Northrop Grumman Corp. (NOC)
Analysis of Revenues
Revenue Recognition Accounting Policy
The majority of Northrop Grumman’s sales are derived from long-term contracts with the U.S. government for the production of goods, the provision of services, or a combination of both. Northrop Grumman classifies sales as product or service based on the predominant attributes of each contract.
Under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, Northrop Grumman recognizes revenue for each separately identifiable performance obligation in a contract representing a promise to transfer a distinct good or service to a customer. In most cases, goods and services provided under Northrop Grumman’s contracts are accounted for as single performance obligations due to the complex and integrated nature of the products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, Northrop Grumman provides multiple distinct goods or services to a customer, most commonly when a contract covers multiple phases of the product lifecycle (development, production, maintenance and/or support). In those cases, Northrop Grumman accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using the cost plus a reasonable margin approach of ASC Topic 606. Warranties are provided on certain contracts, but do not typically provide for services beyond standard assurances and are therefore not within the scope of ASC Topic 606. Likewise, Northrop Grumman’s accounting for costs to obtain or fulfill a contract was not significantly impacted by the adoption of ASC Topic 606 as these costs are not material.
A contract modification exists when the parties to a contract approve a change in the scope or price of a contract. Contracts are often modified for changes in contract specifications or requirements. Most of Northrop Grumman’s contract modifications are for goods or services that are not distinct in the context of the contract and are therefore accounted for as part of the original performance obligation through a cumulative estimate-at-completion (EAC) adjustment.
Northrop Grumman recognizes revenue as control is transferred to the customer, either over time or at a point in time. In general, Northrop Grumman’s U.S. government contracts contain termination for convenience and/or other clauses that generally entitle the customer to goods produced and/or in-process. Similarly, the non-U.S. government contracts generally contain contractual termination clauses or entitle Northrop Grumman to payment for work performed to date for goods and services that do not have an alternative use. As control is effectively transferred while Northrop Grumman performs on the contracts and Northrop Grumman is typically entitled to cost plus a reasonable margin for work in process if the contract is terminated for convenience, Northrop Grumman generally recognizes revenue over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion) as Northrop Grumman believes this represents the most appropriate measurement towards satisfaction of its performance obligations. Revenue for contracts in which the control of goods produced does not transfer until delivery to the customer is recognized at a point in time (i.e., typically upon delivery).
Source: 10-K (filing date: 2019-01-31).
Revenues as Reported
Northrop Grumman Corp., Income Statement, Revenues
US$ in millions
|12 months ended||Dec 31, 2018||Dec 31, 2017||Dec 31, 2016||Dec 31, 2015||Dec 31, 2014|
|Sales||Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).||Northrop Grumman Corp.’s sales increased from 2016 to 2017 and from 2017 to 2018.|