Northrop Grumman 2011 Annual Report Download - page 77

NORTHROP GRUMMAN CORPORATION
accordance with industry practice, inventoried costs are classified as a current asset and include amounts related to
contracts having production cycles longer than one year. Product inventory primarily consists of raw materials and
is stated at the 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. The
company capitalized $4 million, $4 million, and $57 million and amortized $45 million, $39 million, and $46
million of such costs in 2011, 2010 and 2009, respectively. At December 31, 2011 and 2010, deferred outsourcing
contract costs of $198 million and $239 million, respectively, are included in miscellaneous other assets in the
consolidated statements of financial position.
Depreciable Properties – Property, plant, and equipment owned by the company are depreciated over the estimated
useful lives of individual assets. 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 2-40
Buildings and improvements 2-45
Machinery and other equipment 2-20
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 tenant improvement incentives, 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 the company believes a 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. Purchased
intangible assets are generally amortized on a straight-line basis over their estimated useful lives (see Note 11).
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 as then known to them, including any settlement offers, has determined that it is probable that a
liability will be found to have been incurred and the amount of the loss can be reasonably estimated. When only a
range of amounts is established and no amount within the range is more probable than another, the lower end of
the range is recorded. Legal fees are expensed as incurred.
Retirement Benefits – The company sponsors various pension plans covering substantially all employees. The
company also provides post-retirement benefit plans other than pensions, consisting principally of health care and
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