Northrop Grumman 2010 Annual Report Download - page 79

General and Administrative Expenses – In accordance with industry practice and the regulations that govern the cost
accounting requirements for government contracts, most general corporate expenses incurred at both the
segment and corporate locations are considered allowable and allocable costs on government contracts. For most
components of the company, these costs are allocated to contracts in progress on a systematic basis and contract
performance factors include this cost component as an element of cost. General and administrative expenses
primarily relate to segment operations.
Research and Development – Company-sponsored research and development activities primarily include
independent research and development (IR&D) efforts related to government programs. IR&D expenses are
included in general and administrative expenses and are generally allocated to government contracts. Company-
sponsored IR&D expenses totaled $603 million, $610 million, and $564 million, in 2010, 2009, and 2008,
respectively. Expenses for research and development sponsored by the customer are charged directly to the related
contracts.
Restructuring Costs – In accordance with the regulations that govern the cost accounting requirements for
government contracts, certain costs incurred for consolidation or restructuring activities that demonstrate savings
in excess of the cost to implement those actions can be deferred and amortized as allowable and allocable costs
on government contracts. Such deferred costs are not expected to have a material to the company’s consolidated
financial position or results of operations (see Note 7).
Product Warranty Costs – The company provides certain product warranties that require repair or replacement of
non-conforming items for a specified period of time often subject to a specified monetary coverage limit.
Substantially all of the company’s product warranties are provided under government contracts, the costs of
which are immaterial and are accounted for using the percentage-of- completion method of accounting. Accrued
product warranty costs for the remainder of our products (which are almost entirely commercial products) are
not material.
Environmental Costs – Environmental liabilities are accrued when the company determines such amounts are
reasonably estimable, and management has determined that it is probable that a liability has been incurred. When
only a range of amounts is established and no amount within the range is more probable than another, the
minimum amount in the range is recorded. Environmental liabilities are recorded on an undiscounted basis. At
sites involving multiple parties, the company accrues environmental liabilities based upon its expected share of
liability, taking into account the financial viability of other jointly liable parties. Environmental expenditures are
expensed or capitalized as appropriate. Capitalized expenditures relate to long-lived improvements in currently
operating facilities. The company does not anticipate and record insurance recoveries before collection is
probable. At December 31, 2010, and 2009, the company did not have any accrued receivables related to
insurance reimbursements.
Fair Value of Financial Instruments – The company utilizes fair value measurement guidance prescribed by GAAP
to value its financial instruments. The guidance includes a definition of fair value, prescribes methods for
measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands
disclosures about the use of fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect internal market assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
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NORTHROP GRUMMAN CORPORATION