Raytheon 2004 Annual Report Download - page 77

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Raytheon
Company (the “Company”) and all wholly-owned and majority-owned domestic and foreign subsidiaries (except
for RC Trust I, as described in Note I, Equity Security Units). All material intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation.
REVENUE RECOGNITION Sales under long-term government contracts are recorded under the percentage of
completion method. Incurred costs and estimated gross margins are recorded as sales when work is performed
based on the percentage that incurred costs bear to the Company’s estimates of total costs and contract value. Cost
estimates include direct and indirect costs such as labor, materials, warranty, and overhead. Some contracts contain
incentive provisions based upon performance in relation to established targets, which are included at estimated
realizable value. Contract change orders and claims are included when they can be reliably estimated and
realization is probable. Since many contracts extend over a long period of time, revisions in cost and contract value
estimates during the progress of work have the effect of adjusting earnings applicable to performance in prior
periods in the current period. When the current contract estimate indicates a loss, provision is made for the total
anticipated loss in the current period.
Revenue from aircraft sales are recognized at the time of physical delivery of the aircraft. Revenue from certain
qualifying non-cancelable aircraft lease contracts are accounted for as sales-type leases. The present value of all
payments, net of executory costs, are recorded as revenue, and the related costs of the aircraft are charged to cost of
sales. Associated interest, using the interest method, is recorded over the term of the lease agreements. All other
leases for aircraft are accounted for under the operating method wherein revenue is recorded as earned over the
rental period. Service revenue is recognized ratably over contractual periods or as services are performed. Revenue
from the sale of fractional shares is recognized over the expected life of the customer relationship.
Revenue from license fees are recognized over the expected life of the continued involvement with the customer.
PRODUCT WARRANTY Costs incurred under warranty provisions performed under long-term contracts are
accounted for as contract costs as the work is performed. The estimation of these costs is an integral part of the
determination of the pricing of the Company’s products and services.
Warranty provisions related to aircraft sales are determined based upon an estimate of costs that may be
incurred under warranty programs.
Activity related to aircraft warranty provisions was as follows:
(In millions)
Balance at December 31, 2001 $17
Accruals for aircraft deliveries in 2002 22
Accruals related to prior year aircraft deliveries 10
Warranty services provided in 2002 (27)
Balance at December 31, 2002 22
Accruals for aircraft deliveries in 2003 21
Accruals related to prior year aircraft deliveries 8
Warranty services provided in 2003 (22)
Balance at December 31, 2003 29
Accruals for aircraft deliveries in 2004 29
Accruals related to prior year aircraft deliveries 3
Warranty services provided in 2004 (23)
Balance at December 31, 2004 $38