Raytheon 2012 Annual Report Download - page 94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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generally be recovered through the pricing of products and services to the U.S. Government in the period in which the tax is
payable. Accordingly, the state income tax provision (benefit) is allocated to contracts in future periods as described below
in Deferred Contract Costs.
Other Expense (Income), Net—Other expense (income), net consists primarily of gains and losses from our investments
held in rabbi trusts used to fund certain of our non-qualified deferred compensation plans, gains and losses on the early
repurchase of long-term debt and certain financing fees.
Cash and Cash Equivalents—Cash and cash equivalents consist of cash and highly liquid investments with original maturities
of 90 days or less at the date of purchase.
Short-term Investments—We invest in marketable securities in accordance with our short-term investment policy and cash
management strategy. These marketable securities are classified as available-for-sale and are recorded at fair value as short-
term investments in our consolidated balance sheets. Unrealized gains and losses on our available-for-sale securities are
recorded in accumulated other comprehensive loss, net of tax. Realized gains and losses on sales of our available-for-sale
securities are recorded in other expense (income), net on our consolidated statement of operations. When determined, other
than temporary declines in the value of available-for-sale securities are recorded as a loss in earnings. We make such
determinations by considering, among other factors, the length of time the fair value of the investment has been less than the
carrying value, future business prospects for the investee, and information regarding market and industry trends for the
investee's business, if available. For purposes of computing realized gains and losses on available-for-sale securities, we
determine cost on a specific identification basis. There were no securities deemed to have other than temporary improvements
or declines in value for the twelve months ended December 31, 2012. In the twelve months ended December 31, 2012, we
recorded an unrealized gain on short-term investments of less than $1 million, net of tax, in accumulated other comprehensive
loss. In the twelve months ended December 31, 2012, we recorded gains on sales of short-term investments of less than $1
million in other expense (income), net. The amortized cost of these securities closely approximated their fair value as of
December 31, 2012.
Contracts in Process, Net—Contracts in process, net are stated at cost plus estimated profit, but not in excess of estimated
realizable value. Included in contracts in process are accounts receivable, which include 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 creditworthiness, historical payment experience, the age
of outstanding receivables and collateral to the extent applicable.
Deferred Contract Costs—Included in contracts in process, net are certain costs related to 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 certain other accruals. At December 31, 2012 and December 31,
2011, net deferred contract costs were approximately $65 million and $190 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,
2012 and December 31, 2011.
Pension and other postretirement benefits costs are allocated to our contracts as allowed costs based on the U.S. Government
cost accounting standards (CAS). The CAS requirements for pension and other postretirement benefits 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 benefits plans in 2010–2012. This resulted in
$255 million of expense, $337 million of expense, and $187 million of expense in 2012, 2011 and 2010, respectively, reflected
in our consolidated results of operations for the difference between CAS and FAS requirements for our pension and other
postretirement benefits plans in those years.