Lockheed Martin 2015 Annual Report Download - page 83

10 to 40 years for buildings and five to 15 years for machinery and equipment. No depreciation expense is recorded on
construction in progress until such assets are placed into operation. Depreciation expense related to plant and equipment was
$738 million in 2015, $739 million in 2014 and $714 million in 2013.
We review the carrying amounts of long-lived assets for impairment if events or changes in the facts and circumstances
indicate that their carrying amounts may not be recoverable. We assess impairment by comparing the estimated undiscounted
future cash flows of the related asset grouping to its carrying amount. If an asset is determined to be impaired, we recognize
an impairment charge in the current period for the difference between the fair value of the asset and its carrying amount.
Capitalized software – We capitalize certain costs associated with the development or purchase of internal-use
software. The amounts capitalized are included in other noncurrent assets on our Balance Sheets and are amortized on a
straight-line basis over the estimated useful life of the resulting software, which ranges from two to six years. As of
December 31, 2015 and 2014, capitalized software totaled $481 million and $547 million, net of accumulated amortization of
$1.9 billion and $1.8 billion. No amortization expense is recorded until the software is ready for its intended use.
Amortization expense related to capitalized software was $172 million in 2015, $206 million in 2014 and $228 million in
2013.
Goodwill – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at
their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses.
We perform an impairment test of our goodwill at least annually in the fourth quarter and more frequently whenever
certain events or changes in circumstances indicate the carrying value of goodwill may be impaired. Such events or changes
in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of
our industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our
business or the disposal of all or a portion of a reporting unit. Our goodwill has been allocated to and is tested for impairment
at a level referred to as the reporting unit, which is our business segment level or a level below the business segment. The
level at which we test goodwill for impairment requires us to determine whether the operations below the business segment
constitute a business for which discrete financial information is available and segment management regularly reviews the
operating results.
We may use both qualitative and quantitative approaches when testing goodwill for impairment. Under the qualitative
approach, for selected reporting units we perform a qualitative evaluation of events and circumstances impacting the
reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is
more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary.
Otherwise, we perform a quantitative two-step impairment test. For certain reporting units we only perform a quantitative
impairment test.
Under step one of the quantitative impairment test, we compare the fair value of each reporting unit to its carrying value,
including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not
impaired. If the carrying value of a reporting unit exceeds its fair value, we then perform step two of the quantitative
impairment test and compare the implied value of the reporting unit’s goodwill with the carrying value of its goodwill. The
implied value of the reporting unit’s goodwill is calculated by creating a hypothetical balance sheet as if the reporting unit
had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible
assets that may not have any corresponding carrying value in our balance sheet). The implied value of the reporting unit’s
goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If the carrying
value of the reporting unit’s goodwill exceeds the implied value of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
We estimate the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and
market-based valuation methodologies such as comparable public company trading values and values observed in recent
business acquisitions. Determining fair value requires the exercise of significant judgments, including judgments about the
amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public
company earnings multiples and relevant transaction multiples. The cash flows employed in the DCF analyses are based on
our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, U.S.
Government budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in
working capital, long-term business plans and recent operating performance. The discount rates utilized in the DCF analysis
are based on the respective reporting unit’s weighted average cost of capital, which takes into account the relative weights of
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