E-Z-GO 2001 Annual Report Download - page 42

made, historical experience, risk of loss, general economic conditions and trends, and management’s
assessments of the probable future outcome of these matters. Actual results could differ from such
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid securities with original maturities
of ninety days or less.
Revenue Recognition
Revenue is generally recognized w hen products are delivered or services are performed. With respect to
aircraft, delivery is upon completion of manufacturing, customer acceptance and the transfer of risk and
rew ards of ownership.
Revenue under fixed-price contracts are generally recorded as deliveries are made. Certain long-term
fixed-price contracts provide for periodic delivery after a lengthy period of time over w hich significant
costs are incurred or require a significant amount of development effort in relation to total contract volume.
Revenues under those contracts and all cost-reimbursement-type contracts are recorded as costs are
incurred. Revenues under the V-22 low-rate initial production contract w ith the U.S. Government are
recorded as costs are incurred. Certain contracts are aw arded w ith fixed-price incentive fees. Incentive
fees are considered w hen estimating revenues and profit rates, and are recorded w hen these amounts
are reasonably determined. Long-term contract profits are based on estimates of total sales value and
costs at completion. Such estimates are review ed and revised periodically throughout the contract life.
Revisions to contract profits are recorded w hen the revisions to estimated sales value or costs are made.
Estimated contract losses are recorded w hen identified.
Revenue from certain qualifying non-cancelable aircraft and other product lease contracts are accounted
for as sales-type leases. The present value of all payments, net of executory costs, is recorded as revenue,
and the related costs of the product are charged to cost of sales. Generally, this lease financing is through
Textron Finance and the associated interest is recorded over the term of the lease agreement using the
interest method. Lease financing transactions which do not qualify as sales-type leases are accounted for
under the operating method w herein revenue is recorded as earned over the lease period.
Finance revenues include interest on finance receivables w hich is recognized in revenues using the
interest method to provide a constant rate of return over the terms of the receivables. Finance revenues
also include direct loan origination costs and fees received w hich are deferred and amortized over the
contractual lives of the respective receivables using the interest method. Accrual of interest income is
suspended for accounts w hich are contractually delinquent by more than three months, unless collection
is not doubtful. In addition, detailed reviews of loans may result in earlier suspension if collection is doubtful.
Accrual of interest is resumed w hen the loan becomes contractually current, and suspended interest
income is recognized at that time.
Allowance for Losses on Finance Receivables
Provisions for losses on finance receivables are charged to income in amounts sufficient to maintain the
allow ance at a level considered adequate to cover losses in the existing receivable portfolio. M anagement
evaluates the allow ance by examining current delinquencies, the characteristics of the existing accounts,
historical loss experience, the value of the underlying collateral and general economic conditions and trends.
Finance receivables are w ritten-off w hen they are deemed to be uncollectible. Finance receivables are
written dow n to the fair value (less estimated costs to sell) of the related collateral at the earlier of the
date w hen the collateral is repossessed or w hen no payment has been received for six months, unless
management deems the receivable collectible.
Receivable Securitizations
Textron Finance sells or securitizes loans and leases and retains servicing responsibilities and subordi-
nated interests, including interest-only securities, subordinated certificates and cash reserves, all of w hich
are retained interests in the securitized receivables. These retained interests are subordinate to investors’
interest. Gains or losses on sale of the finance receivables depend in part on the previous carrying amount
of the finance receivables involved in the transfer, allocated betw een assets sold and retained interests
based on their relative fair values at the date of transfer. Textron Finance estimates fair value based on the
present value of future expected cash flow s using management’s best estimates of the key assumptions
– credit losses, prepayment speeds, forward interest rate yield curves, and discount rates commensurate
with the risks involved. Textron Finance reviews the fair value of the retained interests quarterly using
40 Textron Annual Report