Lockheed Martin 2015 Annual Report Download - page 66

Services Method
Under a fixed-price service contract, we are paid a predetermined fixed amount for a specified scope of work and
generally have full responsibility for the costs associated with the contract and the resulting profit or loss. We record net
sales under fixed-price service contracts to non-U.S. Government customers on a straight-line basis over the period of
contract performance, unless evidence suggests that net sales are earned or the obligations are fulfilled in a different pattern.
For cost-reimbursable contracts for services to non-U.S. Government customers that provide for award and incentive fees, we
record net sales as services are performed, exclusive of award and incentive fees. Award and incentive fees are recorded
when they are fixed or determinable, generally at the date the amount is communicated to us by the customer. This approach
results in the recognition of such fees at contractual intervals (typically every six months) throughout the contract and is
dependent on the customer’s processes for notification of awards and issuance of formal notifications. Costs for all service
contracts are expensed as incurred.
Other Contract Accounting Considerations
The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under
contracts with the U.S. Government. Cost-based pricing is determined under the FAR. The FAR provides guidance on the
types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example,
costs such as those related to charitable contributions, interest expense and certain advertising and public relations activities
are unallowable and, therefore, not recoverable through sales. In addition, we may enter into advance agreements with the
U.S. Government that address the subjects of allowability and allocability of costs to contracts for specific matters. For
example, most of the environmental costs we incur for environmental remediation related to sites operated in prior years are
allocated to our current operations as general and administrative costs under FAR provisions and supporting advance
agreements reached with the U.S. Government.
We closely monitor compliance with and the consistent application of our critical accounting policies related to contract
accounting. Costs incurred and allocated to contracts are reviewed for compliance with U.S. Government regulations by our
personnel and are subject to audit by the Defense Contract Audit Agency.
Postretirement Benefit Plans
Overview
Many of our employees participate in qualified and nonqualified defined benefit pension plans, retiree medical and life
insurance plans and other postemployment plans (collectively, postretirement benefit plans – see Note 11). The majority of
our accrued benefit obligations relate to our qualified defined benefit pension plans and retiree medical and life insurance
plans. We recognize on a plan-by-plan basis the net funded status of these postretirement benefit plans under GAAP as either
an asset or a liability on our Balance Sheets. There is a corresponding non-cash adjustment to accumulated other
comprehensive loss, net of tax benefits recorded as deferred tax assets, in stockholders’ equity. The GAAP funded status
represents the difference between the fair value of each plan’s assets and the benefit obligation of the plan. The GAAP
benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants
based on past service.
In June 2014, we amended certain of our qualified and nonqualified defined benefit pension plans for non-union
employees to freeze future retirement benefits. The freeze will take effect in two stages. Beginning on January 1, 2016, the
pay-based component of the formula used to determine retirement benefits was frozen so that future pay increases, annual
incentive bonuses or other amounts earned for or related to periods after December 31, 2015 will not be used to calculate
retirement benefits. On January 1, 2020, the service-based component of the formula used to determine retirement benefits
will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019.
When the freeze is complete, the majority of our salaried employees will have transitioned to an enhanced defined
contribution retirement savings plan.
Notwithstanding these actions, the impact of these plans and benefits on our earnings may be volatile in that the amount
of expense we record and the funded status for our postretirement benefit plans may materially change from year to year
because those calculations are sensitive to funding levels as well as changes in several key economic assumptions, including
interest rates, actual rates of return on plan assets and other actuarial assumptions including participant longevity and
employee turnover, as well as the timing of cash funding.
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