Raytheon 2013 Annual Report Download - page 49

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While changes in the high quality corporate bond rate assumption do not impact the CAS discount rate for purposes of
determining the 2013 CAS pension expense, this assumption will impact CAS pension expense in future periods, due to CAS
Harmonization.
An increase or decrease of 25 basis points in the long-term ROA assumption would have the following approximate impacts
on 2013 FAS and CAS pension results:
(In millions)
FAS expense $(40)
CAS expense 34
FAS/CAS Pension Adjustment $(6)
A 25 basis point increase or decrease in our long-term ROA assumption would result in a decrease or increase to our FAS
pension expense by approximately $40 million for 2013. In addition to the impact on our 2013 FAS/CAS Pension Adjustment,
a portion of the $34 million change in CAS pension expense would also be allocated to fixed price contracts in backlog and,
would either increase or decrease the profit rate on those contracts at the time of such a change (i.e., a change in the long-
term ROA assumption on January 1, 2013 would drive a change in estimated costs in EACs and related contract profit rates
as of December 31, 2012). The contract impact resulting from the change in CAS pension expense is difficult to estimate
because remaining performance periods can vary, the amount and timing of expected new awards (i.e., the proposals expected
to be awarded in the year which will bear their allocated portion of the change in CAS pension expense), and our mix of fixed
price and cost reimbursable contracts can change. Based on our contract profile at December 31, 2013, if we had 60 percent
of our backlog in fixed price contracts, and they were on average 50 percent complete, with our actual new award profile for
2013, a 25 basis point change in our long-term ROA assumption at January 1, 2013 would drive approximately $10 million
of aggregate total EAC adjustments at December 31, 2012. In addition, our fixed price contracts in backlog as of December
31, 2012 would have a lower profit rate in 2013, resulting in approximately $5 million impact as costs are incurred in that
year on those contracts. The total impact on 2012 would be approximately $10 million driven by the aggregate EAC adjustments
and the total impact on 2013 would be approximately $11 million (the FAS/CAS Pension Adjustment and the lower profit
rate impact in 2013 on fixed price contracts in backlog at December 31, 2012). A change in our long-term ROA assumption
would be subject to review by our government customer for reasonableness. Given our history of recovering changes to CAS
pension expense, we expect the assumption change would be allocable and allowable, per regulatory guidelines, as long as
the assumption is reasonable. The transition to CAS Harmonization may gradually reduce the impact that a change to the
long-term ROA assumption will have on CAS pension expense in future years as CAS Harmonization is phased in (as discussed
in more detail under the CAS Expense section above).
In accordance with both FAS and CAS, a calculated “market-related value” of our plan assets is used to develop the amount
of deferred asset gains or losses to be amortized. The market-related value of assets is determined using actual asset gains or
losses over a certain prior period (three years for FAS and five years for CAS, subject to certain limitations under CAS on the
difference between the market-related value and actual market value of assets). Because of this difference in the number of
years over which actual asset gains or losses are recognized and subsequently amortized, FAS expense generally tends to
reflect recent asset gains or losses faster than CAS. Another driver of CAS expense (but not FAS expense) is the funded status
of our pension plans under CAS. As noted above, CAS expense is only recognized for plans that are not fully funded;
consequently, if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense
will change accordingly.
Under FAS, a “corridor” approach may be elected and applied in the recognition of asset and liability gains or losses which
limits expense recognition to the net outstanding gains and losses in excess of the greater of 10 percent of the projected benefit
obligation or the calculated "market-related value" of assets. We do not use a “corridor” approach in the calculation of FAS
expense.
For 2014 compared to 2013, we currently expect our FAS expense to decrease and our CAS expense to increase, which causes
the FAS/CAS Pension Adjustment to increase income. We expect the FAS/CAS Pension Adjustment to be approximately $346
million of income driven by the higher discount rate environment, the differences in the recognition period for actual asset
gains and losses under FAS and CAS and CAS harmonization, as described above. This expected decrease in FAS expense
and increase in CAS expense is subject to our annual update, generally planned in the third quarter, of our actuarial estimate