E-Z-GO 2005 Annual Report Download - page 68

Derivative Financial Instruments
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 various derivative transactions pursuant to Textron’s policies in areas such as counterparty exposure and hedging practices.
All derivative instruments are reported on the balance sheet at fair value. Designation 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 values of derivatives accounted for as cash
flow hedges, to the extent they are effective as hedges, are recorded in Other Comprehensive (Loss) Income, 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
speculative 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 Shareholders’ 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 trans-
lation adjustment account in Accumulated Other Comprehensive Loss with the offset recorded as an adjustment to the non-U.S. dollar financing
liability.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, accounts payable, and variable-rate receivables and debt approximate carrying
value. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined
using available market information 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
necessarily indicative of the amounts that could be realized in a current market.
Product and Environmental Liabilities
Product liability claims are accrued on the occurrence method based on insurance coverage and deductibles in effect at the date of the incident
and management’s assessment of the probability of loss when reasonably estimable.
Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount is
reasonably estimated. Textron’s environmental liabilities are undiscounted and do not take into consideration possible future insurance proceeds
or significant amounts from claims against other third parties.
Research and Development Costs
Research and development costs not specifically covered by contracts and those related to Textron’s share of research and development activity in
connection with cost-sharing arrangements are charged to expense as incurred. Research and development costs incurred under contracts with
others are reported as cost of sales over the period that revenue is recognized, consistent with Textron’s contract accounting policy.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and lia-
bilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of
available evidence, Textron recognizes future tax benefits, such as net operating loss carryforwards, to the extent that management believes it is
more likely than not that the benefits will be realized. Management periodically assesses the likelihood that Textron will be able to recover its
deferred tax assets and reflects any changes in estimates in the valuation allowance, with a corresponding adjustment to earnings or Other Compre-
hensive Income (Loss), as appropriate. In assessing the need for a valuation allowance, management looks to the future reversal of existing tax-
able temporary differences, taxable income in prior carryback years, the feasibility of tax planning strategies and estimated future taxable income.
Note 2. Discontinued Operations
Textron’s Consolidated Financial Statements and related footnote disclosures reflect Textron Fastening Systems and the InteSys, OmniQuip and
small business direct businesses as discontinued operations, net of applicable income taxes, for all periods presented in accordance with State-
ment of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
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Textron Inc.