E-Z-GO 2003 Annual Report Download - page 45

43
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line
method. Land improvements and buildings are depreciated primarily over estimated lives ranging from
5 to 40 years, while machinery and equipment are depreciated primarily over 3 to 15 years. Expendi-
tures for improvements that increase asset values and extend useful lives are capitalized. Expenditures
for maintenance and repairs are expensed as incurred.
Management evaluates the recoverability of goodwill and other intangible assets annually, or more fre-
quently 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. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its
estimated fair value. Fair values are established primarily using a discounted cash flow methodology.
The determination of discounted cash flows is based on the businesses’ strategic plans and long-range
planning forecasts.
Textron is exposed to market risk, primarily from changes in interest rates, currency exchange rates and
securities pricing. To manage the volatility relating to these exposures, Textron nets the exposures on a
consolidated basis to take advantage of natural offsets. For the residual portion, Textron enters into vari-
ous derivative transactions pursuant to Textron’s policies in such areas as counterparty exposure and
hedging practices. All derivative instruments are reported on the balance sheet at fair value. Designa-
tion to support hedge accounting is performed on a specific exposure basis. Changes in fair value of
financial instruments qualifying as fair value hedges are recorded in income, offset in part or in whole by
corresponding changes in the fair value of the underlying exposures being hedged. Changes in fair val-
ues of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are
recorded in OCL net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are
reported in income. Textron does not hold or issue derivative financial instruments for trading or specu-
lative purposes.
Foreign currency denominated assets and liabilities are translated into U.S. dollars with the adjustments
from the currency rate changes recorded in the cumulative translation adjustment account in sharehold-
ers’ equity until the related foreign entity is sold or substantially liquidated. Foreign currency financing
transactions, including currency swaps, are used to effectively hedge long-term investments in foreign
operations with the same corresponding currency. Foreign currency gains and losses on the hedge of
the long-term investments are recorded in the cumulative translation adjustment account in accumulat-
ed OCL with the offset recorded as an adjustment to the non-U.S. dollar financing liability.
Fair values of cash and cash equivalents, accounts receivable, accounts payable and variable-rate
receivables and debt approximate cost. The estimated fair values of other financial instruments, includ-
ing debt, equity and risk management instruments, have been determined using available market infor-
mation and valuation methodologies, primarily discounted cash flow analysis or independent investment
bankers. The estimated fair value of nonperforming loans included in finance receivables is based on
discounted cash flow analyses using risk-adjusted interest rates or the fair value of the related collateral.
Because considerable judgment is required in interpreting market data, the estimates are not necessari-
ly indicative of the amounts that could be realized in a current market.
Textron’s 1999 Long-Term Incentive Plan (1999 Plan) authorizes awards to key employees. The 1999
Plan and related awards are described more fully in Note 11. Stock-based compensation awards to
employees under the 1999 Plan are accounted for using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related
Interpretations. No stock-based employee compensation cost related to stock options awards is reflect-
ed in net income, as all options granted under the 1999 Plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. Employee compensation cost related to Tex-
tron’s performance share program and restricted stock awards is reflected in net income over the
awards’ vesting period. Textron has entered into cash settlement forward contracts on its common stock
to mitigate the impact of stock price fluctuations on compensation expense. The following table illus-
trates the effect on net income and earnings per share if Textron had applied the fair-value recognition
provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based
employee compensation.