Boeing 2011 Annual Report Download - page 77

to four-year standard warranty for systems, accessories, equipment, parts, and software manufactured
by us or manufactured to certain standards under our authorization. These warranties are included in
the programs’ estimate at completion. On occasion we have made commitments beyond the standard
warranty obligation to correct fleet-wide major issues of a particular model, resulting in additional
accrued warranty expense. Warranties issued by our BDS segments principally relate to sales of
military aircraft and weapons hardware and are included in the contract cost estimates. These sales
are generally accompanied by a six to twelve-month warranty period and cover systems, accessories,
equipment, parts, and software manufactured by us to certain contractual specifications. Estimated
costs related to standard warranties are recorded in the period in which the related product sales
occur. The warranty liability recorded at each balance sheet date reflects the estimated number of
months of warranty coverage outstanding for products delivered times the average of historical monthly
warranty payments, as well as additional amounts for certain major warranty issues that exceed a
normal claims level. Estimated costs of these additional warranty issues are considered changes to the
initial liability estimate.
We provide guarantees to certain commercial airplane customers which include compensation
provisions for failure to meet specified aircraft performance targets. We account for these performance
guarantees as warranties. The estimated liability for these warranties is based on known and
anticipated operational characteristics and forecasted customer operation of the aircraft relative to
contractually specified performance targets, and anticipated settlements when contractual remedies
are not specified. Estimated payments are recorded as a reduction of revenue at delivery of the related
aircraft. We have agreements that require certain suppliers to compensate us for amounts paid to
customers for failure of supplied equipment to meet specified performance targets. Claims against
suppliers under these agreements are included in Inventories and recorded as a reduction in Cost of
products at delivery of the related aircraft. These performance warranties and claims against suppliers
are included in the programs’ estimate at completion.
Supplier Penalties
We record an accrual for supplier penalties when an event occurs that makes it probable that a
supplier penalty will be incurred and the amount is reasonably estimable. Until an event occurs, we
fully anticipate accepting all products procured under production-related contracts.
Guarantees
We record a liability in Accrued liabilities for the fair value of guarantees that are issued or modified
after December 31, 2002. For a residual value guarantee where we received a cash premium, the
liability is equal to the cash premium received at the guarantee’s inception. For credit and performance
guarantees, the liability is equal to the present value of the expected loss. We determine the expected
loss by multiplying the creditor’s default rate by the guarantee amount reduced by the expected
recovery, if applicable, for each future period the credit or performance guarantee will be outstanding. If
at inception of a guarantee, we determine there is a probable related contingent loss, we will recognize
a liability for the greater of (a) the fair value of the guarantee as described above or (b) the probable
contingent loss amount.
Note 2 – Acquisitions
Argon ST, Inc.
On August 5, 2010, we acquired Argon ST, Inc. (Argon) for $782, net of cash acquired. Argon develops
command, control, communications, computers, intelligence, surveillance, and reconnaissance
(C4ISR) and, combat systems. The acquisition was part of our strategy to expand our capabilities to
address the C4ISR, cyber and intelligence markets. Argon’s results of operations from the acquisition
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