Lockheed Martin 2011 Annual Report Download - page 66

Research and development and similar costs – Except for certain arrangements described below, we account for
independent research and development 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 expensed as incurred.
Independent research and development costs charged to cost of sales totaled $585 million in 2011, $639 million in 2010, and
$717 million in 2009. Costs we incur under customer-sponsored research and development programs pursuant to contracts
are included in net sales and cost of sales.
Investments in marketable securities – Investments in marketable securities consist of debt and equity securities and
are classified as either available-for-sale securities or trading securities. If classified as available-for-sale securities,
unrealized gains and losses are reflected net of income taxes in accumulated other comprehensive loss on the Statements of
Stockholders’ Equity. If classified as trading securities, unrealized gains and losses are recorded in other non-operating
income, net on the Statements of Earnings. If declines in the value of available-for-sale securities 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. For
purposes of computing realized gains and losses on marketable securities, we determine cost on a specific identification
basis.
Available-for-sale securities are recorded at fair value and classified as short-term investments on the Balance Sheets.
Our available-for-sale securities as of December 31, 2010 consisted primarily of U.S. Treasury securities with a fair value of
approximately $500 million, which matured during 2011. The cost basis of these securities was not materially different from
their respective fair value as of December 31, 2010. As of December 31, 2011 and 2010, the fair value of our trading
securities totaled $781 million and $843 million and was included in other assets on the Balance Sheets. Our trading
securities are held in a Rabbi Trust, which includes investments to fund certain of our non-qualified deferred compensation
plans.
Net gains on marketable securities in 2011, 2010, and 2009 were $40 million, $56 million, and $110 million and were
included in other non-operating income, net on the Statements of Earnings. Included in these amounts are net unrealized
gains (losses) on trading securities of $(24) million in 2011, $24 million in 2010, and $115 million in 2009.
Equity method investments – Investments where we have the ability to exercise significant influence over, but do not
control, are accounted for under the equity method of accounting and are included in other assets on the Balance Sheets.
Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of
accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on the
Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment
holding the investment. We evaluate our equity method investments for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity
method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of
December 31, 2011 and 2010, our equity method investments totaled $697 million and $671 million, and our share of net
earnings related to these investments was $332 million in 2011, $312 million in 2010, and $278 million in 2009.
Derivative financial instruments – We use derivative financial instruments to manage our exposure to fluctuations in
foreign currency exchange rates and interest rates. Foreign currency exchange contracts are entered into to manage the
exchange rate risk of forecasted foreign currency denominated cash receipts and cash payments. The majority of our foreign
currency exchange contracts are designated as cash flow hedges. We also use derivative financial instruments to manage our
exposure to changes in interest rates. Our financial instruments that are subject to interest rate risk principally include fixed-
rate, long-term debt. Our interest rate swap contracts are designated as fair value hedges. We do not hold or issue derivative
financial instruments for trading or speculative purposes.
We record derivatives at their fair value. 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. Adjustments to reflect changes
in fair values of derivatives attributable to the effective portion of hedges are either reflected in earnings and largely offset by
corresponding adjustments to the hedged items, or reflected net of income taxes in accumulated other comprehensive loss
until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the
ineffective portion of the hedges, or of derivatives that are not considered to be highly effective hedges, if any, are
immediately recognized in earnings. The aggregate notional amount of our outstanding foreign currency exchange contracts
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