Lockheed Martin 2013 Annual Report Download - page 69

Lockheed Martin Corporation
Notes to Consolidated Financial Statements
Note 1 – Significant Accounting Policies
Organization – We are a global security and aerospace company principally engaged in the research, design,
development, manufacture, integration and sustainment of advanced technology systems, products and services. 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 presentation – Our consolidated financial statements include the accounts of subsidiaries we control and
variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in
consolidation. Our receivables, inventories, customer advances and amounts in excess of costs incurred, 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. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Unless
otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share”
basis.
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 consolidated financial statements and accompanying notes. We base these estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other
sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our
consolidated financial statements include, but are not limited to, sales and cost recognition, postretirement benefit plans,
environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes including
deferred tax assets, fair value measurements, and contingencies.
Sales and earnings – We record net sales and estimated profits for substantially all of our contracts using the
percentage-of-completion method for cost-reimbursable and fixed-price contracts for products and services with the U.S.
Government. Sales are recorded on all time-and-materials contracts as the work is performed based on agreed-upon hourly
rates and allowable costs. We account for our services contracts with non-U.S. Government customers using the services
method of accounting. We classify net sales as products or services on our Statements of Earnings based on the attributes of
the underlying contracts.
Percentage-of-Completion Method of Accounting – The percentage-of-completion method for product contracts depends
on the nature of the products provided under the contract. For example, for contracts that require us to perform a significant
level of development effort in comparison to the total value of the contract and/or to deliver minimal quantities, sales are
recorded using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting,
we recognize sales and an estimated profit as costs are incurred based on the proportion that the incurred costs bear to total
estimated costs. For contracts that require us to provide a substantial number of similar items without a significant level of
development, we record sales and an estimated profit on a percentage-of-completion basis using units-of-delivery as the basis
to measure progress toward completing the contract. For contracts to provide services to the U.S. Government, sales are
generally recorded using the cost-to-cost method.
Award and incentive fees, as well as penalties related to contract performance, are considered in estimating sales and
profit rates on contracts accounted for under the percentage-of-completion method. Estimates of award fees are based on past
experience and anticipated performance. We record incentives or penalties when there is sufficient information to assess
anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant
event are not recognized until the event occurs.
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks,
estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance), and
making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our
contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and
costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in
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