Raytheon 2010 Annual Report Download - page 44

segment a contract could change the amount of revenue and gross profit recorded in a given period had consideration
not been given to these factors. 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 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. Contract costs include material, labor and subcontracting costs, as well as an
allocation of indirect costs. Revenues, including estimated earned fees or profits, are recorded as costs are incurred. Due
to the nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at
completion is complex and subject to many variables. Management must make various assumptions and estimates related
to contract deliverables including design requirements, performance of subcontractors, cost and availability of materials,
productivity and manufacturing efficiency and labor availability. These estimates also include the estimated cost of
satisfying our industrial cooperation agreements, sometimes referred to as offset obligations required under certain
contracts. 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 or other damages 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 subcontractor 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.
We have a standard quarterly process in which management reviews the progress and performance of our significant
contracts. As part of this process, management reviews include, but are not limited to, any outstanding key contract
matters, progress towards completion and the related program schedule, identified risks and opportunities, and the
related changes in estimates of revenues and costs. Based on this analysis, any adjustments to net sales, costs of sales and
the related impact to operating income are recorded as necessary in the period they become known. Changes in estimates
of net sales, costs of sales and the related impact to operating income 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.
Other Revenue Methods—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.
We apply the separation guidance under GAAP 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 described 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 provide guidance on the types of costs that are allowable in establishing prices
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