Lockheed Martin 2003 Annual Report Download - page 50

Lockheed Martin Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
48
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 estimated. 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 envi-
ronmental costs, an asset is recorded for estimated future recov-
ery considered probable through the pricing of products and
services to agencies of the U.S. Government. The portion of
those costs expected to be allocated to commercial business or
that is determined to be unallowable for pricing under U.S.
Government contracts 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 contract
and recognizing revenue. Estimated contract profits are taken
into earnings in proportion to recorded sales. Sales under cer-
tain long-term fixed-price contracts which, among other fac-
tors, provide for the delivery of minimal quantities or require a
substantial level of development effort in relation to total con-
tract value, are recorded upon achievement of performance
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 provided essen-
tially 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 provisions 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.
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 generally
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 otherwise allocable are charged
to expense when incurred. Under certain arrangements in which
a customer shares in product development costs, the
Corporation’s portion of unreimbursed costs is generally
expensed as incurred. Total independent research and develop-
ment costs charged to cost of sales in 2003, 2002 and 2001,
including costs related to bid and proposal efforts, were $903
million, $830 million and $679 million, respectively. Costs
incurred under customer-sponsored research and development
programs pursuant to contracts are accounted for as sales and
cost of sales under the contract.
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 includ-
ed as allowable costs in future pricing of the Corporation’s
products and services. Included in other assets in the consoli-
dated balance sheet at December 31, 2003 and 2002 is approx-
imately $155 million and $215 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 circum-
stances indicate that their carrying values may not be recover-
able. 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.