Lockheed Martin 1996 Annual Report Download - page 72

Notes to Consolidated Financial Statements
December 31, 1996
Note 1 — Summary of Significant
Accounting Policies
Organization — Lockheed Martin Corporation (Lockheed
Martin or the Corporation) is engaged in the design, manufacture,
integration and operation of a broad array of products and services
ranging from aircraft, spacecraft and launch vehicles to energy
management, missiles, electronics, and information systems. The
Corporation serves customers in both domestic and international
defense and civilian markets, with its principal customers being
agencies of the US. Government.
Basis of consolidation and use of estimates —
The consolidated financial statements include the accounts of
wholly-owned and majority-owned subsidiaries. All material inter-
company balances and transactions have been eliminated in con-
solidation. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions, in particular esti-
mates of anticipated contract costs and revenues utilized in the
earnings recognition process, that affect the reported amounts in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Classifications — Receivables and inventories are primarily
attributable to long-term contracts or programs in progress for
which the related operating cycles are longer than one year. In
accordance with industry practice, these items are included in
current assets.
Certain amounts for the prior years have been reclassified to
conform with the 1996 presentation.
Cash and cash equivalents — Cash and cash equivalents
are net of outstanding checks that are funded daily as presented for
payment. Cash equivalents are generally comprised of highly liquid
instruments with maturities of three months or less when pur-
chased. Due to the short maturity of these instruments, carrying
value on the Corporation's consolidated balance sheet approxi-
mates fair value.
Inventories — Inventories are stated at the lower of cost or esti-
mated net realizable value. Costs on long-term contracts and pro-
grams in progress represent recoverable costs incurred for
production, allocable operating overhead, and, where appropriate,
research and development and general and administrative
expenses, less amounts attributed to cost of sales. Pursuant to con-
tract provisions, agencies of the U.S. Government and other cus-
tomers have title to, or a security interest in, certain inventories as a
result of progress payments and advances. General and administra-
tive expenses related to commercial products and services provided
essentially under commercial terms and conditions are expensed as
incurred. Costs of other product and supply inventories are princi-
pally determined by the first-in, first-out or average cost methods.
Property, plant and equipment — Property, plant and
equipment are carried principally at cost. Depreciation is provided
on plant and equipment generally using accelerated methods of
depreciation during the first half of the estimated useful lives of the
assets; thereafter, straight-line depreciation generally is used.
Estimated useful lives generally range from 8 years to 40 years for
buildings and 2 years to 20 years for machinery and equipment.
Intangible assets — Intangible assets related to contracts and
programs acquired are amortized over the estimated periods of
benefit (15 years or less) and are displayed on the consolidated bal-
ance sheet net of accumulated amortization of $505 million and
$400 million at December 31, 1996 and 1995, respectively. Cost in
excess of net assets acquired (goodwill) is amortized ratably over
appropriate periods, primarily 40 years, and is displayed on the
consolidated balance sheet net of accumulated amortization of
$617 million and $438 million at December 31, 1996 and 1995,
respectively. The carrying values of intangible assets are reviewed
if the facts and circumstances indicate potential impairment of
their carrying value, and any impairment determined is recorded in
the current period.
Environmental matters — The Corporation records a lia-
bility for environmental matters when it is probable that a liability
has been incurred and the amount can be reasonably estimated. A
substantial portion of these costs are expected to be reflected in
sales and cost of sales pursuant to U.S. Government agreement or
regulation. At the time a liability is recorded for future environ-
mental costs, an asset is recorded for estimated future recovery
considered probable through the pricing of products and services to
agencies of the U.S. Government. The portion of those costs
expected to be allocated to commercial business is reflected in
costs and expenses at the time the liability is established.
Sales and earnings — Sales and anticipated profits under
long-term fixed-price production contracts are recorded on a per-
centage of completion basis, generally using units of delivery as
the measurement basis for effort accomplished. Estimated contract
profits are taken into earnings in proportion to recorded sales.
Sales under certain long-term fixed-price contracts which, among
other things, provide for the delivery of minimal quantities or
require a significant amount of development effort in relation to
total contract value, are recorded using the percentage of comple-
tion cost-to-cost method of accounting where sales and profits are
recorded based on the ratio of costs incurred to estimated total
costs at completion.
Sales under cost-reimbursement-type contracts are recorded
as costs are incurred. Applicable estimated profits are included in
earnings in the proportion that incurred costs bear to total esti-
mated costs. Sales of products and services provided essentially
under commercial terms and conditions are recorded upon ship-
ment or completion of specified tasks.
Amounts representing contract change orders, claims or other
items are included in sales only when they can be reliably esti-
mated and realization is probable. Incentives or penalties and
awards applicable to performance on contracts are considered in
estimating sales and profit rates, and are recorded when there is