Boeing 2006 Annual Report Download - page 49

The Boeing Company and Subsidiaries 47
Notes to Consolidated Financial Statements
We continued to apply our previous accounting policy to
arrangements entered into prior to December 31, 2002 that
were not modified; such arrangements were grandfathered
under EITF 02-16 and, accordingly, we continued to recognize
concessions associated with these arrangements as revenue.
Effective January 1, 2006, we changed how we account for
concessions received from vendors that were grandfathered
under EITF 02-16. For the years ended December 31, 2005
and 2004, this change decreased Consolidated and
Commercial Airplanes segment Sales of products and
Cost of products by $1,224 and $1,057 as follows:
As
Originally Effect of As
Year ended December 31, 2005 Reported Change Adjusted
Sales of products $«45,398 $(1,224)$«44,174
Sales of services 9,447 9,447
Total revenues $«54,845 $(1,224)$«53,621
Cost of products $(38,082)$«1,224 $(36,858)
Cost of services (7,767)(7,767)
BCC interest expense (359)(359)
Total cost and expenses $(46,208)$«1,224 $(44,984)
As
Originally Effect of As
Year ended December 31, 2004 Reported Change Adjusted
Sales of products $«43,979 $(1,057)$«42,922
Sales of services 8,478 8,478
Total revenues $«52,457 $(1,057)$«51,400
Cost of products $(37,921)$«1,057 $(36,864)
Cost of services (6,754)(6,754)
BCC interest expense (350)(350)
Total cost and expenses $(45,025)$«1,057 $(43,968)
We believe the newly adopted accounting method is preferable
because it aligns our accounting for all concession arrange-
ments with vendors with guidance provided by EITF 02-16.
In accordance with EITF 02-16, reimbursements received by
a customer from a vendor are presumed to be a reduction in
the price of the vendor’s products or services and should be
treated as a reduction of Cost of products when recognized in
the customer’s income statement.
As of January 1, 2006, we have also adopted Statement of
Financial Accounting Standards (SFAS) No.154, Accounting
Changes and Error Corrections (SFAS No. 154), which requires
that changes in accounting policies such as the one described
above be applied retrospectively to all periods presented to the
extent practicable. Consequently, we have retrospectively
adjusted 2005 and 2004 to be consistent with the 2006 pres-
entation. The change had no effect on Earnings from continuing
operations, Net earnings, Retained earnings or Shareholders’
equity. The change reduced previously reported Sales of products
and Cost of products by equal amounts both on a consolidated
basis and in our Commercial Airplanes segment.
Spare Parts Revenue We recognize sales of spare parts upon
delivery and the amount reported as cost of sales is recorded
at average cost.
Service Revenue Service revenue is recognized when the serv-
ice is performed with the exception of U.S. Government service
agreements, which are accounted for using contract accounting.
Service activities primarily include the following: Delta launches,
ongoing maintenance of International Space Station and Space
Shuttle, support agreements associated with military aircraft and
helicopter contracts and technical and flight operation services
for commercial aircraft. Lease and financing revenue arrange-
ments are also included in Sales of services on the Consolidated
Statements of Operations. Service revenue and associated cost
of sales from pay-in-advance subscription fees are deferred and
recognized as services are rendered.
Financial Services Revenue We recognize financial services
revenue associated with sales-type finance leases, operating
leases, and notes receivable.
For sales-type finance leases we record an asset at lease
inception. This asset is recorded at the aggregate future mini-
mum lease payments, estimated residual value of the leased
equipment and deferred incremental direct costs less unearned
income. Income is recognized over the life of the lease to
approximate a level rate of return on the net investment. Residual
values, which are reviewed periodically, represent the estimated
amount we expect to receive at lease termination from the dispo-
sition of leased equipment. Actual residual values realized could
differ from these estimates. Declines in estimated residual value
that are deemed other than temporary are recognized as Cost of
services in the period in which the declines occur.
For operating leases, revenue on leased aircraft and equipment
representing rental fees and financing charges are recorded on
a straight-line basis over the term of the lease. Operating lease
assets, included in Customer financing, are recorded at cost
and depreciated over either the term of the lease or the economic
useful life of the asset to an estimated residual or salvage value
based on our intent to hold or dispose of the equipment before
the end of its economic useful life, using the straight-line
method. Prepayments received on operating lease contracts
are classified as Deferred lease income on the Consolidated
Statements of Financial Position. We periodically review our
estimates of residual value and recognize forecasted decreases
in residual value by prospectively adjusting depreciation expense.
For notes receivable, notes are recorded net of any unamor-
tized discounts and deferred incremental direct costs. Interest
income and amortization of any discounts are recorded ratably
over the related term of the note.
Reinsurance Revenue Our wholly-owned insurance subsidiary,
Astro Ltd., participates in a reinsurance pool for workers’
compensation. The member agreements and practices of the
reinsurance pool minimize any participating members’ individual
risk. Reinsurance revenues were $84 and $101 during 2006
and 2005, respectively. Reinsurance costs related to premiums
and claims paid to the reinsurance pool were $91 and $115
during 2006 and 2005, respectively. Both revenues and costs
are presented net in Cost of services in the Consolidated
Statements of Operations.