E-Z-GO 2005 Annual Report Download - page 65

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valuation, residual values of leased assets, allowance for credit losses on receivables, product liability, workers’ compensation, actuarial assump-
tions for the pension and postretirement plans, estimates of future cash flows associated with goodwill and long-lived assets, environmental and
warranty reserves, and amounts reported under long-term contracts. Management’s estimates are based on the facts and circumstances available
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Revenue Recognition
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 customization and other 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.
Revenue from certain qualifying noncancelable aircraft and other product lease contracts are accounted for as sales-type leases. The present value
of all payments (net of executory costs and any guaranteed 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 oper-
ating method with the revenue recorded as earned over the lease period.
Aircraft sales with guaranteed minimum resale values are viewed as leases and are accounted for in accordance with Emerging Issues Task Force
No. 95-1, “Revenue Recognition on Sales with a Guaranteed Minimum Resale Value.” To determine whether the transaction should be classified
as an operating lease or as a sales-type lease, the minimum lease payments generally represent the difference between the proceeds upon the
equipment’s initial transfer and the present value of the residual value guarantee to the purchaser as of the first exercise date of the guarantee. If
residual value insurance is obtained, the present value of the residual value insurance is also included in the minimum lease payments. Textron
assesses the market values of the aircraft using both industry publications as well as actual sales of used aircraft. For fixed-wing aircraft, specific
information related to the individual aircraft such as hours and condition may be available, and market value assessments are adjusted accord-
ingly. For rotor aircraft, the guarantee arrangements require certain physical condition minimums and/or require the aircraft to be covered under
an extended maintenance plan. Rotor aircraft fair value estimates are valued accordingly. Losses are recorded currently if the estimated market
value of the aircraft at the exercise date is less than the guaranteed amount.
Long-Term Contracts
Long-term contracts are accounted for under American Institute of Certified Public Accountants Statement of Position No. 81-1, “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.” Revenue under fixed-price contracts is generally recorded as deliver-
ies are made under the units-of-delivery method. 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 volume. Revenues
under those contracts and all cost-reimbursement-type contracts are recorded as costs are incurred under the cost-to-cost method. Certain con-
tracts are awarded with fixed-price incentive fees. Incentive fees are considered when estimating revenues and profit rates and are recorded when
these amounts are reasonably determinable. Long-term contract profits are based on estimates of total sales value and costs at completion. Such
estimates are reviewed and revised periodically throughout the contract life. Revisions to contract profits are recorded when the revisions to esti-
mated sales value or costs are made. Estimated contract losses are recorded when identified.
Bell Helicopter has a joint venture with The Boeing Company (“Boeing”) to provide engineering, development and test services related to the V-22
aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (the “V-22 Contracts”). The V-22
Contracts include the development contract and various production release contracts (i.e., lots) that may run concurrently with multiple earlier
lots still being produced as new lots are started. The development contract and the first three production lots are under cost-reimbursement-type
contracts, while subsequent lots are under fixed-price-type contracts. The first three lots under fixed-price incentive contracts have been
accounted for under the cost-to-cost method, primarily as a result of the significant engineering effort required over a lengthy period of time
Notes to the Consolidated Financial Statements