Raytheon 2012 Annual Report Download - page 92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
84
Note 1: Summary of Significant Accounting Policies
Consolidation and Classification—The consolidated financial statements include the accounts of Raytheon Company, and
all wholly-owned, majority-owned and otherwise controlled domestic and foreign subsidiaries. All intercompany transactions
have been eliminated. For classification of certain current assets and liabilities, we use the duration of the related contract or
program as our operating cycle, which is generally longer than one year. In addition, certain prior year amounts have been
reclassified to conform with the current year presentation. As used in these notes, the terms “we”, “us”, “our”, “Raytheon”
and the “Company” mean Raytheon Company and its subsidiaries, unless the context indicates another meaning.
Use of Estimates—Our consolidated financial statements are based on the application of U.S. Generally Accepted Accounting
Principles (GAAP), which require us to make estimates and assumptions about future events that affect the amounts reported
in our consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined
with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from
those estimates, and any such differences may be material to our consolidated financial statements.
Revenue Recognition—We use the percentage-of-completion accounting method to account for our long-term contracts
associated with the design, development, manufacture, or modification of complex aerospace or electronic equipment and
related services, such as certain cost-plus service contracts. Under this method, revenue is recognized based on the extent of
progress towards completion of the long-term contract. Our analysis of these contracts also contemplates whether contracts
should be combined or segmented in accordance with the applicable criteria under GAAP. We combine closely related contracts
when all the applicable criteria under GAAP are met. The combination of two or more contracts requires judgment in
determining whether the intent of entering into the contracts was effectively to enter into a single project, which should be
combined to reflect an overall profit rate. Similarly, we may segment a project, which may consist of a single contract or
group of contracts, with varying rates of profitability, only if the applicable criteria under GAAP are met. Judgment also is
involved in determining whether a single contract or group of contracts may be segmented based on how the arrangement
was negotiated and the performance criteria. The decision to combine a group of contracts or segment a contract could change
the amount of revenue and gross profit recorded in a given period.
The selection of the method by which to measure progress towards completion of a contract requires judgment and is based
on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our long-
term contracts unless we believe another method more clearly measures progress towards completion of the contract. Under
the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred
to date to the total estimated costs at completion of the contract. Contract costs include labor, material and subcontracting
costs, as well as an allocation of indirect costs. Revenues, including estimated fees or profits, are recorded as costs are incurred.
Due to the nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at
completion (the process for which we describe below in more detail) is complex and subject to many variables. Incentive and
award fees generally are awarded at the discretion of the customer or upon achievement of certain program milestones or cost
targets. Incentive and award fees, as well as penalties related to contract performance, are considered in estimating profit
rates. Estimates of award fees are based on actual awards and anticipated performance, which may include the performance
of subcontractors or partners depending on the individual contract requirements. Incentive provisions that increase or decrease
earnings based solely on a single significant event generally are not recognized until the event occurs. Such incentives and
penalties are recorded when there is sufficient information for us to assess anticipated performance. Our claims on contracts
are recorded only if it is probable that the claim will result in additional contract revenue and the amounts can be reliably
estimated.
We have a Company-wide standard and disciplined quarterly Estimate at Completion (EAC) process in which management
reviews the progress and performance of our contracts. As part of this process, management reviews information including,
but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule,
identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities
include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone
events), technical requirements (e.g., a newly-developed product versus a mature product), and other contract requirements.
Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work
to be performed, the availability of materials, the length of time to complete the contract (to estimate increases in wages and
prices for materials and related support cost allocations), performance by our subcontractors, the availability and timing of