Lockheed Martin 2015 Annual Report Download - page 71

The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and
allocations of amounts held at the business segment and corporate levels. Corporate allocations include our postretirement
benefit plans liabilities, as determined in accordance with CAS, in order to align the basis of the carrying values with the
determination of the fair values of our reporting units, which are measured using CAS pension cost. CAS pension cost is
recovered through the pricing of our products and services on U.S. Government contracts and, therefore, affects the fair value
of each reporting unit. The amount of CAS pension liability allocated to each reporting unit is significantly influenced by a
number of factors, including the discount rate used to estimate the obligation. On August 8, 2014, the HATFA, and on
November 2, 2015, the Bipartisan Budget Act of 2015 was enacted, which extended the pension interest rate relief of the
prior MAP-21. As a result, the interest rate used to calculate CAS pension costs recovered under our contracts with the U.S.
Government increased with the resulting effect of decreasing the amount of CAS pension liability allocated to each reporting
unit, contributing to an increase in the carrying value of each reporting unit.
In the fourth quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units. In
connection with our fourth quarter 2015 program realignment, goodwill was reallocated between affected reporting units on a
relative fair value basis. We performed goodwill impairment tests prior and subsequent to the realignment. The results of our
2015 annual impairment tests of goodwill indicated that no impairment existed.
In the fourth quarter of 2014, we performed our annual goodwill impairment test for each of our reporting units. The
results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying values, with the
exception of our Technical Services reporting unit within our IS&GS business segment. Technical Services, for which we
recorded a $195 million goodwill impairment in 2013, experienced further declines in fair value during 2014. Technical
Services which typically has smaller customer contracts of a shorter duration, has been adversely impacted by market
pressures such as lower in-theater support as troop levels are drawn down and increased re-competition on existing contracts
that are awarded primarily on the basis of price. As a result, we compared the implied value of that reporting unit’s goodwill
with the carrying value of its goodwill, and since the carrying value exceeded the implied value, we recorded a non-cash
impairment charge of $119 million in the fourth quarter of 2014 equal to that differential.
As a result of the 2014 annual goodwill impairment test, our Civil reporting unit was considered at risk of future
goodwill impairment due to market factors and because the fair value of the Civil reporting unit exceeded its carrying value
by a margin of approximately 15%. The results of our 2015 annual goodwill impairment test indicated that our Civil
reporting unit’s fair value was no longer considered at risk of future goodwill impairment due to an increase in assessed fair
value.
Impairment assessments inherently involve management judgments regarding a number of assumptions such as those
described above. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of
our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of one or more of
our reporting units and could result in a goodwill impairment charge in a future period.
Intangible Assets
Intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition and
consist of customer programs, trademarks, customer relationships, technology and other intangible assets. Customer
programs include values assigned to major programs of acquired businesses and represent the aggregate value associated
with the customer relationships, contracts, technology and trademarks underlying the associated program. Acquired
intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing
compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value.
Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to twenty years, based
on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard that will change the way we
recognize revenue and significantly expand the disclosure requirements for revenue arrangements. On July 9, 2015, the
FASB approved a one-year deferral of the effective date of the standard to 2018 for public companies, with an option that
would permit companies to adopt the standard in 2017. Early adoption prior to 2017 is not permitted. The new standard may
be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new
contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up
adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance
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