Raytheon 2013 Annual Report Download - page 45

35
Other Revenue Methods—To a much lesser extent, we enter into other types of contracts such as service, commercial, or
software and licensing arrangements. Revenue under fixed-price service contracts not associated with the design, development,
manufacture, or modification of complex aerospace or electronic equipment, and under commercial contracts, generally is
recognized upon delivery or as services are rendered once persuasive evidence of an arrangement exists, our price is fixed or
determinable, and collectability is reasonably assured. Costs on fixed-price service contracts are expensed as incurred, unless
they otherwise qualify for deferral. There were no costs deferred on fixed price service contracts at December 31, 2013 and
December 31, 2012. We recognize revenue on contracts to sell software when evidence of an arrangement exists, the software
has been delivered and accepted by the customer, the fee is fixed or determinable, and collection is probable. For software
arrangements that include multiple elements, including perpetual software licenses and undelivered items (e.g., maintenance
and/or services; subscriptions/term licenses), we allocate and defer revenue for the undelivered items based on vendor specific
objective evidence (VSOE) of the fair value of the undelivered elements, and recognize revenue on the perpetual license using
the residual method. We base VSOE of each element on the price for which the undelivered element is sold separately. We
determine fair value of the undelivered elements based on historical evidence of our stand-alone sales of these elements to
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. Additionally, 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 Regulation
(FAR). The FAR provides 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 taxes, 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 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 benefit plans in 2011–2013. This resulted in
$249 million, $255 million and $337 million of expense in 2013, 2012 and 2011, respectively, reflected in our consolidated
results of operations as the difference between CAS and FAS requirements for our pension and other postretirement benefits
plans in those years.