E-Z-GO 2012 Annual Report Download - page 64

52 Textron Inc. Annual Report ● 2012
We maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover inherent
losses in the portfolio based on management’s evaluation. For larger balance accounts specifically identified as impaired,
including large accounts in homogeneous portfolios, a reserve is established based on comparing the carrying value with either a)
the expected future cash flows, discounted at the finance receivable’s effective interest rate; or b) the fair value of the underlying
collateral, if the finance receivable is collateral dependent. The expected future cash flows consider collateral value; financial
performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal
expenses; and costs associated with the repossession/foreclosure and eventual disposal of collateral. When there is a range of
potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative
likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount
and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the
underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical
factors included in this analysis for the Captive product line include industry valuation guides, age and physical condition of the
collateral, payment history and existence and financial strength of guarantors.
We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. For the
Captive product line, the allowance is established as a percentage of non-recourse finance receivables, which have not been
identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience,
current delinquency and default trends, collateral values and both general economic and specific industry trends.
Finance receivables held for investment are charged off at the earlier of the date the collateral is repossessed or when no payment
has been received for six months, unless management deems the receivable collectible. Repossessed assets are recorded at their
fair value, less estimated cost to sell.
Finance Receivables Held for Sale
Finance receivables are classified as held for sale based on the determination that we no longer intend to hold the receivables for
the foreseeable future, until maturity or payoff, or we no longer have the ability to hold to maturity. Our decision to classify
certain finance receivables as held for sale is based on a number of factors, including, but not limited to, contractual duration, type
of collateral, credit strength of the borrowers, interest rates and perceived marketability of the receivables.
Finance receivables held for sale are carried at the lower of cost or fair value. At the time of transfer to the held for sale
classification, we establish a valuation allowance for any shortfall between the carrying value and fair value. In addition, any
allowance for loan losses previously allocated to these finance receivables is transferred to the valuation allowance account, which
is netted with finance receivables held for sale on the balance sheet. This valuation allowance is adjusted quarterly. Fair value
changes can occur based on market interest rates, market liquidity, and changes in the credit quality of the borrower and value of
underlying loan collateral.
Inventories
Inventories are stated at the lower of cost or estimated net realizable value. We value our inventories generally using the first-in,
first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better
matching of costs and revenues. 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. Inventoried costs related to long-term contracts are stated at
actual production costs, including 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 reflected
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. We capitalize
expenditures for improvements that increase asset values and extend useful lives.