Boeing 2011 Annual Report Download - page 54

Environmental Remediation We are involved with various environmental remediation activities and
have recorded a liability of $758 million at December 31, 2011. For additional information, see Note 12
to our Consolidated Financial Statements.
Income Taxes We have recorded a liability of $939 million at December 31, 2011 for uncertain tax
positions. For further discussion of these contingencies, see Note 5 to our Consolidated Financial
Statements.
Off-Balance Sheet Arrangements
We are a party to certain off-balance sheet arrangements including certain guarantees. For discussion
of these arrangements, see Note 13 to our Consolidated Financial Statements.
Critical Accounting Policies
Contract Accounting
We use contract accounting to determine revenue, cost of sales, and profit for almost all of our BDS
business. Contract accounting involves a judgmental process of estimating the total sales and costs for
each contract, which results in the development of estimated cost of sales percentages. For each
contract, the amount reported as cost of sales is determined by applying the estimated cost of sales
percentage to the amount of revenue recognized.
Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs
through completion is complicated and subject to many variables. Total contract sales estimates are
based on negotiated contract prices and quantities, modified by our assumptions regarding contract
options, change orders, incentive and award provisions associated with technical performance, and
price adjustment clauses (such as inflation or index-based clauses). The majority of these contracts
are with the U.S. government. Generally the price is based on estimated cost to produce the product or
service plus profit. Federal acquisition regulations provide guidance on the types of cost that will be
reimbursed in establishing contract price. Total contract cost estimates are largely based on negotiated
or estimated purchase contract terms, historical performance trends, business base and other
economic projections. Factors that influence these estimates include inflationary trends, technical and
schedule risk, internal and subcontractor performance trends, business volume assumptions, asset
utilization, and anticipated labor agreements.
Revenue and cost estimates for all significant contracts are reviewed and reassessed quarterly.
Changes in these estimates could result in recognition of cumulative catch-up adjustments to the
contract’s inception to date revenues, cost of sales and profit, in the period in which such changes are
made. Changes in revenue and cost estimates could also result in a reach-forward loss or an
adjustment to a reach-forward loss, which would be recorded immediately as a charge to earnings. For
the years ending December 31, 2011, 2010 and 2009 cumulative catch-up adjustments, including
reach-forward losses, across all BDS contracts increased operating earnings by $229 million, $125
million and $29 million respectively. Significant adjustments recorded during the three years ended
December 31, 2011 relate to reach-forward losses on the AEW&C and the KC-767 International
Tanker programs.
Due to the significance of judgment in the estimation process described above, it is likely that
materially different cost of sales amounts could be recorded if we used different assumptions or if the
underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier
performance, or circumstances may adversely or positively affect financial performance in future
periods. If the combined gross margin for all contracts in BDS for all of 2011 had been estimated to be
higher or lower by 1%, it would have increased or decreased pre-tax income for the year by
approximately $320 million. In addition, a number of our fixed price development contracts are in a
reach-forward loss position. Changes to estimated losses are recorded immediately in earnings.
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