E-Z-GO 2003 Annual Report Download - page 43

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The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in these
statements and accompanying notes. Some of the more significant estimates include inventory valua-
tion, residual values of leased assets, allowance for credit losses on receivables, product liability, work-
ers’ compensation, actuarial assumptions for the pension and postretirement plans, estimates of future
cash flows associated with long-lived assets, environmental and warranty reserves, and amounts report-
ed under long-term contracts. Management’s estimates are based on the facts and circumstances avail-
able at the time estimates are made, historical experience, risk of loss, general economic conditions and
trends, and management’s assessments of the probable future outcomes of these matters. Actual
results could differ from such estimates.
Certain prior period amounts have been reclassified to conform to the current year presentation.
Cash and cash equivalents consist of cash and short-term, highly liquid securities with original maturi-
ties of ninety days or less.
Revenue is generally recognized when products are delivered or services are performed. With respect
to aircraft, delivery is upon completion of manufacturing, customer acceptance and the transfer of the
risk and rewards of ownership.
When a sale arrangement involves multiple elements, such as sales of products that include customiza-
tion services, the deliverables in the arrangement are evaluated to determine whether they represent
separate units of accounting. This evaluation occurs at inception of the arrangement and as each item in
the arrangement is delivered. The total fee from the arrangement is allocated to each unit of accounting
based on its relative fair value, taking into consideration any performance, cancellation, termination or
refund type provisions. Fair value for each element is established generally based on the sales price
charged when the same or similar element is sold separately. Revenue is recognized when revenue
recognition criteria for each unit of accounting are met. The adoption of Emerging Issues Task Force
(EITF) 00-21 “Revenue Arrangements with Multiple Deliverables” in the third quarter of 2003 did not
have a material impact on Textron’s results of operations or financial position.
Revenue under fixed-price contracts is generally recorded as deliveries are made. Certain long-term
fixed-price contracts provide for periodic delivery after a lengthy period of time over which significant
costs are incurred or require a significant amount of development effort in relation to total contract vol-
ume. Revenues under those contracts and all cost-reimbursement-type contracts are recorded as costs
are incurred. Certain contracts are awarded with fixed-price incentive fees. Incentive fees are consid-
ered when estimating revenues and profit rates, and are recorded when these amounts are reasonably
determined. Long-term contract profits are based on estimates of total sales value and costs at comple-
tion. Such estimates are reviewed and revised periodically throughout the contract life. Revisions to con-
tract profits are recorded when the revisions to estimated sales value or costs are made. Estimated con-
tract losses are recorded when identified.
Textron continues to manufacture aircraft under the V-22 low-rate initial production releases that began
prior to 2003. Revenues under those releases are recorded on a cost incurred basis primarily as a result
of the significant engineering effort required over a lengthy period of time during the initial development
phase in relation to total contract volume. The development effort is substantially complete for new pro-
duction releases in 2003 and revenue on those releases will be recognized as units are delivered, which
is expected to begin in late 2004.
Revenue from certain qualifying noncancelable aircraft and other product lease contracts are account-
ed for as sales-type leases. The present value of all payments (net of executory costs and any guaran-
teed residual values) is recorded as revenue, and the related costs of the product are charged to cost of
sales. Generally, these leases are financed through Textron Finance and the associated interest is
recorded over the term of the lease agreement using the interest method. Lease financing transactions
that do not qualify as sales-type leases are accounted for under the operating method wherein revenue
is recorded as earned over the lease period.
Finance revenues include interest on finance receivables, which is recognized 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, which are deferred and amortized over the contractual
lives of the respective receivables using the interest method. Unamortized amounts are recognized in