Northrop Grumman 2013 Annual Report Download - page 62

NORTHROP GRUMMAN CORPORATION
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funds. The company does not invest in high yield or high risk securities. Cash in bank accounts at times may exceed
federally insured limits.
Accounts Receivable and Inventoried Costs
Accounts receivable include amounts billed and currently due from customers, as well as amounts currently due but
unbilled (primarily related to costs incurred on contracts accounted for under the cost-to-cost method of percentage-
of-completion accounting). Accounts receivable also include 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.
Accumulated contract costs in unbilled accounts receivable and inventoried 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 accordance with industry practice, unbilled accounts receivable and
inventoried costs are classified as current assets and include amounts related to contracts having production cycles
longer than one year. Payments received in excess of inventoried costs and unbilled accounts receivable amounts on
a contract by contract basis are recorded as advance payments and amounts in excess of costs incurred in the
consolidated statements of financial position.
Inventoried costs primarily relate to work in process on contracts accounted for under the units-of-delivery method
of percentage-of-completion accounting. These costs represent accumulated contract costs less the portion of such
costs allocated to delivered items. Product inventory primarily consists of raw materials and is stated at the lower of
cost or market, generally using the average cost method.
Property, Plant and Equipment
Property, plant and equipment 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. Major
classes of property, plant and equipment and their useful lives are as follows:
December 31
Useful life in years, $ in millions Useful Life 2013 2012
Land and land improvements Up to 40(1) $ 373 $ 373
Buildings and improvements Up to 45 1,450 1,421
Machinery and other equipment Up to 20 4,243 4,233
Capitalized software costs 3-5 418 413
Leasehold improvements Length of Lease(1) 659 593
Property, plant and equipment, at cost 7,143 7,033
Accumulated depreciation (4,337)(4,146)
Property, plant and equipment, net $2,806 $2,887
(1) Land is not a depreciable asset. Leasehold improvements are depreciated over the useful life of the asset if it is
shorter than the length of the 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 majority of our
leases are 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 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.