E-Z-GO 2007 Annual Report Download - page 65

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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 fi nancing transactions that do not qualify as sales-type leases, we record
revenue as earned over the lease period.
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 Certifi ed Public Accountants Statement of Position No. 81-1, “Accounting for Performance of Construction-
Type and Certain Production-Type Contracts.” Under the percentage-of-completion method, we estimate profi t as the difference between the total
estimated revenue and cost of a contract. We then recognize that estimated profi t over the contract term based on either the costs incurred (under
the cost-to-cost method, which is typically used for development effort) or the units delivered (under the units-of-delivery method, which is used
for production effort), as appropriate under the circumstances. Revenues under all cost-reimbursement contracts are recorded using the cost-to-
cost method. Revenues under fi xed-price contracts generally are recorded using the units-of-delivery method; however, when the contracts
provide for periodic delivery after a lengthy period of time over which signifi cant costs are incurred or require a signifi cant amount of development
effort in relation to total contract volume, revenues are recorded using the cost-to-cost method.
Our long-term contract profi ts are based on estimates of total contract cost and revenue utilizing current contract specifi cations, expected
engineering requirements and the achievement of contract milestones, including product deliveries. Certain contracts are awarded with fi xed-
price incentive fees that also are considered when estimating revenues and profi t 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 profi ts 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 the 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”). This joint venture agreement 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 specifi c requirements of the V-
22 Contracts allocated to us under the joint venture agreement. Revenues and cost of sales refl ect our performance under the V-22 Contracts with
revenue on production lots, beginning with the seventh lot, recognized using the units-of-delivery method. 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 fi nance receivables, direct loan origination costs and fees received. We recognize
interest 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 fi nance revenues over the contractual lives of the respective receivables using the interest method.
When receivables are sold or prepaid, unamortized amounts are recognized in fi nance revenues. We generally suspend the accrual of interest
income for accounts that are contractually delinquent by more than three months. In addition, detailed reviews of loans may result in earlier
suspension. We resume the accrual of interest when the loan becomes contractually current and recognize the suspended interest income at that
time. Cash payments on nonaccrual accounts, including fi nance charges, generally are applied to reduce loan principal.
Losses on Finance Receivables
Provisions for losses on fi nance receivables are charged to income in amounts suffi cient to maintain the allowance at a level considered adequate
to cover losses in the existing receivable portfolio. We evaluate the allowance by examining current delinquencies, characteristics of the existing
accounts, historical loss experience, underlying collateral value, and general economic conditions and trends. In addition, for larger balance
commercial loans, we consider borrower specifi c information, industry trends and estimated discounted cash fl ows. Finance receivables
generally are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date when the collateral is
repossessed or when no payment has been received for six months. Finance receivables are charged off when they are deemed to be uncollectible.
Loan Impairment
We periodically evaluate our non-homogeneous loan portfolios for impairment. A loan is considered impaired when it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan agreement. We also identify loans that are considered impaired
due to the signifi cant modifi cation of the original loan terms. These modifi ed loans refl ect deferred principal payments, generally at market
interest rates, and continue to accrue fi nance charges since collection of principal and interest is not doubtful. We measure impairment by
Notes to the Consolidated Financial Statements