Raytheon 2010 Annual Report Download - page 47

CAS Expense—In addition to providing the methodology for calculating pension costs, CAS also prescribes the method
for assigning those costs to specific periods. While the ultimate liability for pension costs under FAS and CAS is similar,
the pattern of cost recognition is different. The key drivers of CAS pension expense include the funded status and the
method used to calculate CAS reimbursement for each of our plans, and our long-term ROA assumption. Unlike FAS,
CAS requires the discount rate to be consistent with the long-term ROA assumption, which changes infrequently given its
long-term nature. As a result, changes in bond or other interest rates generally do not impact CAS. In addition, unlike
FAS, we can only allocate pension costs for a plan under CAS until such plan is fully funded as determined under CAS
requirements. When the estimated future CAS pension costs increase, which occurred at December 31, 2008, driven
mainly by the significant decline in the value of our plan assets, the estimated CAS cost to be allocated to our contracts in
the future increases.
Other FAS and CAS Considerations—On an annual basis, at December 31st, we update our estimate of future FAS and
CAS pension expense based upon actual asset returns and other actuarial factors. Other variables that can impact the
pension plans’ funded status and FAS and CAS income or expense include demographic experience such as the expected
rates of salary increase, retirement age, turnover and mortality. In addition, certain pension plans provide a lump sum
form of benefit that varies based upon externally determined interest rates. Assumptions for these variables are set at the
beginning of the year, and are based on actual and projected plan experience. On a periodic basis, generally planned
annually in the third quarter, we update our actuarial estimate of the unfunded projected benefit obligation for both FAS
and CAS with final census data from the end of the prior year.
The components of the FAS/CAS Pension Adjustment were as follows:
(In millions) 2010 2009 2008
FAS expense $(896) $(646) $(524)
CAS expense 666 673 401
FAS/CAS Pension Adjustment $(230) $ 27 $(123)
As described above, a key driver of the difference between FAS and CAS expense (and consequently, the FAS/CAS
Pension Adjustment) is the pattern of earnings and expense recognition for gains and losses that arise when our asset and
liability experience differ from our assumptions under each set of requirements. Generally, such gains or losses are
amortized under FAS over the average future working lifetime of the eligible employee population of approximately 11
years, and are amortized under CAS over a 15-year period. In accordance with both FAS and CAS, a “market-related
value” of our plan assets is used to calculate the amount of deferred asset gains or losses to be amortized. The market-
related value of assets is determined using actual asset gains or losses over a certain prior period (three years for FAS and
five years for CAS, subject to certain limitations under CAS on the difference between the market-related value and actual
market value of assets). Because of this difference in the number of years over which actual asset gains or losses are
recognized and subsequently amortized, FAS expense generally tends to reflect the recent gains or losses faster than CAS.
Another driver of CAS expense (but not FAS expense) is the funded status of our pension plans under CAS. As noted
above, CAS expense is only recognized for plans that are not fully funded; consequently, if plans become or cease to be
fully funded under CAS due to our asset or liability experience, our CAS expense will change accordingly.
The change in the FAS/CAS Pension Adjustment of $257 million in 2010 compared to 2009 was driven by a $250 million
increase in our FAS expense. The $250 million increase in our FAS expense was driven primarily by the continued
recognition of the 2008 losses in the market related value of assets, which had an impact of approximately $260 million.
Our CAS expense decreased $7 million as a result of actual versus expected asset and liability experience.
The change in the FAS/CAS Pension Adjustment of $150 million in 2009 compared to 2008 was driven by a $272 million
increase in our CAS expense. The $272 million increase in our CAS expense was driven primarily by negative asset
returns in 2008, which caused certain plans to no longer be fully funded under CAS and had an impact of $287 million.
Our FAS expense also increased by $122 million. The primary components of the change in FAS expense included an
increase of $297 million due to the lower than expected return on pension assets during 2008, partially offset by a
decrease of $106 million due to the expected return on our discretionary cash contribution to our
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