E-Z-GO 2014 Annual Report Download - page 55

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. Property, plant and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If
the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset generally is written down
to fair value.
Goodwill and Intangible Assets
For our business acquisitions, we estimate the fair value of intangible assets primarily using discounted cash flow analysis of
anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset using
market participant assumptions. Goodwill represents the excess of cost over the fair values assigned to intangible and other net
assets of the acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject
to annual impairment testing. We evaluate the recoverability of these assets in the fourth quarter of each year 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 a potential impairment.
For our annual impairment test, we calculate the fair value of each reporting unit and indefinite-lived intangible asset primarily
using discounted cash flows. A 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. For the goodwill impairment test, the discounted cash flows incorporate assumptions for revenue
growth, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, 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 business having similar risks and characteristics to the reporting unit being assessed. If the reporting unit’s
estimated fair value exceeds its carrying value, there is no impairment. Otherwise, the amount of the impairment is determined by
comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. The implied fair value
of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities as if the reporting unit had
been acquired in a business combination. If the carrying amount of the goodwill exceeds the implied fair value, an impairment
loss is recognized in an amount equal to that excess.
Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Amortization of intangible
assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in
which the economic benefits of the intangible assets are consumed or otherwise realized. Approximately 76% of our gross
intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using
the straight-line method.
Finance Receivables
Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell
helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses.
We maintain an allowance for losses on finance receivables 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, a reserve is established based
on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the
underlying collateral if the finance receivable is collateral dependent, to its carrying amount. 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 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
49 Textron Inc. Annual Report • 2014