Boeing 2011 Annual Report Download - page 55

Program Accounting
Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to
costs for the defined program accounting quantity. 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. The determination of the accounting quantity is
limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and
anticipated contracts. For each program, 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 airplanes delivered and accepted by the customer.
Factors that must be estimated include program accounting quantity, sales price, labor and employee
benefit costs, material costs, procured part costs, major component costs, overhead costs, program
tooling and other non-recurring costs, and routine warranty costs. Estimation of the accounting quantity
for each program takes into account several factors that are indicative of the demand for the particular
program, such as firm orders, letters of intent from prospective customers, and market studies. Total
estimated program sales are determined by estimating the model mix and sales price for all unsold
units within the accounting quantity, added together with the sales prices for all undelivered units under
contract. The sales prices for all undelivered units within the accounting quantity include an escalation
adjustment that is based on projected escalation rates, consistent with typical sales contract terms.
Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical
performance trends, and business base and other economic projections. Factors that influence these
estimates include production rates, internal and subcontractor performance trends, customer and/or
supplier claims or assertions, asset utilization, anticipated labor agreements, and inflationary trends.
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 other non-recurring 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 and other
non-recurring costs, 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 other 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 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 $276 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. Any such increases could result in additional charges.
The 787 program has a low single digit profit margin. The cumulative impacts of the production
challenges, schedule delays and customer and supplier impacts continue to place significant pressure
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