E-Z-GO 2006 Annual Report Download - page 63

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Leases – Certain qualifying noncancelable aircraft and other product lease contracts are accounted for as sales-type leases. Upon delivery, we
record the present value of all payments (net of executory costs and any guaranteed residual values) under these leases as revenues, and the
related costs of the product are charged to cost of sales. For lease financing transactions that do not qualify as sales-type leases, we record rev-
enue as earned over the lease period.
Aircraft sales in which we guarantee our customer a minimum future resale value are viewed as leases 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 clas-
sified as an operating lease or as a sales-type lease, the minimum lease payments generally represent the difference between a) the proceeds
upon the equipment’s initial transfer and b) the present value of the residual value guarantee to the purchaser as of the first exercise date of the
guarantee, less proceeds from any residual value insurance obtained. To assess the market value of the aircraft, we use industry publications as
well as actual sales of used aircraft. These market value assessments are adjusted based on available information related to the individual aircraft
and any physical condition minimums required by the arrangement. Losses are recorded currently if the projected market value of the aircraft at
the exercise date is less than the guaranteed amount.
Long-Term Contracts – Revenues under long-term contracts are accounted for under the percentage-of-completion method of accounting in
accordance with American Institute of Certified Public Accountants Statement of Position No. 81-1, “Accounting for Performance of Construc-
tion-Type and Certain Production-Type Contracts.” Under the percentage-of-completion method, we estimate profit as the difference between total
estimated revenue and total estimated cost of a contract and recognize that profit over the contract term based on either input (e.g., costs incurred
under the cost-to-cost method which is typically used for development effort) or output (e.g., units delivered under the units-of-delivery method,
which is used for production effort), as appropriate under the circumstances. Revenues under fixed-price contracts generally are recorded using
the units-of-delivery method. However, certain fixed-price contracts provide for periodic delivery after a lengthy period of time over which signifi-
cant 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 using the cost-to-cost method.
Our long-term contract profits are based on estimates of total contract cost and revenue utilizing current contract specifications, expected engi-
neering requirements and the achievement of contract milestones, including product deliveries. Certain contracts are awarded with fixed-price
incentive fees which also are considered when estimating revenues and profit rates. Contract costs typically are incurred over a period of several
years, and the estimation of these costs requires substantial judgment. We review and revise these estimates periodically throughout the contract
term. Revisions to contract profits are recorded when the revisions to estimated revenues or costs are made. Anticipated losses on contracts are
recognized in full in the period in which losses become probable and estimable.
Our Bell Helicopter business 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. We account for the first three fixed-price incentive con-
tract lots using the cost-to-cost method, 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 production releases on the first six production lots include separately con-
tracted modifications to meet additional requirements of the U.S. Government’s Blue Ribbon Panel. The development effort for new production
releases was considered substantially complete at the beginning of 2003 since a consistent production specification had been met with these
units incorporating many of the required modifications on the production line. Accordingly, revenue is recognized on the new production releases
that began in 2003 using the units-of-delivery method.
Our joint venture agreement with Boeing creates contractual, rather than ownership, rights related to the V-22. Accordingly, we do not account for
this joint venture under the equity method of accounting. We account for all of our rights and obligations under the specific requirements of the V-
22 Contracts allocated to us under the joint venture agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts. We
include all assets used in performance of the V-22 Contracts that we own, including inventory and unpaid receivables, and all liabilities arising
from our obligations under the V-22 Contracts in the consolidated balance sheets.
Finance Revenues – Finance revenues include interest on finance receivables, direct loan origination costs and fees received. We recognize inter-
est using the interest method to provide a constant rate of return over the terms of the receivables. Revenues on direct loan origination costs and
fees received are deferred and amortized to finance revenues over the contractual lives of the respective receivables using the interest method.
When receivables are sold or prepaid, unamortized amounts are recognized in revenues. We generally suspend the accrual of interest income for
Notes to the Consolidated Financial Statements