Northrop Grumman 2012 Annual Report Download - page 58

NORTHROP GRUMMAN CORPORATION
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northrop Grumman Corporation (herein referred to as “Northrop Grumman,” the “company,” “we,” “us,” or “our”)
is a leading global security company providing innovative systems, products and solutions in unmanned systems,
cybersecurity, C4ISR, and logistics and modernization to government and commercial customers worldwide through
four sectors: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. We participate in
many high-priority defense and government services programs in the United States (U.S.) and abroad as a prime
contractor, principal subcontractor, partner, or preferred supplier. We conduct the majority of our business with the
U.S. Government, principally the Department of Defense (DoD) and intelligence community. We also conduct
business with foreign, state, and local governments, as well as domestic and international commercial customers.
Principles of Consolidation
The consolidated financial statements include the accounts of Northrop Grumman and its subsidiaries. All material
intercompany accounts, transactions, and profits are eliminated in consolidation. Investments in equity securities and
joint ventures where the company has significant influence, but not control, are accounted for using the equity
method.
Accounting Estimates
The company’s financial statements are prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation thereof requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the
financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared using the most current and best available information; however, actual results could
differ materially from those estimates.
Related Party Transactions
For all periods presented, the company had no material related party transactions.
Revenue Recognition
The majority of our business results are derived from long-term contracts with the U.S. Government for the
production of goods, the provision of services, or in some cases, a combination of both. In accounting for these
contracts, we utilize either the cost-to-cost or the units-of-delivery method of percentage-of-completion accounting.
Generally, sales under cost-reimbursement contracts and construction-type contracts that provide for deliveries at
lower volume rates per year or a small number of units are accounted for using the cost-to-cost method. Under this
method, sales, including estimated profits, are recorded as costs are incurred. Generally, sales under contracts that
provide for deliveries at higher volume rates per year are accounted for using the units-of-delivery method. Under
this method, sales are recognized as units are delivered to the customer. The company estimates profit on contracts
utilizing both of these methods as the difference between total estimated revenue and total estimated cost of a
contract at completion and recognizes that profit either as costs are incurred (cost-to-cost) or as units are delivered
(units-of-delivery). The company classifies revenue as product or service depending upon the predominant attributes
of the contract.
Contract revenues may include estimated amounts not contractually agreed to by the customer, including price
redetermination, cost or performance incentives (such as award and incentive fees), un-priced change orders, claims,
and requests for equitable adjustment.
Amounts pertaining to provisions for price redetermination or for cost and/or performance incentives are included in
sales when they are reasonably estimable. Further, as contracts are performed, change orders can be a regular
occurrence and may be un-priced until negotiated with the customer. Un-priced change orders are included in
revenue when they are probable of recovery in an amount at least equal to the cost.
Amounts representing claims (including change orders unapproved as to both scope and price) and requests for
equitable adjustment are included in estimated contract revenue only when they are reliably estimable and
realization is probable. As of December 31, 2012, the recognized amounts related to claims and requests for
equitable adjustment are not material individually or in the aggregate.
The company's U.S. Government contracts generally contain provisions that enable the customer to terminate a
contract for default, or for the convenience of the government. If the contract is terminated for default, the contractor
may not be entitled to recover any of its costs on partially completed work and may be liable to the government for
re-procurement costs of acquiring similar products or services from another contractor, and for certain other