E-Z-GO 2011 Annual Report Download - page 49

At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract considers
risks surrounding the ability to achieve the technical requirements (for example, a newly-developed product versus a mature
product), schedule (for example, the number and type of milestone events), and costs by contract requirements in the initial
estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire
risks surrounding the technical, schedule, and costs aspects of the contract. Likewise, the profit booking rate may decrease if we
are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All of the estimates are subject
to change during the performance of the contract and, therefore, may affect the profit booking rate. When adjustments are required,
any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from
inception-to-date recorded in the current period.
The following table sets forth the aggregate gross amount of all program profit adjustments that are included within segment profit
for the two years ended December 31, 2011:
(In millions)
2011
2010
Gross favorable
$ 83
$ 98
Gross unfavorable
(29)
(20)
Net adjustments
$ 54
$ 78
Goodwill
We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances,
such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying
value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial
information is prepared and reviewed by segment management for businesses one level below that operating segment, in which
case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a
single reporting unit based on similar economic characteristics.
In September 2011, the Financial Accounting Standards Board issued guidance that permits companies to perform a qualitative
assessment based on economic, industry and company-specific factors as the initial step in the annual goodwill impairment test for
all or selected reporting units. Based on the results of the qualitative assessment, companies are only required to perform Step 1 of
the annual impairment test for a reporting unit if the company concludes that it is more likely than not that the unit’s fair value is
less than its carrying amount. As permitted, we adopted this guidance in the fourth quarter of 2011 to reduce the costs associated
with determining each reporting unit’s fair value for the units where it is more likely than not that the fair value exceeds its
carrying amount.
For the reporting units for which we did not elect to perform a qualitative assessment, we performed a Step 1 analysis, which
required us to calculate fair value of each reporting unit. If the reporting unit’s estimated fair value exceeds its carrying value, the
reporting unit is not impaired, and no further analysis is performed. Otherwise, the amount of the impairment must be determined
in Step 2 of the goodwill impairment test. In Step 2, the implied fair value of goodwill is determined by assigning a fair value to
all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been
acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
Fair values are established primarily using discounted cash flows that incorporate assumptions for the unit’s short- and long-term
revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market
conditions, current cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant
would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.
The revenue growth rates and operating margins used in our discounted cash flow analysis are based on our businesses’ strategic
plans and long-range planning forecasts. The long-term growth rate we use to determine the terminal value of the business is
based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic
considerations such as gross domestic product, inflation and the maturity of the markets we serve. We utilize a weighted-average
cost of capital in our impairment analysis that makes assumptions about the capital structure that we believe a market participant
would make and include a risk premium based on an assessment of risks related to the projected cash flows of each reporting
unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor
or market participant would require for an investment in a company having similar risks and business characteristics to the
reporting unit being assessed.
Based on our annual review, the fair value of all of our reporting units exceeded their carrying values, and we do not believe that
there is a reasonable possibility that any units might fail the Step 1 impairment test in the foreseeable future.
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38 Textron Inc. Annual Report • 2011