Northrop Grumman 2012 Annual Report Download - page 62

NORTHROP GRUMMAN CORPORATION
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Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a group of executives, which are recorded at their cash
surrender value as determined by the insurance carrier. The company also has split-dollar life insurance policies on
former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender
value or premiums paid. These policies are utilized as a partial funding source for deferred compensation and other
non-qualified employee retirement plans. As of December 31, 2012 and 2011, the carrying values associated with
these policies are $271 million and $257 million, respectively, and are recorded in other non-current assets in the
consolidated statements of financial position.
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 as then known to
management, including any settlement offers, has determined that it is probable that a liability will be found to have
been incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is established
and no amount within the range is more probable than another, the lower end of the range is recorded. Legal fees are
expensed as incurred.
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 expected long-term
rate of asset return, and the health care medical cost experience trend rate. Unamortized benefit plan costs consist
primarily of accumulated net after-tax actuarial losses.
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 the qualified 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 classified as equity plans and compensation expense recognized
is net of estimated forfeitures over the vesting period. The company issues stock awards, in the form of restricted
performance stock rights and restricted stock rights, under its existing plans. 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, generally three years.
Foreign Currency Translation
For operations outside the U.S. that have functional 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 translated at end-
of-period exchange rates. Translation adjustments are generally included as a separate component of accumulated
other comprehensive loss in the consolidated statements of shareholders' equity.
Accounting Standards Updates
Accounting standards updates effective after December 31, 2012, are not expected to have a material effect on the
company's consolidated financial position or results of operations.