Northrop Grumman 2013 Annual Report Download - page 49

NORTHROP GRUMMAN CORPORATION
-39-
We also corroborate the fair values determined under the income approach using the market valuation method to
estimate the fair value of our reporting units, by utilizing industry multiples (including relevant control premiums) of
operating earnings. If the carrying value of a reporting unit exceeds its fair value, we determine the fair value of the
reporting unit’s individual assets and liabilities and calculate the implied fair value of goodwill.
Retirement Benefits
Overview – For financial statement purposes, we account for our employee pension and other post-retirement plans
in accordance with GAAP. We recognize the funded status of our retirement benefit plans on a plan-by-plan basis, as
either an asset or a liability in the consolidated statement of financial position. Unamortized benefit plan costs are
recorded as accumulated other comprehensive income/loss within shareholders’ equity, and are then amortized to
expense in future periods. Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they
exceed the accounting corridor. The accounting corridor is a defined range within which amortization of net gains
and losses is not required and is equal to 10 percent of the greater of the plan assets or benefit obligations. Gains or
losses outside of the corridor are subject to amortization over our average employee future service period of
approximately nine years.
We perform an annual review of the assumptions used in determining projected benefit obligations and the fair
values of plan assets for our pension plans and other post-retirement benefit plans in consultation with our outside
actuaries. In the event we determine changes in the assumptions are warranted, or as a result of plan amendments,
future pension and other post-retirement benefit expense could increase or decrease. The principal assumptions that
have a significant effect on our consolidated financial position and annual results of operations are the discount rate,
cash balance crediting rate, the expected long-term rate of return on plan assets and the estimated fair market value
of plan assets.
The company’s 2014 FAS pension expense is expected to be $115 million. The decrease in expected 2014 pension
expense of $259 million, as compared to 2013, is primarily due to the increase in the company’s discount rate
assumption as of December 31, 2013.
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 our pension and other 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 determined using a portfolio of bonds matching the notional cash outflows related to
benefit payments for each significant benefit plan. Taking into consideration the factors noted above, our weighted-
average pension composite discount rate was 4.99 percent at December 31, 2013, and 4.12 percent at December 31,
2012.
The effects of hypothetical changes in the discount rate for a single year may not be representative and may be
asymmetrical or nonlinear for future years because of the application of the accounting corridor. Holding all other
assumptions constant, an increase or decrease of 25 basis points in the December 31, 2013, discount rate assumption
would have the following estimated effects on 2013 pension and other post-retirement benefit obligations and 2014
expected pension and other post-retirement expense:
$ increase/(decrease) in millions
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
Pension expense $ 83 ($ 81)
Other post-retirement benefit expense 2(2)
Pension obligation 828 (792)
Other post-retirement benefit obligation 58 (55)
Cash Balance Crediting Rate - A portion of the company’s pension obligation and resulting pension expense is
based on a cash balance formula, where participants’ hypothetical account balances are accumulated over time with
pay-based credits and interest. Interest is credited monthly using the 30-Year Treasury bond rate. The interest
crediting rate is part of the cash balance formula and independent of actual pension investment earnings. Although
current 30-Year Treasury bond rates are near historically low levels, we expect such bond rates to rise in the
future. The cash balance crediting rate assumption has been set to its current level of 3.9 percent as of December 31,
2013, growing to 4.7 percent by 2019. Holding all other assumptions constant, an increase or decrease of 25 basis
points in the December 31, 2013, cash balance crediting rate assumption would have the following estimated effects
on 2013 pension benefit obligations and 2014 expected pension expense: