Lockheed Martin 2010 Annual Report Download - page 60

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Lockheed Martin Corporation
Notes to Consolidated Financial Statements
December 31, 2010
Note 1 – Significant Accounting Policies
Organization – Lockheed Martin Corporation is a global security company that principally is engaged in the research, design,
development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range
of management, engineering, technical, scientific, logistic, and information services. We serve both domestic and international
customers with products and services that have defense, civil, and commercial applications, with our principal customers being
agencies of the U.S. Government.
Basis of consolidation and classifications – Our consolidated financial statements include the accounts of subsidiaries we
control and other entities where we are the primary beneficiary. We eliminate intercompany balances and transactions in
consolidation. Our receivables, inventories, customer advances, and certain amounts in other current liabilities primarily are
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, we include these items in Current Assets and Current Liabilities. We have reclassified certain
amounts for prior years to conform to the 2010 presentation.
Use of estimates – We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting
principles (GAAP). In doing so, we are required to make estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Our actual results may differ from those estimates.
Receivables – Receivables include amounts billed and currently due from customers, and unbilled costs and accrued profits
primarily related to revenues on long-term contracts that have been recognized for accounting purposes but not yet billed to customers.
As we recognize those revenues, we reflect appropriate amounts of customer advances, performance-based payments, and progress
payments as an offset to the related receivables balance.
Inventories – We record inventories at the lower of cost or estimated net realizable value. Costs on long-term contracts and
programs in progress represent recoverable costs incurred for production or contract-specific facilities and equipment, allocable
operating overhead, advances to suppliers and, in the case of contracts with the U.S. Government, research and development and
general and administrative expenses. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers
have title to, or a security interest in, inventories related to such contracts as a result of advances, performance-based payments, and
progress payments. We reflect those advances and payments as an offset against the related inventory balances. We expense general
and administrative costs related to products and services provided essentially under commercial terms and conditions as incurred. We
determine the costs of other product and supply inventories by the first-in first-out or average cost methods.
Property, plant and equipment – We include property, plant, and equipment on our Balance Sheets principally at cost. We
provide for depreciation and amortization on plant and equipment generally using accelerated methods during the first half of the
estimated useful lives of the assets, and the straight-line method thereafter. The estimated useful lives of our plant and equipment
generally range from 10 to 40 years for buildings and five to 15 years for machinery and equipment.
We review the carrying values of long-lived assets for impairment if events or changes in the facts and circumstances indicate
that their carrying values may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows
of the related asset to its carrying value. If an asset is determined to be impaired, we recognize an impairment charge in the current
period for the difference between the fair value of the asset and its carrying value.
Goodwill – We evaluate goodwill for potential impairment annually on October 1, or if impairment indicators are present. Our
evaluation includes comparing the fair value of a reporting unit, using a discounted cash flow methodology, to its carrying value
including goodwill recorded by the reporting unit. If the carrying value exceeds the fair value, we measure impairment by comparing
the derived fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period. We define
reporting units at the business segment level or one level below the business segment. The decrease in goodwill from 2009 to 2010
primarily was due to the sale of Enterprise Integration Group and the reclassification of Pacific Architects and Engineers, Inc.’s assets
and liabilities to discontinued operations at December 31, 2010 (see Note 2).
Capitalized software – We capitalize certain direct costs associated with the development or purchase of internal-use software.
Expenditures are included in operating activities on our Statements of Cash Flows. The amounts capitalized are included in other
assets on our Balance Sheets and amortized on a straight-line basis over the estimated useful life of the resulting software, which
ranges from two to six years. We amortize capitalized internal-use software beginning when the asset is substantially ready for use. As
of December 31, 2010 and 2009, capitalized software totaled $899 million and $887 million, net of accumulated amortization of
$1,097 million and $948 million. Amortization expense related to capitalized software was $149 million in 2010, $152 million in
2009, and $135 million in 2008.