E-Z-GO 2005 Annual Report Download - page 66

during the initial development phase in relation to total contract volume. The production releases on the first six production lots include sepa-
rately contracted modifications to meet the additional requirements of the U.S. Government’s Blue Ribbon Panel. Beginning in 2003, the develop-
ment effort was considered substantially complete for the new production releases and management believed a consistent production
specification had been met as these units incorporate many of these modifications on the production line. Accordingly, revenue on the new pro-
duction releases that began in 2003 is recognized under the units-of-delivery method.
Finance Revenues
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 revenues when receivables
are sold or prepaid. Accrual of interest income is suspended for accounts that are contractually delinquent by more than three months unless col-
lection is not doubtful. In addition, detailed reviews of loans may result in earlier suspension if collection is doubtful. Accrual of interest is
resumed when the loan becomes contractually current, and suspended interest income is recognized at that time.
Losses on Finance Receivables
Provisions for losses on finance receivables are charged to income in amounts sufficient to maintain the allowance at a level considered adequate
to cover losses in the existing receivable portfolio. Management evaluates the allowance by examining current delinquencies, the characteristics
of the existing accounts, historical loss experience, the value of the underlying collateral, and general economic conditions and trends. Finance
receivables are charged off when they are deemed to be uncollectible. Finance receivables are written down to the fair value (less estimated costs
to sell) of the related collateral at the earlier of the date the collateral is repossessed or when no payment has been received for six months unless
management deems the receivable collectible.
Loan Impairment
Textron Finance periodically evaluates finance receivables, excluding homogeneous loan portfolios and finance leases, for impairment. A loan is
considered impaired when it is probable that Textron Finance will be unable to collect all amounts due according to the contractual terms of the
loan agreement. In addition, Textron Finance identifies loans that are considered impaired due to the significant modification of the original loan
terms to reflect deferred principal payments generally at market interest rates but which continue to accrue finance charges since full collection of
principal and interest is not doubtful. Impairment is measured by comparing the fair value of a loan with its carrying amount. Fair value is based
on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or, if the loan
is collateral dependent, at the fair value of the collateral, less selling costs. If the fair value of the loan is less than its carrying amount, Textron
Finance establishes a reserve based on this difference. This evaluation is inherently subjective as it requires estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may differ from actual results.
Securitized Transactions
Textron Finance sells or securitizes loans and leases and may retain an interest in the assets sold in the form of servicing responsibilities and sub-
ordinated interests, including interest-only securities, seller certificates and cash reserves. These retained interests are subordinate to other
investors’ interests in the securitizations. A gain or loss on the sale of finance receivables depends, in part, on the previous carrying amount of the
finance receivables involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the
date of transfer. Retained interests are recorded at fair value as a component of Other Assets.
Textron Finance estimates fair value based on the present value of future expected cash flows using management’s best estimates of key assump-
tions: credit losses, prepayment speeds, forward interest rate yield curves and discount rates commensurate with the risks involved. Textron
Finance reviews the fair values of the retained interests quarterly using updated assumptions and compares such amounts with the carrying value
of the retained interests. When the carrying value exceeds the fair value of the retained interests and the decline in fair value is determined to be
other than temporary, the retained interest is written down to fair value with a corresponding charge to income. When a change in the fair value of
the retained interest is deemed temporary, any unrealized gains or losses are included in Shareholders’ Equity as a component of Accumulated
Other Comprehensive Loss.
Investments
Investments in marketable equity securities are classified as available for sale and are recorded at fair value as a component of Other Assets.
Unrealized gains and losses on these securities, net of income taxes, are included in Shareholders’ Equity as a component of Accumulated Other
Comprehensive Loss. Investments in non-marketable equity securities are accounted for under either the cost or equity method of accounting.
Textron periodically reviews investment securities for impairment based on criteria that include the duration of the market value decline, Textron’s
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Textron Inc.