Raytheon 2011 Annual Report Download - page 90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
82
Contracts in Process—Contracts in process are stated at cost plus estimated profit, but not in excess of estimated realizable
value. Included in contracts in process is accounts receivables, which includes amounts billed and due from customers. We
maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be
collected. The allowance is based upon an assessment of customer credit-worthiness, historical payment experience, the age
of outstanding receivables and collateral to the extent applicable.
Deferred Contract Costs—Included in contracts in process are certain costs incurred in the performance of our U.S.
Government contracts which are required to be recorded under GAAP but are not currently allocable to contracts. Such costs
are deferred and primarily include a portion of our environmental expenses, asset retirement obligations, certain restructuring
costs, deferred state income taxes, workers’ compensation and other accruals. At December 31, 2011 and December 31, 2010,
net deferred contract costs were approximately $190 million and $340 million, respectively. These costs are allocated to
contracts when they are paid or otherwise agreed. We regularly assess the probability of recovery of these costs. This assessment
requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract
activity. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of our
remaining contracts could be adversely affected. There were no costs deferred on fixed price service contracts at December
31, 2011 and December 31, 2010.
Pension and other postretirement benefit costs are allocated to our contracts as allowed costs based upon the U.S. Government
cost accounting standards (CAS). The CAS requirements for pension and other postretirement benefit costs differ from the
financial accounting standards (FAS) requirements under GAAP. Given the inability to match with reasonable certainty
individual expense and income items between the CAS and FAS requirements to determine specific recoverability, we have
not estimated the incremental FAS income or expense to be recoverable under our expected future contract activity, and
therefore did not defer any FAS expense for pension and other postretirement benefit plans in 2009–2011. This resulted in
$337 million of expense, $187 million of expense, and $80 million of income in 2011, 2010 and 2009, respectively, reflected
in our consolidated results of operations for the difference between CAS and FAS requirements for our pension and other
postretirement plans in those years.
Inventories—Inventories are stated at cost (first-in, first-out or average cost), but not in excess of net realizable value. A
write down for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical
usage patterns, future sales expectations and salvage value.
Inventories consisted of the following at December 31:
(In millions)
Materials and purchased parts
Work in process
Finished goods
Total
2011
$ 60
264
12
$ 336
2010
$ 63
278
22
$ 363
We capitalize costs incurred in advance of contract award or funding in inventories if we determine contract award or funding
is probable. To the extent these are pre-contract costs, start-up costs have been excluded. We included capitalized pre-contract
costs and other deferred costs of $121 million and $116 million in inventories as work in process at December 31, 2011 and
December 31, 2010, respectively.
Property, Plant and Equipment, Net—Property, plant and equipment, net are stated at cost less accumulated depreciation.
Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are expensed. We
include gains and losses on the sales of plant and equipment that are allocable to our contracts in overhead as we can generally
recover these costs through the pricing of products and services to the U.S. Government. For all other sales or asset retirements,
the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or
loss is reflected in income.