Lockheed Martin 2002 Annual Report Download - page 50

FIFTY-SEVEN
Research and development and similar costs—Corporation-
sponsored research and development costs primarily include
independent research and development and bid and proposal
efforts related to government products and services. Except for
certain arrangements described below, these costs are gener-
ally included as part of the general and administrative costs
that are allocated among all contracts and programs in
progress under U.S. Government contractual arrangements.
Corporation-sponsored product development costs not other-
wise allocable are charged to expense when incurred. Under
certain arrangements in which a customer shares in product
development costs, the Corporation’s portion of such unreim-
bursed costs is expensed as incurred. Total independent
research and development costs charged to cost of sales
in 2002, 2001 and 2000, including costs related to bid and
proposal efforts, were $830 million, $875 million and $863
million, respectively. Customer-sponsored research and
development costs incurred pursuant to contracts are
accounted for as contract costs.
Restructuring activities—Under existing U.S. Government
regulations, certain costs incurred for consolidation or restruc-
turing activities that can be demonstrated to result in savings
in excess of the cost to implement those actions can be
deferred and amortized for government contracting purposes
and included as allowable costs in future pricing of the
Corporation’s products and services. Included in the consoli-
dated balance sheet at December 31, 2002 and 2001 is approx-
imately $215 million and $308 million, respectively, of
deferred costs related to various consolidation actions.
Impairment of certain long-lived assets—Generally, the carry-
ing values of long-lived assets other than goodwill are
reviewed for impairment if events or changes in the facts and
circumstances indicate that their carrying values may not be
recoverable. Any impairment determined is recorded in the
current period and is measured by comparing the fair value of
the related asset to its carrying value.
Derivative financial instruments—The Corporation sometimes
uses derivative financial instruments to manage its exposure to
fluctuations in interest rates and foreign exchange rates.
Effective January 1, 2001, the Corporation began to account for
derivative financial instruments in accordance with FAS 133,
“Accounting for Derivative Instruments and Hedging
Activities.” The effect of adopting FAS 133 was not material
to the Corporation’s consolidated results of operations, cash
flows or financial position. Under FAS 133, all derivatives are
recorded as either assets or liabilities in the consolidated bal-
ance sheet, and periodically adjusted to fair value. The classi-
fication of gains and losses resulting from changes in the fair
values of derivatives is dependent on the intended use of the
derivative and its resulting designation. Adjustments to reflect
changes in fair values of derivatives that are not considered
highly effective hedges are reflected in earnings. Adjustments
to reflect changes in fair values of derivatives that are consid-
ered highly effective hedges are either reflected in earnings
and largely offset by corresponding adjustments related to the
fair values of the hedged items, or reflected in other compre-
hensive income until the hedged transaction matures and the
entire transaction is recognized in earnings. The change in fair
value of the ineffective portion of a hedge is immediately rec-
ognized in earnings.
Interest rate swap agreements are designated as effective
hedges of the fair value of certain existing fixed-rate debt instru-
ments. Forward currency exchange contracts are designated as
qualifying hedges of cash flows associated with firm commit-
ments or specific anticipated transactions. At December 31,
2002, the fair values of interest rate swap agreements and for-
ward currency exchange contracts outstanding, as well as the
amounts of gains and losses recorded during the year, were not
material. The Corporation does not hold or issue derivative
financial instruments for trading purposes.
Stock-based compensation—The Corporation measures com-
pensation cost for stock-based compensation plans using the
intrinsic value method of accounting as prescribed in
Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations. The
Corporation has adopted those provisions of FAS 123,
“Accounting for Stock-Based Compensation” and FAS 148,
“Accounting for Stock-Based Compensation—Transition and
Disclosure,” which require disclosure of the pro forma effects
on net earnings and earnings per share as if compensation cost
had been recognized based upon the fair value-based method
at the date of grant for options awarded.
Lockheed Martin Corporation