Lockheed Martin 2007 Annual Report Download - page 77

Accumulated other comprehensive income (loss) in the Statement of Stockholders’ Equity. If declines in the value of
investments accounted for under either the equity method or FAS 115 are determined to be other than temporary, a loss is
recorded in earnings in the current period. We make such determinations by considering, among other factors, the length of
time the fair value of the investment has been less than the carrying value, future business prospects for the investee, and
information regarding market and industry trends for the investee’s business, if available. Investments not accounted for
under one of these methods are generally accounted for under the cost method of accounting.
Derivative financial instruments – We sometimes use derivative financial instruments to manage our exposure to
fluctuations in interest rates and foreign exchange rates. We do not hold or issue derivative financial instruments for trading
or speculative purposes. We record derivatives at their fair value as either Other current assets or liabilities on the
consolidated Balance Sheet. The classification of gains and losses resulting from changes in the fair values of derivatives is
dependent on our intended use of the derivative and its resulting designation. We include adjustments to reflect changes in
fair values of derivatives that are not considered highly effective hedges in earnings. Adjustments to reflect changes in fair
values of derivatives that we consider 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 net of income taxes in Accumulated
other comprehensive income (loss) until the hedged transaction occurs and the entire transaction is recognized in earnings, to
the extent these derivatives are effective hedges. Changes in the fair value of these derivatives attributable to the ineffective
portion of the hedges, if any, are immediately recognized in earnings.
We designate interest rate swap agreements as hedges of the fair value of debt instruments to which they relate in cases
where we swap fixed rates for variable rates, and as hedges of the cash flows of forecasted variable interest payments in
cases where we swap variable rates for fixed rates. Our forward currency exchange contracts generally qualify as hedges of
the fluctuations in cash flows associated with firm commitments or specific anticipated transactions contracted in foreign
currencies, or as hedges of the exposure to rate changes affecting foreign currency denominated assets or liabilities. At
December 31, 2007, the fair value of our outstanding interest rate swap agreement and forward currency exchange contracts,
as well as the amounts of gains and losses recorded during the year, were not material.
Stock-based compensation – Effective January 1, 2006, we adopted FAS 123(R), Share-Based Payments, and the
related SEC rules included in Staff Accounting Bulletin No. 107, on a modified prospective basis (see Note 11). Under this
method, we recognize compensation cost related to 1) all share-based payments (stock options and restricted stock awards)
granted before but not yet vested as of January 1, 2006 based on the grant-date fair value estimated under the original
provisions of FAS 123, Accounting for Stock-Based Compensation, and 2) all share-based payments (stock options and
restricted stock units) granted after December 31, 2005 based on the grant-date fair value estimated under the provisions of
FAS 123(R).
To account for the tax effects of stock-based compensation, FAS 123(R) requires a calculation to establish the
beginning pool of excess tax benefits, or the additional paid-in capital (APIC) pool, available to absorb any tax deficiencies
recognized after its adoption. Tax deficiencies arise when the actual tax benefit for the tax deduction for stock-based
compensation at the statutory tax rate is less than the related deferred tax asset recognized in the financial statements. We
have elected the alternative transition method for calculating the APIC pool as described in the Financial Accounting
Standards Board (FASB) Staff Position 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-
Based Payment Awards.
Prior to January 1, 2006, we measured compensation cost for stock-based compensation plans using the intrinsic value
method of accounting as prescribed under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, but disclosed the pro forma effects on Net earnings and Earnings per share as if
compensation cost had been recognized based on the fair value-based method at the date of grant for stock options awarded
consistent with the provisions of FAS 123. Reported and pro forma earnings per share information for the year ended
December 31, 2005 is included in Note 11.
Income taxes – We periodically assess our tax filing exposures related to periods that are open to examination. Based
on the latest available information, we evaluate tax positions to determine whether the position will more likely than not be
sustained upon examination by the Internal Revenue Service (IRS). If we determine that the tax position is more likely than
not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is
settled. If we cannot reach that determination, no benefit is recorded. We record interest and penalties related to income taxes
as a component of Income tax expense in our financial statements.
Comprehensive income – Comprehensive income consists primarily of Net earnings and the after-tax impact of the
adjustments for postretirement benefit plans, including minimum pension liabilities for years prior to 2007. The adjustments
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