Lockheed Martin 2002 Annual Report Download - page 49

FIFTY-SIX
Lockheed Martin Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
at fair value, with unrealized gains and losses recorded in
other comprehensive income, in accordance with Statement of
Financial Accounting Standards (FAS) No. 115, “Accounting
for Certain Investments in Debt and Equity Securities.” If
declines in the value of investments accounted for under either
the equity method or FAS 115 are determined to be other than
temporary, a loss is recorded in earnings currently.
Investments not accounted for under one of these methods are
generally accounted for under the cost method of accounting.
Goodwill and other intangible assets—Intangible assets
related to contracts and programs acquired are amortized over
the estimated periods of benefit (15 years or less) and are dis-
played in the consolidated balance sheet net of accumulated
amortization. In periods prior to the adoption of FAS 142 (see
discussion under the caption “New accounting pronounce-
ments” in this Note), goodwill, as well as the amount by
which the Corporation’s investment in Intelsat exceeded its
share of Intelsat’s net assets, was amortized ratably over
appropriate periods, generally 30 to 40 years. Beginning
January 1, 2002, these amounts are no longer amortized.
Goodwill is displayed on the consolidated balance sheet net of
accumulated amortization of $1,382 million at December 31,
2002 and 2001. Under FAS 142, goodwill is evaluated for
potential impairment annually by comparing the fair value of a
reporting unit to its carrying value, including goodwill
recorded by the reporting unit. If the carrying value exceeds
the fair value, impairment is measured by comparing the
derived fair value of goodwill to its carrying value, and any
impairment determined is recorded in the current period.
Customer advances and amounts in excess of costs incurred—
The Corporation receives advances, performance-based pay-
ments and progress payments from customers which may
exceed costs incurred on certain contracts, including contracts
with agencies of the U.S. Government. Such advances, other
than those reflected as an offset to accounts receivable or inven-
tories as discussed above, are classified as current liabilities.
Environmental matters—The Corporation records a liability
for environmental matters when it is probable that a liability
has been incurred and the amount can be reasonably esti-
mated. A substantial portion of these costs are expected to
be reflected in sales and cost of sales pursuant to U.S.
Government agreement or regulation. At the time a liability is
recorded for future environmental costs, an asset is recorded
for estimated future recovery considered probable through the
pricing of products and services to agencies of the U.S.
Government. The portion of those costs expected to be allo-
cated to commercial business is reflected in cost of sales at the
time the liability is established.
Sales and earnings—Sales and anticipated profits under long-
term fixed-price production contracts are recorded on a per-
centage of completion basis, generally using units-of-delivery
as the basis to measure progress toward completing the con-
tract and recognizing revenue. Estimated contract profits are
taken into earnings in proportion to recorded sales. Sales
under certain long-term fixed-price contracts which, among
other factors, provide for the delivery of minimal quantities or
require a substantial level of development effort in relation to
total contract value, are recorded upon achievement of per-
formance milestones or using the cost-to-cost method of
accounting where sales and profits are recorded based on the
ratio of costs incurred to estimated total costs at completion.
Sales under cost-reimbursement-type contracts are
recorded as costs are incurred. Applicable estimated profits are
included in earnings in the proportion that incurred costs bear
to total estimated costs. Sales of products and services pro-
vided essentially under commercial terms and conditions are
recorded upon delivery and passage of title.
Amounts representing contract change orders, claims or
other items are included in sales only when they can be reliably
estimated and realization is probable. Incentives or penalties
related to performance on contracts are considered in estimating
sales and profit rates, and are recorded when there is sufficient
information to assess anticipated contract performance. Estimates
of award fees are also considered in estimating sales and profit
rates based on actual and anticipated awards. Incentive provi-
sions which increase or decrease earnings based solely on a
single significant event are generally not recognized until the
event occurs.
When adjustments in contract value or estimated costs are
determined, any changes from prior estimates are generally
reflected in earnings in the current period. Anticipated losses
on contracts are charged to earnings when identified and deter-
mined to be probable.