E-Z-GO 2007 Annual Report Download - page 66

Textron Inc.
comparing the fair value of a loan with its carrying amount. Fair value is based on the present value of expected future cash fl ows 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, we establish a reserve based on this difference.
Securitized Transactions
Securitized transactions involve the sale of fi nance receivables to qualifi ed special purpose trusts. Through our Finance group, we sell or
securitize loans and leases and may retain an interest in the assets sold in the form of interest-only securities, seller certifi cates, cash reserve
accounts, and servicing rights and obligations. These retained interests are subordinate to other investors’ interests in the securitizations. We do
not provide legal recourse to third-party investors that purchase interests in our securitizations beyond the credit enhancement inherent in the
retained interest-only securities, seller certifi cates and cash reserve accounts. Gain or loss on the sale of the loans or leases depends, in part, on
the previous carrying amount of the fi nancial assets involved in the transfer, which is 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 in other assets. We estimate fair values based on the present value of expected future cash fl ows using
management’s best estimates of key assumptions – credit losses, prepayment speeds and discount rates commensurate with the risks involved.
We review the fair values of the retained interests quarterly using updated assumptions and compare such amounts with the carrying value of the
retained interests. When the carrying value exceeds the fair value of the retained interests, we determine whether the decline in fair value is other
than temporary. When we determine that the value of the decline is other than temporary, we write down the retained interests to fair value with a
corresponding charge to income. When a change in fair value of retained interests is deemed temporary, we record a corresponding credit or
charge to other comprehensive income for any unrealized gains or losses.
Investments
We classify investments in marketable equity securities as available for sale and record these investments at fair value in other assets. Unrealized
gains and losses related to these investments 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. For investments in joint
ventures for which we do not have control or are not the primary benefi ciary but where we do have the ability to exercise signifi cant infl uence over
the venture’s operating and fi nancial policies, we use the equity method.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the fi rst-in, fi rst-out (“FIFO”)
method or the last-in, fi rst-out (“LIFO”) method for certain qualifying inventories in the U.S. We determine costs for our commercial helicopters
on an average cost basis by model considering the expended and estimated costs for the current production release. Costs on long-term contracts
represent costs incurred for production, allocable operating overhead, advances to suppliers, and, in the case of contracts with the U.S. Government,
allocable research and development and general and administrative expenses. Since our inventoried costs include amounts related to contracts
with long production cycles, a portion of these costs is not expected to be realized within one year. Pursuant to contract provisions, agencies of
the U.S. Government have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments
and progress payments. Such advances and payments are refl ected as an offset against the related inventory balances.
Customer deposits are recorded against inventory when the right of offset exists. All other customer deposits are recorded in accrued liabilities.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method. Land improvements and
buildings are depreciated primarily over estimated lives ranging from four to 40 years, while machinery and equipment are depreciated primarily
over one to 15 years. We capitalize expenditures for improvements that increase asset values and extend useful lives.
Intangible and Other Long-Lived Assets
At acquisition, we estimate and record the fair value of purchased intangible assets primarily using discounted cash fl ow analysis of anticipated
cash fl ows refl ecting incremental revenues and/or cost savings resulting from the acquired intangible asset, refl ecting market participant
assumptions. Amortization of intangible assets with fi nite lives is recognized over their estimated useful lives using a method of amortization that
refl ects the pattern in which the economic benefi ts of the intangible assets are consumed or otherwise realized. Approximately 40% of our gross
intangible assets with fi nite lives are amortized using the straight-line method, with the remaining assets, primarily customer agreements,
amortized based on the cash fl ow streams used to value the asset.
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