Northrop Grumman 2009 Annual Report Download - page 79

lower of cost or market, generally using the average cost method. General corporate expenses and IR&D allocable
to commercial contracts are expensed as incurred.
Outsourcing Contract Costs – Costs on outsourcing contracts, including costs incurred for bid and proposal
activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing
contract are deferred and expensed over the contract life. These costs represent incremental external costs or
certain specific internal costs that are directly related to the contract acquisition and transition/set-up. The
primary types of costs that may be capitalized include labor and related fringe benefits, subcontractor costs, and
travel costs.
Depreciable Properties – Property, plant, and equipment owned by the company are depreciated over the estimated
useful lives of individual assets. Costs incurred for computer software developed or obtained for internal use are
capitalized and classified in machinery and other equipment. Most of these assets are depreciated using declining-
balance methods, with the remainder using the straight-line method, with the following lives:
Years
Land improvements 2-45
Buildings and improvements 2-45
Machinery and other equipment 2-25
Capitalized software costs 3-5
Leasehold improvements Length of lease
Leases – The company uses its incremental borrowing rate in the assessment of lease classification as capital or
operating and defines the initial lease term to include renewal options determined to be reasonably assured. The
company conducts operations primarily under operating leases.
Many of the company’s real property lease agreements contain incentives for tenant improvements, rent holidays,
or rent escalation clauses. For incentives for tenant improvements, the company records a deferred rent liability
and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and
rent escalation clauses during the lease term, the company records minimum rental expenses on a straight-line
basis over the term of the lease. For purposes of recognizing lease incentives, the company uses the date of initial
possession as the commencement date, which is generally when the company is given the right of access to the
space and begins to make improvements in preparation of intended use.
Goodwill and Other Purchased Intangible Assets – The company performs impairment tests for goodwill as of
November 30th of each year, or when evidence of potential impairment exists. When it is determined that
impairment has occurred, a charge to operations is recorded. Goodwill and other purchased intangible asset
balances are included in the identifiable assets of the business segment to which they have been assigned. Any
goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the
respective business segments’ operating income. Purchased intangible assets are amortized on a straight-line basis
over their estimated useful lives (see Note 10).
Self-Insurance Accruals – Accruals for self-insured workers’ compensation totaling approximately $520 million and
$523 million as of December 31, 2009, and 2008, respectively are included in other liabilities. The company
estimates the required liability for such claims on a discounted basis utilizing actuarial methods based on various
assumptions, which include, but are not limited to, the company’s historical loss experience and projected loss
development factors.
Litigation, Commitments, and Contingencies – Amounts associated with litigation, commitments, and contingencies
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.
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NORTHROP GRUMMAN CORPORATION
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