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overtheremaining lifeofthecontractbasedoneither inputmeasures
(e.g., costs incurred)oroutputmeasures (e.g., contractmilestones or
units delivered), asappropriate to thecircumstances. Wherean interim
outputmeasureisreliably determinableand representativeofprogress
toward completion,weuse such outputmeasures. Otherwise, we use
inputmeasures.
We generally measureprogress toward completiononcontracts in our
defense businesses basedontheproportionofcosts incurredto date
relativetototal estimatedcosts atcompletionorbasedonunitdeliveries
underthecontract. Our contracts forthemanufactureofbusiness-jet
aircraftusually providefortwo majorphases: themanufactureofthe
“green” aircraft(i.e., beforeexteriorpainting and installationof
customer-selectedinteriorsand optional avionics) and its completion.We
record revenueat two contractual milestones: whengreenaircraftare
deliveredto, and acceptedby,thecustomerandwhenthecustomer
accepts final delivery ofthefully outfitted aircraft. We donot recognize
revenueatgreendelivery unless (1)acontracthasbeenexecutedwith
thecustomer and (2) thecustomercanbeexpectedto satisfy its obligations
underthecontract, asevidencedbythereceiptofdeposits fromthe
customerandotherfactors.
We includerevisionsofestimatedprofits oncontracts in earningsunder
thereallocationmethodratherthan thecumulativecatch-up method.
Underthereallocationmethod,theimpactofrevisionsin
estimates isrecognizedprospectively overtheremaining contractterm,
whileunderthecumulativecatch-up methodsuch impactwould be
recognizedimmediately.If a revisedestimate ofcontractprofitabilityreveals
an anticipatedloss onthecontract, we recognize theloss in theperioditis
identified.Anticipatedlosses coverallcosts allocabletothecontracts,
including general and administrativeexpenses ong
overnmentcontracts.
We use thereallocationmethodbecause we believethemajorityof
factorsthattypically resultin changes in estimates oftotal contract
revenue, total costs ortheextentofprogress toward completiononour
long-term contracts affectboththeperiodinwhich thechangeis
identifiedandfutureperiods. We believethese changes generally reflect
expectationsastofutureperformanceand,therefore, thereallocation
methodisthemethodthatbest matches our revenues and earningsin
theperiodsin which theyareearned.Whilewehaveappliedthismethod
consistently formorethan 30 years, most contractorsuse thecumulative
catch-up method.
Thepercentage-of-completionmethodof accounting involves theuse
of variousestimating techniques to projectcosts atcompletion,and in
somecases includes estimates ofrecoveries assertedagainst the
customerfor changes in specificationsorotherdisputes. Contract
estimates involvevariousassumptionsand projectionsrelativetothe
outcomeoffutureevents overaperiodofseveral years, including future
laborproductivity and availability,thenatureand complexityofthework
to beperformed,thecost and availabilityofmaterials, theimpact
ofdelayedperformance, theavailabilityandtiming of funding fromthe
customer,and thetiming ofproductdeliveries. These estimates are
basedonour best judgment. Asignificantchangein oneormoreofthese
estimates could affecttheprofitabilityofoneormoreofour contracts. We
review our contract estimates regularly to assess revisionsin contract
values and estimatedcosts atcompletionandreflectchanges in
estimates in thecurrentand futureperiodsunderthereallocationmethod.
We recognize revenuearising fromclaimseitherasincomeorasan
offset against apotential loss only whentheamountoftheclaim can be
estimatedreliably and its realizationisprobable. In evaluating these
criteria,weconsiderthecontractual/legal basisfortheclaim,thecause
ofanyadditional costs incurred,thereasonableness ofthose costs and
theobjectiveevidenceavailabletosupporttheclaim.Werecognize
revenuefromaward orincentivefees whenthereisabasistoreasonably
estimate theamountofthefee. Estimates ofaward orincentivefees are
basedonactual award experienceand anticipatedperformance.
Goodwill.Since1995, we haveacquired57businesses atatotal
cost of approximately $21 billion,including three in 2010. In connection
withthese acquisitions, we haverecognized$12.6 billionofgoodwill.
Goodwill represents thepurchase pricepaid in excess ofthefair valueof
identifiablenet tangibleand intangibleassets acquired.Goodwill isnot
amortizedbutissubjecttoan impairmenttestonanannualbasisand
when circumstances indicate thatan impairmentismorelikely than not.
Thetestforgoodwill impairmentisatwo-stepprocess thatrequires a
significantlevelofestimationbymanagement, particularly theestimate
ofthefair valueofour reporting units. These estimates requiretheuse of
judgment. We estimate thefair valueofour reporting units basedonthe
discountedprojectedcashflows oftheunderlying operations. This
requires numerousassumptions, including thetiming ofwork embedded
in our backlog,our performanceand profitabilityunderour contracts, our
success in securing futurebusiness and theappropriate interest rate
usedto discounttheprojectedcashflows. Thisdiscountedcashflow
analysisiscorroboratedby“top-down” analyses, including a market
assessmentofour enterprise value. Beyond theannual impairmenttest,
we review forfactorsonaquarterly basisthatmay lead ustoperform a
goodwill impairment test, such asasignificantadverse changein the
business climate foroneofour reporting units oradecisionto dispose of
areporting unitorasignificantportionofareporting unit. We have
recordednogoodwill impairmenttodate and donot anticipate any
reasonably possiblecircumstances thatwould lead to an impairmentin
theforeseeablefuture. Thefair valueofeach ofour reporting units on
December31,2010, substantially exceededits carrying value.
Commitmentsand Contingencies. We aresubjecttolitigationand
otherlegal proceedingsarising eitheroutoftheordinary course ofour
business orunderprovisionsrelating to theprotectionoftheenvironment.
Estimating liabilities and costs associatedwiththese mattersrequires the
use ofjudgment. We record a chargeagainst earningswhen a liability
associatedwith claimsorpending orthreatenedlitigationmattersis
probableand whenour exposureisreasonably estimable. Theultimate
resolutionofour exposurerelatedto these mattersmay changeas
furtherfacts and circumstances becomeknown.
General Dynamics Annual Report • 201034