Raytheon 2009 Annual Report Download - page 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Consolidation and Classification—The consolidated financial statements include the accounts of Raytheon Company,
and all wholly-owned and majority-owned domestic and foreign subsidiaries. All intercompany transactions have been
eliminated. For classification of certain current assets and liabilities, we use the duration of the related contract or
program as our operating cycle, which is generally longer than one year. In addition, certain prior year amounts have
been reclassified to conform with the current year presentation. As used in these notes, the terms “we”, “us”, “our”,
“Raytheon” and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another
meaning.
Use of Estimates—Our consolidated financial statements are based on the application of U.S. Generally Accepted
Accounting Principles (GAAP), which require us to make estimates and assumptions about future events that affect the
amounts reported in our consolidated financial statements and the accompanying notes. Future events and their effects
cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual
results could differ from those estimates, and any such differences may be material to our consolidated financial
statements.
Revenue Recognition—We account for our long-term contracts associated with the design, development, manufacture,
or modification of complex aerospace or electronic equipment and related services, such as certain cost-plus service
contracts, using the percentage-of-completion accounting method. Under this method, revenue is recognized based on
the extent of progress towards completion of the long-term contract. We combine closely related contracts when all the
applicable criteria under GAAP are met. Similarly, we may segment a project, which may consist of a single contract or a
group of contracts, with varying rates of profitability, only if all the applicable criteria under GAAP are met.
We generally use the cost-to-cost measure of progress for all of our long-term contracts unless we believe another method
more clearly measures progress towards completion of the contract. Under the cost-to-cost measure of progress, the
extent of progress towards completion is measured based on the ratio of costs incurred-to-date to the total estimated
costs at completion of the contract. Revenues, including estimated earned fees or profits, are recorded as costs are
incurred. Incentive and award fees are generally awarded at the discretion of the customer or upon achievement of
certain program milestones or cost targets. Incentive and award fees, as well as penalties related to contract performance,
are considered in estimating profit rates. Estimates of award fees are based on actual awards and anticipated performance,
which may include the performance of subcontractors or partners depending upon the individual contract requirements.
Incentive provisions that increase or decrease earnings based solely on a single significant event are generally not
recognized until the event occurs. Such incentives and penalties are recorded when there is sufficient information for us
to assess anticipated performance. Our claims on contracts are recorded only if it is probable the claim will result in
additional contract revenue and the amounts can be reliably estimated.
Changes in estimates of contract sales, costs of sales and profits are recognized using a cumulative catch-up, which
recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in
one or more of these estimates could affect the profitability of one or more of our contracts. When estimates of total costs
to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract
is recorded in the period the loss is determined.
To a much lesser extent, we enter into contracts that are not associated with the design, development, manufacture, or
modification of complex aerospace or electronic equipment and related services. Revenue under such contracts is
generally recognized upon delivery or as the service is performed. Revenue on contracts to sell software is recognized
when evidence of an arrangement exists, the software has been delivered and accepted by the customer, the fee is fixed or
determinable and collection is probable. 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 collectability is reasonably assured.
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