Boeing 2012 Annual Report Download - page 55

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Due to the size, duration and nature of many of our contracts, the estimation of total sales and costs
through completion is complicated and subject to many variables. Total contract sales estimates are based
on negotiated contract prices and quantities, modified by our assumptions regarding contract options,
change orders, incentive and award provisions associated with technical performance, and price
adjustment clauses (such as inflation or index-based clauses). The majority of these contracts are with
the U.S. government where the price is generally based on estimated cost to produce the product or service
plus profit. Federal Acquisition Regulations provide guidance on the types of cost that will be reimbursed
in establishing contract price. Total contract cost estimates are largely based on negotiated or estimated
purchase contract terms, historical performance trends, business base and other economic projections.
Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and
subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor
agreements.
Revenue and cost estimates for all significant contracts are reviewed and reassessed quarterly. Changes
in these estimates could result in recognition of cumulative catch-up adjustments to the contract’s inception
to date revenues, cost of sales and profit, in the period in which such changes are made. Changes in
revenue and cost estimates could also result in a reach-forward loss or an adjustment to a reach-forward
loss, which would be recorded immediately in earnings. For the years ending December 31, 2012, 2011
and 2010 cumulative catch-up adjustments, including reach-forward losses, across all BDS contracts
increased operating earnings by $379 million, $229 million and $125 million, respectively.
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 the combined
gross margin for all contracts in BDS for all of 2012 had been estimated to be higher or lower by 1%, it
would have increased or decreased pre-tax income for the year by approximately $326 million. In addition,
a number of our fixed price development contracts are in a reach-forward loss position. Changes to
estimated losses are recorded immediately in earnings.
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 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 for inflation that is
updated quarterly. 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.