Northrop Grumman 2010 Annual Report Download - page 81

tooling costs, and, for government contracts, allowable general and administrative expenses. According to the
provisions of U.S. Government contracts, the customer asserts title to, or a security interest in, inventories related
to such contracts as a result of contract advances, performance-based payments, and progress payments. In
accordance with industry practice, inventoried costs are classified as a current asset and include amounts related to
contracts having production cycles longer than one year. Product inventory primarily consists of raw materials
and is stated at the lower of cost or market, generally using the average cost method. General corporate expenses
and IR&D allocable to commercial contracts are expensed as incurred.
Outsourcing Contract Costs – Costs on outsourcing contracts, including costs incurred for bid and proposal
activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing
contract are deferred and expensed over the contract life. These costs represent incremental external costs or
certain specific internal costs that are directly related to the contract acquisition and transition/set-up. The
primary types of costs that may be capitalized include labor and related fringe benefits, subcontractor costs, and
travel costs. The company capitalized $4 million, $57 million, and $111 million and amortized $39 million,
$46 million, and $52 million of such costs in 2010, 2009 and 2008, respectively. At December 31, 2010, and
2009, respectively, deferred outsourcing contract costs of $239 million and $274 million were included in
miscellaneous other assets.
Depreciable Properties – Property, plant, and equipment owned by the company are depreciated over the estimated
useful lives of individual assets. Most of these assets are depreciated using declining-balance methods, with the
remainder using the straight-line method, with the following lives:
Years
Land improvements 2-45
Buildings and improvements 2-45
Machinery and other equipment 2-25
Capitalized software costs 3-5
Leasehold improvements Length of lease
Leases – The company uses its incremental borrowing rate in the assessment of lease classification as capital or
operating and defines the initial lease term to include renewal options determined to be reasonably assured. The
company conducts operations primarily under operating leases.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays,
or rent escalation clauses. For tenant improvement incentives, the company records a deferred rent liability and
amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent
escalation clauses during the lease term, the company records minimum rental expenses on a straight-line basis
over the term of the lease. For purposes of recognizing lease incentives, the company uses the date of initial
possession as the commencement date, which is generally when the company is given the right of access to the
space and begins to make improvements in preparation of intended use.
Goodwill and Other Purchased Intangible Assets – The company performs impairment tests for goodwill as of
November 30th of each year, or when evidence of potential impairment exists. When it is determined that
impairment has occurred, a charge to operations is recorded. Goodwill and other purchased intangible asset
balances are included in the identifiable assets of the business segment to which they have been assigned. Any
goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the
respective business segments’ operating income. Purchased intangible assets are amortized on a straight-line basis
over their estimated useful lives (see Note 12).
Self-Insurance Accruals – Accruals for self-insured workers’ compensation totaling approximately $549 million and
$520 million as of December 31, 2010, and 2009, respectively are included in other current liabilities and other
long-term liabilities. The company estimates the required liability for such claims on a discounted basis utilizing
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NORTHROP GRUMMAN CORPORATION