Lockheed Martin 1999 Annual Report Download - page 39

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
services provided essentially under commercial terms and
conditions are recorded upon shipment or completion of
specified tasks.
Amounts representing contract change orders, claims
or other items are included in sales only when they can be
reliably estimated and realization is probable. Incentives
or penalties and awards applicable to performance on con-
tracts are considered in estimating sales and profit rates,
and are recorded when there is sufficient information to
assess anticipated contract performance. Incentive provi-
sions which increase or decrease earnings based solely
on a single significant event are generally not recognized
until the event occurs.
When adjustments in contract value or estimated costs
are determined, any changes from prior estimates are
reflected in earnings in the current period. Anticipated
losses on contracts or programs in progress are charged
to earnings when identified.
Research and development and similar costs— Corporation-
sponsored research and development costs primarily include
research and development and bid and proposal efforts
related to government products and services. Except for
certain arrangements described below, these costs are gen-
erally included as part of the general and administrative
costs that are allocated among all contracts and programs
in progress under U.S. Government contractual arrange-
ments. Corporation-sponsored product development costs
not otherwise allocable are charged to expense when
incurred. Under certain arrangements in which a customer
shares in product development costs, the Corporation’s por-
tion of such unreimbursed costs is expensed as incurred.
Customer-sponsored research and development costs incurred
pursuant to contracts are accounted for as contract costs.
Derivative financial instruments— The Corporation may
use derivative financial instruments to manage its exposure
to fluctuations in interest rates and foreign exchange rates.
Forward exchange contracts are designated as qualifying
hedges of firm commitments or specific anticipated
transactions. Gains and losses on these contracts are recog-
nized in income when the hedged transactions occur. At
December 31, 1999, the amounts of forward exchange
contracts outstanding, as well as the amounts of gains and
losses recorded during the year, were not material. The
Corporation does not hold or issue derivative financial
instruments for trading purposes.
Stock-based compensation— The Corporation measures
compensation cost for stock-based compensation
plans using the intrinsic value method of accounting as
prescribed in Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,”
and related interpretations. The Corporation has adopted
those provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, “Accounting for Stock-Based
Compensation,” which require disclosure of the pro forma
effect on net earnings and earnings per share as if compen-
sation cost had been recognized based upon the estimated
fair value at the date of grant for options awarded.
Comprehensive income— Comprehensive income for the
Corporation consists primarily of net earnings, foreign
currency translation adjustments and unrealized gains and
losses on available-for-sale securities. At December 31,
1999 and 1998, the accumulated balances of other com-
prehensive income related to foreign currency translation
adjustments were insignificant. Prior to 1998, such adjust-
ments were recorded in other liabilities and were also
insignificant. In October 1999, the Corporation sold its
remaining interest in L-3 Communications Holdings, Inc.
(L-3) (see Note 3), and reclassified to net earnings $30
million of unrealized gains previously recorded as com-
prehensive income.
New accounting pronouncements adopted— Effective
January 1, 1999, the Corporation adopted the American
Institute of Certified Public Accountants’ (AICPA) Statement
of Position (SOP) No. 98-5, “Reporting on the Costs of