Abdul Bello - Project 1: Analysis of a 10-K Relating to Segment and NCI Reporting & Disclosures PDF

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Running head: Analysis of a 10-K Relating to Segment and NCI Reporting & Disclosures

Analysis of a 10-K Relating to Segment and NCI Reporting & Disclosures: Lockheed Martin Abdul Bello University of Maryland University College: ACCT 424, Advanced Accounting April 20, 2019

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Analysis of Lockheed Martin’s Segment and NCI Reporting & Disclosures

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Lockheed Martin Corporation is an American global aerospace, defense, security and advanced technologies company with worldwide interests. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995. This being called the “merger of equals”, become the largest aerospace, defense and technology companies. Lockheed Martin is responsible for many of today’s well-known accomplishments. This included the SR-71 Blackbird, the F-117 nighthawk and the Manned Maneuvering Unit (MMU). Today, Lockheed Martin continues to be one of the largest government defense contractors. (Corporation, Lockheed Martin, 2010) Mission Statement. It is headquartered in North Bethesda, Maryland, in the Washington, DC, area. In August 30th of 1994, the New York Times reported that “The Lockheed Corporation and the Martin Marietta Corporation announced early today that they had agreed to a merger in an exchange of common stock valued at more than $10 billion” (The New York Times, 1994). As a planetary security and information engineering company. the bulk of Lockheed Martin’s concern is with the U.S. Department of Defense and the U.S. federal authorities’ bureaus. In fact. Lockheed Martin is the largest supplier of IT services. systems integrating. and developing to the U.S. Government. This paper is aimed at discussing in length the requirements of disclosures as it relates to segment reporting and non-controlling interest using Lockheed Martin as case study. Segment Reporting Segment reporting continues to be an important element of financial reporting for public companies, for many publicly traded entities, it is increasingly important to operate in several different industries or geographical area. As such, there is need to understand the increased financial reporting demands that accompany these type of business operations. One major demand is segment reporting, The Securities and Exchange Commission require companies to disclose certain disaggregated information about their operating segments in their financial statements. Investors, creditors, regulators and analyst who evaluate the strengths and weaknesses of a diversified company’s stock often find it difficult to analyze companies who only report the aggregate operations of its business. “Public entities' segment disclosures continue to be an area of frequent comment by the U.S. Securities and Exchange Commission (SEC) staff. Almost every year, the SEC staff discusses their current views on some aspect of segment reporting during the annual AICPA Conference on Current SEC and PCAOB Developments” (Grant Thornton, 2018). Financial statement users will be better positioned to understand the public entity’s performance, to assess its prospects for future net cash flows and to make more informed judgments about the entity. Identifying reportable operating segments can be strenuous Under Generally Accepted Accounting Principles (GAAP), an operating segment engages in business activities from which it may earn revenue and incur expenses (generate its own cash flow), has discrete financial information available, or its activities are distinct from the rest of company’s activities. According to GAAP, these rules to determine which segments need to be reported are:

Analysis of Lockheed Martin’s Segment and NCI Reporting & Disclosures   

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Aggregate the results of two or more segments if they have similar products, services, processes, customers, distribution methods, and regulatory environments. Report a segment if it has at least 10% of the revenues, 10% of the profit or loss, or 10% of the combined assets of the entity. If the total revenue of the segments you have selected under the preceding criteria comprises less than 75% of the entity’s total revenue, then add more segments until you reach that threshold.

Segment information is included (1) within the body of the financial statements, with supporting footnote disclosures, (2) entirely in the footnotes, or (3) in a separate schedule that is considered an integral part of the financial statements. For each of the reportable segments the entity Identifies, GAAP specifies what information is required in your disclosures. Firstly, under general information, the company must disclose the factors the reportable segments, whether by product or geography. Additionally, entities will need to describe the types of products and services behind the revenue in each segment. Secondly, under information about profit or loss and assets, reporting entity is required to provide a measure of profit or loss and total assets for each of its reportable segments. “In addition to the aggregated numbers, the following information is required if it is reviewed by the CODM, even if it is not included in the measure of segment profit or loss: (a) revenues from external sales, (b) revenue from transactions with other operating segments within your company, (c) interest revenue, (d) interest expense, (e) depreciation, depletion, or amortization expense, (f) unusual items, (g) equity in the net income of investees accounted for by the equity method, (h) income tax expense or benefit, and (i) other significant noncash items” (Ellsworth, 2018). Under measurements, the amounts that a company discloses for each segment should be the same amounts that are reported to the CODM for decision making purposes. In fact, GAAP repeatedly reiterates that only the information used by the CODM should be disclosed. However, if the CODM uses multiple measures of a segment’s profits or losses or assets, the amounts disclosed in the segment disclosures should be those that correspond most closely with the consolidated financial statements. Lastly, changes in operating segments, if your company’s internal organization evolves such that your reportable segments change, the information from prior periods, including interim periods, must be restated to match the current information. However, restatements are only required if it is reasonable. Lockheed Martin operates in four business segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems. Lockheed Martin reports its business segments based on the nature of the products and services offered as opposed geographical segmentation. Operating profit of its business segments includes its share of earnings or losses from equity method investees because the operating activities of the equity method investees are closely aligned with the operations of its business segments. Furthermore, Lockheed disclosed that On “August 24, 2016, our ownership interest in the AWE joint venture increased from 33% to 51% and we were required to change our accounting for this investment from the equity method to consolidation” (Lockheed Martin, SEC 10K 2018). As a result of the increased ownership interest, the entity recognized a non-cash gain of $127million from its Space business segment,

Analysis of Lockheed Martin’s Segment and NCI Reporting & Disclosures

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which increased net earnings from continuing operations by $104 million ($0.34 per share) in 2016. Under measurements, Lockheed disclosed that management evaluates performance based on its contract by focusing on net sales and operating profit and not by type or amount of operating expense. Furthermore, consequently, its discussion of business segment performance focuses on net sales and operating profit, consistent with its approach for managing the business. Lockheed stated that “This approach is consistent throughout the life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance on our contracts in a similar manner through their completion.” However, Lockheed fails to disclose some of its contract with the government, in fact the company stated, “We have a number of programs that are designated as classified by the U.S. Government which cannot be specifically described. The operating results of these classified programs are included in our consolidated and business segment results and are subjected to the same oversight and internal controls.” Non-Controlling Interest A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. “The noncontrolling interest shall be reported in the consolidated statement of financial position within equity, separately from the parent’s equity” (FASB, ASU 160, para 26). Attributing Net Income and Comprehensive Income to the Parent and the Noncontrolling Interest. The complete elimination of the intercompany income or loss is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single economic entity. The elimination of the intercompany income or loss may be allocated between the parent and noncontrolling interests. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income shall be reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest. Net income or loss and reporting Comprehensive Income, shall be attributed to the parent and the noncontrolling interest. Changes in a Parent’s Ownership Interest in a Subsidiary A parent’s ownership interest in a subsidiary might change while the parent retains its controlling financial interest in the subsidiary. For example, a parent’s ownership interest in a subsidiary might change if (a) the parent purchases additional ownership interests in its subsidiary, (b) the parent sells some of its ownership interests in its subsidiary, (c) the subsidiary reacquires some of its ownership interests, or (d) the subsidiary issues additional ownership interests. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss shall be recognized in consolidated net income or comprehensive income. The carrying amount of the

Analysis of Lockheed Martin’s Segment and NCI Reporting & Disclosures

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noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted shall be recognized in equity attributable to the parent. Interestingly, Lockheed Martin did not provide any additional information regarding its noncontrolling interest. Additionally, it did not provide any accounting methods used in accounting for its NCI. However, Lockheed reported $74 million of non-controllable interest. Overall, Lockheed Martin disclosures about its business segments have been effective. Going through the disclosures as an investor or analyst, one would be confident about its disclosures as it relates to its reporting segment. The disclosures are understandable, relevant, reliable and comparable. Nonetheless, I think more could be done regarding its non-controlling interest, I do think enough emphasis or disclosures was not stated on its NCI. This could be as a result of its dealings with the U.S. government, as most of its operations are security sensitive.

Analysis of Lockheed Martin’s Segment and NCI Reporting & Disclosures

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Works Cited Disclosure Update and Simplification: A Small Entity Compliance Guide [*]. (2018, November 05). Retrieved April 22, 2019, from https://www.sec.gov/corpfin/disclosure-updatesimplification-small-entity-compliance-guide Ellsworth, C. (2018, October 04). Segment Reporting Overview. Retrieved April 22, 2019, from https://www.ipohub.org/segment-reporting-overview/ FASB, Financial Accounting Standards Board. (n.d.). Retrieved April 22, 2019, from https://www.fasb.org/summary/stsum160.shtml Lockheed Martin Corp. (2019, February 08). Lockheed Martin Corp (LMT) 10K Annual Reports & 10Q SEC Filings. Retrieved April 22, 2019, from https://last10k.com/sec-filings/lmt Lockheed Martin Corp (LMT.N) Company Profile. (n.d.). Retrieved April 22, 2019, from https://www.reuters.com/finance/stocks/company-profile/LMT.N...