Northrop Grumman 2014 Annual Report Download - page 45

NORTHROP GRUMMAN CORPORATION
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the many variables inherent in the estimation of a business’ fair value and the relative size of our recorded goodwill,
differences in assumptions may have a material effect on the results of our impairment analysis.
We 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.
Retirement Benefits
Overview – The determination of projected benefit obligations and the fair value of plan assets for our pension and
other post-retirement plans requires the use of several actuarial assumptions. We perform an annual review of these
assumptions 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, expected long-term rate of return
on plan assets, estimated fair market value of plan assets, and life expectancy for those covered by our pension and
other post-retirement benefit plans.
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 4.12 percent at December 31, 2014, and 4.99 percent at December 31,
2013.
The effects of a hypothetical change in the discount rate may be nonlinear and asymmetrical for future years as the
discount rate changes and the accounting corridor is applied. 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 plan assets or
benefit obligations. Holding all other assumptions constant, an increase or decrease of 25 basis points in the
December 31, 2014, discount rate assumption would have the following estimated effects on 2014 pension and other
post-retirement benefit obligations and 2015 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 $ 100 $ (96)
Other post-retirement benefit expense 4(3)
Pension obligation 1,064 (1,008)
Other post-retirement benefit obligation 68 (64)
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. The cash
balance crediting rate tends to move in concert with the discount rate but has an offsetting effect on pension benefit
obligations and pension expense in comparison to the discount rate. 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 2.75 percent as of December 31, 2014, growing to 3.5 percent by
2020. Holding all other assumptions constant, an increase or decrease of 25 basis points in the December 31, 2014,
cash balance crediting rate assumption would have the following estimated effects on 2014 pension benefit
obligations and 2015 expected pension expense:
$ increase/(decrease) in millions
25 Basis Point
Decrease in
Rate
25 Basis Point
Increase in
Rate
Pension expense $(25) $ 26
Pension obligation (121) 127