Boeing 2006 Annual Report Download - page 48

46 The Boeing Company and Subsidiaries
Note 1 – Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include the accounts of
all majority-owned subsidiaries and variable interest entities that
are required to be consolidated.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make assumptions and
estimates that directly affect the amounts reported in the
consolidated financial statements. Significant estimates for
which changes in the near term are considered reasonably
possible and that may have a material impact on the financial
statements are disclosed in these notes to the consolidated
financial statements.
Operating Cycle
For classification of certain current assets and liabilities, we use
the duration of the related contract or program as our operating
cycle, which is generally longer than one year and could exceed
three years.
Revenue and Related Cost Recognition
Contract Accounting Contract accounting is used for develop-
ment and production activities predominately by the three seg-
ments within Integrated Defense Systems (IDS). These activities
include the following products and systems: military aircraft,
helicopters, missiles, space systems, missile defense systems,
satellites, and information and battle management systems.
The majority of business conducted in the IDS segments is
performed under contracts with the U.S. Government and
non-U.S. governments that extend over a number of years.
Contract accounting involves a judgmental process of estimating
the total sales and costs for each contract resulting 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.
We combine contracts for accounting purposes when they are
negotiated as a package with an overall profit margin objective;
they essentially represent an agreement to do a single project
for a single customer; they involve interrelated construction
activities with substantial common costs; and they are performed
concurrently or sequentially. When a group of contracts is
combined, revenue and profit are earned uniformly over the
performance of the combined contracts.
Sales related to contracts with fixed prices are recognized as
deliveries are made, except for certain fixed-price contracts that
require substantial performance over an extended period before
deliveries begin, for which sales are recorded based on the
attainment of performance milestones. Sales related to contracts
in which we are reimbursed for costs incurred plus an agreed
upon profit are recorded as costs are incurred. The Federal
Acquisition Regulations provide guidance on the types of cost
that will be reimbursed in establishing contract price. Contracts
may contain provisions to earn incentive and award fees if
targets are achieved. Incentive and award fees that can be
reasonably estimated are recorded over the performance period
of the contract. Incentive and award fees that cannot be
reasonably estimated are recorded when awarded.
Program Accounting Our Commercial Airplanes segment
predominately uses program accounting to account for sales
and cost of sales related to commercial airplane programs.
Program accounting is a method of accounting applicable to
products manufactured for delivery under production-type con-
tracts where profitability is realized over multiple contracts and
years. Under program accounting, inventoriable production
costs, program tooling costs and routine warranty costs are
accumulated and charged to cost of sales by program instead
of by individual units or contracts. A program consists of the
estimated number of units (accounting quantity) of a product to
be produced in a continuing, long-term production effort for
delivery under existing and anticipated contracts. To establish
the relationship of sales to cost of sales, program accounting
requires estimates of (a) the number of units to be produced
and sold in a program, (b) the period over which the units can
reasonably be expected to be produced, and (c) the units’
expected sales prices, production costs, program tooling, and
routine warranty costs for the total program.
We recognize revenue on sales of commercial airplanes based
on the gross amount billed to customers. We recognize sales
for commercial airplane deliveries as each unit is completed
and accepted by the customer. Sales recognized represent the
price negotiated with the customer, adjusted by an escalation
formula. The amount reported as cost of sales is determined
by applying the estimated cost of sales percentage for the total
remaining program to the amount of sales recognized for air-
planes delivered and accepted by the customer.
Concession Sharing Arrangements We account for sales con-
cessions to our customers in consideration of their purchase of
products and services as a reduction to revenue (sales conces-
sions) when the related products and services are delivered.
The sales concessions incurred are partially reimbursed by a
supplier in accordance with a concession sharing arrangement.
Prior to adoption of EITF Issue No. 02-16, Accounting by a
Customer (including a reseller) for Certain Consideration Received
from a Vendor (EITF 02-16), we recognized concessions re-
ceived from vendors as revenue. Upon adoption of EITF 02-16
on January 1, 2003, in accordance with the transition provisions
of the consensus, we recognized concessions received from
vendors for new arrangements, including modifications of
existing arrangements, as a reduction in Cost of products.
Notes to Consolidated Financial Statements
(Dollars in millions except per share data)