Lockheed Martin Corporation
6801 Rockledge Drive
Bethesda, MD 20817
Telephone 301-897-6764
Facsimile 301-897-6813

Rajeev Bhalla
Vice President and Controller

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549-0609

Subject: File No. S7-16-02

Dear Mr. Katz:

Lockheed Martin Corporation appreciates the opportunity to provide comments with respect to the Securities and Exchange Commission's proposed rule, "Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies" (Proposed Rule) Release Nos. 33-8098 and 34-45907. Our Company is engaged in the conception, research, design, development, manufacture, integration and operation of advanced technology systems, products and services. We serve customers in both domestic and international defense and commercial markets, with our principal customers being agencies of the U.S. Government.

Lockheed Martin strongly supports the Commission's initiatives to strengthen corporate governance and improve the transparency of financial disclosures, including the identification of significant accounting estimates. However, while we agree with the underlying objectives, we have several significant issues with respect to the Proposed Rule as follows:

These concerns are addressed in the following discussion, which is segregated into the respective categories of questions on which the Commission requested comment. Other concerns are addressed in the section entitled "Other Matters."

Broadening the Scope -

We oppose a requirement to include a discussion of the impact of alternative accounting policies under GAAP. Such a requirement would encourage second guessing and likely result in companies having to constantly explain their accounting policy preference determination. This type of discussion would also tend to increase concerns relative to financial statement credibility and may confuse versus help the investor, creating a distraction from a full understanding of the policy actually being applied. Incremental, non-value added costs would be incurred in most cases to reconcile among the alternatives. We believe the focus should be on the policy adopted, not those policies rejected. Similarly, we do not believe that a requirement to discuss the impact of different accounting methods used within a particular industry is warranted. If material, qualitative discussion of accounting methods would be included in discussions about critical accounting policies.

We do not believe that additional disclosure should be required relative to a change from one accounting policy to another, as current accounting and disclosure requirements are sufficient assuming the effects of the change are material. Additionally, we do not believe further disclosure is warranted relative to accounting policies used for unusual or innovative transactions or in emerging areas, as significant accounting policies are already required to be disclosed in the notes to the financial statements. We believe that existing MD&A rules require management to discuss complex or unusual transactions that are material.

Definition of Critical Accounting Estimate -

From our review of the Proposed Rule, it appears that the definition of critical accounting estimates is too broad, as it seems that many accounting estimates would have to be included within the proposed framework. We believe that the additional disclosures could be potentially distracting to investors, which would be inconsistent with the stated intent to focus only on those accounting estimates deemed critical. For example, based on the definition, accounting estimates like the actuarial assumptions used in estimating pension and post-retirement benefit obligations, would be considered critical. However, inclusion of a discussion of these estimates in MD&A would be duplicative with the extensive disclosures currently required in the notes to the financial statements, which we do not believe was the Commission's intent.

In our view, significant management judgment must be used for many accounting estimates. That, combined with the lack of a clear understanding of the Commission's view of materiality under the Proposed Rule (i.e., material to financial position versus earnings), results in the potential for many accounting estimates to be identified for disclosure. The Commission stated that the Proposed Rule was intended to "promote greater investor understanding of a company's important accounting estimates that reflect significant management judgment and uncertainty."

To that end, we believe that management, who has the responsibility to identify and address factors necessary for an understanding and evaluation of the company, should be responsible for identification of the accounting estimates that are most important to the portrayal of a company's financial condition and results of operations, and that require significant management judgment. This is consistent with the guidance included in Financial Reporting Release No. FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" (FR-60), which referred to "accounting policies management believes are most critical." We believe that this approach ensures that only the most significant estimates are disclosed as seen through the eyes of management. Otherwise, clearer guidance as to the definition of "material" is necessary to ensure that only those estimates that are significant to a company's financial position are disclosed. The Commission should also make it clear that many estimates are necessary in the preparation of financial statements and that changes in other estimates not disclosed as critical may also be significant.

Identification and Analysis of Changes -

In general, it is our view that the level of detail required by the Proposed Rule is voluminous and does not provide corresponding insight into the management of the company. We believe that expanding the MD&A disclosure by several pages for each significant issue will result in an imbalance by centering the focus of the discussion on the critical accounting estimates, thereby overshadowing management's discussion of the results of operations, financial position and other significant business issues.

We strongly oppose the Proposed Rule's requirements to include a sensitivity/quantitative analysis in the critical accounting estimate disclosures for the following reasons:

  • There are critical accounting estimates for which quantitative disclosures would not be meaningful and, therefore, not helpful to investors. For example, a significant portion of our business is derived from long-term development and production contracts which are accounted for under the provisions of the AICPA's Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Accordingly, at any given time, we have numerous such contracts in process. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, as well as their duration (some contracts may cover periods as long as a decade), the estimation of cost at completion is complicated and subject to numerous significant assumptions, many of which are interdependent.

    It is unclear how the provisions of the Proposed Rules could be applied in the above circumstance. On the one hand, developing a sensitivity analysis under either of the proposed methodologies across our entire base of contracts would be extremely difficult if not impossible, and would potentially be misleading or not meaningful to investors. On the other hand, it is unclear how selecting and applying a sensitivity analysis to a single contract would be beneficial to an investor. Moreover, we do not believe that changing one or two significant assumptions and holding the others constant would be meaningful to investors. Applying alternative assumptions, especially those not deemed the most likely outcome by management could, in our view, be potentially misleading. The requirements of the Proposed Rule may also result in disclosure of too many "what if" scenarios, distracting the investor from the most likely scenario. In addition, potential mitigating factors not readily apparent to the reader could result in misinterpretation.

  • There are situations where providing sensitivity analyses could cause significant competitive harm. The requirement in the Proposed Rule to disclose a range of estimates/sensitivities "that a company reasonably could have used" as it relates to the disclosure of potential liabilities could apply to litigation, environmental remediation and tax audits. Therefore, companies would be required to disclose possible strategic alternatives related to these activities, all of which may be subject to a wide range of outcomes. Such disclosure could undermine a company's negotiating position, which would be harmful to investors' overall interests.

  • A sensitivity analysis will put management in the position of being second guessed. Having to continually explain to shareholders and analysts why a certain estimate was not used distracts users from understanding management's actual decision. Further, analysts could use other amounts included in the range of reasonably possible amounts to create financial information which would reflect different conclusions than management's. Finally, the use of such a range could be interpreted as acknowledgement of possible inaccuracies in a registrant's financial statements, and result in concerns about the credibility of financial statements, thereby exacerbating the current general lack of confidence in financial reporting.

    In lieu of a sensitivity analysis, the disclosure should provide an appropriate level of qualitative information that can be easily understood and interpreted. We believe it is more important to disclose the significant assumptions management had to make in preparation of the financial statements, including a discussion regarding why those assumptions were chosen and what could cause related estimates to change. We believe that a robust qualitative disclosure could provide much more meaningful information than quantitative disclosures and still achieve the Commission's objective of highlighting significant estimates. We encourage the Commission to provide expanded guidance and permit registrants to provide disclosures of information they believe would provide a clear depiction of management's development and use of significant estimates.

    Other Matters -

    Discussions Between Management and the Audit Committee - By their nature, critical accounting estimates rise to the level of discussion with the audit committee. Since the 10-K includes a discussion of critical accounting estimates, it should be presumed that appropriate discussions have taken place. We do not believe that a boilerplate statement indicating that our senior management has discussed the development and selection of the accounting estimate is warranted. We would not expect there to be unresolved concerns of the audit committee related to any of our MD&A disclosures.

    Segment Disclosures - We believe that current segment disclosure rules are adequate, and we are therefore opposed to expanding the discussion of critical accounting estimates to each segment. Such disclosure would only increase the volume of the disclosure without providing meaningful information.

    Auditor Examination of MD&A Disclosures on Critical Accounting Estimates - We believe that the current requirement for auditors to review MD&A is sufficient, and therefore would oppose a requirement that critical accounting estimate disclosures undergo an auditor's examination comparable to that enumerated in AT §701. This would result in an increase in the cost of the audit, and we fail to see a true cost/benefit. Because of the nature of critical accounting estimates, auditors would have audited these estimates, including a review of the underlying methods and assumptions, as part of their audit of the financial statements. In addition, other information required by the Proposed Rule (e.g., reasonably possible changes in an estimate) would generally be forward-looking, so their responsibility would be limited in that respect.

    Disclosure Related to Initial Adoption of Accounting Policies - We believe that current requirements to discuss significant accounting policies in the notes to the financial statements are sufficient. If a particular policy impacted a critical accounting estimate, it would be discussed in the related qualitative discussion in MD&A. Otherwise, it seems that an accounting principle adopted which had a previously immaterial impact but which became material would be addressed in a footnote and should not be repeated in MD&A. As discussed in the first paragraph under the caption "Broadening the Scope" above, we oppose a requirement to discuss alternative accounting policies.

    Disclosure Presentation - We do not believe that a specific format should be mandated, although it would be our view that information with respect to a critical accounting estimate would be more effective in the discussion of the area of a company's business to which it related. Such integrated disclosure would likely minimize redundancy in MD&A.

    Safe Harbor - The Proposed Rule represents a significant departure from the Commission's view regarding forward-looking information. With one exception (the disclosure of known trends and uncertainties in MD&A), the Commission has in the past encouraged, but not required, disclosure of forward-looking information. The Proposed Rule would require disclosure of a significant amount of additional forward-looking information due to the requirement to quantitatively discuss the impact of making reasonably possible changes in material assumptions. It is not clear to us that the existing statutory and rule safe harbors are adequate to protect companies from unwarranted litigation and potential liability exposure risks that may result from adoption of the Proposed Rule. We would strongly encourage the Commission to review, and consider amending, Rule 175 and Rule 3b-6 to specifically cross reference and describe the additional disclosures regarding critical accounting estimates and other forms of forward-looking information that would be required if the Proposed Rule is adopted. We also would encourage the Commission to consider creating an expanded safe harbor for this type of information or to treat the information as provided, but not filed, as has been done in a limited number of other instances.

    * * *

    We very much appreciate the Commission's consideration of these important matters and welcome the opportunity to discuss any and all issues with the Commission at its convenience. If you have questions regarding this letter, please feel free to call me at (301) 897-6764.

    Rajeev Bhalla
    Vice President and Controller