Northrop Grumman 2010 Annual Report Download - page 82

actuarial methods based on various assumptions, which include, but are not limited to, the company’s historical
loss experience and projected loss development factors.
Litigation, Commitments, and Contingencies – Amounts associated with litigation, commitments, and contingencies
are recorded as charges to earnings when management, after taking into consideration the facts and circumstances
of each matter, including any settlement offers, has determined that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
Retirement Benefits – The company sponsors various pension plans covering substantially all employees. The
company also provides post-retirement benefit plans other than pensions, consisting principally of health care and
life insurance benefits, to eligible retirees and qualifying dependents. The liabilities, unamortized benefit plan
costs and annual income or expense of the company’s pension and other post-retirement benefit plans are
determined using methodologies that involve several actuarial assumptions, the most significant of which are the
discount rate, the long-term rate of asset return (based on the market-related value of assets), and the medical
cost experience trend rate (rate of growth for medical costs). Unamortized benefit plan costs consist primarily of
accumulated net after-tax actuarial losses. Net actuarial gains or losses are re-determined annually and principally
arise from gains or losses on plan assets due to variations in the fair market value of the underlying assets and
changes in the benefit obligation due to changes in actuarial assumptions. Net actuarial gains or losses are
amortized to expense in future periods when they exceed ten percent of the greater of the plan assets or
projected benefit obligations by benefit plan. The excess of gains or losses over the ten percent threshold are
subject to amortization over the average future service period of employees of approximately ten years. The fair
values of plan assets are determined based on prevailing market prices or estimated fair value for investments with
no available quoted prices. Not all net periodic pension income or expense is recognized in net earnings in the
year incurred because it is allocated to production as product costs, and a portion remains in inventory at the end
of a reporting period. The company’s funding policy for pension plans is to contribute, at a minimum, the
statutorily required amount to an irrevocable trust.
Stock Compensation – All of the company’s stock compensation plans are considered equity plans, and
compensation expense recognized is net of estimated forfeitures over the vesting period. The company issues
stock options and stock awards, in the form of restricted performance stock rights and restricted stock rights,
under its existing plans. The fair value of stock option grants are estimated on the date of grant using a Black-
Scholes option-pricing model and expensed on a straight-line basis over the vesting period of the options, which
is generally three to four years. The fair value of stock awards is determined based on the closing market price of
the company’s common stock on the grant date and at each reporting date the number of shares is adjusted to
equal the number ultimately expected to vest. Compensation expense for stock awards is expensed over the
vesting period, usually three to five years.
Foreign Currency Translation – For operations outside the U.S. that prepare financial statements in currencies other
than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the
period, and assets and liabilities are generally translated at end-of-period exchange rates. Translation adjustments
are included as a separate component of accumulated other comprehensive loss in consolidated shareholders’
equity.
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NORTHROP GRUMMAN CORPORATION