E-Z-GO 2008 Annual Report Download - page 68

Textron Inc.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in interest rates, currency exchange rates and securities pricing. We do not hold or issue
derivative financial instruments for trading or speculative purposes. To manage the volatility relating to our exposures, we net these exposures on
a consolidated basis to take advantage of natural offsets. For the residual portion, we enter into various derivative transactions pursuant to our
policies in areas such as counterparty exposure and hedging practices. All derivative instruments are reported on the balance sheets at fair value.
Designation to support hedge accounting is performed on a specific exposure basis. For financial instruments qualifying as fair value hedges, we
record changes in fair value in income, offset, in part or in whole, by corresponding changes in the fair value of the underlying exposures being
hedged. For cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in other
comprehensive (loss) income, net of deferred taxes. Changes in fair value of derivatives not qualifying as hedges are recorded in income.
Foreign currency denominated assets and liabilities are translated into U.S. dollars. Adjustments from currency rate changes are recorded in the
cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. We use foreign
currency financing transactions, including currency swaps, 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 translation
adjustment account with the offset recorded as an adjustment to the non-U.S. dollar financing liability.
Fair Values of Financial Instruments
Fair values of financial instruments are based upon estimates at the balance sheet date of the price that would be received in an orderly transaction
between market participants. We use quoted market prices and observable inputs when available; however, these inputs are often not available in
the markets for many of our assets. In these cases, we typically perform discounted cash flow analysis using our best estimates of key
assumptions such as credit losses, prepayment speeds and discount rates based on both historical experience and our interpretation of how
comparable market data in more active markets should be utilized. These estimates are subjective in nature and involve uncertainties and
significant judgment in the interpretation of current market data. Accordingly, the fair values presented may differ from amounts we could realize
or settle currently.
Product and Environmental Liabilities
We accrue product liability claims and related defense costs on the occurrence method when a loss is probable and reasonably estimable. Our
estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience and
considering the insurance coverage and deductibles in effect at the date of the incident.
Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can
be reasonably estimated. We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently
enacted laws and regulations, all of which are subject to a number of factors and uncertainties. Our 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 that are either not specifically covered by contracts or represent our share under 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.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and
liabilities, applying enacted tax rates expected to be in effect for the year in which we expect the differences will reverse or settle. Based on the
evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more
likely than not that we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and
reflect any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income
(loss), as appropriate. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences,
taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. We recognize net tax-related
interest and penalties in income tax expense.
Recently Announced Accounting Pronouncements
In June 2008, the FASB issued Staff Position (FSP) Emerging Issues Task Force No. 03-6-1, “Determining Whether Instruments Granted In
Share-Based Payment Transactions Are Participating Securities.” This FSP concludes that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the
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