Lockheed Martin 2015 Annual Report Download - page 72

obligations. In addition, the FASB is contemplating making additional changes to certain elements of the new standard. We
are currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have
on our consolidated financial statements and related disclosures. As the new standard will supersede substantially all existing
revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on thousands of contracts across all
our business segments, in addition to our business processes and our information technology systems. As a result, our
evaluation of the effect of the new standard will extend over future periods.
In September 2015, the FASB issued a new standard that simplifies the accounting for adjustments made to preliminary
amounts recognized in a business combination by eliminating the requirement to retrospectively account for those
adjustments. Instead, adjustments will be recognized in the period in which the adjustments are determined, including the
effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at
the acquisition date. We adopted the standard on January 1, 2016 and will prospectively apply the standard to business
combination adjustments identified after the date of adoption.
In November 2015, the FASB issued a new standard that simplifies the presentation of deferred income taxes and
requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in our
consolidated balance sheets. The standard is effective January 1, 2017, with early adoption permitted. The standard may be
applied either prospectively from the date of adoption or retrospectively to all prior periods presented. We are currently
evaluating when we will adopt the standard and the method of adoption.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We maintain active relationships with a broad and diverse group of U.S. and international financial institutions. We
believe that they provide us with sufficient access to the general and trade credit we require to conduct our business. We
continue to closely monitor the financial market environment and actively manage counterparty exposure to minimize the
potential impact from adverse developments with any single credit provider while ensuring availability of, and access to,
sufficient credit resources.
Our main exposure to market risk relates to interest rates, foreign currency exchange rates and market prices on certain
equity securities. Our financial instruments that are subject to interest rate risk principally include fixed-rate long-term debt.
The estimated fair value of our outstanding debt was $16.5 billion at December 31, 2015 and the outstanding principal
amount was $16.2 billion, excluding unamortized discounts and deferred financing costs of $1.0 billion. A 10% change in the
level of interest rates would not have a material impact on the fair value of our outstanding debt at December 31, 2015.
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency
exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We
transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into
foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates
change. Our most significant foreign currency exposures relate to the British Pound Sterling and the Canadian Dollar. These
contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows
associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We
also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings,
we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings indexed to
LIBOR in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate
borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in
order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also
may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are
intended to mitigate certain economic exposures.
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 interest rate swaps at December 31, 2015 and 2014 was $1.5 billion and
$1.3 billion. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2015 and 2014 was
$4.1 billion and $804 million. At December 31, 2015 and 2014, the net fair value of our derivative instruments was not
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