Raytheon 2012 Annual Report Download - page 44

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third parties or from the stated renewal rate for the undelivered elements. When VSOE does not exist for undelivered items,
we recognize the entire arrangement fee ratably over the applicable performance period. 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.
We apply the separation guidance under GAAP for contracts with multiple deliverables. We analyze revenue arrangements
with multiple deliverables 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 allocate the consideration we receive among the separate units of accounting
based on their relative selling prices, which we determine based on prices of the deliverables as sold on a stand-alone basis,
or if not sold on a stand-alone basis, the prices we would charge if sold on a stand-alone basis, and 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 for goods and services under
U.S. Government contracts. For example, costs such as those related to charitable contributions, certain merger and acquisition
costs, lobbying costs, interest expense and certain litigation defense costs are unallowable. In addition, we may enter into
agreements with the U.S. Government that address the allowability and allocation of costs to contracts for specific matters.
Certain costs incurred in the performance of our U.S. Government contracts 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 tax, workers’ compensation and certain other
accruals. 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.
Pension and other postretirement benefits 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. This resulted in $255 million,
$337 million and $187 million of expense in 2012, 2011 and 2010, respectively, reflected in our results of operations for the
difference between CAS and FAS requirements for our pension and other postretirement plans in those years.
Pension and Other Postretirement Benefits Costs
We have pension plans covering the majority of our employees, including certain employees in foreign countries. We must
calculate our pension costs under both CAS and FAS requirements under GAAP, and both calculations require judgment. CAS
prescribes the allocation to and recovery of pension costs on U.S. Government contracts through the pricing of products and
services and the methodology to determine such costs. GAAP outlines the methodology used to determine pension expense
or income for financial reporting purposes. The CAS requirements for pension costs and its calculation methodology differ
from the FAS requirements and calculation methodology. As a result, while both CAS and FAS use long-term assumptions
in their calculation methodologies, each method results in different calculated amounts of pension cost. In addition, the cash
funding requirements for our pension plans are determined under the Employee Retirement Income Security Act of 1974
(ERISA). ERISA funding requirements use a third and different method to determine funding requirements, which is primarily
based on the year’s expected service cost and amortization of other previously unfunded liabilities.
Effective January 1, 2011, we are subject to the funding requirements under the Pension Protection Act of 2006 (PPA), which
amended ERISA. Under the PPA, we are required to fully fund our pension plans over a rolling seven-year period as determined
annually based upon the funded status at the beginning of each year. Due to the foregoing differences in requirements and
calculation methodologies, our FAS pension expense or income is not indicative of the funding requirements or amount of
government recovery.
On December 27, 2011, the CAS Pension Harmonization Rule (CAS Harmonization) was published in the Federal Register.
The rule will impact pension costs on contracts beginning in 2013 and is effective for forward pricing purposes for contracts
negotiated on or after February 27, 2012. The rule is intended to improve the alignment of the pension cost recovered through