Boeing 2012 Annual Report Download - page 56

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44
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 for all of 2012 had been estimated to be lower
by 1%, it would have increased pre-tax income for the year by approximately $420 million. If the combined
cost of sales percentages for commercial airplane programs for all of 2012 (excluding the 747 and 787
programs which have gross margins that are breakeven or near breakeven at December 31, 2012) had
been estimated to be higher by 1%, it would have decreased pre-tax income for the year by approximately
$324 million. If we are unable to mitigate risks associated with the 747 and 787 programs, or if we are
required to change one or more of our pricing, cost or other assumptions related to these programs, we
could be required to record reach forward losses which could have a material effect on our reported results.
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, 2012, the allowance would have decreased by $35 million or increased by $90
million. If the collateral values were 20% higher or lower at December 31, 2012, the allowance would have
decreased by $21 million or increased by $20 million. If the cumulative default rates used for each rating
category increased or decreased 1%, the allowance would have increased or decreased by $6 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
circumstances indicate that the expected undiscounted cash flow from the asset may be less than its
carrying value. We use various assumptions when determining the expected undiscounted cash flow
including the expected future lease rates, lease terms, residual value of the asset, periods in which the
asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the
remaining economic life of the asset.
When we determine that impairment is indicated for an asset, the amount of impairment expense recorded
is the excess of the carrying value over the fair value of the asset.