Boeing 2011 Annual Report Download - page 68

Sales related to fixed-price contracts 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 specified targets are achieved. Incentive and award fees that can be reasonably
estimated and are probable 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 predominantly uses program accounting to
account for cost of sales related to its programs. Program accounting is applicable to products
manufactured for delivery under production-type contracts where profitability is realized over multiple
contracts and years. Under program accounting, inventoriable production costs, program tooling and
other non-recurring 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. 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. 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 other non-recurring costs, and routine warranty costs for the
total program.
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 as specified in the customer agreement. 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. Changes in
estimated revenues, cost of sales and the related effects on program margins are recognized
prospectively except in cases where the program is determined to have a reach-forward loss in which
case the loss is recognized in the current period.
Concession Sharing Arrangements We account for sales concessions to our customers in
consideration of their purchase of products and services as a reduction to revenue when the related
products and services are delivered. The sales concessions incurred may be partially reimbursed by
certain suppliers in accordance with concession sharing arrangements. We record these
reimbursements, which are presumed to represent reductions in the price of the vendor’s products or
services, as a reduction in Cost of products.
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 service is performed with the exception of
U.S. government service agreements, which are accounted for using contract accounting. Service
activities primarily include: support agreements associated with military aircraft and helicopter
contracts, ongoing maintenance of International Space Station and Space Shuttle, commercial Delta
launches and technical and flight operation services for commercial aircraft. Service revenue and
associated cost of sales from pay-in-advance subscription fees are deferred and recognized as
services are rendered.
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