Boeing 2015 Annual Report Download - page 61

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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 or
deflationary trends.
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 initial margins
than established programs. In addition, actual costs incurred for earlier units in excess of the estimated
average cost of all units in the program accounting quantity are included within program inventory as
deferred production costs. Deferred production, unamortized tooling and other non-recurring costs are
expected to be fully recovered when all units in the accounting quantity are delivered as the expected unit
cost for later deliveries is below the estimated average cost as learning curve and other improvements
are realized.
Due to the significance of judgment in the estimation process described above, it is reasonably possible
that changes in underlying circumstances or assumptions could have a material effect on program gross
margins. If the combined gross margin percentages for our commercial airplane programs had been
estimated to be 1% higher or lower it would have a similar effect on the Commercial Airplane segment’s
operating margins. For the year-ended December 31, 2015, a 1% increase or decrease in operating
margins for our Commercial Airplane segment would have a $650 million impact on operating earnings.
The 747 is in a reach-forward loss position at December 31, 2015 while the 787 program had near breakeven
margins during 2015. Absent changes in estimated revenues or costs, subsequent 747 deliveries are
recorded at zero margin. Reductions to the estimated loss in subsequent periods are spread over all
undelivered units in the accounting quantity, whereas increases to the estimated loss are recorded
immediately as an additional reach-forward loss. 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 additional reach-forward losses which could
have a material effect on our reported results.
Goodwill and Indefinite-Lived Intangible Impairments
We test goodwill for impairment by performing a qualitative assessment or using a two-step impairment
process. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-
specific factors as an initial step in assessing the fair value of operations. If we determine it is more likely
than not that the carrying value of the net assets is more than the fair value of the related operations, the