Raytheon 2014 Annual Report Download - page 70

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FAS/CAS Adjustment
The FAS/CAS Adjustment represents the difference between our pension and other postretirement benefit (PRB) expense or
income under Financial Accounting Standards (FAS) requirements under GAAP and our pension and PRB expense under
U.S. Government Cost Accounting Standards (CAS). The results of each segment only include pension and PRB expense
under CAS that we generally recover through the pricing of our products and services to the U.S. Government.
The components of the FAS/CAS Adjustment were as follows:
(In millions) 2014 2013 2012
FAS/CAS Pension Adjustment $ 281 $(253) $ (255)
FAS/CAS PRB Adjustment 54 —
FAS/CAS Adjustment $ 286 $(249) $ (255)
The components of the FAS/CAS Pension Adjustment were as follows:
(In millions) 2014 2013 2012
FAS (expense) $(895)$(1,240) $ (1,093)
CAS expense 1,176 987 838
FAS/CAS Pension Adjustment $ 281 $(253) $ (255)
On December 27, 2011, the CAS Pension Harmonization Rule (CAS Harmonization) was published in the Federal Register.
The rule impacted pension costs on contracts beginning in 2013 and has been included for forward pricing purposes since
February 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 decreases our FAS/
CAS expense in 2014 and beyond primarily due to the liability measurement transition period included in the rule.
In July 2012, the Surface Transportation Extension Act, which is also referred to as the Moving Ahead for Progress in the 21st
Century Act (STE Act), was passed by Congress and signed by the President. The STE Act includes a provision for temporary
pension funding relief due to the low interest rate environment. The provision adjusts the 24-month average high quality
corporate bond rates used to determine the PPA funded status so that they are within a floor and cap, or “corridor”, based on
the 25-year average of corporate bond rates. The STE Act gradually phases out this interest rate provision beginning in 2013.
In August 2014, the pension provisions of the STE Act were extended as part of the Highway and Transportation Funding Act
of 2014 (HATFA). As a result, the interest rates used to determine PPA funded status will continue to be adjusted within a
“corridor” and do not begin to phase out until 2018. Prior to the extension of such pension funding relief under the HATFA,
we expected to make required contributions to our pension and other postretirement benefit plans of approximately $900
million in 2014. The HATFA reduced our required 2014 pension and other postretirement benefit plan contributions to
approximately $700 million As a result of lower expected contributions under HATFA in both 2014 and 2015, our 2014
expected tax payments increased by approximately $300 million. The HATFA also impacts our CAS expense in 2014, since
CAS Harmonization incorporates the PPA interest rate into CAS calculations. Our 2014 CAS expense decreased by $69 million
resulting in a reduction in our 2014 FAS/CAS income by the same amount since the HATFA does not change the calculation
of our 2014 FAS expense. However, reductions in our pension contributions under the HATFA would increase our FAS expense
in future years by the amount of expected return that would have applied to the contributions.
The key drivers of the difference between FAS and CAS expense (and consequently, the FAS/CAS Pension Adjustment) are
the pattern of earnings and expense recognition for gains and losses that arise when our asset and liability experience differs
from our assumptions under each set of requirements and the calculation of funded status under CAS Harmonization. In
accordance with both FAS and CAS, a “calculated market-related value” of our plan assets is used to calculate 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). Generally, gains or losses are amortized under
FAS over the average future working lifetime of the eligible employee population of approximately 10 years. As described