E-Z-GO 2010 Annual Report Download - page 62

50
Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the
year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as
a component of other comprehensive (loss) income (OCI) and are amortized into net periodic pension cost in future periods.
Derivative Financial Instruments
We are exposed to market risk primarily from changes in interest rates and currency exchange rates. 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 at fair value in the Consolidated Balance Sheets. 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 earnings, 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 OCI, net of deferred taxes. Changes in fair
value of derivatives not qualifying as hedges are recorded in earnings.
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 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 debt.
Product and Environmental Liabilities
We accrue for product liability claims and related defense costs 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 not discounted and do not take into consideration possible future insurance proceeds or significant
amounts from claims against other third parties.
Warranty and Product Maintenance Contracts
We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging
from one to five years. We estimate the costs that may be incurred under warranty programs and record a liability in the amount of
such costs at the time product revenues are recognized. Factors that affect this liability include the number of products sold,
historical and anticipated rates of warranty claims, and cost per claim. We assess the adequacy of our recorded warranty and
product maintenance liabilities periodically and adjust the amounts as necessary. Additionally, we may establish warranty liabilities
related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.
Research and Development Costs
Our customer-funded research and development costs primarily are related to U.S. Government contracts. Research and
development costs incurred under long-term contracts with the U.S. Government are reported as cost of sales over the period that
revenues are recognized. Research and development costs that are not reimbursable under a contract with the U.S. Government or
another customer are charged to expense as incurred. Our research and development costs are as follows:
(In millions) 2010 2009 2008
Company-funded
$ 403
$ 401
$ 465
Customer-funded
299
443
501
Total research and development
$ 702
$ 844
$ 966
Our company-funded research and development costs include $33 million, $28 million and $23 million in development costs that were
reimbursed by our commercial development partners in 2010, 2009 and 2008, respectively. In 2010, customer-funded research and
development costs were lower than in prior years primarily due to the ramp up of the H-1 program into full production requiring less
research and development costs and the cancellation of the Armed Reconnaissance Helicopter and VH-71 programs.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets
and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates
expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce