Lockheed Martin 2005 Annual Report Download - page 52

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Lockheed฀Martin฀Corporation
NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
December฀31,฀2005
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.฀ In฀ cases฀ where฀ a฀ date฀ to฀ complete฀ activities฀ at฀ a฀ par-
ticular฀environmental฀site฀cannot฀be฀estimated฀by฀reference฀to฀
agreements฀ or฀ otherwise,฀ we฀ project฀ costs฀ over฀ a฀ reasonable฀
time฀ frame฀ not฀ to฀ exceed฀ 20฀ years.฀ Liabilities฀ are฀ not฀ dis-
counted฀unless฀the฀amount฀and฀timing฀of฀future฀cash฀payments฀
are฀ fixed฀ or฀ reliably฀ determinable.฀ A฀ substantial฀ portion฀ of฀
environmental฀costs฀are฀expected฀to฀be฀reflected฀in฀sales฀and฀
cost฀of฀sales฀pursuant฀to฀U.S.฀Government฀agreement฀or฀regu-
lation.฀ At฀ the฀ time฀ a฀ liability฀ is฀ recorded฀ for฀ future฀ environ-
mental฀costs,฀an฀asset฀is฀recorded฀for฀estimated฀future฀recovery฀
considered฀probable฀through฀ the฀ pricing฀ of฀ products฀and฀ser-
vices฀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฀design,฀development฀and฀production฀contracts฀
are฀ recorded฀ on฀ a฀ percentage฀ 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฀ certain฀ long-term฀ fixed-price฀
development฀ and฀ production฀ 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฀perfor-
mance฀milestones฀or฀using฀the฀cost-to-cost฀method฀of฀account-
ing฀where฀sales฀and฀profits฀are฀recorded฀based฀on฀the฀ratio฀of฀
costs฀ incurred฀ to฀ estimated฀ total฀ costs฀ at฀ completion.฀ Sales฀
under฀ development฀ and฀ production฀ cost-reimbursement-type฀
contracts฀are฀ recorded฀ as฀ costs฀ are฀incurred.฀ Applicable฀esti-
mated฀ profits฀ are฀ included฀ in฀ earnings฀ in฀ the฀ proportion฀ that฀
incurred฀costs฀bear฀to฀total฀estimated฀costs.฀Sales฀of฀products฀
and฀services฀provided฀essentially฀under฀commercial฀terms฀and฀
conditions฀are฀recorded฀upon฀delivery฀and฀passage฀of฀title.
Incentives฀or฀penalties฀related฀to฀performance฀on฀design,฀
development฀and฀production฀contracts฀are฀considered฀in฀esti-
mating฀sales฀and฀profit฀rates,฀and฀are฀recorded฀when฀there฀is฀
sufficient฀ information฀ to฀ assess฀ anticipated฀ contract฀ perfor-
mance.฀ Estimates฀ of฀ award฀ fees฀ are฀ also฀ considered฀ in฀ esti-
mating฀ sales฀ and฀ profit฀ rates฀ based฀ on฀ actual฀ awards฀ and฀
anticipated฀performance.฀Incentive฀provisions฀which฀increase฀
or฀decrease฀earnings฀based฀solely฀on฀a฀single฀significant฀event฀
are฀generally฀not฀recognized฀until฀the฀event฀occurs.฀Amounts฀
representing฀contract฀change฀orders,฀claims฀or฀other฀items฀are฀
included฀ in฀ sales฀ only฀ when฀ they฀ can฀ be฀ reliably฀ estimated฀
and฀realization฀is฀probable.
Revenue฀ under฀ contracts฀ for฀ services฀ other฀ than฀ those฀
associated฀with฀design,฀development฀or฀production฀activities฀is฀
generally฀recognized฀either฀as฀services฀are฀performed฀or฀when฀
earned,฀depending฀on฀the฀contract.฀This฀ methodology฀ is฀pri-
marily฀ used฀ by฀the฀ Information฀ &฀Technology฀ Services฀ seg-
ment.฀ Revenue฀ under฀ such฀ contracts฀ is฀ generally฀ recognized฀
on฀ a฀ straight-line฀ basis฀ over฀ the฀ period฀ of฀ contract฀ perfor-
mance,฀unless฀evidence฀suggests฀that฀the฀revenue฀is฀earned฀or฀
the฀ obligations฀ are฀ fulfilled฀ in฀ a฀ different฀ pattern.฀ Costs฀
incurred฀ under฀ these฀ service฀ contracts฀ are฀ expensed฀ as฀
incurred,฀except฀that฀initial฀“set-up”฀costs฀are฀capitalized฀and฀
recognized฀ over฀ the฀ life฀ of฀ the฀ agreement.฀ Incentives฀ and฀
award฀ fees฀ related฀ to฀ performance฀ on฀ services฀ contracts฀ are฀
recognized฀ when฀they฀are฀ fixed฀ and฀ determinable,฀generally฀
at฀the฀date฀of฀award.฀
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฀prog-
ress฀ 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฀unreimbursed฀
costs฀ is฀ generally฀ expensed฀ as฀ incurred.฀ Total฀ independent฀
research฀ and฀ development฀ costs฀ charged฀ to฀ cost฀ of฀ sales฀ in฀
2005,฀2004฀and฀2003,฀including฀costs฀related฀to฀bid฀and฀pro-
posal฀efforts,฀totaled฀$1,042฀million฀in฀2005,฀$984฀million฀in฀
2004฀ and฀ $1,030฀ million฀ in฀ 2003.฀ Costs฀ incurred฀ under฀฀
customer-sponsored฀ research฀and฀ development฀programs฀ pur-
suant฀to฀contracts฀are฀accounted฀for฀as฀sales฀and฀cost฀of฀sales฀
under฀the฀contract.