Northrop Grumman 2009 Annual Report Download - page 44

Factors which could result in changes to the assessment of probability, range of estimated costs, and
environmental accruals include: modification of planned remedial actions, increase or decrease in the estimated
time required to remediate, discovery of more extensive contamination than anticipated, results of efforts to
involve other legally responsible parties, financial insolvency of other responsible parties, changes in laws and
regulations or contractual obligations affecting remediation requirements, and improvements in remediation
technology. Although we cannot predict whether new information gained as projects progress will materially
affect the estimated liability accrued, we do not anticipate that future remediation expenditures will have a
material adverse effect on our financial position, results of operations, or cash flows.
Litigation Accruals – Litigation accruals are recorded as charges to earnings when management, after taking into
consideration the facts and circumstances of each matter, including any settlement offers, has determined that it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate
resolution of any exposure to us may vary from earlier estimates as further facts and circumstances become
known. Based upon the information available, we believe that the resolution of any of these various claims and
legal proceedings would not have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.
Uncertain Tax Positions – In 2007, we adopted a new accounting standard related to uncertain tax positions, and
made a comprehensive review of our portfolio of uncertain tax positions at the date of adoption. Only tax
positions meeting the more-likely-than-not recognition threshold may be recognized or continue to be
recognized in the financial statements. The timing and amount of accrued interest is determined by the
applicable tax law associated with an underpayment of income taxes. If a tax position does not meet the
minimum statutory threshold to avoid payment of penalties, we recognize an expense for the amount of the
penalty in the period the tax position is claimed in our tax return. We recognize interest accrued related to
unrecognized tax benefits in income tax expense. Penalties, if probable and reasonably estimable, are recognized
as a component of income tax expense. See Note 12 to the consolidated financial statements in Part II, Item 8.
Under existing GAAP, prior to January 1, 2009, changes in accruals associated with uncertainties arising from the
resolution of pre-acquisition contingencies of acquired businesses were charged or credited to goodwill; effective
January 1, 2009, such changes will be recorded to income tax expense. Adjustments to other tax accruals are
generally recorded in earnings in the period they are determined.
Retirement Benefits
Overview – We annually evaluate assumptions used in determining projected benefit obligations and the fair values
of plan assets for our pension plans and other post-retirement benefits plans in consultation with our outside
actuaries. In the event that we determine that plan amendments or changes in the assumptions are warranted,
future pension and post-retirement benefit expenses could increase or decrease.
Assumptions – The principal assumptions that have a significant effect on our consolidated financial position and
results of operations are the discount rate, the expected long-term rate of return on plan assets, the health care
cost trend rate and the estimated fair market value of plan assets. For certain plan assets where the fair market
value is not readily determinable, such as real estate, private equity, and hedge funds, estimates of fair value are
determined using the best information available.
Discount Rate – The discount rate represents the interest rate that is used to determine the present value of future
cash flows currently expected to be required to settle the pension and post-retirement benefit obligations. The
discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of
each year, the discount rate is primarily determined using the results of bond yield curve models based on a
portfolio of high quality bonds matching the notional cash inflows with the expected benefit payments for each
significant benefit plan. Taking into consideration the factors noted above, our weighted-average pension
composite discount rate was 6.03 percent at December 31, 2009, and 6.25 percent at December 31, 2008.
Holding all other assumptions constant, and since net actuarial gains and losses were in excess of the 10 percent
accounting corridor in 2009, an increase or decrease of 25 basis points in the discount rate assumption for 2009
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NORTHROP GRUMMAN CORPORATION
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