Raytheon 2010 Annual Report Download - page 65

The components of the FAS/CAS Pension Adjustment was 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 in Critical Accounting Estimates, 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 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 plans in 2008 as well as
the expected return on the expected cash contributions in 2009. In addition, the FAS expense decreased by $47 million
due to the recognition of previous historical asset returns which were greater than the expected return.
For 2011, we currently expect our FAS expense will increase more than our CAS expense, which will increase the FAS/
CAS Pension Adjustment. We expect the FAS/CAS Pension Adjustment to be approximately $370 million of expense
driven by the lower discount rate environment and the difference in amortization periods under FAS and CAS, described
above, of the net unrecognized liability, principally due to the negative 2008 asset returns. This expected increase in FAS
expense in excess of CAS expense is subject to our annual update, generally planned in the third quarter, of our actuarial
estimate of the unfunded benefit obligation for both FAS and CAS for final 2010 census data and does not include any
potential change for the Harmonization Rule. After 2011, the FAS/CAS Pension Adjustment is more difficult to predict
because future FAS and CAS expense is based on a number of key assumptions for future periods. Differences between
those assumptions and future actual results could significantly change both FAS and CAS expense in future periods.
However, based solely on our current assumptions at December 31, 2010 and without an adjustment for the
Harmonization Rule, we would expect our FAS/CAS Pension Adjustment to decline as CAS continues to recognize the
market related value of the 2008 asset losses through 2013 which FAS will have fully recognized through 2011.
Beginning in 2011, in order to more clearly show each business’ underlying operational performance, we began treating
for management reporting purposes the amounts related to the FAS/CAS Post Retirement benefit (FAS/CAS PRB
Adjustment) consistent with the FAS/CAS Pension Adjustment. Also beginning in 2011, we changed our segment
presentation to exclude from each business the amounts related to the FAS/CAS PRB Adjustment and combined such
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