits (either individually or in the aggregate), including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our financial condition, results of operations or liquidity.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Matters

In August 2010, competition authorities in Brazil opened an administrative proceeding to investigate alleged anticompetitive behavior in the freight forwarding industry. Approximately 45 freight forwarding companies and individuals are named in the proceeding, including UPS, UPS SCS Transportes (Brasil) S.A., and a former employee in Brazil. UPS submitted its written defenses to these allegations in April 2014. These allegations have been settled for an immaterial amount.

NOTE 10. SHAREOWNERS’ EQUITY

Capital Stock, Additional Paid-In Capital, and Retained Earnings

We maintain two classes of common stock, which are distinguished from each other by their respective voting rights. Class A shares of UPS are entitled to 10 votes per share, whereas class B shares are entitled to one vote per share. Class A shares are primarily held by UPS employees and retirees, as well as trusts and descendants of the Company’s founders, and these shares are fully convertible into class B shares at any time. Class B shares are publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “UPS”. Class A and B shares both have a $0.01 par value, and as of December 31, 2016, there were 4.6 billion class A shares and 5.6 billion class B shares authorized to be issued. Additionally, there are 200 million preferred shares authorized to be issued, with a par value of $0.01 per share; as of December 31, 2016, no preferred shares had been issued.

The following is a rollforward of our common stock, additional paid-in capital, and retained earnings accounts (in millions, except per share amounts):

	2016							2015							2014
	Shares			Dollars				Shares			Dollars				Shares			Dollars
Class A Common Stock:
Balance at beginning of year	194			$	2			201			$	2			212			$	2
Common stock purchases	(4	)		—				(4	)		—				(5	)		—
Stock award plans	5			—				5			—				5			—
Common stock issuances	2			—				3			—				3			—
Conversions of class A to class B common stock	(17	)		—				(11	)		—				(14	)		—
Class A shares issued at end of year	180			$	2			194			$	2			201			$	2
Class B Common Stock:
Balance at beginning of year	693			$	7			705			$	7			712			$	7
Common stock purchases	(21	)		—				(23	)		—				(21	)		—
Conversions of class A to class B common stock	17			—				11			—				14			—
Class B shares issued at end of year	689			$	7			693			$	7			705			$	7
Additional Paid-In Capital:
Balance at beginning of year				$	—						$	—						$	—
Stock award plans				541							492							656
Common stock purchases				(898		)					(791		)					(918		)
Common stock issuances				303							316							309
Option premiums received (paid)				54							(17		)					(47		)
Balance at end of year				$	—						$	—						$	—
Retained Earnings:
Balance at beginning of year				$	6,001						$	5,726						$	6,925
Net income attributable to controlling interests				3,431							4,844							3,032
Dividends ($3.12, $2.92 and $2.68 per share)				(2,771		)					(2,649		)					(2,487		)
Common stock purchases				(1,782		)					(1,920		)					(1,744		)
Balance at end of year				$	4,879						$	6,001						$	5,726

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2016, 2015 and 2014, we repurchased a total of 25.2, 26.8 and 26.4 million shares of class A and class B common stock for $2.680, $2.711 and $2.662 billion, respectively ($2.678, $2.702 and $2.695 billion in repurchases for 2016, 2015 and 2014, respectively, are reported on the cash flow statement due to the timing of settlements). During the first quarter of 2016, we also exercised a capped call option that we entered in 2015 for which we received 0.2 million UPS class B shares. The $25 million premium payment for this capped call option reduced shareowners' equity in 2015. In total, shares repurchased and received the twelve months ended December 31, 2016 were 25.4 million shares for $2.705 billion. In May 2016, the Board of Directors approved a new share repurchase authorization of $8.0 billion, which replaced an authorization previously announced in 2013. This new share repurchase authorization has no expiration date. As of December 31, 2016, we had $6.155 billion of this share repurchase authorization remaining.

From time to time, we enter into share repurchase programs with large financial institutions to assist in our buyback of company stock. These programs allow us to repurchase our shares at a price below the weighted average UPS share price for a given period. During the fourth quarter of 2016, we entered into an accelerated share repurchase program, which allowed us to repurchase $300 million of shares (2.6 million shares). The program was completed in December 2016.

In order to lower the average cost of acquiring shares in our ongoing share repurchase program, we periodically enter into structured repurchase agreements involving the use of capped call options for the purchase of UPS class B shares. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We received (paid) net premiums of $54 and $(17) million during 2016 and 2015, respectively, related to entering into and settling capped call options for the purchase of class B shares. As of December 31, 2016, we had outstanding options for the purchase of 1.0 million shares with an average strike price of $97.27 per share that will settle in the first quarter of 2017.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Income (Loss)

We incur activity in AOCI for unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses from derivatives that qualify as hedges of cash flows and unrecognized pension and postretirement benefit costs. The activity in AOCI is as follows (in millions):

	2016				2015				2014
Foreign Currency Translation Gain (Loss):
Balance at beginning of year	$	(897	)		$	(457	)		$	(126	)
Translation adjustment (net of tax effect of $32, $0, and $105)	(119		)		(440		)		(331		)
Balance at end of year	(1,016		)		(897		)		(457		)
Unrealized Gain (Loss) on Marketable Securities, Net of Tax:
Balance at beginning of year	(1		)		—				(1		)
Current period changes in fair value (net of tax effect of $0, $(1), and $1)	—				(1		)		2
Reclassification to earnings (no tax impact in any period)	—				—				(1		)
Balance at end of year	(1		)		(1		)		—
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax:
Balance at beginning of year	67				61				(219		)
Current period changes in fair value (net of tax effect of $75, $103, and $133)	124				171				220
Reclassification to earnings (net of tax effect of $(142), $(99), and $35)	(236		)		(165		)		60
Balance at end of year	(45		)		67				61
Unrecognized Pension and Postretirement Benefit Costs, Net of Tax:
Balance at beginning of year	(2,709		)		(3,198		)		(114		)
Reclassification to earnings (net of tax effect of $1,040, $97, and $870)	1,783				195				1,462
Net actuarial gain (loss) and prior service cost resulting from remeasurements of plan assets and liabilities (net of tax effect of $(1,460), $197, and $(2,714))	(2,495		)		294				(4,546		)
Balance at end of year	(3,421		)		(2,709		)		(3,198		)
Accumulated other comprehensive income (loss) at end of year	$	(4,483	)		$	(3,540	)		$	(3,594	)

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Detail of the gains (losses) reclassified from AOCI to the statements of consolidated income for the years ended December 31, 2016, 2015 and 2014 is as follows (in millions):

	2016 Amount Reclassified from AOCI				2015 Amount Reclassified from AOCI				2014 Amount Reclassified from AOCI				Affected Line Item in the Income Statement
Unrealized Gain (Loss) on Marketable Securities:
Realized gain (loss) on sale of securities	—				—				1				Investment income
Income tax (expense) benefit	—				—				—				Income tax expense
Impact on net income	—				—				1				Net income
Unrealized Gain (Loss) on Cash Flow Hedges:
Interest rate contracts	(26		)		(24		)		(23		)		Interest expense
Foreign exchange contracts	—				(25		)		(48		)		Interest expense
Foreign exchange contracts	404				313				(24		)		Revenue
Income tax (expense) benefit	(142		)		(99		)		35				Income tax expense
Impact on net income	236				165				(60		)		Net income
Unrecognized Pension and Postretirement Benefit Costs:
Prior service costs	(172		)		(174		)		(170		)		Compensation and benefits
Curtailment and settlement loss	—				—				(356		)		Compensation and benefits
Remeasurement of benefit obligation	(2,651		)		(118		)		(1,806		)		Compensation and benefits
Income tax (expense) benefit	1,040				97				870				Income tax expense
Impact on net income	(1,783		)		(195		)		(1,462		)		Net income
Total amount reclassified for the period	$	(1,547	)		$	(30	)		$	(1,521	)		Net income

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Compensation Obligations and Treasury Stock

We maintain a deferred compensation plan whereby certain employees were previously able to elect to defer the gains on stock option exercises by deferring the shares received upon exercise into a rabbi trust. The shares held in this trust are classified as treasury stock, and the liability to participating employees is classified as “deferred compensation obligations” in the shareowners’ equity section of the consolidated balance sheets. The number of shares needed to settle the liability for deferred compensation obligations is included in the denominator in both the basic and diluted earnings per share calculations. Employees are generally no longer able to defer the gains from stock options exercised subsequent to December 31, 2004.

Activity in the deferred compensation program for the years ended December 31, 2016, 2015 and 2014 is as follows (in millions):

	2016							2015							2014
	Shares			Dollars				Shares			Dollars				Shares			Dollars
Deferred Compensation Obligations:
Balance at beginning of year				$	51						$	59						$	69
Reinvested dividends				3							3							2
Options exercise deferrals				—							—							—
Benefit payments				(9		)					(11		)					(12		)
Balance at end of year				$	45						$	51						$	59
Treasury Stock:
Balance at beginning of year	(1	)		$	(51	)		(1	)		$	(59	)		(1	)		$	(69	)
Reinvested dividends	—			(3		)		—			(3		)		—			(2		)
Options exercise deferrals	—			—				—			—				—			—
Benefit payments	—			9				—			11				—			12
Balance at end of year	(1	)		$	(45	)		(1	)		$	(51	)		(1	)		$	(59	)

Noncontrolling Interests

We have noncontrolling interests in certain consolidated subsidiaries in our International Package and Supply Chain & Freight segments. Noncontrolling interests increased $3 and $4 million for the years ended December 31, 2016 and 2015, respectively.

NOTE 11. STOCK-BASED COMPENSATION

The UPS Incentive Compensation Plan permits the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock units, and restricted performance shares and units to eligible employees. The number of shares reserved for issuance under the Incentive Compensation Plan is 27 million. Each share issued pursuant to restricted stock units and restricted performance units (collectively referred to as "Restricted Units"), stock options and other permitted awards will reduce the share reserve by one share. We had 17 million shares available to be issued under the Incentive Compensation Plan as of December 31, 2016.

The primary compensation programs offered under the UPS Incentive Compensation Plan include the UPS Management Incentive Award program, the Coyote Restricted Stock Award, the UPS Long-Term Incentive Performance Award program and the UPS Stock Option program. These awards are discussed in the following paragraphs. The total expense recognized in our income statement under all stock compensation award programs was $591, $574 and $536 million during 2016, 2015 and 2014, respectively. The associated income tax benefit recognized in our income statement was $219, $215 and $199 million during 2016, 2015 and 2014, respectively. The cash income tax benefit received from the exercise of stock options and the lapsing of Restricted Units was $207, $252 and $261 million during 2016, 2015 and 2014, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management Incentive Award Program ("MIP")

Non-executive management earning the right to receive the Management Incentive Award are determined annually by the Salary Committee, which is comprised of executive officers of UPS. Awards granted to executive officers are determined annually by the Compensation Committee of the UPS Board of Directors. Our Management Incentive Award program provides, with certain exceptions, that one-half to two-thirds of the annual Management Incentive Award will be made in Restricted Units (depending upon the level of management involved). The other one-third to one-half of the award is electable in the form of cash or unrestricted shares of class A common stock, and is fully vested at the time of grant.

Upon vesting, Restricted Units result in the issuance of the equivalent number of UPS class A common shares after required tax withholdings. Except in the case of death, disability, or retirement, Restricted Units granted for our Management Incentive Award generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. The entire grant is expensed on a straight-line basis over the requisite service period. All Restricted Units granted are subject to earlier cancellation or vesting under certain conditions. Dividends earned on Restricted Units are reinvested in additional Restricted Units at each dividend payable date.

Coyote Restricted Stock Award

In August 2015 we acquired Coyote, a U.S.-based truckload freight brokerage company. During the third quarter of 2015, we granted Restricted Units to certain eligible Coyote management employees. The vesting of Restricted Units granted under this award will vary between one and four years with an equal number of restricted units vesting at each anniversary date. The entire grant is expensed on a straight-line basis over the requisite service period (except in the case of death, disability or retirement, in which case immediate vesting occurs).

Long-Term Incentive Performance Award granted prior to 2014

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. The Restricted Units ultimately granted under the Long-Term Incentive Performance Award program were based upon the achievement of certain performance measures, including growth in consolidated revenue and operating return on invested capital during the performance award cycle, and other measures, including the achievement of an adjusted earnings per share target over the entire three-year performance award cycle. The last award granted under this program fully vested in the first quarter of 2016.

As of December 31, 2016, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Management Incentive Award program, Coyote Restricted Stock Award and Long-Term Incentive Performance Award program (granted prior to 2014):

	Shares (in thousands)			Weighted-Average Grant Date Fair Value				Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2016	11,012			$	90.71
Vested	(5,180	)		87.79
Granted	5,446			97.04
Reinvested Dividends	348			N/A
Forfeited / Expired	(151	)		95.23
Nonvested at December 31, 2016	11,475			$	94.32			1.42		$	1,315
Restricted Units Expected to Vest	11,129			$	94.33			1.41		$	1,276

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2016, 2015 and 2014 was $97.04, $100.63 and $92.35, respectively. The total fair value of Restricted Units vested was $445, $564 and $579 million in 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $512 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of three years and two months.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Incentive Performance Award granted after 2013

We award Restricted Units in conjunction with our Long-Term Incentive Performance Award program to certain eligible employees. Beginning with the Long-Term Incentive Performance grant in 2014, the performance targets are equally-weighted among consolidated operating return on invested capital, growth in currency-constant consolidated revenue and total shareowner return relative ("RTSR") to a peer group of companies. The Restricted Units granted under this award generally vest at the end of a three-year period (except in the case of death disability or retirement, in which case immediate vesting occurs on a prorated basis). The number of Restricted Units earned will be based on the percentage achievement of the performance targets set forth on the grant date. The range of percentage achievement can vary from 0% to 200% of the target award.

For the two-thirds of the award related to consolidated operating return on invested capital and growth in currency-constant consolidated revenue, we recognize the grant date fair value of these units (less estimated forfeitures) as compensation expense ratably over the vesting period, based on the number of awards expected to be earned. The remaining one-third of the award related to RTSR is valued using a Monte Carlo model. This portion of the award is recognized as compensation expense (less estimated forfeitures) ratably over the vesting period.

The weighted-average assumptions used, by year, and the calculated weighted-average fair values of the RTSR portion of the grants, are as follows:

	2016				2015				2014
Risk-free interest rate	1.00		%		0.89		%		0.65		%
Expected volatility	16.46		%		15.53		%		17.02		%
Weighted-average fair value of units granted	$	136.18			$	63.64			$	106.52
Share payout	129.08		%		65.86		%		109.84		%

There is no expected dividend yield as units earn dividend equivalents.

As of December 31, 2016, we had the following Restricted Units outstanding, including reinvested dividends, that were granted under our Long-Term Incentive Performance Award program (granted after 2013):

	Shares (in thousands)			Weighted-Average Grant Date Fair Value				Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in millions)
Nonvested at January 1, 2016	1,615			$	96.80
Vested	(800	)		97.02
Granted	926			105.50
Reinvested Dividends	70			N/A
Forfeited / Expired	(128	)		99.70
Nonvested at December 31, 2016	1,683			$	101.36			1.53		$	193
Performance Units Expected to Vest	1,590			$	101.44			1.56		$	182

The fair value of each Restricted Unit is the NYSE closing price of class B common stock on the date of grant. The weighted-average grant date fair value of Restricted Units granted during 2016, 2015 and 2014 was $105.50, $96.64 and $96.98, respectively. The total fair value of Restricted Units vested was $13 and $5 million in 2016 and 2015, respectively. As of December 31, 2016, there was $92 million of total unrecognized compensation cost related to nonvested Restricted Units. That cost is expected to be recognized over a weighted-average period of one year and nine months.

Non-qualified Stock Options

We maintain fixed stock option plans, under which options are granted to purchase shares of UPS class A common stock. Stock options granted in connection with the UPS Incentive Compensation Plan must have an exercise price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Executive officers and certain senior managers receive a non-qualified stock option grant annually, in which the value granted is determined as a percentage of salary. Options granted generally vest over a five-year period with approximately 20% of the award vesting at each anniversary date of the grant. All options granted are subject to earlier cancellation or vesting under certain conditions. The options granted will expire ten years after the date of the grant. Option holders may exercise their options via the tender of cash or class A common stock and new class A shares are issued upon exercise.

The following is an analysis of options to purchase shares of class A common stock issued and outstanding:

	Shares (in thousands)			Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2016	2,771			$	77.33
Exercised	(1,186	)		77.63
Granted	259			100.92
Forfeited / Expired	(16	)		80.88
Outstanding at December 31, 2016	1,828			$	80.45			4.26		$	62
Options Vested and Expected to Vest	1,828			$	80.45			4.26		$	62
Exercisable at December 31, 2016	1,410			$	75.07			3.01		$	56

The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted-average assumptions used, by year, and the calculated weighted-average fair values of options, are as follows:

	2016				2015				2014
Expected dividend yield	2.95		%		2.63		%		2.56		%
Risk-free interest rate	1.62		%		2.07		%		2.40		%
Expected life in years	7.5				7.5				7.5
Expected volatility	22.40		%		20.61		%		24.26		%
Weighted-average fair value of options granted	$	16.46			$	18.07			$	20.48

Expected volatilities are based on the historical returns on our stock and the implied volatility of our publicly-traded options. The expected dividend yield is based on the recent historical dividend yields for our stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time options are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of our prior grants with similar characteristics, the vesting schedule of the grants and an index of peer companies with similar grant characteristics in estimating this variable.

We received cash of $72, $56 and $85 million during 2016, 2015 and 2014, respectively, from option holders resulting from the exercise of stock options. The total intrinsic value of options exercised during 2016, 2015 and 2014 was $24, $31 and $47 million, respectively. As of December 31, 2016, there was $1 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted-average period of three years and seven months.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:

	Options Outstanding									Options Exercisable
Exercise Price Range	Shares (in thousands)			Average Life (in years)		Weighted-Average Exercise Price				Shares (in thousands)			Weighted-Average Exercise Price
$55.01 - $70.00	201			2.93		$	62.42			201			$	62.42
$70.01 - $80.00	937			1.79		72.42				921			72.34
$80.01 - $90.00	147			6.17		82.94				115			82.92
$90.01 - $110.00	543			8.49		100.31				173			99.14
	1,828			4.26		$	80.45			1,410			$	75.07

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Discounted Employee Stock Purchase Plan

We maintain an employee stock purchase plan for all eligible employees. Under this plan, shares of UPS class A common stock may be purchased at quarterly intervals at 95% of the NYSE closing price of UPS class B common stock on the last day of each quarterly period. Employees purchased 0.9, 0.9 and 0.9 million shares at average prices of $99.27, $95.41 and $95.67 per share during 2016, 2015 and 2014, respectively. This plan is not considered to be compensatory, and therefore no compensation cost is measured for the employees’ purchase rights.

NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION

We report our operations in three segments: U.S. Domestic Package operations, International Package operations and Supply Chain & Freight operations. Package operations represent our most significant business and are broken down into regional operations around the world. Regional operations managers are responsible for both domestic and export products within their geographic area.

U.S. Domestic Package

Domestic Package operations include the time-definite delivery of letters, documents and packages throughout the United States.

International Package

International Package operations include delivery to more than 220 countries and territories worldwide, including shipments wholly outside the United States, as well as shipments with either origin or destination outside the United States. Our International Package reporting segment includes the operations of our Europe, Asia, Americas and ISMEA (Indian Subcontinent, Middle East and Africa) operating segments.

Supply Chain & Freight

Supply Chain & Freight includes our Forwarding, Logistics, Coyote, Marken, UPS Mail Innovations, UPS Freight and other aggregated business units. Our forwarding, logistics and Coyote units provide services in more than 195 countries and territories worldwide and include international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services, mail and consulting services. UPS Freight offers a variety of LTL and TL services to customers in North America. Other aggregated business units within this segment include The UPS Store and UPS Capital.

In evaluating financial performance, we focus on operating profit as a segment’s measure of profit or loss. Operating profit is before investment income and other, interest expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies (see note 1), with certain expenses allocated between the segments using activity-based costing methods. Unallocated assets are comprised primarily of cash, marketable securities and certain investment partnerships.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment information as of, and for the years ended, December 31 is as follows (in millions):

	2016				2015				2014
Revenue:
U.S. Domestic Package	$	38,301			$	36,747			$	35,851
International Package	12,350				12,149				12,988
Supply Chain & Freight	10,255				9,467				9,393
Consolidated	$	60,906			$	58,363			$	58,232
Operating Profit:
U.S. Domestic Package	$	3,017			$	4,767			$	2,859
International Package	2,044				2,137				1,677
Supply Chain & Freight	406				764				432
Consolidated	$	5,467			$	7,668			$	4,968
Assets:
U.S. Domestic Package	$	23,191			$	21,701			$	20,708
International Package	8,193				7,858				7,850
Supply Chain & Freight	7,806				7,728				6,004
Unallocated	1,187				1,024				878
Consolidated	$	40,377			$	38,311			$	35,440
Depreciation and Amortization Expense:
U.S. Domestic Package	$	1,479			$	1,408			$	1,276
International Package	491				475				478
Supply Chain & Freight	254				201				169
Consolidated	$	2,224			$	2,084			$	1,923

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue by product type for the years ended December 31 is as follows (in millions):

	2016				2015				2014
U.S. Domestic Package:
Next Day Air	$	6,752			$	6,570			$	6,581
Deferred	4,082				3,903				3,672
Ground	27,467				26,274				25,598
Total U.S. Domestic Package	38,301				36,747				35,851
International Package:
Domestic	2,441				2,425				2,784
Export	9,374				9,092				9,586
Cargo	535				632				618
Total International Package	12,350				12,149				12,988
Supply Chain & Freight:
Forwarding and Logistics	6,793				5,900				5,758
Freight	2,736				2,881				3,048
Other	726				686				587
Total Supply Chain & Freight	10,255				9,467				9,393
Consolidated	$	60,906			$	58,363			$	58,232

Geographic information as of, and for the years ended, December 31 is as follows (in millions):

	2016				2015				2014
United States:
Revenue	$	48,013			$	45,309			$	43,840
Long-lived assets	$	19,253			$	18,196			$	15,902
International:
Revenue	$	12,893			$	13,054			$	14,392
Long-lived assets	$	5,898			$	5,828			$	6,105
Consolidated:
Revenue	$	60,906			$	58,363			$	58,232
Long-lived assets	$	25,151			$	24,024			$	22,007

Long-lived assets include property, plant and equipment, pension and postretirement benefit assets, long-term investments, goodwill and intangible assets.

No countries outside of the United States, nor any individual customers, provided 10% or more of consolidated revenue for the years ended December 31, 2016, 2015 or 2014.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. INCOME TAXES

The income tax expense (benefit) for the years ended December 31 consists of the following (in millions):

	2016				2015				2014
Current:
U.S. Federal	$	1,338			$	1,634			$	932
U.S. State and Local	67				88				103
Non-U.S.	177				236				185
Total Current	1,582				1,958				1,220
Deferred:
U.S. Federal	103				469				427
U.S. State and Local	31				65				(11		)
Non-U.S.	(11		)		6				(31		)
Total Deferred	123				540				385
Total Income Tax Expense	$	1,705			$	2,498			$	1,605

Income before income taxes includes the following components (in millions):

	2016				2015				2014
United States	$	4,322			$	6,348			$	3,819
Non-U.S.	814				994				818
Total Income Before Income Taxes:	$	5,136			$	7,342			$	4,637

A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31 consists of the following:

	2016			2015			2014
Statutory U.S. federal income tax rate	35.0	%		35.0	%		35.0	%
U.S. state and local income taxes (net of federal benefit)	1.5			1.7			1.2
Non-U.S. tax rate differential	(2.4	)		(1.2	)		(2.4	)
Nondeductible/nontaxable items	0.8			0.2			1.3
U.S. federal tax credits	(1.2	)		(1.3	)		(1.5	)
Other	(0.5	)		(0.4	)		1.0
Effective income tax rate	33.2	%		34.0	%		34.6	%

Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions we operate in and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.

Our effective tax rate decreased to 33.2% in 2016, compared with 34.0% in 2015 and 34.6% in 2014, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items:

2016 Discrete Items

In the fourth quarter of 2016, we recognized an income tax benefit of $978 million related to pre-tax mark-to-market losses of $2.651 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

2015 Discrete Items

During the third quarter of 2015 and after the filing of our annual federal tax returns, we reconciled our deferred tax balances and identified adjustments to be made with respect to prior years’ deferred tax balances. The adjustments resulted in a reduction of income tax expense of $66 million.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with our acquisition of Coyote Logistics (see note 7), we distributed $500 million of cash held by a Canadian subsidiary to its U.S. parent during the fourth quarter of 2015. As a result of the distribution, we recorded additional net income tax expense of $28 million.

In the fourth quarter of 2015, we recognized an income tax benefit of $39 million related to pre-tax mark-to-market losses of $118 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower average statutory tax rate than our U.S. federal statutory tax rate because it was due, in part, to non-U.S. benefit plans.

Other favorable rate impacting items in 2015 include: resolution of several U.S. state and local tax matters; the extension of favorable U.S. federal tax provisions associated with the Protecting Americans from Tax Hikes Act of 2015 related to research and development tax credits and work opportunity tax credits; and the execution of two bilateral advance pricing agreements. These agreements established intercompany transfer pricing arrangements between the U.S. and certain non-U.S. jurisdictions related to our small package operations for tax years 2010 through 2019.

2014 Discrete Items

In 2014, we recorded a $415 million tax benefit related to a pre-tax charge of $1.102 billion for certain health and welfare plan changes (see note 5). This income tax benefit was generated at a higher average statutory tax rate than our U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

In the fourth quarter of 2014, we recognized an income tax benefit of $392 million related to pre-tax mark-to-market losses of $1.062 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average statutory tax rate than the U.S. federal statutory tax rate because it included the effect of U.S. state and local taxes.

Other Items

Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through December 31, 2017 and may be extended through December 31, 2022 if additional requirements are satisfied. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $21, $25 and $21 million for 2016, 2015, and 2014, respectively.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income tax assets and liabilities are comprised of the following at December 31 (in millions):

	2016				2015
Fixed assets and capitalized software	$	(4,782	)		$	(4,776	)
Other	(756		)		(699		)
Deferred tax liabilities	(5,538		)		(5,475		)
Pension and postretirement benefits	4,236				3,915
Loss and credit carryforwards	229				261
Insurance reserves	733				730
Stock compensation	297				256
Other	681				650
Deferred tax assets	6,176				5,812
Deferred tax assets valuation allowance	(159		)		(197		)
Deferred tax asset (net of valuation allowance)	6,017				5,615
Net deferred tax asset	$	479			$	140
Amounts recognized in the consolidated balance sheets:
Deferred tax assets	$	591			$	255
Deferred tax liabilities	(112		)		(115		)
Net deferred tax asset	$	479			$	140

The valuation allowance changed by $(38), $(11) and $(43) million during the years ended December 31, 2016, 2015 and 2014, respectively.

We have a U.S. federal capital loss carryforward of $33 million as of December 31, 2016 which expires December 31, 2021. In addition, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):

	2016				2015
U.S. state and local operating loss carryforwards	$	603			$	894
U.S. state and local credit carryforwards	$	70			$	53

The U.S. state and local operating loss carryforwards expire at varying dates through 2036. The U.S. state and local credits can be carried forward for periods ranging from three years to indefinitely. We also have non-U.S. loss carryforwards of $479 million as of December 31, 2016, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain non-U.S. and state carryforwards, due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions.

Undistributed earnings of foreign subsidiaries amounted to $5.504 billion at December 31, 2016. Those earnings are considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to income taxes and withholding taxes payable in various jurisdictions, which could potentially be offset by foreign tax credits. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the activity related to our unrecognized tax benefits (in millions):

	Tax				Interest				Penalties
Balance at January 1, 2014	$	191			$	40			$	4
Additions for tax positions of the current year	15				—				—
Additions for tax positions of prior years	51				13				—
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(74		)		(8		)		—
Settlements during the period	(10		)		(2		)		—
Lapses of applicable statute of limitations	(1		)		(1		)		(1		)
Balance at December 31, 2014	172				42				3
Additions for tax positions of the current year	24				—				—
Additions for tax positions of prior years	45				21				3
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(85		)		(8		)		—
Settlements during the period	(6		)		(2		)		—
Lapses of applicable statute of limitations	(2		)		—				—
Balance at December 31, 2015	148				53				6
Additions for tax positions of the current year	17				—				—
Additions for tax positions of prior years	20				10				—
Reductions for tax positions of prior years for:
Changes based on facts and circumstances	(41		)		(13		)		—
Settlements during the period	—				—				—
Lapses of applicable statute of limitations	—				—				—
Balance at December 31, 2016	$	144			$	50			$	6

The total amount of gross unrecognized tax benefits as of December 31, 2016, 2015 and 2014 that, if recognized, would affect the effective tax rate were $142, $147 and $166 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense.

We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2013.

A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):

	2016				2015				2014
Numerator:
Net income attributable to common shareowners	$	3,431			$	4,844			$	3,032
Denominator:
Weighted-average shares	878				896				913
Deferred compensation obligations	1				1				1
Vested portion of restricted shares	4				4				2
Denominator for basic earnings per share	883				901				916
Effect of Dilutive Securities:
Restricted performance units	3				4				7
Stock options	1				1				1
Denominator for diluted earnings per share	887				906				924
Basic Earnings Per Share	$	3.89			$	5.38			$	3.31
Diluted Earnings Per Share	$	3.87			$	5.35			$	3.28

Diluted earnings per share for the years ended December 31, 2016, 2015 and 2014 exclude the effect of 0.2, 0.2 and 0.1 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive.

NOTE 15. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

Risk Management Policies

We are exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, we enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates, commodity prices and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. As we use price sensitive instruments to hedge a certain portion of our existing and anticipated transactions, we expect that any loss in value for those instruments generally would be offset by increases in the value of those hedged transactions. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Credit Risk Management

The forward contracts, swaps and options discussed below contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, we minimize such risk exposures for these instruments by limiting the counterparties to banks and financial institutions that meet established credit guidelines and by monitoring counterparty credit risk to prevent concentrations of credit risk with any single counterparty.

We have agreements with all of our active counterparties (covering the majority of our derivative positions) containing early termination rights and/or zero threshold bilateral collateral provisions whereby cash is required based on the net fair value of derivatives associated with those counterparties. Events such as a counterparty credit rating downgrade (depending on the ultimate rating level) could also allow us to take additional protective measures such as the early termination of trades. At December 31, 2016 and 2015, we held cash collateral of $575 and $717 million, respectively, under these agreements; this collateral is included in "cash and cash equivalents" on the consolidated balance sheets and its use by UPS is not restricted.

In connection with the agreements described above, we could also be required to provide additional collateral or terminate transactions with certain counterparties in the event of a downgrade of our credit rating. The amount of collateral required would be determined by the net fair value of the associated derivatives with each counterparty. At December 31, 2016 and 2015, no collateral was required to be posted with any of our counterparties; however, the aggregate fair value of instruments not covered by the zero threshold bilateral collateral provisions that were in a net liability position was $10 million at December 31, 2016.

We have not historically incurred, and do not expect to incur in the future, any losses as a result of counterparty default.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting Policy for Derivative Instruments

We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the derivative, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.

A cash flow hedge refers to hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or hedge components excluded from the assessment of effectiveness, are recognized in the statements of consolidated income during the current period.

A fair value hedge refers to hedging the exposure to changes in the fair value of an existing asset or liability on the consolidated balance sheets that is attributable to a particular risk. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument is recognized in the statements of consolidated income during the current period, as well as the offsetting gain or loss on the hedged item.

A net investment hedge refers to the use of cross currency swaps, forward contracts or foreign currency denominated debt to hedge portions of our net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the cumulative translation adjustment within AOCI. The remainder of the change in value of such instruments is recorded in earnings.

Types of Hedges

Commodity Risk Management

Currently, the fuel surcharges that we apply to our domestic and international package and LTL services are the primary means of reducing the risk of adverse fuel price changes on our business. We periodically enter into option and future contracts on energy commodity products to manage the price risk associated with forecasted transactions involving refined fuels, principally jet-A, diesel and unleaded gasoline. The objective of the hedges is to reduce the variability of cash flows, due to changing fuel prices, associated with the forecasted transactions involving those products. We have designated and account for these contracts as cash flow hedges of the underlying forecasted transactions involving these fuel products and, therefore, the resulting gains and losses from these hedges are recognized as a component of fuel expense or revenue when the underlying transactions occur.

Foreign Currency Risk Management

To protect against the reduction in value of forecasted foreign currency cash flows from our international package business, we maintain a foreign currency cash flow hedging program. Our most significant foreign currency exposures relate to the Euro, British Pound Sterling, Canadian Dollar, Chinese Renminbi and Hong Kong Dollar. We hedge portions of our forecasted revenue denominated in foreign currencies with foreign currency option and forward contracts. We have designated and account for these contracts as cash flow hedges of anticipated foreign currency denominated revenue and, therefore, the resulting gains and losses from these hedges are recognized as a component of international package revenue when the underlying sales transactions occur.

We also hedge portions of our anticipated cash settlements of intercompany transactions subject to foreign currency remeasurement using foreign currency forward contracts. We have designated and account for these contracts as cash flow hedges of forecasted foreign currency denominated transactions, and therefore the resulting gains and losses from these hedges are recognized as a component of investment income and other when the underlying transactions are subject to currency remeasurement.

We hedge our net investment in certain foreign operations with foreign currency denominated debt instruments. The use of foreign denominated debt as the hedging instrument allows the debt to be remeasured to cumulative translation adjustment within AOCI to offset the translation risk from those investments. Any ineffective portion of net investment hedging is recognized as a component of investment income and other. Balances in the cumulative translation adjustment accounts remain until the sale or liquidation of the foreign entity.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Risk Management

Our indebtedness under our various financing arrangements creates interest rate risk. We use a combination of derivative instruments as part of our program to manage the fixed and floating interest rate mix of our total debt portfolio and related overall cost of borrowing. The notional amount, interest payment date and maturity date of the swaps match the terms of the associated debt being hedged. Interest rate swaps allow us to maintain a target range of floating rate debt within our capital structure.

We have designated and account for the majority of our interest rate swaps that convert fixed rate interest payments into floating rate interest payments as hedges of the fair value of the associated debt instruments. Therefore, the gains and losses resulting from fair value adjustments to the interest rate swaps and fair value adjustments to the associated debt instruments are recorded to interest expense in the period in which the gains and losses occur. We have designated and account for interest rate swaps that convert floating rate interest payments into fixed rate interest payments as cash flow hedges of the forecasted payment obligations. The gains and losses resulting from fair value adjustments to the interest rate swaps are recorded to AOCI.

We periodically hedge the forecasted fixed-coupon interest payments associated with anticipated debt offerings, using forward starting interest rate swaps, interest rate locks or similar derivatives. These agreements effectively lock a portion of our interest rate exposure between the time the agreement is entered into and the date when the debt offering is completed, thereby mitigating the impact of interest rate changes on future interest expense. These derivatives are settled commensurate with the issuance of the debt, and any gain or loss upon settlement is amortized as an adjustment to the effective interest yield on the debt.

Outstanding Positions

The notional amounts of our outstanding derivative positions were as follows as of December 31, 2016 and 2015 (in millions):

			2016			2015
Currency Hedges:
Euro	EUR		3,702			3,750
British Pound Sterling	GBP		1,380			1,140
Canadian Dollar	CAD		1,053			177
Indian Rupee	INR		76			—
Mexican Peso	MXN		—			3,863
Japanese Yen	JPY		3,972			20,000
Singapore Dollar	SGD		32			—
Interest Rate Hedges:
Fixed to Floating Interest Rate Swaps	USD		5,799			5,799
Floating to Fixed Interest Rate Swaps	USD		778			778
Investment Market Price Hedges:
Marketable Securities	EUR		76			496

As of December 31, 2016, we had no outstanding commodity hedge positions.

The maximum term over which we are hedging exposures to the variability of cash flow is 16 years.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Recognition

The following table indicates the location on the consolidated balance sheets in which our derivative assets and liabilities have been recognized, and the related fair values of those derivatives as of December 31, 2016 and 2015 (in millions). The table is segregated between those derivative instruments that qualify and are designated as hedging instruments and those that are not, as well as by type of contract and whether the derivative is in an asset or liability position.

We have master netting arrangements with substantially all of our counterparties giving us the right of offset for our derivative positions. However, we have not elected to offset the fair value positions of our derivative contracts recorded on our consolidated balance sheets. The columns labeled "net amounts if right of offset had been applied" indicate the potential net fair value positions by type of contract and location on the consolidated balance sheets had we elected to apply the right of offset.

			Gross Amounts Presented in Consolidated Balance Sheets								Net Amounts if Right of Offset had been Applied
Asset Derivatives	Balance Sheet Location		2016				2015				2016				2015
Derivatives designated as hedges:
Foreign exchange contracts	Other current assets		$	176			$	408			$	176			$	408
Foreign exchange contracts	Other non-current assets		131				92				126				92
Interest rate contracts	Other non-current assets		137				204				119				185
Derivatives not designated as hedges:
Foreign exchange contracts	Other current assets		1				2				1				—
Investment market price contracts	Other current assets		—				5				—				—
Interest rate contracts	Other non-current assets		42				57				40				53
Total Asset Derivatives			$	487			$	768			$	462			$	738

			Gross Amounts Presented in Consolidated Balance Sheets								Net Amounts if Right of Offset had been Applied
Liability Derivatives	Balance Sheet Location		2016				2015				2016				2015
Derivatives Designated As Hedges:
Interest rate contracts	Other current liabilities		1				—				1				—
Foreign exchange contracts	Other non-current liabilities		6				—				1				—
Interest rate contracts	Other non-current liabilities		21				19				3				—
Derivatives Not Designated As Hedges:
Foreign exchange contracts	Other current liabilities		—				12				—				10
Interest rate contracts	Other current liabilities		—				—				—				—
Investment market price contracts	Other current liabilities		10				9				10				4
Interest rate contracts	Other non-current liabilities		7				13				5				9
Total Liability Derivatives			$	45			$	53			$	20			$	23

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Statement and AOCI Recognition

The following table indicates the amount of gains and losses that have been recognized in AOCI within "unrealized gain (loss) on cash flow hedges" for the years ended December 31, 2016 and 2015 for those derivatives designated as cash flow hedges (in millions):

Derivative Instruments in Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
	2016				2015
Interest rate contracts		$	1			$	(1	)
Foreign exchange contracts		198				275
Total		$	199			$	274

As of December 31, 2016, $92 million of pre-tax gains related to cash flow hedges that are currently deferred in AOCI are expected to be reclassified to income over the 12 month period ended December 31, 2017. The actual amounts that will be reclassified to income over the next 12 months will vary from this amount as a result of changes in market conditions.

The amount of ineffectiveness recognized in income on derivative instruments designated in cash flow hedging relationships was immaterial for the years ended December 31, 2016, 2015 and 2014.

The following table indicates the amount of gains and losses that have been recognized in AOCI within "foreign currency translation gain (loss)" for the years ended December 31, 2016 and 2015 for those instruments designated as net investment hedges (in millions):

Non-derivative Instruments in Net Investment Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Debt (Effective Portion)
	2016				2015
Foreign denominated debt		$	119			$	(33	)
Total		$	119			$	(33	)

The amount of ineffectiveness recognized in income on non-derivative instruments designated in net investment hedging relationships was immaterial for the years ended December 31, 2016, 2015 and 2014.

The following table indicates the amount and location in the statements of consolidated income in which derivative gains and losses, as well as the associated gains and losses on the underlying exposure, have been recognized for those derivatives designated as fair value hedges for the years ended December 31, 2016 and 2015 (in millions):

Derivative Instruments in Fair Value Hedging Relationships		Location of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income								Hedged Items in Fair Value Hedging Relationships		Location of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		2016				2015						2016				2015
Interest rate contracts		Interest Expense		$	(71	)		$	(7	)		Fixed-Rate Debt and Capital Leases		Interest Expense		$	71			$	7

Additionally, we maintain some interest rate swaps, foreign currency forwards, investment market price forwards and commodity contracts that are not designated as hedges. These interest rate swap contracts are intended to provide an economic hedge of portions of our outstanding debt. These foreign exchange forward contracts are intended to provide an economic offset to foreign currency remeasurement risks for certain assets and liabilities in our consolidated balance sheets. These investment market price forward contracts are intended to provide an economic offset to fair value fluctuations of certain investments in marketable securities. These commodity contracts are intended to provide a short-term economic offset to fuel expense changes due to price fluctuations.

We also periodically terminate interest rate swaps and foreign currency options by entering into offsetting swap and foreign currency positions with different counterparties. As part of this process, we de-designate our original swap and foreign currency contracts. These transactions provide an economic offset that effectively eliminates the impact of changes in market valuation.

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the amounts recorded in the statements of consolidated income related to fair value changes and settlements of these foreign currency forwards, interest rate swaps, investment market price and commodity contracts not designated as hedges for the years ended December 31, 2016 and 2015 (in millions):

Derivative Instruments Not Designated in Hedging Relationships		Location of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		2016				2015
Commodity contracts		Fuel Expense		$	—			$	(2	)
Foreign exchange contracts		Other Operating Expenses		—				22
Foreign exchange contracts		Investment income and other		(145		)		43
Investment market price contracts		Investment income and other		(5		)		(5		)
Foreign exchange contracts		Interest Expense		—				(14		)
Interest rate contracts		Interest Expense		(8		)		(7		)
Total				$	(158	)		$	37

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

Our foreign currency, interest rate and investment market price derivatives are largely comprised of over-the-counter derivatives, which are primarily valued using pricing models that rely on market observable inputs such as yield curves, currency exchange rates and commodity forward prices, and therefore are classified as Level 2. The fair values of our derivative assets and liabilities as of December 31, 2016 and 2015 by hedge type are as follows (in millions):

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
2016
Assets:
Foreign Exchange Contracts		$	—			$	308			$	—			$	308
Interest Rate Contracts		—				179				—				179
Total		$	—			$	487			$	—			$	487
Liabilities:
Foreign Exchange Contracts		$	—			$	6			$	—			$	6
Investment Market Price Contracts		—				10				—				10
Interest Rate Contracts		—				29				—				29
Total		$	—			$	45			$	—			$	45
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
2015
Assets:
Foreign Exchange Contracts		$	—			$	502			$	—			$	502
Investment Market Price Contracts		—				5				—				5
Interest Rate Contracts		—				261				—				261
Total		$	—			$	768			$	—			$	768
Liabilities:
Foreign Exchange Contracts		$	—			$	12			$	—			$	12
Investment Market Price Contracts		—				9				—				9
Interest Rate Contracts		—				32				—				32
Total		$	—			$	53			$	—			$	53

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. QUARTERLY INFORMATION (UNAUDITED)

Our revenue, segment operating profit, net income, basic and diluted earnings per share on a quarterly basis are presented below (in millions, except per share amounts):

	First Quarter								Second Quarter								Third Quarter								Fourth Quarter
	2016				2015				2016				2015				2016				2015				2016				2015
Revenue:
U.S. Domestic Package	$	9,084			$	8,814			$	9,015			$	8,808			$	9,289			$	8,860			$	10,913			$	10,265
International Package	2,914				2,970				3,077				3,045				3,024				2,959				3,335				3,175
Supply Chain & Freight	2,420				2,193				2,537				2,242				2,615				2,418				2,683				2,614
Total revenue	14,418				13,977				14,629				14,095				14,928				14,237				16,931				16,054
Operating Profit (Loss):
U.S. Domestic Package	1,102				1,024				1,233				1,201				1,252				1,258				(570		)		1,284
International Package	574				498				613				552				576				507				281				580
Supply Chain & Freight	147				151				192				207				206				219				(139		)		187
Total operating profit	1,823				1,673				2,038				1,960				2,034				1,984				(428		)		2,051
Net Income	$	1,131			$	1,026			$	1,269			$	1,230			$	1,270			$	1,257			$	(239	)		$	1,331
Net Income Per Share:
Basic	$	1.27			$	1.13			$	1.43			$	1.37			$	1.44			$	1.40			$	(0.27	)		$	1.49
Diluted	$	1.27			$	1.12			$	1.43			$	1.35			$	1.44			$	1.39			$	(0.27	)		$	1.48

Operating profit for the quarter ended December 31, 2016 was impacted by a mark-to-market loss of $2.651 billion on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $1.908 billion, International Package $425 million and Supply Chain & Freight $318 million). This loss reduced fourth quarter net income by $1.673 billion, and basic and diluted earnings per share by $1.91.

Operating profit for the quarter ended December 31, 2015 was impacted by a mark-to-market loss of $118 million on our pension and postretirement benefit plans related to the remeasurement of plan assets and liabilities recognized outside of a 10% corridor (allocated as follows—U.S. Domestic Package $62 million, International Package $44 million and Supply Chain & Freight $12 million). This loss reduced net income by $79 million, and basic and diluted earnings per share by $0.09.