Raytheon 2009 Annual Report Download - page 100

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9: Fair Value Measurement
The estimated fair value of certain financial instruments, including cash and cash equivalents and short-term debt
approximates the carrying value due to their short maturities and varying interest rates. The estimated fair value of notes
receivable approximates the carrying value based principally on the underlying interest rates and terms, maturities,
collateral and credit status of the receivables. The carrying value of long-term debt of $2.3 billion at December 31, 2009
and December 31, 2008 was recorded at amortized cost. The estimated fair value of long-term debt of approximately $2.6
billion at December 31, 2009 and $2.5 billion at December 31, 2008 was based on quoted market prices.
In 2009, we adopted the required new accounting standard for fair value measurements of all nonfinancial assets and
nonfinancial liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis. The
accounting standard for those assets and liabilities did not have a material impact on our financial position, results of
operations or liquidity. We did not have any significant nonfinancial assets or nonfinancial liabilities that would be
recognized or disclosed at fair value on a recurring basis as of December 31, 2009.
The accounting standard for fair value measurements provides a framework for measuring fair value and requires
expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an
asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. The accounting standard established a fair value
hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes
the three levels of inputs required as well as the assets and liabilities that we value using those levels of inputs.
Level 1: Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets are investments in
marketable securities held in rabbi trusts that we use to pay benefits under certain of our non-qualified deferred
compensation plans which we include in other assets, net. Our Level 1 liabilities include our obligations to pay
certain non-qualified deferred compensation plan benefits which we include in accrued retiree benefits and
other long-term liabilities. Under these non-qualified deferred compensation plans, participants designate
investment options (primarily mutual funds) to serve as the basis for measurement of the notional value of
their accounts. We also include foreign exchange forward contracts that we trade in an active exchange market
in our Level 1 assets and liabilities.
Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or that we corroborate with observable
market data for substantially the full term of the related assets or liabilities. Our Level 2 assets were interest rate
swaps whose fair value we determined using a pricing model predicated upon observable market inputs. We
terminated our interest rate swaps in the first quarter of 2009.
Level 3: Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets
or liabilities. Our Level 3 asset relates to our subordinated retained interest in general aviation finance
receivables (Subordinated Retained Interest) that we sold in previous years for which the underlying aircraft
serve as collateral. We estimate the fair value for this asset based on the present value of the future expected
cash flows using certain unobservable inputs, including the collection periods for the underlying receivables
and a credit adjusted rate of 5.3% at December 31, 2009 and 4.4% at December 31, 2008. These unobservable
inputs reflect our suppositions about the assumptions market participants would use in pricing this asset.
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