E-Z-GO 2002 Annual Report Download - page 29

The preparation of our consolidated financial statements in conformity with generally accepted account-
ing principles requires management to make complex and subjective judgments in the selection and
application of accounting policies. The accounting policies that we believe are most critical to the por-
trayal of Textron’s financial condition and results of operations, and that require management’s most diffi-
cult, subjective and complex judgments in estimating the effect of inherent uncertainties are listed
below. This section should be read in conjunction with Note 1 to the consolidated financial statements
which includes other significant accounting policies.
Receivable and Inventory Reserves
We evaluate the collectibility of our commercial and finance receivables based on a combination of fac-
tors. In circumstances where we are aware of a specific customer’s inability to meet its short-term finan-
cial obligations to us (e.g., bankruptcy filings, substantial down-grading of credit scores, geographic
economic conditions, etc.), we record a specific reserve for bad debts for amounts we estimate to be
potentially uncollectible. Receivables are charged-off when they are deemed uncollectible. For
homogenous loan pools and all other receivables, we recognize reserves for bad debts based on cur-
rent delinquencies, the characteristics of the existing accounts, historical loss experience, the value of
underlying collateral and general economic conditions and trends. Finance receivables are written
down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when
the collateral is repossessed or when no payment has been received for six months, unless we deem
the receivable collectible.
Reserves on certain finance receivables are determined using estimates of related collateral values
based on historical recovery rates and current market conditions. While we have no commercial cus-
tomers that represent more than 10% of sales in 2002, we do have significant collateralized finance
receivables with certain large customers, including national rental companies. Market conditions for
used equipment and aircraft inventories could deteriorate if the current depressed economic conditions
result in either numerous or several large customer defaults, leading to large quantities of used inventory
being offered in the market. Such a deterioration in market conditions would result in lower estimated
collateral values, increasing the amount of reserves required on related receivables and used invento-
ries on hand. Based on current market conditions, we believe our reserves are adequate as of Decem-
ber 28, 2002.
Long-Term Contracts
We recognize revenue and profit as work on certain government long-term engineering, development
and production contracts progresses using the contract method of accounting, which relies on esti-
mates of the total contract cost and revenue. Estimated contract cost and revenue are based on current
contract specifications, expected engineering requirements and the achievement of contract mile-
stones, including product deliveries. Contract costs are typically incurred over a period of several years,
and the estimation of these costs requires substantial judgments. The cost estimation process is based
on the professional knowledge and experience of engineers and program managers along with finance
professionals. The duration of the contracts and the technical challenges included in certain contracts
affect our ability to estimate costs precisely. As a result, we update our projections of costs at least semi-
annually or when circumstances significantly change. Adjustments to projected costs are recognized in
net earnings when determinable. Favorable changes in estimates result in additional profit recognition,
while unfavorable changes in estimates result in the reversal of previously recognized earnings. Any
anticipated losses on contracts are charged to earnings when identified. Earnings on long-term con-
tracts could be reduced by a material amount resulting in a charge to income if (a) total estimated con-
tract costs are significantly higher than expected due to changes in customer specifications prior to
contract amendment, (b) there is a change in engineering efforts required during the development
stage of the contract, or (c) we are unable to meet contract milestones.
Goodwill and Other Intangible Assets
Upon the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, on December 30, 2001, we
recorded an after-tax transitional impairment charge of $488 million as discussed in Note 7 to the con-
solidated financial statements. This new accounting standard requires companies to evaluate goodwill
and other intangible assets for impairment on an annual basis. We evaluate the recoverability of good-
will and other intangible assets annually in the fourth quarter, or more frequently if events or changes in
circumstances, such as declines in sales, earnings or cash flows or material adverse changes in the
business climate, indicate that the carrying value of an asset might be impaired. We completed our
Critical
Accounting
Policies
27