Northrop Grumman 2011 Annual Report Download - page 76

NORTHROP GRUMMAN CORPORATION
instruments to manage its exposure to interest rate and foreign currency exchange risks and to balance its fixed and
variable rate long-term debt portfolio. The company does not use derivative financial instruments for trading or
speculative purposes, nor does it use leveraged financial instruments. Credit risk related to derivative financial
instruments is considered minimal and is managed by requiring high credit standards for counterparties and
through periodic settlements of positions.
For derivative financial instruments not designated as cash flow hedging instruments, gains or losses resulting from
changes in the fair value are reported in Other, net in the consolidated statements of operations.
Income Taxes – Provisions for federal, foreign, state, and local income taxes are calculated on reported financial
statement pre-tax income based on current tax law and include the cumulative effect of any changes in tax rates
from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the
amounts currently payable because certain items of income and expense are recognized in different time periods
for financial reporting purposes than for income tax purposes. If a tax position does not meet the minimum
statutory threshold to avoid payment of penalties, the company recognizes an expense for the amount of the
penalty in the period the tax position is determined. The company recognizes federal interest accrued related to
unrecognized tax benefits in income tax expense. The company recognizes state interest accrued related to
unrecognized tax benefits in operating income. Federal penalties are recognized as a component of income tax
expense. State and local income and franchise tax provisions are allocable to government contracts in process and,
accordingly, are included in operating income.
The company performs a comprehensive review of its portfolio of uncertain tax positions regularly. In this regard,
an uncertain tax position represents the company’s expected treatment of a tax position taken in a filed tax return,
or planned to be taken in a future tax return or claim, that has not been reflected in measuring income tax expense
for financial reporting purposes. Until these positions are sustained by the taxing authorities or the statute of
limitations concerning such issues lapses, the company does not recognize the tax benefits resulting from such
positions and reports the tax effects as a liability for uncertain tax positions in its consolidated statements of
financial position.
Cash and cash equivalents – Cash and cash equivalents are comprised of cash in banks and highly liquid instruments
with original maturities of three months or less, primarily consisting of bank time deposits and investments in
institutional money market funds. The carrying amounts approximate fair value due to the short-term nature of
these items. The company does not invest in high yield or high risk securities. Cash in bank accounts at times may
exceed federally insured limits.
Marketable Securities – Marketable securities accounted as trading and available-for-sale are recorded at fair value.
For available-for-sale securities, any unrealized gains and losses are reported as a separate component of
Accumulated Other Comprehensive Income (AOCI). Unrealized gains and losses on trading securities are
included in Other, net in the consolidated statements of operations. In addition, investments in held-to-maturity
instruments with original maturities greater than three months are recorded at amortized cost, and are included in
prepaid expenses and other current assets in the consolidated statements of financial position.
Accounts Receivable – Accounts receivable include amounts billed and currently due from customers, amounts
currently due but unbilled (primarily related to contracts accounted for under the cost-to-cost measure of the
percentage-of-completion method of accounting), certain estimated contract change amounts, claims or requests
for equitable adjustment in negotiation that are probable of recovery, and amounts retained by the customer
pending contract completion.
Inventoried Costs – Inventoried costs primarily relate to work in process under fixed-price and units-of-delivery
contracts. These costs represent accumulated contract costs less the portion of such costs allocated to delivered
items. Accumulated contract costs include direct production costs, factory and engineering overhead, production
tooling costs, and, for government contracts, allowable general and administrative expenses. According to the
provisions of U.S. Government contracts, the customer asserts title to, or a security interest in, inventories related
to such contracts as a result of contract advances, performance-based payments, and progress payments. In
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