Lockheed Martin 2007 Annual Report Download - page 65

contracts are recognized in the current period. At December 31, 2007, the fair value of forward exchange contracts
outstanding and the amounts of gains and losses recorded during the year then ended were not material.
We evaluate the credit quality of potential counterparties to derivative transactions and only enter into agreements with
those deemed to have minimal credit risk. We periodically monitor changes to counterparty credit quality as well as our
concentration of credit exposure to individual counterparties. We do not hold or issue derivative financial instruments for
trading or speculative purposes.
New Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards (FAS) 141(R), Business
Combinations, which will become effective January 1, 2009. The new standard will replace existing guidance and
significantly change accounting and reporting relative to business combinations in consolidated financial statements,
including requirements to recognize acquisition-related transaction and post acquisition restructuring costs in our results of
operations as incurred. FAS 141(R) will be effective for businesses acquired after the effective date.
In September 2006, the FASB issued FAS 157, Fair Value Measurements, which is effective January 1, 2008, with the
exception of leases and certain nonfinancial assets and liabilities. FAS 157 defines fair value, establishes a market-based
framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. The new standard
generally is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured
at fair value. We currently do not expect that the adoption of FAS 157 will have a material impact on our results of
operations, financial position or cash flows.
In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115, which also becomes effective January 1, 2008. Under FAS 159, a
company may choose to measure certain financial instruments (e.g., assets and liabilities) and certain other items not
currently subject to fair value measurement at fair value. If so elected, any unrealized gains and losses from marking those
items to market will be included in earnings in each subsequent reporting period. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. We do not plan to elect the fair value option.
In September 2007, the FASB issued a proposed rule that would change the accounting for our $1 billion of floating rate
convertible debentures. The effect of the rule, if enacted as proposed, requires the proceeds from the debt issuance to be
bifurcated between a debt and equity component as of the August 2003 issuance date. The equity component reflects the
value of the conversion feature. The FASB currently plans to re-deliberate the proposal in the first quarter of 2008 and has
not indicated when it may become effective. If approved as currently drafted, we would expect the proposed rule to result in
immaterial changes to our previously reported Balance Sheets and Statements of Earnings to reflect the amortization of
additional interest expense over the period from August 2003 to August 2008.
Controls and Procedures
We maintain disclosure controls and procedures, including internal control over financial reporting, which are designed
to ensure that information required to be disclosed in our periodic filings with the SEC is reported within the time periods
specified in the SEC’s rules and forms, and to provide reasonable assurance that assets are safeguarded and transactions are
properly executed and recorded. Our disclosure controls and procedures are also designed to ensure that information is
accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating such
controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to use
its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in
certain unconsolidated entities. As we do not control or manage these entities, our controls and procedures with respect to
those entities are necessarily substantially more limited (in some cases, only that of a passive equity holder) than those we
maintain with respect to our consolidated subsidiaries.
We routinely review our system of internal control over financial reporting and make changes to our processes and
systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more efficient systems, consolidating the activities
of two or more business units, and migrating certain processes to our Shared Services centers. In addition, when we acquire
new businesses, we review the controls and procedures of the acquired business as part of our integration activities.
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