Raytheon 2010 Annual Report Download - page 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of determining pension expense under GAAP, investment gains and losses are spread over 3 years to
develop a market-related value of the assets.
We recognize the funded status of a postretirement benefit plan (defined benefit pension and other benefits) as an asset
or liability on our consolidated balance sheets. Funded status represents the difference between the projected benefit
obligation of the plan and the market value of the plan’s assets. Previously unrecognized deferred amounts such as
demographic or asset gains or losses and the impact of historical plan changes are included in AOCL. Changes in these
amounts in future years will be reflected through AOCL and amortized in future pension expense over the average
employee service period.
Derivative Financial Instruments—We enter into foreign currency forward contracts with commercial banks to fix the
foreign currency exchange rates on specific commitments and payments to vendors, and customer receipts. Our foreign
currency forward contracts are transaction driven and directly relate to a particular asset, liability or transaction for which
commitments are in place. For foreign currency forward contracts designated and qualified for cash flow hedge
accounting, we record the effective portion of the gain or loss on the derivative in AOCL, net of tax, and reclassify it into
earnings in the same period or periods during which the hedged revenue or cost of sales transaction affects earnings.
We recognize all derivative financial instruments as either assets or liabilities at fair value in our consolidated balance
sheets. We measure and record the impact of counterparty credit risk into our valuation and the impact was less than $1
million as of December 31, 2010. We designate most foreign currency forward contracts as cash flow hedges of forecasted
purchases and sales denominated in foreign currencies, and interest rate swaps as fair value hedges of our fixed-rate
financing obligations. We classify the cash flows from these instruments in the same category as the cash flows from the
hedged items. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Realized gains and losses resulting from these cash flow hedges offset the foreign exchange gains and losses on the
underlying transactions being hedged. Gains and losses on derivatives not designated for hedge accounting or
representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized currently in cost of sales or net sales.
We also periodically enter into pay-variable, receive-fixed interest rate swaps to manage interest rate risk associated with
our fixed-rate financing obligations. We account for our interest rate swaps as fair value hedges of a portion of our fixed-
rate financing obligations, and accordingly record gains and losses from changes in the fair value of these swaps in interest
expense, along with the offsetting gains and losses on the fair value adjustment of the hedged portion of our fixed-rate
financing obligations. We also record in interest expense the net amount paid or received under the swap for the period
and the amortization of gain or loss from the early termination of interest rate swaps. For a discussion of the impacts of
our hedging activities on our results, see page 86 of this Form 10-K.
Fair Values—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. This 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.
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