Raytheon 2007 Annual Report Download - page 92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Inventories—Inventories are stated at cost (first-in, first-out or average cost), but not in excess of realizable value. A
provision for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels,
historical usage patterns, future sales expectations and salvage value.
Property,PlantandEquipment,Net—Property, plant and equipment, net are stated at cost less accumulated
depreciation. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements
are expensed. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is reflected in income. Gains and losses
resulting from the sale of plant and equipment at the government and defense businesses are included in overhead and
reflected in the pricing of products and services to the U.S. government.
Provisions for depreciation are generally computed using a combination of accelerated and straight-line methods.
Depreciation provisions are based on estimated useful lives as follows: buildings—20 to 45 years, machinery and
equipment—3 to 10 years and equipment leased to others—5 to 10 years. Leasehold improvements are amortized over
the lesser of the remaining life of the lease or the estimated useful life of the improvement.
Impairment of Goodwill and Long-lived Assets—We comply with the provisions of Statement of Financial
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which requires that we evaluate our goodwill
for impairment at least annually or whenever events or circumstances indicate the carrying value of that goodwill may not
be recoverable. We perform our annual impairment test in the fourth quarter utilizing a two-step methodology that
requires us to first identify potential goodwill impairment and then measure the amount of the related goodwill
impairment loss, if any. We have identified our operating segments as reporting units under the impairment test
assessment criteria outlined in SFAS No. 142. In performing our annual impairment test in the fourth quarter of 2007
and 2006, we did not identify any goodwill impairment associated with our continuing operations.
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we determine whether long-lived assets are to be held for use or held for disposal. Upon indication of
possible impairment, we evaluate the recoverability of held for use long-lived assets by measuring the carrying amount of
the assets against the related estimated undiscounted future cash flows. When an evaluation indicates that the future
undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is adjusted to its estimated
fair value. In order for long-lived assets to be considered held for disposal, we must have committed to a plan to dispose
of the assets. Once deemed held for disposal, the assets are stated at the lower of the carrying amount or fair value.
Computer Software—Internal use computer software, which consists primarily of an integrated financial package, is
stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life,
generally 10 years.
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