Raytheon 2007 Annual Report Download - page 65

contracts to sell software is recognized in accordance with the requirements of Statement of Position 97-2, Software
Revenue Recognition. Revenue from non-software license fees is recognized over the expected life of the continued
involvement with the customer. Royalty revenue is recognized when earned. Revenue generated from fixed price service
contracts not associated with the design, development, manufacture or modification of complex aerospace or electronic
equipment is recognized as services are rendered once persuasive evidence of an arrangement exists, our price is fixed or
determinable, and we have determined that collectibility is reasonably assured.
We apply the separation guidance in Emerging Issues Task Force 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21) for contracts with multiple deliverables. Revenue arrangements with multiple deliverables are
evaluated to determine if the deliverables should be divided into more than one unit of accounting. For contracts with
more than one unit of accounting, we recognize revenue for each deliverable based on the revenue recognition policies
discussed above.
Other Considerations
The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under
contracts with the U.S. government. Cost-based pricing is determined under the Federal Acquisition Regulations (FAR).
The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services under
U.S. government contracts. For example, costs such as those related to charitable contributions, advertising, interest
expense and public relations are unallowable. In addition, we may enter into agreements with the U.S. government that
address the allowability and allocability of costs to contracts for specific matters. Certain costs incurred in the
performance of our U.S. government contracts are required to be recorded under GAAP but are not currently allocable to
contracts. Such costs are deferred and primarily include a portion of our environmental expenses, asset retirement
obligations, certain restructuring costs, deferred state income tax and workers’ compensation. These costs are allocated to
contracts when they are paid or otherwise agreed. We regularly assess the probability of recovery of these costs. This
assessment requires us to make assumptions about the extent of cost recovery under our contracts and the amount of
future contract activity. If the level of backlog in the future does not support the continued deferral of these costs, the
profitability of our remaining contracts could be adversely affected.
Pension and other postretirement costs are allocated to our contracts as allowed costs based upon the U.S. Government
Cost Accounting Standards (CAS). The CAS requirements for pension and other postretirement costs differ from the
financial accounting standards (FAS) requirements under U.S. GAAP. Given the inherent difficulty in matching
individual expense and income items between the CAS and FAS requirements to determine specific recoverability, we
have not estimated the incremental FAS expense to be recoverable under our expected future contract activity, and
therefore have not deferred any FAS expense for pension and other postretirement plans in 2005-2007. This resulted in
$259 million, $362 million and $448 million of incremental expense reflected in our results of operations for 2007, 2006
and 2005, respectively, for the difference between CAS and FAS requirements for our pension plans in those years.
Pension Costs—We have pension plans covering the majority of our employees, including certain employees in foreign
countries. The selection of the assumptions used to determine pension expense involves significant judgment. Our long-
term return on assets (ROA) and discount rate assumptions are the key variables in determining pension expense and the
funded status of our pension plans.
To develop the long-term ROA assumption, we perform periodic studies which consider our asset allocation strategies,
recent and anticipated future long-term performance of individual asset classes, and the associated risk. The investment
policy asset allocation ranges for our domestic plans are as follows:
U.S. Equities 35% - 65%
International Equities 5% - 30%
Debt Securities 20% - 40%
Real Estate 2% - 7%
Other (including private equity and cash) 2% - 17%
The long-term ROA assumption for our domestic pension plans in 2007 was 8.75%, unchanged from 2006. If we
significantly changed our investment allocation or strategy, it could change our assumed long-term rate of return.
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