Raytheon 2013 Annual Report Download - page 94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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respectively. This component of AOCL is included in the calculation of net periodic pension expense (income) (see "Note
13: Pension and Other Employee Benefits" for additional details).
The defined benefit pension and other employee benefit plans are shown net of tax benefits of $2,780 million and $4,218
million at December 31, 2013 and December 31, 2012, respectively. The cash flow hedges and interest rate locks are shown
net of tax benefits of $4 million and $2 million at December 31, 2013 and December 31, 2012, respectively. The unrealized
gains on investments and other are shown net of tax benefits of $4 million at December 31, 2013 and December 31, 2012.
We expect approximately $2 million of after-tax net unrealized losses on our cash flow hedges at December 31, 2013, to be
reclassified into earnings at then-current values over the next twelve months as the underlying hedged transactions occur.
Translation of Foreign Currencies—Assets and liabilities of foreign subsidiaries are translated at current exchange rates
and the effects of these translation adjustments are reported as a component of AOCL in equity. Deferred taxes are not
recognized for translation-related temporary differences of foreign subsidiaries as their undistributed earnings are considered
to be indefinitely reinvested. Income and expenses in foreign currencies are translated at the average exchange rate during
the period. Foreign exchange transaction gains and losses in 2013, 2012 and 2011 were not material.
Treasury Stock—During 2012, our Board of Directors authorized the retirement of all outstanding treasury shares directly
held by the Company. As a result, all outstanding treasury shares directly held by the Company were retired in the fourth
quarter of 2012, with an offsetting reduction in common stock for the par value and the remaining amount offset in additional
paid-in-capital. In addition, our Board of Directors authorized all future share repurchases to be retired immediately upon
repurchase. We account for treasury stock under the cost method. Upon retirement the excess over par value is charged against
additional paid-in capital. The remaining treasury stock activity relates primarily to stock-based compensation awards and
the related shares withheld to settle employee tax obligations.
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, 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 three year period. Under GAAP, 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.
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, 2013 and 2012. 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.