Raytheon 2012 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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amounts related to treasury stock have been reclassified into additional paid-in capital in our consolidated balance sheets and
consolidated statements of equity.
Pension and Other Postretirement Benefits Costs—We have pension plans covering the majority of our employees,
including certain employees in foreign countries. We calculate our pension costs as required under GAAP, and the calculations
and assumptions utilized require judgment. GAAP outlines the methodology used to determine pension expense or income
for financial reporting purposes. For purposes of determining pension expense under GAAP, investment gains and losses are
spread over three 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 in 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 estimated average remaining 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, payments, and receipts. Our foreign currency forward contracts
are transaction driven and relate directly 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 not material for the years
ended December 31, 2012 and 2011. 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 net sales or
cost of 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 Note 8: Derivative Financial Instruments.
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.
Level 1: Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets are investments in marketable
securities held in rabbi trusts that we use to pay benefits under certain of our non-qualified deferred compensation
plans, which we include in other assets, net. Our Level 1 liabilities include our obligations to pay certain non-
qualified deferred compensation plan benefits, which we include in accrued retiree benefits and other long-term
liabilities. Under these non-qualified deferred compensation plans, participants designate investment options