Raytheon 2014 Annual Report Download - page 45

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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. 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 2012–2014. This resulted in
$286 million of income, and $249 million and $255 million of expense in 2014, 2013 and 2012, 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.
Pension and Other Postretirement Benefits Costs
We have pension plans covering the majority of our employees, including certain employees in foreign countries. We must
calculate our pension and other postretirement benefits (PRB) costs under both CAS and FAS requirements under GAAP, and
both calculations require judgment. GAAP outlines the methodology used to determine pension expense or income for financial
reporting purposes, which is not indicative of the funding requirements for pension and PRB plans that we determine under
the Employee Retirement Income Security Act of 1974 (ERISA). CAS prescribes the allocation to and recovery of pension
and PRB costs on U.S. Government contracts. The CAS requirements for pension costs and its calculation methodology differ
from the FAS requirements and calculation methodology. As a result, while both CAS and FAS use long-term assumptions
in their calculation methodologies, each method results in different calculated amounts of pension and PRB cost. In addition,
we are subject to the funding requirements under the Pension Protection Act of 2006 (PPA), which amended ERISA. Under
the PPA, we are required to fully fund our pension plans over a rolling seven-year period as determined annually based upon
the PPA calculated funded status at the beginning of each year. The funding requirements are primarily based on the year’s
expected service cost and amortization of other previously unfunded liabilities.
On December 27, 2011, the CAS Pension Harmonization Rule (CAS Harmonization) was published in the Federal Register.
The rule impacts pension costs on contracts beginning in 2013 and was effective for forward pricing purposes since February
27, 2012. The rule intends to improve the alignment of the pension cost recovered through contract pricing under CAS and
the pension funding requirements under the PPA. The rule shortened the CAS amortization period for gains and losses from
15 to 10 years and requires the use of a discount rate based on high quality corporate bonds, consistent with PPA, to measure
liabilities in determining the CAS pension expense. While the change in amortization period was applicable in 2013, there is
a transition period for the impact of the change in liability measurement method of 0% in 2013, 25% in 2014, 50% in 2015,
75% in 2016 and 100% in 2017. CAS Harmonization increases pension costs under CAS and increases the FAS/CAS
Adjustment to income in 2014 and beyond primarily due to the liability measurement transition period included in the rule.
Because the pension cost increases occur primarily in 2014 and beyond, the impact to our contracts in existence prior to
February 27, 2012 was not material. Furthermore, because CAS Harmonization is a mandatory change in cost accounting for