Northrop Grumman 2012 Annual Report Download - page 61

NORTHROP GRUMMAN CORPORATION
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Accounts Receivable and Inventoried Costs
Accounts receivable include amounts billed and currently due from customers, as well as amounts currently due but
unbilled (primarily related to contracts accounted for under the cost-to-cost measure of the percentage-of-completion
method of accounting). Accounts receivable also include certain estimated contract change amounts, claims or
requests for equitable adjustment in negotiation that are probable of recovery, and amounts retained by the customer
pending contract completion.
Accumulated contract costs in unbilled accounts receivable and inventoried costs include direct production costs,
factory and engineering overhead, production 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, unbilled accounts receivable and
inventoried costs are classified as current assets and include amounts related to contracts having production cycles
longer than one year. Progress payments received in excess of inventoried costs and unbilled accounts receivable
amounts on a contract by contract basis are recorded as advance payments and billings in excess of costs incurred in
the consolidated statements of financial position.
Inventoried costs primarily relate to work in process under units-of-delivery contracts. These costs represent
accumulated contract costs less the portion of such costs allocated to delivered items. Product inventory primarily
consists of raw materials and is stated at the lower of cost or market, generally using the average cost method.
Property, Plant and Equipment
Property, plant and equipment 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. Major
classes of property, plant and equipment and their useful lives are as follows:
December 31
Useful life in years, $ in millions Useful Life 2012 2011
Land and land improvements Up to 40(1) $ 373 $ 375
Buildings and improvements Up to 45 1,421 1,433
Machinery and other equipment Up to 20 4,233 4,143
Capitalized software costs 3-5 413 444
Leasehold improvements Length of Lease(1) 593 585
Property, plant and equipment, cost 7,033 6,980
Accumulated depreciation (4,146)(3,933)
Property, plant and equipment, net $2,887 $3,047
(1) Land is not a depreciable asset. Leasehold improvements are depreciated over the useful life of the asset if it is
shorter than the length of the 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 majority of our
leases are 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 the company
believes a 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. Purchased intangible assets are generally amortized on a
straight-line basis over their estimated useful lives.