General Dynamics 2015 Annual Report Download - page 37

While this assessment continues, we have not yet selected a transition
date or method nor have we yet determined the effect of the standard
on our Consolidated Financial Statements. We expect this
determination will near completion in the second half of 2016. Because
the new standard will impact our business processes, systems and
controls, we have developed a comprehensive change management
project plan to guide the implementation.
The required adoption of the ASU will preclude our use of the
reallocation method of recognizing revisions in estimated profit on
contracts discussed above. As changes in estimated profit will be
recognized in the period they are identified (cumulative catch-up
method), rather than prospectively over the remaining contract term,
we expect the impact of revisions of contract estimates may be larger
and potentially more variable from period to period. Anticipated losses
on contracts will continue to be recognized in the quarter they are
identified.
Goodwill and Intangible Assets. Goodwill represents the
purchase price paid in excess of the fair value of net tangible and
intangible assets acquired. Goodwill is not amortized but is subject to
an impairment test on an annual basis and when circumstances
indicate that an impairment is more likely than not. Such
circumstances include a significant adverse change in the business
climate for one of our reporting units or a decision to dispose of a
reporting unit or a significant portion of a reporting unit. The test for
goodwill impairment is a two-step process that requires a significant
level of estimation and use of judgment by management, particularly
the estimate of the fair value of our reporting units. We estimate the
fair value of our reporting units based primarily on the discounted
projected cash flows of the underlying operations. This requires
numerous assumptions, including the timing of work embedded in our
backlog, our performance and profitability under our contracts, our
success in securing future business, the appropriate risk-adjusted
interest rate used to discount the projected cash flows, and terminal
value growth and earnings rates applied to the final year of projected
cash flows. Due to the variables inherent in our estimates of fair value,
differences in assumptions may have a material effect on the result of
our impairment analysis. To assess the reasonableness of our
discounted projected cash flows, we compare the sum of our reporting
units’ fair value to our market capitalization and calculate an implied
control premium (the excess of the sum of the reporting units’ fair
values over the market capitalization). Additionally, we evaluate the
reasonableness of each reporting unit’s fair value by comparing the fair
value to comparable peer companies and recent comparable market
transactions.
We completed the required annual goodwill impairment test as of
December 31, 2015. The first step of the goodwill impairment test
compares the fair values of our reporting units to their carrying values.
Our reporting units are consistent with our business groups. The
estimated fair values for each of our reporting units were in excess of
their respective carrying values as of December 31, 2015.
We review intangible assets subject to amortization for impairment
whenever events or changes in circumstances indicate that the carrying
value of the asset may not be recoverable. We assess the recoverability
of the carrying value of assets held for use based on a review of
projected undiscounted cash flows. Impairment losses, where identified,
are determined as the excess of the carrying value over the estimated
fair value of the long-lived asset.
Commitments and Contingencies. We are subject to litigation and
other legal proceedings arising either from the ordinary course of our
business or under provisions relating to the protection of the
environment. Estimating liabilities and costs associated with these
matters requires the use of judgment. We record a charge against
earnings when a liability associated with claims or pending or threatened
litigation is probable and when our exposure is reasonably estimable.
The ultimate resolution of our exposure related to these matters may
change as further facts and circumstances become known.
Deferred Contract Costs. Certain costs incurred in the performance
of our government contracts are recorded under GAAP but are not
allocable currently to contracts. Such costs include a portion of our
estimated workers’ compensation obligations, other insurance-related
assessments, pension and other post-retirement benefits, and
environmental expenses. These costs will become allocable to contracts
generally after they are paid. We have elected to defer or inventory these
costs in contracts in process until they can be allocated to contracts. We
expect to recover these costs through ongoing business, including
existing backlog and probable follow-on contracts. We regularly assess
the probability of recovery of these costs. This assessment requires that
we make assumptions about future contract costs, the extent of cost
recovery under our contracts and the amount of future contract activity.
These estimates are based on our best judgment. If the backlog in the
future does not support the continued deferral of these costs, the
profitability of our remaining contracts could be adversely affected.
Retirement Plans. Our defined-benefit pension and other post-
retirement benefit costs and obligations depend on several assumptions
and estimates. The key assumptions include interest rates used to
discount estimated future liabilities and projected long-term rates of
return on plan assets. We determine the long-term rate of return on
assets based on consideration of historical and forward-looking returns
and the current and expected asset allocation strategy. We base the
discount rate on a current yield curve developed for a portfolio of high-
quality fixed-income investments with maturities consistent with the
projected benefit payout period.
Beginning in 2016, we refined the method used to determine the
service and interest cost components of our net periodic benefit cost.
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