Raytheon 2005 Annual Report Download - page 79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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 I, Equity Security Units). All material intercompany transactions have been eliminated. Certain prior
year amounts have been reclassified to conform with the current year presentation.
Revenue Recognition—Sales under long-term contracts generally are recorded under the percentage of completion
method. Incurred costs and estimated gross margins are recorded as sales when work is performed based on the
percentage that incurred costs bear to the Company’s estimates of total 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 realization is considered 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
current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. Contracts
with multiple elements, primarily license fees, are evaluated and separated, as appropriate, into elements on which
revenue is recognized in the proper periods.
Revenue from aircraft sales are recognized at the time of physical delivery of the completed 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 periods or as services are performed. Revenue from the sale of fractional shares is
recognized over the expected life of the customer relationship.
Revenue from license fees are recognized over the expected life of the continued involvement with the customer.
Lot Accounting—The Company uses lot accounting for new commercial aircraft introductions at Raytheon Aircraft
Company (Raytheon Aircraft or RAC). Lot accounting involves selecting an initial lot size at the time a new aircraft
begins to be delivered and measuring an average margin over the entire lot for each aircraft sold. The costs attributed to
aircraft delivered are based on the estimated average margin of all aircraft in the lot and are determined under the
learning curve concept, which anticipates a predictable decrease in unit costs from cost reduction 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 margin were included in inventories and totaled $67 million and $89 million on
Premier at December 31, 2005 and 2004, respectively, and $112 million and $90 million on Hawker 4000 at December 31,
2005 and 2004, respectively. Once 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 aircraft, and experience on similar new aircraft. The size of the initial lot for the Beechcraft Premier I is 200 units
of which 143 had been delivered at December 31, 2005. There was 26 units for the Premier in firm backlog of which 11
units are expected to be delivered from the initial lot. The size of the initial lot for the Hawker 4000 is 75 units, no units
had been delivered at December 31, 2005. There was 74 units for the Hawker 4000 in firm backlog of which 34 units are
expected to be delivered from the initial lot. At December 31, 2005, deferred costs of $56 million related to Premier and
$89 million related to Hawker 4000 were not recoverable from existing firm orders.
Product Warranty—Costs incurred under warranty provisions 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 commercial aircraft sales are determined based upon an estimate of costs that may be
incurred for warranty services and other post-sales support programs.
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