ACCOUNTING CHANGES OR RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In the first quarter of fiscal 2017, we adopted an accounting standard issued by the Financial Accounting Standards Board (“FASB”) that changed the accounting for certain aspects of stock options and other share-based compensation. This accounting standard requires companies to recognize excess tax benefits or expenses related to the vesting or settlement of employee share-based awards (i.e., the difference between the actual tax benefit realized and the tax benefit initially recognized for financial reporting purposes) as income tax benefit or expense in our Consolidated Statement of Income. Prior to adoption of this accounting standard, we were required to recognize these amounts directly in our Consolidated Balance Sheet as additional paid-in capital. This accounting standard also requires classification of cash flows resulting from excess tax benefits or expenses related to employee share-based awards as cash flows from operating activities in our Consolidated Statement of Cash Flows. Prior to adoption of this accounting standard, we classified cash flows resulting from excess tax benefits or expenses related to employee share-based awards as cash flows from financing activities in our Consolidated Statement of Cash Flows. We applied all significant changes required by this accounting standard on a prospective basis from the beginning of fiscal 2017. Adopting this accounting standard did not have a material impact on our financial position, results of operations or cash flows, except as follows:


•	We recognized $23 million ($.18 per diluted share) of income tax benefit in our Consolidated Statement of Income for fiscal 2017; and


•	We classified $23 million of cash flows resulting from excess tax benefits related to employee share-based awards as net cash provided by operating activities in our Consolidated Statement of Cash Flows for fiscal 2017.

In the fourth quarter of fiscal 2017, we adopted an accounting standard issued by the FASB that simplified measurement of goodwill impairment. The accounting standard simplified the goodwill impairment calculation by eliminating step 2 from the former two-step impairment test under existing GAAP. The new standard does not change how a goodwill impairment is identified. We will continue to perform our quantitative goodwill impairment test by comparing the fair value of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amount of the charge will be calculated by subtracting the reporting unit’s fair value from its carrying amount. Prior to adoption of this standard, if the fair value of a reporting unit was lower than its carrying amount (Step 1), we were required to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge was calculated by subtracting the reporting unit’s implied fair value of goodwill from its actual goodwill balance (Step 2). The new guidance simplifies financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. We applied all significant changes required by this accounting standard on a prospective basis from the fourth quarter of fiscal 2017. Adopting this accounting standard did not have a material impact on our financial position, results of operations or cash flows.

In fiscal 2017, we adopted an accounting standard issued by the FASB that removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV per share practical expedient. Adopting this accounting standard did not have a material impact on our financial position, results of operations or cash flows.

Accounting Standards Issued But Not Yet Effective

In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition guidance under GAAP and International Financial Reporting Standards and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and consequently, entities will be required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue that is recognized, this standard requires significantly more interim and annual disclosures. This standard allows for either “full retrospective” adoption (application to all periods presented) or “modified retrospective” adoption (application to only the most current period presented in the financial statements, with certain additional required footnote disclosures). In August 2015, the FASB issued an accounting standards update that deferred the effective date of the standard by one year, while continuing to permit entities to elect to adopt the standard as early as the original effective date. As a result, this standard is now effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, which for us is our fiscal 2019.

In preparation for the adoption of the new standard, the project team we formed has made progress against the detailed implementation plan we developed, including in the following areas:


•	Completing an accounting guidance gap analysis, consisting of a review of significant revenue streams and representative contracts to determine potential changes to our existing accounting policies and potential impacts to our consolidated financial statements;


•	Completing an inventory of our outstanding contracts and revenue streams;


•	Drafting a Company-wide revenue recognition policy reflecting the requirements of the new standard and tailored to our businesses;


•	Providing Company-wide training to affected employees, including in the areas of accounting, finance, contracts, tax and segment management;


•	Applying the five-step model of the new standard to our contracts and revenue streams to evaluate the quantitative and qualitative impacts the new standard will have on our consolidated financial statements, accounting and operating policies, accounting systems, internal control structure and business practices; and


•	Initiating the process of reviewing the additional disclosure requirements of the new standard and the potential impact on our accounting systems and internal control structure.

Although we are still in the process of evaluating and quantifying the impact of the new standard as described above, we have identified certain changes we expect the new standard to have on our consolidated financial statements. A significant portion of our revenue is derived from contracts with the U.S. Government, with revenue recognized using the POC method. We expect to recognize revenue on an “over time” basis for most of these contracts by using cost inputs to measure progress toward the completion of our performance obligations, which is similar to the POC cost-to-cost method currently used on the majority of these contracts. Consequently, we expect the adoption of the new standard primarily to impact certain of these contracts that recognize revenue using the POC units-of-delivery or milestone methods, resulting in recognition of revenue (and costs) earlier in the performance period as costs are incurred, as opposed to when units are delivered or milestones are achieved. We also are continuing to evaluate the impact of the new standard in other areas, including:


•	The number of distinct performance obligations within our contractual arrangements;


•	Contract modifications;


•	The potential impact to timing of revenue recognition for certain non-U.S. Government contracts based on existing contractual language; and


•	Estimation and recognition of variable consideration for contracts to provide services.

Because of the broad scope of the new standard, it could impact revenue and cost recognition across all of our business segments as well as related business processes and IT systems. As a result, our evaluation of the impact of the new standard will continue over future periods. We also have not yet made a determination regarding the use of a full retrospective or modified retrospective adoption approach for the new standard, as this determination is primarily dependent on the completion of our analysis of the effect the adoption will have on our consolidated financial statements.

In July 2015, the FASB issued a new standard that simplifies the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The standard applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. The standard is effective for public business entities for fiscal years beginning after December 15, 2016, which for us is fiscal 2018. We do not expect that adopting this accounting standard will have a material impact on our financial position, results of operations or cash flows.

In February 2016, the FASB issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to existing lease guidance under GAAP. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with the option to use certain relief. Full retrospective application is prohibited. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020. We are currently evaluating the impact this standard will have on our financial position, results of operations and cash flows.

In March 2017, the FASB issued an accounting standards update to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This update requires that entities present components of net periodic pension cost and net periodic postretirement benefit cost other than the service cost component separately from the service cost component and outside the subtotal of income from operations. This update must be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, which for us is our fiscal 2019. Adopting this accounting standard will result in a decrease in operating income and an increase in the net non-operating components of income from continuing operations of $164 million and $183 million for fiscal 2017 and 2018, respectively. We do not expect that adopting this accounting standard will have a material impact on our financial position or cash flows.