Lockheed Martin 2007 Annual Report Download - page 76

and profits are recorded based on the ratio of costs we incur to our estimate of total costs at completion. We record sales and
an estimated profit under development and production cost-reimbursement-type contracts as costs are incurred. We include
applicable estimated profits in earnings in the proportion that incurred costs bear to total estimated costs. When adjustments
in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized
by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods.
We record sales of products and services provided under essentially commercial terms and conditions upon delivery and
passage of title.
We consider incentives or penalties related to performance on design, development and production contracts in
estimating sales and profit rates, and record them when there is sufficient information to assess anticipated contract
performance. We also consider estimates of award fees in estimating sales and profit rates based on actual awards and
anticipated performance. We generally do not recognize incentive provisions which increase or decrease earnings based
solely on a single significant event until the event occurs. We only include amounts representing contract change orders,
claims or other items in sales when they can be reliably estimated and realization is probable.
We record revenue under contracts for services other than those associated with design, development or production
activities either as services are performed or when a contractually required event has occurred, depending on the contract.
This methodology is primarily used by our Information Systems & Global Services (IS&GS) segment. We generally record
revenue under such services contracts on a straight-line basis over the period of contract performance, unless evidence
suggests that the revenue is earned or the obligations are fulfilled in a different pattern. Costs we incur under these services
contracts are expensed as incurred, except that we capitalize and recognize initial “set-up” costs over the life of the
agreement. Incentives and award fees related to our performance on services contracts are recognized when they are fixed
and determinable, generally at the date of award.
Research and development and similar costs – Costs for research and development we sponsor primarily include
independent research and development and bid and proposal efforts related to government products and services. Except for
certain arrangements described below, we generally include these costs as part of the general and administrative costs that are
allocated among all of our contracts and programs in progress under U.S. Government contractual arrangements. Costs for
product development initiatives we sponsor that are not otherwise allocable are charged to expense when incurred. Under
some arrangements in which a customer shares in product development costs, our portion of unreimbursed costs is generally
expensed as incurred. Total independent research and development costs charged to Cost of sales in 2007, 2006 and 2005,
including costs related to bid and proposal efforts, totaled $1,206 million in 2007, $1,051 million in 2006 and $1,042 million
in 2005. Of those amounts, $528 million, $427 million and $416 million represented bid and proposal costs. Costs we incur
under customer-sponsored research and development programs pursuant to contracts are accounted for as Net sales and Cost
of sales under the contract.
Restructuring activities – Under existing U.S. Government regulations, certain costs we incur for consolidation or
restructuring activities that we can demonstrate will 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 our products
and services to agencies of the U.S. Government. Assets recorded at December 31, 2007 and 2006 for deferred costs related
to various consolidation actions were not material.
Impairment of certain long-lived assets – Generally, we review the carrying values of long-lived assets other than
Goodwill for impairment if events or changes in the facts and circumstances indicate that their carrying values may not be
recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of the related asset to its
carrying value. If an asset is determined to be impaired, we recognize an impairment charge in the current period for the
difference between the fair value of the asset and its carrying value.
Investments in equity securities – Investments in equity securities include our ownership interests in companies that
we do not control, including those where our investment represents less than a 20% ownership. We include these investments
in Other assets on the Balance Sheet. When we have investments that represent a 20% to 50% ownership interest, we
generally account for them under the equity method of accounting. Under this method of accounting, our share of the net
earnings or losses of the companies is included in Operating profit in Other income (expense), net since the activities of the
investees are closely aligned with the operations of the business segments holding the investments. We recognize gains or
losses arising from issuances of stock by wholly-owned or majority-owned subsidiaries, or by equity method investees, in the
current period in Other income (expense), net.
For those investments that represent less than a 20% ownership interest, if classified as available-for-sale under FAS
115, the investments are accounted for at fair value, with unrealized gains and losses reflected as a net after-tax amount in
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