E-Z-GO 2011 Annual Report Download - page 61

Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries. Our financings
are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its
majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group, which
also is the Finance segment, consists of Textron Financial Corporation (TFC), its consolidated subsidiaries and three other finance
subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance
group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services,
while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s
activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those
evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial
Statements.
Our Finance group provides captive financing for retail purchases and leases for new and used aircraft and equipment
manufactured by our Manufacturing group. In the Consolidated Statements of Cash Flows, cash received from customers or from
the sale of receivables is reflected as operating activities when received from third parties. However, in the cash flow information
provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations
of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance
group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s
statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance
group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the
two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.
These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in
consolidation.
Collaborative Arrangements
Our Bell segment has a strategic alliance agreement 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 (V-22 Contracts). The alliance created by this agreement is not a legal entity and has no employees, no assets and no
true operations. This agreement creates contractual rights and does not represent an entity in which we have an equity interest.
We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated
from transactions with the U.S. Government in each company’s respective income statement. Neither Bell nor Boeing is
considered to be the principal participant for the transactions recorded under this agreement. Profits on cost-plus contracts are
allocated between Bell and Boeing on a 50%-50% basis. Negotiated profits on fixed-price contracts are also allocated 50%-50%;
however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns. Based on
the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific
requirements of the V-22 Contracts allocated to Bell under the work breakdown structure. We account for all of our rights and
obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts
allocated to us under the agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues
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 our
Consolidated Balance Sheets.
Use of Estimates
We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make
estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those
estimates. Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the
Consolidated Statements of Operations in the period that they are determined.
During 2011 and 2010, we changed our estimates of revenues and costs on certain long-term contracts that are accounted for under
the percentage-of-completion method of accounting, primarily in our Bell V-22 and H-1 programs. The changes in estimates
increased income from continuing operations before income taxes in 2011 and 2010 by $54 million and $78 million, respectively,
($34 million and $49 million after tax, or $0.11 and $0.16 per diluted share, respectively). These changes were primarily related to
favorable cost and operational performance. For 2011 and 2010, the gross favorable program profit adjustments totaled $83
million and $98 million, respectively. For 2011 and 2010, the gross unfavorable program profit adjustments totaled $29 million
and $20 million, respectively.
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50 Textron Inc. Annual Report • 2011