Deciphering Financial Statements (Northrop Grumman)
Northrop Grumman is a leading aerospace/defense company. The company has developed the F 16 fighter, the Apache helicopter, the AWACS early warning airborne radar, and the B 2 Stealth bomber. Grumman, one of the predecessor companies of Northrop Grumman, was the primary contractor for the Lunar Excursion Module (LEM) that landed Neil Armstrong on the moon in 1969. Information relating to Northrop Grumman’s pension and other postretirement benefit plans follows.
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Medical and |
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Pension Benefits |
Life Benefits |
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$ in millions |
2004 |
2003 |
2004 |
2003 |
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Change in benefit obligation |
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Benefit obligation at beginning of year |
$16,872 |
$21,524 |
$ 2,986 |
$ 3,809 |
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Service cost |
564 |
491 |
56 |
52 |
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Interest cost |
1,050 |
1,022 |
175 |
176 |
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Plan participants’ contributions |
21 |
24 |
72 |
63 |
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Special termination benefits |
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8 |
4 |
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Plan amendments |
84 |
50 |
(13) |
(3) |
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Actuarial loss |
1,555 |
205 |
198 |
124 |
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Divestitures |
(81) |
(5,216) |
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(978) |
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Acquisitions/transfers |
302 |
(90) |
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(17) |
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Settlements |
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(47) |
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Benefits paid |
(1,029) |
(1,091) |
(259) |
(244) |
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Benefit obligations at end of year |
19,338 |
16,872 |
3,223 |
2,986 |
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Change in plan assets |
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Fair value of plan assets at beginning of year |
15,985 |
18,532 |
688 |
561 |
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Gain on plan assets |
2,076 |
3,023 |
71 |
131 |
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Employer contributions |
624 |
329 |
182 |
177 |
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Plan participants’ contributions |
21 |
24 |
72 |
63 |
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Divestitures |
(83) |
(4,808) |
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Acquisitions/transfers |
143 |
24 |
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Settlements |
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(48) |
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Benefits paid |
(1,029) |
(1,091) |
(259) |
(244) |
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Other |
(17) |
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Fair value of plan assets at end of year |
17,720 |
15,985 |
754 |
688 |
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Funded status |
(1,618) |
(887) |
(2,469) |
(2,298) |
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Unrecognized prior service cost |
322 |
289 |
(10) |
3 |
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Unrecognized net transition asset |
2 |
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Unrecognized net loss |
2,647 |
1,799 |
562 |
397 |
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Net asset (liability) recognized |
$ 1,353 |
$ 1,201 |
$(1,917) |
$(1,898) |
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Amounts recognized in the statements of financial position |
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Prepaid benefit cost |
$ 2,868 |
$ 2,918 |
$ 46 |
$ 44 |
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Accrued benefit liability |
(1,773) |
(1,869) |
(1,963) |
(1,942) |
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Intangible asset |
24 |
26 |
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Accumulated other comprehensive loss |
234 |
126 |
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Net asset (liability) recognized |
$ 1,353 |
$ 1,201 |
$(1,917) |
$(1,898) |
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Based on this information, answer the following questions:
1. Is Northrop Grumman’s pension plan overfunded or underfunded? How can you tell?
2. In 2004, was the actual return on the pension fund more or less than the expected amount? Explain.
3. During 2004, Northrop Grumman acquired new subsidiaries that had pre existing defined benefit pension plans. Were those plans overfunded or underfunded?
4. Recreate the summary journal entry required to recognize Northrop Grumman’s additional minimum pension liability as of the end of 2004. For simplicity, assume that the entire amount was recognized in 2004.
5. Are Northrop Grumman’s medical and life benefits programs overfunded or underfunded? Explain.