Boeing 2014 Annual Report Download - page 76

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Warranties
In conjunction with certain product sales, we provide warranties that cover factors such as non-conformance
to specifications and defects in material and design. The majority of our warranties are issued by our
Commercial Airplanes segment. Generally, aircraft sales are accompanied by a three 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 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 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.