Boeing 2010 Annual Report Download - page 56

To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and
updated on a quarterly basis. Changes in estimates are normally recognized on a prospective basis;
when estimated costs to complete a program exceed estimated revenues from undelivered units in the
accounting quantity, a loss provision is recorded in the current period for the estimated loss on all
undelivered units in the accounting quantity.
The program method of accounting allocates tooling and production costs over the accounting quantity
for each program. Because of the higher unit production costs experienced at the beginning of a new
program and substantial investment required for initial tooling, new commercial aircraft programs, such
as the 787 program, typically have lower margins than established 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 combined cost of sales percentages for commercial airplane programs, excluding the 747
and 787 programs, for all of 2010 had been estimated to be higher or lower by 1%, it would have
increased or decreased pre-tax income for the year by approximately $261 million.
The 747 program is in a reach-forward loss position having recorded a total of $2,037 million of reach-
forward losses in 2009 and 2008. Absent changes in the estimated revenues or costs, subsequent
deliveries are recorded at zero margin. Reductions to the estimated loss in subsequent periods are
spread over all undelivered units in the accounting quantity, whereas increases to the estimated loss
are recorded immediately.
Our current assessment is that the 787 program does not have a reach-forward loss. The cumulative
impacts of the production challenges, schedule delays and customer and supplier impacts have
created significant pressure on revenue and cost estimates such that we expect to record zero margin
on the initial deliveries. The scale and duration of the 787 program is such that relatively minor
changes in assumptions or variables could have a material effect on our reported results in any period
if the program is determined to have a reach-forward loss.
Aircraft Valuation
Allowance for Losses on Customer Financing Receivables The allowance for losses on customer
financing receivables (valuation provision) is used to provide for potential impairment of customer
financing receivables in the Consolidated Statements of Financial Position. The balance represents an
estimate of probable but unconfirmed losses in the customer financing receivables portfolio. The
estimate is based on various qualitative and quantitative factors, including historical loss experience,
collateral values, and results of individual credit and collectibility reviews. The adequacy of the
allowance is assessed quarterly.
Three primary factors influencing the level of our allowance are customer credit ratings, collateral
values and default rates. If each customer’s credit rating were upgraded or downgraded by one major
rating category at December 31, 2010, the allowance would have decreased by $163 million or
increased by $343 million. If the collateral values were 20% higher or lower at December 31, 2010, the
allowance would have decreased by $94 million or increased by $72 million. If the cumulative default
rates used for each rating category should increase or decrease 1%, the allowance would have
increased or decreased by $7 million.
Impairment Review for Assets Under Operating Leases and Held for Re-Lease We evaluate for
impairment assets under operating lease or assets held for re-lease when events or changes in
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