Northrop Grumman 2013 Annual Report Download - page 63

NORTHROP GRUMMAN CORPORATION
-53-
Goodwill and Other Purchased Intangible Assets
The company performs impairment tests for goodwill annually 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. In the fourth quarter of 2013, the company changed the date of its annual goodwill
impairment test from November 30 to December 31. This change in accounting principle is preferable as it aligns
the timing of our annual goodwill impairment test with our year-end financial reporting process. This change did not
result in the acceleration, delay or avoidance of an impairment charge. The company applied the change in the
annual impairment date retrospectively to January 1, 2011; it is impracticable to objectively determine valuation
estimates necessary to apply the change in periods prior to that date. There were no changes in previously reported
amounts as a result of retrospectively applying the change in the annual impairment testing date. As a result of this
change, during 2013, we performed an annual goodwill impairment test as of November 30 and as of December 31.
Cash Surrender Value of Life Insurance Policies
The company maintains whole life insurance policies on a group of executives, which are recorded at their cash
surrender value as determined by the insurance carrier. The company also has split-dollar life insurance policies on
former officers and executives from acquired businesses, which are recorded at the lesser of their cash surrender
value or premiums paid. These policies are utilized as a partial funding source for deferred compensation and other
non-qualified employee retirement plans. As of December 31, 2013 and 2012, the carrying values associated with
these policies are $287 million and $271 million, respectively, and are recorded in other non-current assets in the
consolidated statements of financial position.
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
management, including any settlement offers, has determined it is probable 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 likely than another, the low 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 life insurance benefits, to
eligible retirees and qualifying dependents. The liabilities, unamortized benefit plan costs and annual income or
expense of the company’s pension and other post-retirement benefit plans are determined using methodologies that
involve several actuarial assumptions, the most significant of which are the discount rate, the expected long-term
rate of return on plan assets, and the cash balance crediting rate. Unamortized benefit plan costs consist primarily of
accumulated net after-tax actuarial losses.
Because U.S. Government regulations require that the costs of pension and other post-retirement plans be charged to
our contracts with customers in accordance with the Federal Acquisition Regulation and the related CAS (U.S.
Government Cost Accounting Standards) that govern such plans, we calculate retiree benefit plan costs under both
CAS and FAS (GAAP Financial Accounting Standards) methods. While both FAS and CAS recognize a normal
service cost component in measuring periodic pension cost, there are differences in the way the remaining
components of annual pension costs are calculated under each method. Measuring plan obligations under FAS and
CAS methods utilize different assumptions and models, such as in estimating earnings on plan assets and calculating
interest expense. In addition, the periods over which gains/losses related to pension assets and actuarial changes are
amortized are different under each FAS/CAS method. As a result, annual retiree benefit plan expense amounts for
FAS are different from the amounts for CAS even though the ultimate cost of providing benefits is the same under
either method. CAS retiree benefit plan costs are charged to contracts and are included in segment operating income,
and the difference between CAS and FAS expense is recorded in operating income at the consolidated company
level.
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.
The fair values of plan assets are determined based on prevailing market prices or estimated fair value for
investments with no available quoted prices. Not all net periodic pension expense is recognized in net earnings in the