E-Z-GO 2003 Annual Report Download - page 31

loan pools and all other receivables, we recognize reserves for bad debts based on current delinquen-
cies, the characteristics of the existing accounts, historical loss experience, the value of underlying col-
lateral, 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 col-
lectible.
Reserves on certain finance receivables are determined using estimates of related collateral values
based on historical recovery rates and current market conditions. Management reviews the market con-
ditions for used equipment and aircraft inventories on a periodic basis. A deterioration in market condi-
tions resulting in lower recovery rates would result in lower estimated collateral values, increasing the
amount of reserves required on related receivables and used inventories on hand. Based on current
market conditions and recovery rates, we believe our reserves are adequate as of January 3, 2004.
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.
We evaluate the recoverability of goodwill 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 annual impairment test in the fourth quarter of 2003 using the estimates
from our long-term strategic plans. No adjustment was required to the carrying value of our goodwill or
other intangible assets based on the analysis performed.
Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated
fair value. Fair values are primarily established using a discounted cash flow methodology using
assumptions consistent with market participants. The determination of discounted cash flows is based
on the businesses’ strategic plans and long-range planning forecasts. The revenue growth rates includ-
ed in the plans are management’s best estimates based on current and forecasted market conditions,
and the profit margin assumptions are projected by each segment based on the current cost structure
and anticipated net cost reductions. If different assumptions were used in these plans, the related undis-
counted cash flows used in measuring impairment could be different, potentially resulting in an impair-
ment charge.
Securitized transactions involve the sale of finance receivables to qualified special purpose trusts. While
the assets sold are no longer on our balance sheet, our retained interests are included in other assets.
We may retain an interest in the transferred assets in the form of interest-only securities, subordinated
certificates, cash reserve accounts, and servicing rights and obligations. Our retained interests are sub-
ordinate to other investors’ interests in the securitizations. Generally, we do not provide legal recourse to
third-party investors that purchase interests in our securitizations beyond the credit enhancement inher-
ent in the retained interest-only securities, subordinated certificates and cash reserve accounts. Howev-
er, Textron Manufacturing has provided a guarantee on a limited basis to a securitization trust sponsored
by a third-party financial institution that purchases timeshare note receivables from Textron Finance, as
discussed more fully in Note 3 to the consolidated financial statements.
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