Raytheon 2003 Annual Report Download - page 40

RAYTHEON COMPANY 333
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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333NOTE A: ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial
statements include the accounts of Raytheon Company (the
“Company”) and all wholly-owned and majority-owned domestic
and foreign subsidiaries (except for RC Trust I, as described in
Note J, Equity Security Units). All material intercompany trans-
actions have been eliminated. Certain prior year amounts have
been reclassified to conform with the current year presentation.
REVENUE RECOGNITION Sales under long-term government
contracts are recorded under the percentage of completion
method. Incurred costs and estimated gross margins are recorded
as sales as work is performed based on the percentage that
incurred costs bear to estimated total costs utilizing the Company’s
estimates of costs and contract value. Cost estimates include
direct and indirect costs such as labor, materials, warranty, and
overhead. Some contracts contain incentive provisions based
upon performance in relation to established targets, which are
included at estimated realizable value. Contract change orders and
claims are included when they can be reliably estimated and real-
ization is probable. Since many contracts extend over a long period
of time, revisions in cost and contract value estimates during the
progress of work have the effect of adjusting earnings applicable to
performance in prior periods in the current period. When the cur-
rent contract estimate indicates a loss, provision is made for the
total anticipated loss in the current period.
Revenue from aircraft sales are recognized at the time of physi-
cal delivery of the aircraft. Revenue from certain qualifying non-
cancelable aircraft lease contracts are accounted for as sales-type
leases. The present value of all payments, net of executory costs,
are recorded as revenue, and the related costs of the aircraft are
charged to cost of sales. Associated interest, using the interest
method, is recorded over the term of the lease agreements. All
other leases for aircraft are accounted for under the operating
method wherein revenue is recorded as earned over the rental
period. Service revenue is recognized ratably over contractual peri-
ods or as services are performed.
PRODUCT WARRANTY Costs incurred under warranty provi-
sions performed under long-term contracts are accounted for as
contract costs as the work is performed. The estimation of these
costs is an integral part of the determination of the pricing of the
Company’s products and services.
Warranty provisions related to aircraft sales are determined
based upon an estimate of costs that may be incurred under
warranty and other post-sales support programs. Activity related to
aircraft warranty provisions was as follows:
(In millions)
Balance at December 31, 2001 $ 19
Accruals for aircraft deliveries in 2002 25
Accruals related to prior year aircraft deliveries 10
Warranty services provided in 2002 (27)
Balance at December 31, 2002 27
Accruals for aircraft deliveries in 2003 27
Accruals related to prior year aircraft deliveries 8
Warranty services provided in 2003 (23)
Balance at December 31, 2003 $39
LOT ACCOUNTING The Company uses lot accounting for new
commercial aircraft introductions at Raytheon Aircraft. Lot account-
ing involves selecting an initial lot size at the time a new aircraft
begins to be delivered and measuring an average cost over the
entire lot for each aircraft sold. The costs attributed to aircraft deliv-
ered are based on the estimated average cost of all aircraft in the
lot and are determined under the learning curve concept, which
anticipates a predictable decrease in unit costs from cost reduc-
tion initiatives and as tasks and production techniques become
more efficient through repetition. Costs incurred on in-process and
delivered aircraft in excess of the estimated average cost were
included in inventories and totaled $84 million and $110 million at
December 31, 2003 and 2002, respectively. Once production
costs stabilize, which is expected by the time the initial lot has been
completed, the use of lot accounting is discontinued. The
Company determines lot size based on several factors, including
the size of firm backlog, the expected annual production on the air-
craft, and experience on similar new aircraft. The size of the initial
lot for the Beechcraft Premier I, the only aircraft for which the
Company is currently utilizing lot accounting for, is 200 units.
RESEARCH AND DEVELOPMENT EXPENSES Expenditures
for company-sponsored research and development projects are
expensed as incurred. Customer-sponsored research and develop-
ment projects performed under contracts are accounted for as
contract costs as the work is performed.
FEDERAL AND FOREIGN INCOME TAXES The Company
and its domestic subsidiaries provide for federal income taxes on
pretax accounting income at rates in effect under existing tax law.
Foreign subsidiaries have recorded provisions for income taxes at
applicable foreign tax rates in a similar manner.
CASH AND CASH EQUIVALENTS Cash and cash equivalents
consist of cash and short-term, highly liquid investments with origi-
nal maturities of 90 days or less.