Northrop Grumman 2014 Annual Report Download - page 58

NORTHROP GRUMMAN CORPORATION
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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, 2014 and 2013, the carrying values associated with
these policies are $290 million and $287 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 considering the facts and circumstances of each matter as then known to management, 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. Due to the inherent uncertainties
surrounding gain contingencies, we generally do not recognize potential gains until realized.
Retirement Benefits
The company sponsors various defined benefit pension plans and defined contribution retirement plans covering
substantially all of its employees. The company also provides post-retirement benefits other than pensions,
consisting principally of health care and life insurance benefits, to eligible retirees and qualifying dependents. In
most cases, our defined contribution plans provide for a cash matching of employee contributions up to four percent
of compensation.
The liabilities, unamortized benefit plan costs and annual income or expense of the company’s defined benefit
pension and other post-retirement benefit plans are determined using methodologies that involve several actuarial
assumptions. 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 in accordance with the Federal Acquisition Regulation (FAR) and the related U.S. Government Cost
Accounting Standards (CAS) 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 includes 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
FAS and CAS. 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 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. Not all net
periodic pension expense is recognized in net earnings in the year incurred because it is allocated as production costs
and a portion remains in inventory at the end of a reporting period. The company’s funding policy for the qualified
pension plans is to contribute, at a minimum, the statutorily required amount to an irrevocable trust.
Stock Compensation
The company’s stock compensation plans are classified as equity plans and compensation expense is recognized
over the vesting period (generally three years), net of estimated forfeitures. The company issues stock awards in the
form of restricted performance stock rights and restricted stock rights under its existing plans. The fair value of stock
awards is determined based on the closing market price of the company’s common stock on the grant date. At each
reporting date, the number of shares is adjusted to equal the number ultimately expected to vest.
Accounting Standards Updates
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition
guidance, including Accounting Standards Codification (ASC) No. 605-35, Revenue Recognition - Construction-
Type and Production-Type Contracts. ASU 2014-09 outlines a single set of comprehensive principles for