Raytheon 2005 Annual Report Download - page 89

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
risks. As a part of that evaluation, the Company evaluated certain specific receivables and considered factors including
extended delinquency and requests for restructuring, among other things. Long-term receivables included commuter
aircraft receivables of $228 million and $281 million at December 31, 2005 and 2004, respectively.
The Company accrues interest on aircraft-related long-term receivables in accordance with the terms of the underlying
notes. When an aircraft-related long-term receivable is over 90 days past due, the Company generally stops accruing
interest. At December 31, 2005 and 2004, there were $7 million and $27 million, respectively, of aircraft-related long-
term receivables on which the Company was not accruing interest. Interest payments related to these receivables are
credited to income when received. Once a past-due receivable has been brought current, the Company begins to accrue
interest again. Interest deemed to be uncollectible is written off at the time the determination is made.
In 2004, the Company entered into an agreement to sell certain general aviation finance receivables, with the buyer
assuming all servicing responsibilities. As part of the agreement, the Company retained a first loss deficiency guarantee of
7.5% of the receivable amount sold. In 2005 and 2004, $5 million and $37 million, respectively, of receivables were sold
under the agreement, with no associated gain or loss. Also in 2005 and 2004, the Company sold $18 million and $22
million, respectively, of general aviation finance receivables without any continuing involvement.
In 2003, the Company sold an undivided interest in $337 million of general aviation finance receivables, while retaining a
subordinated interest in and servicing rights to the receivables. The Company received proceeds of $279 million and
recognized a gain of $2 million. In connection with the sale, the Company formed a qualifying special purpose entity
(QSPE) for the sole purpose of buying these receivables. The Company irrevocably, and without recourse, transferred the
receivables to the QSPE which in turn, issued beneficial interests in these receivables to a commercial paper conduit. The
transaction involves a third party guarantee of the conduit investment. The assets of the QSPE are not available to pay the
claims of the Company or any other entity. The Company retained a subordinated interest in the receivables sold of
approximately 17%. The conduit obtained the funds to purchase the interest in the receivables, other than the retained
interest, by selling commercial paper to third-party investors. The Company retained responsibility for the collection and
administration of receivables. The Company continues to service the sold receivables and charges the third party conduit
a monthly servicing fee at market rates.
The Company accounted for the sale under Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The gain was determined at the date of
transfer based upon the relative fair value of the assets sold and the interests retained. The Company estimated the fair
value at the date of transfer and at December 31, 2005 and 2004 based on the present value of future expected cash flows
using certain key assumptions, including collection period and a discount rate of 5.0%, 6.2%, and 5.6%, respectively. At
December 31, 2005 a 10 and 20% adverse change in the collection period and discount rate would not have a material
effect on the Company’s financial position or results of operations.
At December 31, 2005 and 2004, the outstanding balance of securitized accounts receivable held by the third party
conduit totaled $157 million and $204 million, respectively, of which the Company’s subordinated retained interest was
$59 million and $58 million, respectively, and the fair value of the servicing asset was $2 million and $4 million,
respectively.
Computer software amortization expense was $77 million, $64 million, and $52 million in 2005, 2004 and 2003,
respectively. Accumulated amortization of computer software was $327 million and $261 million at December 31, 2005
and 2004, respectively.
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