Lockheed Martin 2015 Annual Report Download - page 82

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. Under fixed-price service contracts, 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 with 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. Costs for all service contracts are expensed as
incurred.
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 and charged to cost of sales. Under
certain arrangements in which a customer shares in product development costs, our portion of unreimbursed costs is
expensed as incurred in cost of sales. Independent research and development costs charged to cost of sales totaled
$839 million in 2015, $751 million in 2014 and $697 million in 2013. Costs we incur under customer-sponsored research and
development programs pursuant to contracts are included in net sales and cost of sales.
Stock-based compensation – Compensation cost related to all share-based payments is measured at the grant date based
on the estimated fair value of the award. We generally recognize the compensation cost ratably over a three-year vesting
period.
Income taxes – We calculate our provision for income taxes using the asset and liability method, under which deferred
tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist
between the financial statement carrying amount of assets and liabilities and their respective tax bases, as well as from
operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates that will
apply in the years in which we expect the temporary differences to be recovered or paid.
We periodically assess our tax filing exposures related to periods that are open to examination. Based on the latest
available information, we evaluate our tax positions to determine whether the position will more-likely-than-not be sustained
upon examination by the Internal Revenue Service (IRS) or other taxing authorities. If we cannot reach a more-likely-than-
not determination, no benefit is recorded. 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. We record
interest and penalties related to income taxes as a component of income tax expense on our Statements of Earnings. Interest
and penalties were not material.
Cash and cash equivalents – Cash equivalents include highly liquid instruments with original maturities of 90 days or
less.
Receivables – Receivables include amounts billed and currently due from customers and unbilled costs and accrued
profits primarily related to sales on long-term contracts that have been recognized but not yet billed to customers. Pursuant to
contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, assets
related to such contracts as a result of advances, performance-based payments and progress payments. We reflect those
advances and payments as an offset to the related receivables balance for contracts that we account for on a percentage-of-
completion basis using the cost-to-cost method to measure progress towards completion.
Inventories – We record inventories at the lower of cost or estimated net realizable value. Costs on long-term contracts
and programs in progress represent recoverable costs incurred for production or contract-specific facilities and equipment,
allocable operating overhead, advances to suppliers and, in the case of contracts with the U.S. Government and substantially
all other governments, research and development and general and administrative expenses. Pursuant to contract provisions,
agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such
contracts as a result of advances, performance-based payments and progress payments. We reflect those advances and
payments as an offset against the related inventory balances for contracts that we account for on a percentage-of-completion
basis using units-of-delivery as the basis to measure progress toward completing the contract. We determine the costs of
other product and supply inventories by the first-in first-out or average cost methods.
Property, plant and equipment – We record property, plant and equipment at cost. We provide for depreciation and
amortization on plant and equipment generally using accelerated methods during the first half of the estimated useful lives of
the assets and the straight-line method thereafter. The estimated useful lives of our plant and equipment generally range from
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