case study:Accounting turbulance-ACCT 303 Intermediate Accounting I

Write My Assignment FREE

ACCT 303 Intermediate Accounting I

Assignment 02- Case Analysis

Instructions:

· Read the assigned case study.

· Form a group of 3 people and Prepare a Report (not more than 5 pages) 20 marks

The Assignment should cover the following points:

1. Introduction

2. Executive Summary

3. Situation/Issue

4. Cause of the problem/situation/issue

5. Decision Criteria and Alternative Solutions

6. Recommended Solution, Implementation and Justification

Follow proper formatting for report.

HOMEWORKMARKET.COM – YOUR HOMEWORK ANSWERS
chat0
Post a question
Help
Homework Answers
Login
Not a Member? Sign up!
case study:Accounting turbulance.
Home
Business & Finance homework help
Accounting homework help
case study:Accounting turbulance.
9-118-020 R E V : O C T O B E R 2 5 , 2 0 1 7

Professors Jonas Heese and Suraj Srinivasan, Senior Case Researcher David Lane (Case Research & Writing Group), and Associate Case Researcher James Barnett (Case Research & Writing Group) prepared this case with the assistance of Research Associate Quinn Pitcher. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. Laurie Pitcher and Eastport Capital Management are fictional. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

J O N A S H E E S E

S U R A J S R I N I V A S A N

D A V I D L A N E

J A M E S B A R N E T T

Accounting Turbulence at Boeing

Laurie Pitcher, a vice president at Eastport Capital Management, a leading investment advisory firm, sat back after listening to the hour-long earnings conference call for Boeing’s 2016 financial results. Laurie was Eastport’s senior aerospace analyst, with over 20 years of experience covering the industry. It was January 25, 2017 and Boeing had some good news to report. Boeing CFO Greg Smith had announced that the company achieved its first deferred production cost reductions on the 787 Dreamliner.1 Laurie thought back to February 11, 2016 when Boeing’s stock had dropped almost 7% on word that the U.S. Securities and Exchange Commission (SEC) was investigating the aircraft manufacturer’s accounting for its 787 Dreamliner model. She had spent that day fielding anxious calls from her clients who were trying to assess the implications for the company.2

Unlike its rival Airbus, Boeing had used an accounting methodology called program accounting to record its commercial aircraft expenses since the 1980s. Accepted by the U.S. Financial Accounting Standards Board (FASB) and the SEC, program accounting allowed Boeing to expense estimated average costs instead of the actual production costs of an aircraft. This practice lowered the effect of the initially high costs of tooling and manufacturing a new model of aircraft on Boeing’s profitability and reflected potential learning efficiencies that could drive down manufacturing costs over time. (See Exhibit 1 for an example illustrating the mechanics of program accounting.)

Boeing had estimated that it would sell 1,300 Dreamliners over the lifetime of the program. Various obstacles had delayed 787 development substantially, however, increasing its costs from the $5 billion expected when development began in 2004 to $30 billion by the start of production in 2011.3 In 2016, average production cost per plane was nearly double the $40 million initially anticipated, for an aircraft that had a list price upwards of $200 million but often sold for substantially less.4

Laurie’s investors had wondered about how Boeing applied program accounting, the judgment required to apply it accurately, and the implications of the probe on Boeing’s value and ongoing rivalry with Airbus. The intervening year had done little to quell concerns: the company had been critiqued in the press and by analysts and the fate of the SEC enquiry, which involved tips from a whistleblower, was still unknown. Laurie knew that her clients would need help interpreting this latest news and braced herself for the flurry of calls soon to come.

Do N

ot C

op y

or P

os t

This document is authorized for educator review use only by ABIRAMI DEVI SIVAKUMAR, Jubail University College until Mar 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860

118-020 Accounting Turbulence at Boeing

Market Structure

In 2000, 13,600 commercial jets were in service worldwide.5, 6 As of 2015, this figure had increased to 22,510 commercial aircraft,7 and was expected to more than double by 2035.8 Boeing and Airbus were the only manufacturers of “heavy” and wide-bodied commercial aircraft.a The two companies held a joint market share of nearly 60% of the overall market for passenger jets (including commuter/regional and business jets). Boeing aircraft comprised 31.5% of the world’s jets in 2016, followed closely by Europe’s Airbus with 27%, and more distantly by Canada’s Bombardier with 7.7%, and Brazil’s Embraer with 6.8%.9 (Exhibit 2 shows commercial aircraft deliveries by year.) Bombardier, Embraer, and other jet makers specialized in smaller jets than Boeing and Airbus, though their largest aircraft were beginning to overlap the 100+ passenger minimum capacity of the smallest Boeing and Airbus models.10, 11

Boeing

Founded in Seattle in 1916 but headquartered in Chicago in 2016, The Boeing Company manufactured and supplied commercial airlines and defense, space and security systems. By total dollar value, it was the United States’ largest exporter,12 and since 1987 had been a member of the Dow Jones Industrial Average of U.S. firms. The company was organized into three divisions: Boeing Commercial Airplanes (Boeing), which generated 68% of company revenue in 2015,13 Boeing Defense, Space and Security (32% of revenue), and Boeing Capital (0.4% of revenue). (See Exhibit 3 for Boeing financial data.)

Boeing developed, manufactured, and marketed commercial jets to airlines and aircraft leasing firms around the world. In 2016, Boeing manufactured five commercial aircraft models: the 737, 747, 767, 777, and 787, each with several variants. Boeing aircraft comprised 90% of the world’s cargo aircraft;14 the firm also manufactured business jets. Having delivered roughly 7,090 of the commercial aircraft currently in operation (the most amongst manufacturers),15 Boeing expected its commercial jet fleet to rise to 16,970 in 2035.16

Airbus

Begun in the late 1960s as a British, French, and German effort to challenge U.S. dominance in commercial aircraft, Airbus soon added Dutch and Spanish aircraft manufacturers and produced its first plane in 1974. The consortium’s first operating profit came in 1990.17 Consolidation formed a new parent company for Airbus in 2000,18 which was publicly listed in 2015. That year, Airbus’s commercial aircraft subsidiary generated 70% of group revenue (defense, space, and helicopter products generated 30%),19 and accounted for 55% of the gross worldwide market share of aircraft with more than 100 seats, as compared to Boeing’s 45%.20

Airbus had succeeded in becoming a rival to Boeing, first delivering more planes than its competitor in 2003,21, 22 and delivering its 10,000th overall in 2016.23 In contrast, Boeing sold its first commercial aircraft in 1919 and its 15,000th in 2001.24 Airbus had received more gross aircraft orders than Boeing in 12 of the 14 years between 2003 and 2016 (refer to Exhibit 2).25

a The case uses “aircraft” and “airplane” to refer collectively to single-aisle and double-aisle (wide-bodied) commercial jets made by Boeing and other commercial aircraft manufacturers. The U.S. Federal Aviation Administration defined a heavy aircraft as any model with a maximum takeoff weight exceeding 300,000 pounds. All Boeing models in production except the 737 (which could seat up to 200 passengers) were categorized as heavy aircraft; select Embraer and Bombardier models were considered large aircraft (exceeding 41,000 pounds at takeoff) but none were considered heavy. Source: Federal Aviation Administration, “Notice N JO 7110.525,” April 8, 2010, https://www.faa.gov/documentLibrary/media/Notice/N7110.525.pdf, accessed April 2017. Do

N ot

C op

y or

P os

Accounting Turbulence at Boeing 118-020

Industry dynamics

A multitude of factors—world economic conditions, government regulations, manufacturing costs—affected airline demand for commercial aircraft and made forecasting the number of aircraft deliveries for the full duration of a particular program difficult and imprecise.26 Long-range forecasts of air travel demand influenced manufacturers’ outlook on future deliveries, as did the creation of longer or new and more efficient route structures.27 For example, following airline deregulation (first in the U.S. starting in the late 1970s), airlines predominately adopted a hub-and-spoke model:28 Jets flew from regional airports on shorter routes (the spokes) to large, international airports (the hubs) for onward flights. However, manufacturing advances produced smaller jets that traveled longer distances, thereby permitting new and direct point-to-point route options while often increasing capacity utilization.29 The backlog of commercial jet orders, planes ordered but not yet delivered, reflected this shift: in 2015, orders for single-aisle aircraft reached 80.5% of the commercial aircraft order backlog, up from 70% a decade earlier; 19.5% of backlogged orders were for wide-body models.30, b

The 4 to 8 years31 typically required to research, design, and manufacture a plane further complicated aircraft demand forecasting. Following the design phase, aircraft makers went through four additional steps before delivery to the customer: manufacturing of aircraft sections, transportation of major aircraft sections, final assembly, and trial flights.32 Relying on forecasts of consumer travel demand, airlines ordered planes from manufacturers several years before anticipated use. Airlines either purchased planes directly from the manufacturer or leased aircraft from firms such as the International Lease Finance Corporation (ILFC). More than half of planes in service were leased due to the shorter commitments leasing required of airlines. Leasing allowed airlines the flexibility to reassess their aircraft needs (both by aircraft type and by number of planes) after 5-15 years rather than be saddled with a fleet that airlines would need to sell or hold for the length of their service life. 33

Manufacturers sold planes to airlines and leasing companies. Buyers paid 1%-2% of total contract value at the time of their order and made periodic payments as construction progressed, including 20%-25% during the final 24 months before delivery. Final payments were made upon delivery.34, 35 The price buyers paid for a given aircraft varied, even for the same model, often most benefiting firms that bought new models early and in large numbers.36 Moreover, airlines and leasing agencies negotiated significant discounts to list price.37 When order cancelations occurred, airlines paid fees to the manufacturer or leasing company as outlined in the airline’s initial purchasing contract and sometimes renegotiated a new order for different aircraft models.38 Cancellation terms depended on factors such as order size, and relationship between the buyer and seller (larger airlines with longer relationships generally received more favorable terms).39

In 2016, the backlog of aircraft orders reached historically high levels. Travel demand had increased at a CAGR of 5.4%between 2005 and 2015,40 and Boeing anticipated that global passenger traffic would increase another 4.8% annually through 2035.41 As airlines increased their orders to match travel demand, the manufacturing duopoly remained: in 2015, Boeing and Airbus accounted for 93% unit order backlog for commercial aircraft.42

b A single-aisle, or narrow-body aircraft was built with a single aisle fitting up to 6 seats across. A wide-body, or twin-aisle aircraft fit 7 to 11 seats across. Wide-body aircraft were also used for freight and cargo shipments. Do

N ot

C op

y or

P os

118-020 Accounting Turbulence at Boeing

The Boeing 787 Dreamliner In 2003, Boeing announced plans for a new twin-engine jet that would enter service in 2008, the

Boeing 787 Dreamliner. 43,c Boeing received its first 787 orders in June 2004, but the aircraft did not go into service until 2011, three years behind schedule. Labor strife, cost increases on parts, and engineering missteps led to a series of delays between 2007 and 2011, prompting cancellation of 60 of the 900 orders44 in hand at the end of 2008.45 Buyers that did not cancel their orders sought compensation from Boeing, as delayed delivery prevented them from accommodating rising passenger traffic.46 Boeing executives blamed suppliers for many of the setbacks.

Through 2015, Boeing had received over 1,100 orders for the 787.47 When Boeing delivered the first Dreamliner in 2011, it manufactured two planes a month—by 2017, the company manufactured twelve 787s each month and executives intended to increase production to fourteen planes per month by 2020 to match increased market demand and order backlog.48 Although the 787 list price was roughly $200 million per plane,49 the average unit price was $120 million due to price reductions based on order specifications.50 While most transactions were confidential, leaks revealed that in 2011 Air India paid roughly $110 million per plane on an order of seven 787s,51 a 43% discount on the $194 million list price at the time.52

Program Accounting under U.S. GAAP The Financial Accounting Standards Board (FASB, a nonprofit group designated by the SEC to

create and improve U.S. accounting standards) described program accounting this way:

Program accounting is a method of accounting for the costs of certain products manufactured for delivery under production type contracts. Under this method, costs are accumulated and accounted for by programs rather than by individual units or individual contracts. A program consists of the estimated number of units of a product to be produced by an entity in a continuing, long-term production effort for delivery under existing and anticipated contracts. The program is used as the accounting cost center for accumulating costs and allocating costs to cost of sales.53

Assuming that unit production costs would decrease throughout the course of a program, program accounting had the effect of spreading initial outlays on production costs across the estimated units to be sold under that program, thereby reducing variability in profits over the course of multiple reporting periods. Actual production tooling and inventoriable costs incurred for earlier units in excess of the estimated average cost of all units in the program were included as deferred production costs within the program-inventory asset account.

U.S. Generally Accepted Accounting Principles (GAAP) recognized the program accounting method, and the SEC permitted its use in the aerospace industry, though in 2016, Boeing was the only commercial aircraft manufacturer to use it.54 This had not always been the case: McDonnell Douglas had applied program accounting to its commercial aircraft manufacturing before Boeing acquired the company in 1997, as had other U.S. firms in the aerospace industry.55 International Financial Reporting Standards (IFRS), with which Airbus complied, did not recognize program accounting. Bombardier and Embraer also did not use program accounting.

c The model was originally called the 7E7 before Boeing rebranded it the 787 in 2005. The name “Dreamliner” resulted from a 2003 ‘name your plane’ competition sponsored by the company. Do

N ot

C op

y or

P os

Accounting Turbulence at Boeing 118-020

In 1981, the American Institute of Certified Public Accountants (AICPA, an industry association that set ethics and auditing standards and developed the CPA examination) issued a statement of position (SOP) that provided program accounting procedures for companies using the method. Though the document was never formalized, it became the basis for accepted program accounting practices under U.S. GAAP.56 The SOP made the following points.

Rationale Lengthy program periods made it likely that substantial learning would occur during the program, and that units produced late in the program would require fewer resources than those produced early in the program. If unit sales prices stayed at similar levels over the duration of the program, costs incurred for the earlier units in the program would not be covered by the sale prices early in the life of the program, and a loss would occur. However, the overall program was expected to be profitable, with the earlier losses to be recovered when the units produced in the latter part of a program would benefit from the learning and gain a higher profit margin than the earlier units.57 Program accounting provided for the matching of costs with revenue over the entire program, reflecting the long-term nature of the investment and production commitment. Thus, program accounting essentially treated a program as a single contract, deemphasizing the costs and revenue mix associated with individual units.58

Criteria The AICPA recommended use of program accounting only in very limited circumstances. In general, the method applied to routine production that required substantial commitment of resources and more than several years to complete. Pricing assumed decreasing production cost per unit over time. Due to the long duration of the production process, the company would need to demonstrate product demand could be estimated from identified customers and show that unforeseen competition was unlikely. In addition, the company would need to prove its ability to finance and produce the product and make reasonable estimates for all the variables used.59 To apply program accounting, the company needed to estimate, from the beginning of a program, the number of units to be produced and their price to estimate total program revenues, the period over which the units would be produced, and the production costs, which allowed firms to derive the gross margin for the program.

Mechanics Deferrable costs represented both direct and indirect costs incurred in the production effort, including materials, direct labor, subcontractor charges, tooling and applicable overhead. Certain costs, such as abnormal costs from unforeseen production disruptions and excessive rework costs, sometimes had to be expensed in the current period, along with expenses in selling and marketing, market research and development (R&D), general and administrative expenses, and current period product testing and evaluation. The difference between actual costs and the estimated average cost of all units in the program was included as deferred production costs within inventory. Under program accounting, the deferred production costs were treated as assets—resources used to generate future cash flows or income.60 Revenue would be recognized when the plane was delivered to and accepted by the customer based on the plane’s actual sales price. Capitalized estimated average costs were charged to cost of sales when revenues were recognized.61

Long program periods meant that estimates made at the start of the program could change, affecting average gross margin. Revisions to the estimated gross margin were accounted for prospectively in the current and future periods. However, when the estimated future costs of the program plus deferred production costs exceeded expected future program revenues, the excess was charged as a loss to income in the current period, requiring the firm to record a reach-forward loss liability on the balance sheet, which represented the expected loss to be incurred in the program. In turn, when these assumptions changed, the reach-forward loss could be reversed by debiting this liability and crediting the deferred production costs account.62 Do

N ot

C op

y or

P os

118-020 Accounting Turbulence at Boeing

Program Accounting at Boeing

Boeing applied these program accounting rules to its commercial aircraft programs.63 (See Exhibit 4 for Boeing’s note on program accounting.) The company considered existing orders, expected orders, and market forecasts to estimate the number of units it expected to sell over the course of a program period. Due to the level of judgment required in these estimates, Boeing reviewed its forecasts quarterly and announced updated information when forecasts changed.64 For example, Boeing announced in 2011 that it expected to deliver 1,100 787 aircraft over a 10-year program period. In 2013 Boeing revised this figure to 1,300.65 (See Exhibit 5 for Boeing’s number of units to be produced in a program, orders received, and planes delivered).

Each quarter, the company compared a program’s actual costs, expected costs, and expected revenues, based on estimates of the number of units to be sold, sales price per unit, length of production period, production costs for the total program, and an estimate of learning efficiencies still to be realized. When expected total costs exceeded expected total revenue for the program, a forward loss and write-off of deferred production cost would be recorded in the current period for the expected loss to be incurred in the future for all undelivered units.66

Boeing had recorded reach-forward losses on some prior commercial jet programs. In October 1997, Boeing wrote off $2.6 billion due to previously undisclosed production cost increases on its 777 aircraft.67 At the time, some analysts argued Boeing should have reported the production issues sooner, and criticized the company for waiting to do so until after its merger with McDonnell Douglas closed in August 1997 to avoid jeopardizing the deal.68 Boeing officials maintained the high production costs in 1996 and early 1997 were not abnormal, and that program accounting guidelines therefore did not require them to report the increased costs earlier.69 Critics also argued Boeing overestimated future production efficiencies when spreading early program costs, another point company officials refuted.70 Boeing later increased the 777 program size from 400 to 600 planes, allowing the company to spread production costs over a greater number of planes.71 In 2002, Boeing paid $92.5 million to settle a private securities fraud suit stemming from this write-off.72

Other programs were subject to write-offs. In January 2016, the company booked an $885 million write-off to compensate for overestimating 747 sales.73 Cargo jet sales had decreased globally since 2013, a market trend Boeing did not accurately anticipate when estimating future 747 sales. Fewer than expected 747 orders led Boeing to cut 747 production by 50%, to six aircraft per year.74 The company acknowledged additional write-offs were likely if 747 sales continued to slow, for the program still had more than $1 billion in deferred production costs after the January 2016 write-off.75 In turn, Boeing also made reclassifications from reach-forward losses to inventories, when market conditions improved, production costs decreased, or projected delivery prices increased. For instance, in 2011, Boeing reclassified $1,934 million of a reach-forward loss on the 747 program to inventories, due to improving market conditions for the 747.76

In 2009, Boeing determined that its first three 787 flight test aircraft could not be sold, and reclassified them as $2.7 billion in R&D expense as opposed to being capitalized in inventory.77 Boeing reclassified another $1.24 billion of 787 flight test aircraft costs to R&D in 2016.78 Regarding the 2009 change, Boeing stated “we concluded that the first three flight-test 787 aircraft could not be sold as previously anticipated due to the inordinate amount of rework and unique and extensive modifications made to those aircraft. As a result, costs associated with those airplanes were included in research and development expense.” 79 Regarding the 2016 reclassification, Boeing repeated a similar justification stating “We produced the fourth and fifth flight test aircraft in 2009 but have been unable to sell them at acceptable prices. […] During the second quarter of 2016 we determined that firm orders for these aircraft prior to refurbishment were now Do

N ot

C op

y or

P os

Accounting Turbulence at Boeing 118-020

unlikely, and that the Company would not invest company funds for their refurbishment. The Company also determined the costs to refurbish the aircraft at a future date would be prohibitively expensive. We therefore determined that the aircraft were not commercially saleable, and accordingly, costs of $1,235 million associated with these aircraft were reclassified from 787 program inventory to research and development expense during the second quarter of 2016.”80

In 2016, inventoried costs associated with the 787 program amounted to $39.3 billion, or 76% of the $52 billion of total inventoried costs associated with Boeing’s commercial aircraft programs. This included $27.3 billion in deferred production costs, $6.1 billion work in progress, $2.3 billion supplier advances, and $3.6 billion unamortized tooling cost.81 There were no reach-forward losses recorded in the 787 program. (See Exhibit 6 for deferred production balances per program and Exhibit 7 for 787 deferred costs.)

Accounting Rules under IFRS Unlike Boeing, Airbus and other commercial aircraft manufacturers employed unit-cost accounting,

which determined cost of sales based on the units actually delivered.82 Though it officially reported its financial results using program accounting, Boeing shared unit-cost accounting equivalents to provide a comparison point to Airbus, Bombardier, and Embraer.83 (See Exhibit 8 for Boeing’s program accounting vs. unit-cost earnings.)

Airbus Accounting

The use of unit-cost accounting meant that Airbus recognized costs of production (direct material and labor, plus overhead and depreciation charges84) as they incurred—the high production costs of the first batches of aircraft produced were recognized on Airbus’ income statement, resulting in lower profits or higher losses at the beginning of production. Higher profits resulted over time as Airbus benefited from the production learning curve.85 Write-downs for inventories were recorded when it became probable that total estimated contract costs would exceed total contract revenues.86

Airbus’ accounting for production costs further differed from Boeing due to how IFRS and U.S. GAAP treated R&D expenses. R&D costs were expensed under U.S. GAAP, but some R&D costs could be capitalized either as intangible assets or fixed assets under IFRS. Development costs were capitalized as intangible assets under IFRS when costs were separately identifiable and reliably measured, the product or process was technically feasible, and the company could demonstrate it had adequate resources and intention to produce and market for the benefits.87 Other development costs were capitalized under IFRS as property, plant and equipment when development activities led to the construction of specialized tooling for production, or involved the design, construction and testing of prototypes and models. Capitalized development costs were generally amortized over the estimated number of units produced. If the number of units produced could not be estimated reliably, development costs were amortized over the estimated useful life of the asset. Amortization of capitalized development costs was recognized in cost of sales.88

In 2016, commercial aircraft were responsible for $2.4 billion of Airbus’ $3.3 billion total property investments, plant and equipment, and intangible assets. The majority of the $2.4 billion were from the “ramp-up” phase of the A350 XWB, the A320 family, and for the A330 aircraft; only $0.9 billion were for additional projects in the other divisions.89 That year, Airbus capitalized $331 million of development costs, mostly related to the H160 and A350 programs, and carried a net book value of $1.82 billion in capitalized development costs ($3.05 billion gross balance and $1.24 billion in accumulated amortization) at the end of 2016. Of the $1.8 billion internally generated intangible assets, Do

N ot

C op

y or

P os

118-020 Accounting Turbulence at Boeing

the balances for the A350 XWB and A380 Programs were $860 million and $357 million, respectively. (See Exhibit 9 for Airbus financial data.)90,d

What to Believe? Laurie was unsure of whether Boeing’s recent 2016 results would do anything to ease longstanding

criticism of program accounting. As one analyst had said, “Any estimating process that looks this far out in the future and has this many moving parts and assumptions is almost certainly destined to be wrong.”91 A former SEC chief accountant was similarly skeptical: “The problem with program accounting is that it is virtually impossible to audit. No one really knows whether the company will produce as many planes as [are] needed to recover costs.”92 Boeing’s accumulation of write-offs in recent years reinforced analyst skepticism about the ultimate profitability of the 787 program: “They need to recover far too much money per airplane. They will never do that,” said one.93

Critics also doubted that Boeing would realize its projected production improvements for the 787 program. Production for the 787 was split between South Carolina and the Seattle area, potentially limiting learning gains to each line.94 Boeing could control only part of the program’s production costs: most 787 manufacturing was outsourced to global suppliers. Nor were 787 production costs falling as quickly as they had for earlier Boeing aircraft programs.95 Citing these concerns, one analyst conservatively estimated that the 787 would see “a total program loss of $5 billion” even if Boeing sold 2,000 rather than the projected 1,300 Dreamliners.96 In an article titled “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” the Wall Street Journal criticized Boeing’s program accounting and argued that it helped Boeing to improve profitability.97

On the other hand, Laurie knew that Boeing had and would vigorously defend its accounting practices. Citing instances in which Boeing accurately calculated sales estimates, company executives expressed confidence in Boeing’s use of program accounting.98 In February 2016, CEO Dennis Muilenburg said at an industry conference: “It is a normal accounting procedure we have used for the duration of our company. It is how we do business and it is the right way to do it because it allows us to look at current year investment in R&D that is going to play out for decades in a way that makes the business case make sense.”99 He also highlighted: “It’s a very disciplined, rigorous accounting process, one we understand well. And the way we apply it on 787 is the same way we apply it on all of our commercial airplane lines.”100

Boeing averred that each of the 900 remaining 787s it expected to sell would realize an average profit of over $35 million.101 Muilenburg highlighted production innovations as reason for optimistic projections; to increase efficiency, the company deemphasized costly research projects and cut production costs.102 Despite the $885 million write-off at the start of 2016, Boeing officials also asserted that 747 sales would increase due to the need for new 747s to replace older 747s in the coming years.103 The company touted the outside organizations validating its procedures: the sales and costs forecasts used for program accounting were subject to review by Boeing’s external auditor; U.S. GAAP recognized the program accounting method; and the SEC had permitted its use in the aerospace industry since at least 1981.

d Airbus financial figures converted to U.S. dollars using exchange rate data: Internal Revenue Service, “Yearly Average Currency Exchange Rates,” https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange- rates, accessed June 2017. Do

N ot

C op

y or

P os

https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates
https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates
Accounting Turbulence at Boeing 118-020

Some analysts agreed with Boeing and praised its program accounting method. They suspected that one reason for its poor reputation was that investors and analysts simply did not understand it.

Boeing’s program accounting doesn’t have to be as intimidating or confusing as it’s often made out to be […]. The basic premise is to think in terms of averages, as the methodology is effectively meant to “smooth” the returns of a given aircraft program […] through the use of an average gross margin […]. It’s fair to say that program margins at any given time are a holistic representation of all the moving variables that could influence profitability gains […]. The best indicator of where future margins will be is current margins […]. This is why the underlying margin figure was so instructive in our view, as it tells a good bit about the future for those who know what they’re looking at.104

Laurie knew that the debate was far from over and what was at stake: if Boeing had been forced to change its accounting and expense actual production costs, it would have shown profits of $1.4 billion for its commercial aircraft division between 2012 and 2016, rather than the $25.2 billion in earnings the company reported using program accounting.105 This difference of $23.8 billion would have almost eliminated Boeing’s cumulative net income of about $24 billion over that time period. So, she braced herself for those incoming calls from investors looking for guidance on Boeing’s announcement and what it spelled for the company’s future and the concerns over program accounting.

Do N

ot C

op y

or P

os t

118-020 Accounting Turbulence at Boeing

Exhibit 1 Program Accounting Example

Below is a simplified step-by-step illustration of the program accounting method based on the 1981 AICPA statement of position paper. It ignores the substantial design and developmental costs, which would be incurred prior to initial deliveries and be treated as period expenses, as well as any increases or decreases in production inputs such as labor or material. Also excluded from this example are ongoing general and administrative expenses and product development costs, which would also be recorded as period expenses. In other words, program accounting includes program costs related to both direct and indirect costs incurred in the production effort, including materials, direct labor, subcontractor charges, tooling and applicable overhead. In addition, in this example, there is no variation between actual and estimated sales numbers and production costs.

1. At the start of a program, the following estimates were made (see Table A-1):

• Number of units of planes to be produced and sold over the entire program: 150

• Initial program production period: 4 years

• Average selling price per unit: $20 million

• Average expected gross margin for the program: 15%

Table 1 Year 1 initial estimate (in $ million)

Year Units Revenue Cost of Sales Cost of Sales % Gross Profit Gross Profit %

1 10 200 291 146% (91) (46)% 2 40 800 777 97% 23 3% 3 50 1,000 783 78% 217 22% 4 50 1,000 699 70% 301 30% Total program 150 $ 3,000 $ 2,550 85% $ 450 15%

Source: Casewriter.

2. Year 1 Financials: A comparison between program accounting and unit cost.

Table 2 Year 1 financials (in $ million)

Program Accounting Unit Cost

Revenue 200 200 Cost of Goods Sold 170 85% 291 146% Gross Profit $ 30 15% $ (91) (46)%

Deferred Production Cost * $121 (* $291 cost incurred less $170 cost expensed)

Source: Casewriter.

Do N

ot C

op y

or P

os t

Accounting Turbulence at Boeing 118-020

Exhibit 2 Commercial Aircraft Deliveries by Year, 1997-2015

Year Boeing Airbus Bombardier Embraer Other Total

1997 375 182 60 33 27 677 1998 564 229 75 60 22 950 1999 620 294 82 97 38 1,131 2000 492 311 99 160 48 1,110 2001 527 325 147 161 39 1,199 2002 381 303 185 129 8 1,006 2003 281 305 222 92 11 911 2004 285 320 175 147 8 935 2005 290 378 99 138 4 909 2006 398 434 79 129 1 1,041 2007 441 453 60 169 0 1,123 2008 375 483 61 198 0 1,117 2009 481 498 59 139 0 1,177 2010 462 510 34 97 0 1,103 2011 477 534 47 108 5 1,171 2012 601 588 14 106 8 1,317 2013 648 624 26 90 28 1,416 2014 723 629 59 92 26 1,529 2015 762 635 44 101 21 1,563 2016 748 688 53 108 N/A N/A

Source: Statista, “Number of Jets Added to the Global Aircraft Fleet from 1997 to 2015 by Manufacturer (in units),” 2017, and companies annual reports.

Do N

ot C

op y

or P

os t

118-020 Accounting Turbulence at Boeing

Exhibit 3a Boeing Balance Sheet, 2011–2016 (in $ million)

For fiscal years ending December 31 2016 2015 2014 2013 2012 2011 ASSETS Cash and equivalents 8,801 11,302 11,733 9,088 10,341 10,049 Short term investments 1,228 750 1,359 6,170 3,217 1,223 Cash and short term investments 10,029 12,052 13,092 15,258 13,558 11,272 Accounts receivables, net 8,832 8,713 7,729 6,546 5,608 5,793 Inventories 43,199 47,257 46,756 42,912 37,751 32,240 Current portion of financing, net 428 212 190 344 364 476 Current assets 62,488 68,234 67,767 65,060 57,281 49,781 Property, plant and equipment, net 12,807 12,076 11,007 10,224 9,660 9,313 Goodwill & Intangible assets 5,324 5,126 5,119 5,043 5,035 4,945 Acquired intangible assets 2,540 2,657 2,869 3,052 3,111 3,044 Long term portion of financing 3,773 3,358 3,371 3,627 4,056 4,296 Other Investments 1,317 1,284 1,154 1,204 1,180 1,043 Other assets 1,416 1,408 1,317 1,500 1,792 1,643 Total assets 89,665 94,143 92,604 89,710 82,115 74,065 LIABILITIES Trade payable 11,190 10,800 10,667 9,498 9,394 8,406 Accrued liabilities 14,691 14,014 13,343 14,131 12,995 12,239 Short term debt and current LT debt 384 1,234 929 1,563 1,436 2,353 Other current liabilities 23,869 24,364 23,175 20,027 16,672 15,496 Current liabilities 50,134 50,412 48,114 45,219 40,497 38,494 Deferred income taxes net 1,006 2,127 2,009 3,314 (2,296) (3,141) Long term debt 9,568 8,730 8,141 8,072 8,973 10,018 Other liabilities 28,080 26,477 25,550 18,108 28,974 25,086 Total liabilities 88,788 87,746 83,814 74,713 76,148 70,457 Common stock 5,061 5,061 5,061 5,061 5,061 5,061 Capital surplus (Paid in Capital) 4,762 4,834 4,625 4,415 4,122 4,033 Accumulated other comprehensive loss (13,623) (12,748) (13,903) (9,894) (17,416) (16,500) Retained earnings 40,714 38,756 36,180 32,964 30,037 27,524 Total common equity 36,914 35,903 31,963 32,546 21,804 20,118 Less: Treasury Stock (36,097) (29,568) (23,298) (17,671) (15,937) (16,603) Minority interest 60 62 125 122 100 93 Total shareholders’ equity 877 6,397 8,790 14,997 5,967 3,608 Total liabilities and equity 89,665 94,143 92,604 89,710 82,115 74,065 Inventory: Deferred production -787 27,308 28,510 26,149 21,620 15,929 10,753 Other work in progress -787 6,046 6,146 7,014 5,956 5,360 5,345 787 work in progress 33,354 34,656 33,163 27,576 21,289 16,098 Supplier advances -787 2,275 2,551 2,257 2,189 1,908 1,770 Unamortized tooling -787 3,625 3,890 3,801 3,377 2,339 1,914 787 program deferred cost / unamortized tooling 39,254 41,097 39,221 33,142 25,536 19,782

747 program deferred cost/Unamortized tooling 293 1,319 2,217 2,117 1,975 1,300

Commercial customer consideration 2,866 3,166 3,341 3,465 2,989 2,564 Other Boeing Commercial Aircrafts 9,635 9,648 10,441 9,341 9,889 11,434 Commercial aircraft programs 52,048 55,230 55,220 48,065 40,389 35,080 Long-term contracts in progress 12,801 13,858 13,381 12,608 15,130 13,587 Other stock materials and used aircrafts 5,446 6,673 7,421 7,793 7,206 7,832 Inventory before advance and progress billings 70,295 75,761 76,022 68,466 62,725 56,499 Less advances and progress billings (27,096) (28,504) (29,266) (25,554) (24,974) (24,259) Total inventory 43,199 47,257 46,756 42,912 37,751 32,240

Source: Boeing 10-K filings. Do

N ot

C op

y or

P os

Accounting Turbulence at Boeing 118-020

Exhibit 3b Boeing Income Statement, 2011-2016 (in $ million)

For fiscal years ending December 31 2016 2015 2014 2013 2012 2011

Sale of products 84,399 85,255 80,688 76,792 71,234 57,401 Sale of services 10,172 10,859 10,074 9,831 10,464 11,334 Total revenues 94,571 96,114 90,762 86,623 81,698 68,735 Costs of products 72,713 73,446 68,551 65,640 60,309 46,642 Costs of services 8,018 8,578 8,132 7,553 8,247 9,097 Total cost of sales 80,731 82,024 76,683 73,193 68,556 55,739 Selling, general and administrative 3,616 3,525 3,767 3,956 3,717 3,408 Research and development 4,627 3,331 3,047 3,071 3,298 3,918 Total operating expenses 88,974 88,880 83,497 80,220 75,571 63,065 Earnings before interest and taxes 5,597 7,234 7,265 6,403 6,127 5,670 Interest expense (365) (339) (402) (461) (551) (626) Interest and investment income Net interest income/(expense) (365) (339) (402) (461) (551) (626) Other operating investment income (cost), net 303 274 287 214 268 278 Equity in share of earnings Other income 40 (13) (3) 56 62 47 Other (expenses) Extraordinary credits (charge) pretax (1) (3) 7 Gain(loss) on dispositions, net (7) (1) (10) 20 4 24 Earnings before income taxes 5,568 7,155 7,137 6,231 5,907 5,400 Income tax expense 673 1,979 1,691 1,646 2,007 1,382 Profit after tax 4,895 5,176 5,446 4,585 3,900 4,018 After tax other expenses (3) (4) (6) (7) (8) (9) Net income to company 4,892 5,172 5,440 4,578 3,892 4,009 Minority interest in earnings Net income 4,892 5,172 5,440 4,578 3,892 4,009 Distribution for preferred shares Income available to common shares 4,892 5,172 5,440 4,578 3,892 4,009 Supplemental Information: EBITDA 7,843 9,327 9,445 8,536 8,269 6,026 Common shares, outstanding (in millions) 618 666 706 747 755 744 Common shares, fully diluted (in millions) 643 695 736 767 761 753 Closing share price ($) 156 144 129 136 75 73 Dividends per share ($) 4.4 3.6 3.1 2.2 1.8 1.7

Source: Boeing 10-K filings.

Do N

ot C

op y

or P

os t

118-020 Accounting Turbulence at Boeing

Exhibit 3c Boeing Cash Flow, 2011-2016 (in $ million)

For fiscal years ending December 31 2016 2015 2014 2013 2012 2011 Profit after tax 4,895 5,176 5,446 4,585 3,900 4,018 Depreciation & amortization 1,910 1,833 1,906 1,844 1,811 1,675 Other cash flow adjustments 649 559 609 672 917 465 Operating profits before working capital changes 7,454 6,628 7,568 7,101 6,628 6,158 Adjustments for change in working capital Decrease/(increase) in accounts receivable 112 (1,069) (1,328) (879) (27) (292) Decrease/(increase) in inventory 3,755 (1,110) (4,330) (5,562) (5,681) (10,012) Increase/(decrease) in accounts payable 622 (238) 1,339 (298) 1,199 1,164 Increase/(decrease) in other assets and liabilities (634) 3,735 3,891 6,372 3,784 5,743 Income taxes (810) 477 1,325 1,445 1,605 1,262 Change in other net operating assets 3,045 1,795 897 1,078 880 (2,135) Cash from operating activities 10,499 9,363 8,858 8,179 7,508 4,023 Capital expenditures/addition of fixed assets (2,613) (2,450) (2,236) (2,098) (1,703) (1,713) Disposals of fixed assets 38 42 34 51 97 94 Decrease/(Increase) in investments (510) 554 4,799 (2,941) (2,020) 3,961 Other sources/(uses) of investing activities (295) 8 (130) (166) (131) 27 Cash from investing activities (3,380) (1,846) 2,467 (5,154) (3,757) 2,369 Cash dividends paid – Common (2,756) (2,490) (2,115) (1,467) (1,322) (1,244) Increase in long term debts 1,325 1,746 962 571 60 799 Reduction in long term debts (1,359) (885) (1,601) (1,434) (2,076) (930) Common stock repurchased (7,001) (6,751) (6,001) (2,801) Other source/(use) of financing activities 204 460 162 882 (139) (325) Proceeds from sale/issuance of stock Cash from financing activities (9,587) (7,920) (8,593) (4,249) (3,477) (1,700) Effect of exchange rate changes on cash and cash equivalents

(33)

(28)

(87)

(29)

(2)

Net change in cash (2,501) (431) 2,645 (1,253) 292 4,690 Cash, beginning of period 11,302 11,733 9,088 10,341 10,049 5,359 Cash, end of period 8,801 11,302 11,733 9,088 10,341 10,049

Source: Boeing 10-K filings.

Do N

ot C

op y

or P

os t

Accounting Turbulence at Boeing 118-020

Exhibit 4 Boeing’s Note on Program Accounting in its 2016 Annual Report

Program accounting requires the demonstrated ability to reliably estimate the relationship of sales to costs for the defined program accounting quantity. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. The determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts. For each program, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of sales recognized for airplanes delivered and accepted by the customer.

Factors that must be estimated include program accounting quantity, sales price, labor and employee benefit costs, material costs, procured part costs, major component costs, overhead costs, program tooling and other non-recurring costs, and warranty costs. Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. Total estimated program sales are determined by estimating the model mix and sales price for all unsold units within the accounting quantity, added together with the sales prices for all undelivered units under contract. The sales prices for all undelivered units within the accounting quantity include an escalation adjustment for inflation that is updated quarterly. Cost estimates are based largely on negotiated and anticipated contracts with suppliers, historical performance trends, and business base and other economic projections. Factors that influence these estimates include production rates, internal and subcontractor performance trends, customer and/or supplier claims or assertions, asset utilization, anticipated labor agreements, and inflationary or deflationary trends. To ensure reliability in our estimates, we employ a rigorous estimating process that is reviewed and updated on a quarterly basis. Changes in estimates are normally recognized on a prospective basis; when estimated costs to complete a program exceed estimated revenues from undelivered units in the accounting quantity, a loss provision is recorded in the current period for the estimated loss on all undelivered units in the accounting quantity.

The program method of accounting allocates tooling and other non-recurring and production costs over the accounting quantity for each program. Because of the higher unit production costs experienced at the beginning of a new program and substantial investment required for initial tooling and other non-recurring costs, new commercial aircraft programs, such as the 787 and 777X programs, typically have lower initial margins than established programs. In addition, actual costs incurred for earlier units in excess of the estimated average cost of all units in the program accounting quantity are included within program inventory as deferred production costs. Deferred production, unamortized tooling and other non-recurring costs are expected to be fully recovered when all units in the accounting quantity are delivered as the expected unit cost for later deliveries is below the estimated average cost as learning curve and other improvements are realized. Due to the significance of judgment in the estimation process described above, it is reasonably possible that changes in underlying circumstances or assumptions could have a material effect on program gross margins. If the combined gross margin percentages for our commercial airplane programs had been estimated to be 1% higher or lower it would have a similar effect on the Commercial Airplane segment’s operating margins. For the year ended December 31, 2016, a 1% increase or decrease in operating margins for our Commercial Airplane segment would have a $650 million impact on operating earnings.

Source: The Boeing Company, Annual Report 2016, Critical Accounting Policies, p. 44 – 45. http://investors.boeing.com/investors/financial-reports/default.aspx, accessed May 2017. Do N

ot C

op y

or P

os t

http://investors.boeing.com/investors/financial-reports/default.aspx
11 8-

02 0

-1

Ex hi

bi t 5

Bo ei

ng , A

nn ua

l P ro

gr am

P ro

du ct

io n

U ni

ts , 2

00 0-

20 16

(in u

ni ts

) 20

20 15

20 13

20 11

20 09

20 07

20 05

20 03

20 01

73 7

(F irs

t y ea

r o f d

el iv

er y

– 1 96

og ra

m A

cc ou

nt in

g Q

ua nt

iti es

00 0

8, 40

0 7,

80 0

7, 00

0 6,

60 0

6, 20

0 5,

00 0

4, 60

0 4,

20 0

3, 80

0 3,

20 0

2, 80

0 2,

40 0

2, 20

0 2,

00 0

1, 80

0 1,

65 0

D el

iv er

49 0

49 5

48 5

44 0

41 5

37 2

37 6

37 2

29 0

33 0

30 2

21 2

20 2

17 3

22 3

29 9

28 2

C um

ul at

iv e

D el

iv er

6, 20

3 5,

71 3

5, 21

8 4,

73 3

4, 29

3 3,

87 8

3, 50

6 3,

13 0

2, 75

6 2,

46 6

2, 13

6 1,

83 4

1, 62

2 1,

42 0

1, 24

7 1,

02 4

72 5

U nd

el iv

er ed

45 2

4, 39

2 4,

29 9

3, 68

0 3,

07 4

2, 36

5 2,

18 6

2, 07

6 2,

27 0

2, 07

6 1,

56 0

1, 12

3 77

1 80

0 76

5 85

7 99

C um

ul at

iv e

Fi rm

O rd

er s

10 ,6

10 ,1

9, 51

7 8,

41 3

7, 36

7 6,

24 3

5, 69

2 5,

20 6

5, 02

6 4,

54 2

3, 69

6 2,

95 7

2, 39

3 2,

22 0

2, 01

2 1,

88 1

1, 72

74 7

(F irs

t y ea

r o f d

el iv

er y

– 1 96

og ra

m A

cc ou

nt in

g Q

ua nt

iti es

55 5

1, 57

4 1,

57 4

1, 57

4 1,

57 4

1, 54

9 1,

52 4

1, 49

9 1,

49 9

1, 47

4 1,

44 9

1, 42

4 1,

40 0

1, 38

8 1,

40 1

1, 40

1 1,

35 1

D el

iv er

9 18

– 8

C um

ul at

iv e

D el

iv er

1, 52

8 1,

51 9

1, 50

1 1,

48 2

1, 45

8 1,

42 7

1, 41

8 1,

41 8

1, 41

0 1,

39 6

1, 38

0 1,

36 6

1, 35

3 1,

33 8

1, 31

9 1,

29 2

1, 26

U nd

el iv

er ed

7 10

8 11

4 12

5 11

6 58

C um

ul at

iv e

Fi rm

O rd

er s

1, 55

6 1,

53 9

1, 53

7 1,

53 7

1, 52

5 1,

52 4

1, 52

5 1,

52 6

1, 52

4 1,

52 1

1, 49

6 1,

42 4

1, 38

0 1,

37 0

1, 37

1 1,

35 1

1, 33

77 7

(F irs

t y ea

r o f d

el iv

er y

– 1 99

og ra

m A

cc ou

nt in

g Q

ua nt

iti es

62 5

1, 65

0 1,

60 0

1, 55

0 1,

45 0

1, 35

0 1,

15 0

1, 10

0 1,

05 0

95 0

90 0

80 0

70 0

65 0

60 0

D el

iv er

C um

ul at

iv e

D el

iv er

1, 46

0 1,

36 1

1, 26

3 1,

16 4

1, 06

6 98

3 91

0 83

6 74

8 68

7 60

4 53

9 49

9 46

3 42

4 37

7 31

U nd

el iv

er ed

6 21

8 27

8 31

4 36

5 38

0 25

3 28

1 35

0 35

7 29

9 28

8 16

7 15

9 17

3 19

8 24

C um

ul at

iv e

Fi rm

O rd

er s

1, 59

6 1,

57 9

1, 54

1 1,

47 8

1, 43

1 1,

36 3

1, 16

3 1,

11 7

1, 09

8 1,

04 4

90 3

82 7

66 6

62 2

59 7

57 5

55 7

78 7

(F irs

t y ea

r o f d

el iv

er y

– 2 01

og ra

m A

cc ou

nt in

g Q

ua nt

iti es

30 0

1, 30

0 1,

30 0

1, 30

0 1,

10 0

1, 10

0 **

* **

D el

iv er

13 7

13 5

11 4

3 –

– –

–

C um

ul at

iv e

D el

iv er

50 0

36 3

22 8

11 4

3 –

– –

–

U nd

el iv

er ed

0 77

9 84

3 91

6 79

9 85

7 84

7 85

1 91

0 81

7 44

8 28

C um

ul at

iv e

Fi rm

O rd

er s

1, 20

0 1,

14 2

1, 07

1 1,

03 0

84 8

86 0

84 7

85 1

91 0

81 7

44 8

28 7

So ur

ce :

C om

pi le

d fr

om c

om pa

ny fi

na nc

ia l s

ta te

m en

ts .

N ot

** *T

he in

iti al

a cc

ou nt

in g

qu an

tit y

fo r 7

87 p

ro gr

am w

as e

st ab

lis he

d in

th e

th ir

d qu

ar te

r o f 2

01 1.

Do N

ot C

op y

or P

os t

11 8-

02 0

-1

Ex hi

bi t 6

D ef

er re

d Pr

od uc

tio n

Ba la

nc es

D is

cl os

ed b

y Bo

ei ng

, 2 00

0- 20

(in $

m ill

io ns

) 20

20 15

20 13

20 11

20 09

20 07

20 05

20 03

20 01

78 7

D PC

,3 08

,5 10

,1 49

,6 20

,9 29

,7 53

–

7 D

–

9 42

74 1

55 4

,2 92

4 48

–

77 7

D PC

–

3 19

51 0

,2 23

04 3

8 71

68 3

70 3

1, 12

73 7

N ex

t G en

er at

io n

D PC

–

To ta

l D PC

d is

cl os

27 ,3

29 ,4

27 ,8

23 ,1

17 ,2

11 ,2

1 ,2

1 ,0

1 ,2

1 ,7

To ta

l c om

m er

ci al

a irc

ra ft

in ve

nt or

y 52

,0 48

,2 30

,2 20

,0 65

,3 89

,0 80

,5 50

,5 68

,3 09

,7 10

,7 43

,7 45

,0 72

,4 48

66 5

,0 84

,8 98

PC a

s %

o f T

ot al

om m

er ci

al A

irc ra

ft In

ve nt

or y)

53 %

48 %

32 %

12 %

11 %

16 %

ta l A

ss et

s 89

,6 65

,1 43

,6 04

,7 10

,1 15

,0 65

,5 65

,0 53

,7 79

,9 86

,7 94

,9 96

,2 24

,9 86

,3 42

,9 78

,6 77

PC a

s %

o f T

ot al

A ss

et s

30 %

21 %

So ur

ce :

C om

pi le

d fr

om c

om pa

ny fi

na nc

ia l s

ta te

m en

ts .

Do N

ot C

op y

or P

os t

118-020 Accounting Turbulence at Boeing

Exhibit 7 Deferred Production Balances by Quarter, 2011-2016 (in $ million)

Source: Compiled from company financial statements.

Exhibit 8 Boeing Annual Commercial Earnings from Operations, Program vs. Unit-Cost Accounting, 2012-2016 (in $ million)

Year Program Accounting

Unit-Cost Accounting

2016 $ 3,130 $ 3,905

2015 $ 5,157 $ 2,669 2014 $ 6,411 $ 122 2013 $ 5,795 $ (1,582) 2012 $ 4,711 $ (3,716) Sum $ 25,204 $ 1,398

Source: Boeing, “Commercial Airplane Unit Cost vs Program,” http://www.boeing.com/investors/accounting- considerations.page/, accessed March 2017.

–

5,000

10,000

15,000

20,000

25,000

30,000

Se p-

De c-

M ar

-1 2

Ju n-

Se p-

De c-

M ar

-1 3

Ju n-

Se p-

De c-

M ar

-1 4

Ju n-

Se p-

De c-

M ar

-1 5

Ju n-

Se p-

De c-

M ar

-1 6

Ju n-

Se p-

De c-

Do N

ot C

op y

or P

os t

http://www.boeing.com/investors/accounting-considerations.page/
http://www.boeing.com/investors/accounting-considerations.page/
Accounting Turbulence at Boeing 118-020

Exhibit 9a Airbus Balance Sheet, 2011-2016 (in $ million)

Source: Compiled from company financial statements. Converted to U.S. dollars using exchange rate data: Internal Revenue Service, “Yearly Average Currency Exchange Rates,” https://www.irs.gov/individuals/international- taxpayers/yearly-average-currency-exchange-rates, accessed June 2017.

For fiscal years ending December 31 2016 2015 2014 2013 2012 2011

ASSETS Cash and equivalents 10,143 7,011 9,322 9,232 10,810 7,045 Short term investments 1,551 1,902 4,081 3,314 2,874 5,696 Cash and short term investments 11,694 8,913 13,403 12,546 13,684 12,741 Accounts receivables, net 8,101 8,380 8,715 8,497 8,380 8,525 Inventories 29,688 30,905 32,506 30,799 28,662 30,084 Current portion of financing, net 1,779 1,681 1,706 22,09 2,142 2,548 Income taxes 1,110 915 776 805 565 452 Other assets 2,576 2,999 3,063 2,513 2,526 3,004 Current assets 54,948 53,793 60,169 57,369 55,959 57,355 Property, plant and equipment, net 16,913 18,220 20,924 19,981 18,760 18,861 Goodwill & Intangible assets 12,068 13,356 16,356 16,026 16,579 17,048 Long term portion of financing 4,631 3,817 3,019 4,913 4,322 3,977 Investment, equity method 1,608 1,411 4,347 4,946 3,286 3,569 Other Investments 11,050 12,443 8,726 5,599 7,480 9,737 Other assets 2,358 2,304 2,336 2,117 1,747 1,671 Total assets 103,576 105,344 115,878 110,950 108,135 112,219 LIABILITIES Trade payable 12,532 11,557 13,055 12,395 12,248 12,840 Accrued liabilities 6,143 5,541 7,323 6,695 7,456 7,808 Short term debt and current LT debt 7,448 8,310 5,837 4,219 3,689 4,217 Income taxes 1,126 966 946 790 565 411 Other current liabilities 28,452 29,879 33,732 35,326 36,102 38,060 Current liabilities 55,701 56,253 60,894 59,424 60,060 63,336 Non-current trade payables 288 280 342 304 262 387 Deferred income taxes debit (7,557) (7,190) (7,329) (47,86) (5,595) (5,757) Deferred income taxes credit 1,292 1,277 1,449 1,864 1,854 1,391 Long term debt 22,104 21,673 20,769 14,049 13,536 15,761 Other liabilities 28,096 26,697 30,678 26,113 25,153 25,281 Total liabilities 99,924 98,989 106,803 96,968 95,270 100,399 Common stock 773 835 1,006 1,004 1,021 1,093 Capital surplus (Paid in Capital) 2,745 3,706 5,769 6,473 8,954 10,025 Accumulated other comprehensive loss (4,845) (4,591) (1,545) 3,737 1,868 204 Retained earnings 4,987 6,719 3,832 2,778 1,104 628 Total common equity 3,660 6,669 9,063 13,992 12,947 11,951 Less: Treasury Stock (3) (322) (10) (64) (104) (151) Minority interest (5) 7 23 54 21 20 Total shareholders’ equity 3,652 6,354 9,076 13,982 12,864 11,820 Total liabilities and equity 103,576 105,344 115,878 110,950 108,135 112,219 Inventory: Raw material 2,780 2,929 3,483 3,301 2,959 2,640 Work in Process 21,058 21,739 22,122 20,603 19,091 19,737 Finished Goods 2,750 2,505 2,815 2,627 2,331 2,292 Progress Payments and Other 3,100 3,732 4,086 4,268 4,280 5,415 Total inventory 29,688 30,905 32,506 30,799 28,662 30,084 Euro: dollar average exchange rate (€) 0.94 0.94 0.78 0.78 0.81 0.75

Do N

ot C

op y

or P

os t

Exhibit 9b Airbus Income Statement, 2011-2016 (in $ million)

For fiscal years ending December 31 2016 2015 2014 2013 2012 2011

Total revenues 66,581 65,504 69,728 73,804 77,837 68,564 Total cost of sales 61,317 56,468 59,978 63,606 66,379 59,148 Selling, general and administrative 2,723 3,219 3,542 3,541 3,335 2,820 Research and development 2,970 4,203 3,879 3,997 4,347 3,681 Total operating expenses 67,010 63,889 67,399 71,145 74,062 65,649 Earnings before interest and taxes (429) 1,615 2,330 2,659 3,776 2,915 Interest expense (522) (485) (644) (632) (592) (586) Interest and investment income 247 503 293 206 182 195 Net interest income/(expense) (275) 17 (352) (426) (410) (391) Other operating investment income (cost), net (692) (311) (207) (356) (587) (339) Equity in share of earnings 231 219 298 556 1,077 1,081 Other income 21 37 7 63 71 57 Other (expenses) (254) (295) (283) (332) (229) (236) 0 0 0 Gain(loss) on dispositions, net 2,689 479 227 349 423 504 Earnings before income taxes 1,291 1,761 2,020 2,513 4,119 3,590 Income tax expense 291 449 541 612 1,106 720 Profit after tax 1,000 1,312 1,479 1,901 3,013 2,870 After tax other expenses 0 0 0 0 0 Net income to company 1,000 1,312 1,479 1,901 3,013 2,870 Minority interest in earnings (5) 0 (1) (13) (9) (2) Net income 995 1,312 1,478 1,888 3,004 2,868 Distribution for preferred shares 0 0 0 0 0 Income available to common shares 995 1,312 1,478 1,888 3,004 2,868 Supplemental Information: EBITDA 3,876 2,028 4,901 5,059 6,391 5,719 Common shares, outstanding (in million) 772.73 1,087 1,015 1,000 1,006 834 Common shares, fully diluted (in million) 779.11 1,085 1,013 1,018 1,005 839 Closing share price ($) 63 32 36 72 53 66 Dividends per share ($) 1 1 1 1 2 1

Do N

ot C

op y

or P

os t

Exhibit 9c Airbus Cash Flow, 2012-2016 (in $ million)

For fiscal years ending December 31 2016 2015 2014 2013 2012

Profit after tax 1,000 2,870 3,013 1,901 1,479 Depreciation & amortization 2,294 2,623 2,756 2,471 2,535 Other cash flow adjustments 98 (982) (387) 354 551 Operating profits before working capital changes 3,392 5,382 4,726 4,564 3,697 Adjustments for change in working capital Decrease/(increase) in accounts receivable (1,1215) (897) (106) (321) (260) Decrease/(increase) in inventory (3,477) (4,397) (4,169) (3,977) (1,884) Increase/(decrease) in accounts payable 2,398 951 167 669 931 Increase/(decrease) in other assets and liabilities 3,539 1,841 733 1,180 956 Income taxes (268) 87 959 300 270 Change in other net operating assets 977 (1,436) (2,100) (2,381) 177 Cash from operating activities 4,369 3,076 3,282 2,345 4,741 Capital expenditures/addition of fixed assets (3,060) (3,267) (3,741) (4,037) (3,270) Disposals of fixed assets 72 83 297 62 90 Decrease/(Increase) in investments 337 (2,512) (2,585) 1,624 4,225 Other sources/(uses) of investing activities 1,821 1,860 1,422 (12) (310) Cash from investing activities (830) (3,680) (4,132) (2,067) (32) Cash dividends paid – Common (1,012) (1,009) (755) (601) (468) Increase in long term debts 3,297 1,334 2,613 2,137 469 Reduction in long term debts (1,725) (279) (1,421) (685) (623) Common stock repurchased (736) (281) – (2,455) (6) Other source/(use) of financing activities 60 207 197 219 178 Proceeds from sale/issuance of stock Cash from financing activities (116) (27) 635 (1,385) (451) Effect: ex. rate changes on cash & cash equivalent 60 328 (137) 28 23

Net change in cash 3,483 (449) 113 (1,244) 4,286 Cash, beginning of period * 6,867 7,754 9,232 10,476 6,523 Cash, end of period 10,350 7,305 9,345 9,232 10,810

Do N

ot C

op y

or P

os t

Endnotes

1 Q4 2016 Boeing Co Earnings Call-Final. CQ FD Disclosure, January 25, 2017.

2 Jon Ostrower and Doug Cameron, “Boeing Shares Fall on Accounting Probe Report,” The Wall Street Journal, February 11, 2016, https://www.wsj.com/articles/boeing-shares-fall-on-probe-report-1455215511, accessed May 2017.

3 Jon Ostrower, “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” The Wall Street Journal, October 4, 2016, https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362, accessed April 2017.

4 Ibid.

5 Boeing, “2000 Current Market Outlook,” September 2000, p. 42, http://www.as777.com/data/manufacturer/forecast/boeing_2000.pdf, accessed February 2017.

6 Airbus, “Global Market Forecast 2000-2019,” July 2000, p. 4, http://www.as777.com/data/manufacturer/forecast/airbus_2000.pdf, accessed February 2017.

7 Statista, “Size of Aircraft Fleets by Region Worldwide in 2015 and 2035 (in units),” 2017.

8 Boeing, “Current Market Outlook: 2016-2035,” 2016, p. 23, http://www.boeing.com/resources/boeingdotcom/commercial/ about-our-market/assets/downloads/cmo_print_2016_final_updated.pdf, accessed February 2017.

9 Boeing cargo aircraft comprised a further 3.8% of the commercial aircraft fleet. Statista, “Distribution of the Global Operating Commercial Aircraft Fleet as of May 2016, by Manufacturer,” 2017.

10 CAPA: Center for Aviation, “Embraer Challenges Bombardier’s CSeries with Orders for Second Generation E-Jets,” June 28, 2013, https://centreforaviation.com/analysis/embraer-challenges-bombardiers-cseries-with-orders-for-second-generation-e- jets-115578, accessed February 2017.

11 Bombardier Commercial Aircraft, “Market Forecast, 2015-2034,” 2014, p. 9, http://www.bombardier.com/content/dam/ Websites/bombardiercom/supporting-documents/BA/Bombardier-Aerospace-20150614-Commercial-Aircraft-Market- Forecast_2015-34_V13.pdf, accessed February 2017.

12 Boeing, “Boeing in Brief,” http://www.boeing.com/company/general-info/, n.d., accessed February 2017.

13 Global Data, “The Boeing Company—Financial and Strategic SWOT Analysis Review,” February 3, 2017.

14 Boeing, “Boeing in Brief,” http://www.boeing.com/company/general-info/, accessed February 2017.

15 Statista, “Distribution of the Global Operating Commercial Aircraft Fleet as of May 2016, by Manufacturer,” 2017.

16 Boeing, Current Market Outlook: 2016-2035, 2016, p. 5, http://www.boeing.com/resources/boeingdotcom/commercial/about-our- market/assets/downloads/cmo_print_2016_final_updated.pdf, accessed March 2017.

17 Airbus Commercial Aircraft, “Expansion (1991-1992),” 2017, http://www.aircraft.airbus.com/company/history/the- narrative/expansion-1991-1992/, accessed June 2017

18 Amir R. Amir and Stanley Weiss, “European Aeronautic Defense and Space Company (EADS),” Encyclopedia Britannica, Updated August 23, 2002, https://www.britannica.com/topic/European-Aeronautic-Defence-and-Space-Company, accessed March 2017.

19 Airbus Defence and Space generated 20% of group revenue, and Airbus Helicopters the remaining 10%. Global Data, “Airbus Group SE-Financial and Strategic SWOT Analysis Review,” February 2017, p. 37.

20 Global Data, “Airbus Group SE-Financial and Strategic SWOT Analysis Review,” February 2017, p. 39.

21 Boeing, “Orders and Deliveries,” n.d., http://www.boeing.com/company/general-info/index.page#/overview, accessed March 2017.

22 Airbus, “Orders and Deliveries,” n.d., http://www.airbus.com/company/market/orders-deliveries/, accessed March 2017.

23 Airbus press release, “A Journey of 10,000 Aircraft and Counting: Airbus’ Pioneering Spirit and Commitment to Shaping the Future,” October 14, 2016.

Do N

ot C

op y

or P

os t

https://www.wsj.com/articles/boeing-shares-fall-on-probe-report-1455215511
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362

https://centreforaviation.com/analysis/embraer-challenges-bombardiers-cseries-with-orders-for-second-generation-e-jets-115578
https://centreforaviation.com/analysis/embraer-challenges-bombardiers-cseries-with-orders-for-second-generation-e-jets-115578

http://www.aircraft.airbus.com/company/history/the-narrative/expansion-1991-1992/
http://www.aircraft.airbus.com/company/history/the-narrative/expansion-1991-1992/
https://www.britannica.com/topic/European-Aeronautic-Defence-and-Space-Company
http://www.boeing.com/company/general-info/index.page#/overview
http://www.airbus.com/company/market/orders-deliveries/
Accounting Turbulence at Boeing 118-020

24 Boeing, “Boeing History Chronology,” n.d., http://www.boeing.com/resources/boeingdotcom/history/pdf/Boeing_Chronology.pdf, accessed March 2017.

25 Statista, “Number of Aircraft Orders from Airbus and Boeing from 2003 to 2016,” 2017.

26 Martin Liehr, Andreas Größler, and Martin Klein, “Understanding Business Cycles in the Airline Market,” https://www.systemdynamics.org/conferences/1999/PAPERS/PARA15.PDF, accessed March 2017.

27 Ivan Pitt and John Norsworthy, Economics of the U.S. Commercial Airline Industry: Productivity, Technology, and Deregulation (New York: Kluwer Academic Publishers, 1999), p. 10.

28 Gerald N. Cook and Jeremy Goodwin, “Airline Networks: A Comparison of Hub-and-Spoke and Point-to-Point Systems,” Journal of Aviation/Aerospace Education & Research, Vol. 17, No. 2, Winter 2008, p. 53, http://commons.erau.edu/cgi/viewcontent.cgi?article=1443&context=jaaer, accessed March 2017.

29 Fred L. Smith Jr. and Braden Cox, “Airline Deregulation,” Library of Economics and Liberty, 2008, http://www.econlib.org/library/Enc/AirlineDeregulation.html, accessed March 2017.

30 Deloitte, “Global Commercial Aerospace Industry: Aircraft Order Backlog Analysis,” July 2016, p. 17, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-manufacturing-aircraft-order- backlog-analysis.pdf, accessed March 2017.

31 NASA, Development Cycle Time Simulation for Civil Aircraft, p. 1-1, https://pdfs.semanticscholar.org/29f5/d06c43530f7b52973b95178ab413c18cc6b8.pdf, accessed March 2017.

32 Airbus, “How Is an Aircraft Built?” n.d., http://www.airbus.com/company/aircraft-manufacture/how-is-an-aircraft- built/, accessed March 2017.

33 Leslie Wayne, “The Real Owner of All These Planes,” The New York Times, May 10, 2007, http://www.nytimes.com/2007/05/10/business/10flyboy.html?pagewanted=all&_r=0, accessed March 2017.

34 Rick Tauber, “Boeing Co,” Morningstar Corporate Credit Research, September 16, 2016, pp. 2-3, accessed March 2017.

35 Daniel Michaels, “The Secret Price of a Jet Airliner,” The Wall Street Journal, July 9, 2012, https://www.wsj.com/articles/SB10001424052702303649504577494862829051078 , accessed March 2017.

36 Ibid.

37 Ibid.

38 Robert Wall, “Airbus Shrugs Off Canceled Plane Orders,” The Wall Street Journal, July 30, 2014, https://www.wsj.com/articles/order-backlog-lifts-airbus-profit-1406700842, accessed April 2017.

39 Daniel Michaels, “The Secret Price of a Jet Airliner,” The Wall Street Journal, July 9, 2012, https://www.wsj.com/articles/SB10001424052702303649504577494862829051078 , accessed March 2017.

40 Deloitte, “Global Commercial Aerospace Industry: Aircraft Order Backlog Analysis,” July 2016, p. 9, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-manufacturing-aircraft-order- backlog-analysis.pdf, accessed March 2017.

41 Boeing, Current Market Outlook: 2016-2035, 2016, p. 7, http://www.boeing.com/resources/boeingdotcom/commercial/ about-our-market/assets/downloads/cmo_print_2016_final_updated.pdf, accessed March 2017.

42 Deloitte, “Global Commercial Aerospace Industry: Aircraft Order Backlog Analysis,” July 2016, p. 20, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-manufacturing-aircraft-order- backlog-analysis.pdf, accessed March 2017.

43 “Building the 787 Dreamliner: A Timeline,” The Seattle Times, December 15, 2009, http://www.seattletimes.com/business/boeing-aerospace/building-the-787-dreamliner-a-timeline/, accessed March 2017.

44 Ibid.

45 Ibid.

46 Pilita Clark and Jonathan Soble, “Boeing Delays Dreamliner Delivery Date,” Financial Times, August 27, 2010, https://www.ft.com/content/e0e05d48-b1ab-11df-ad4d-00144feabdc0, accessed March 2017. Do

N ot

C op

y or

P os

http://commons.erau.edu/cgi/viewcontent.cgi?article=1443&context=jaaer
http://www.econlib.org/library/Enc/AirlineDeregulation.html

http://www.airbus.com/company/aircraft-manufacture/how-is-an-aircraft-built/
http://www.airbus.com/company/aircraft-manufacture/how-is-an-aircraft-built/

https://www.wsj.com/articles/SB10001424052702303649504577494862829051078
https://www.wsj.com/articles/order-backlog-lifts-airbus-profit-1406700842
https://www.wsj.com/articles/SB10001424052702303649504577494862829051078
http://www.seattletimes.com/business/boeing-aerospace/building-the-787-dreamliner-a-timeline/
https://www.ft.com/content/e0e05d48-b1ab-11df-ad4d-00144feabdc0
118-020 Accounting Turbulence at Boeing

47 Boeing, “Orders and Deliveries,” n.d., http://www.boeing.com/commercial/#/orders-deliveries, accessed February 2017.

48 Thomas Reuters Streetevents, “Edited Transcript BA – Q4 2016 Boeing Co Earnings Call,” January 25, 2017, p. 18, accessed March 2017.

49 UBS, “Boeing Incorporating Improved Commercial and Defense Outlooks,” February 1, 2017, p. 10, accessed March 2017.

50 UBS, “Boeing Incorporating Improved Commercial and Defense Outlooks,” February 1, 2017, p. 13, accessed March 2017.

51 Daniel Michaels, “The Secret Price of a Jet Airliner,” The Wall Street Journal, July 9, 2012, https://www.wsj.com/articles/SB10001424052702303649504577494862829051078, accessed March 2017.

52 Ibid.

53 FASB Codification, Contractors- Federal government, Topic 912-20-25-5A, accessed May 2017.

54 David Ingram and Dena Aubin, “Boeing Uses an Accounting Method that Others Have Left Behind,” Reuters, February 12, 2016, http://www.reuters.com/article/us-boeing-probe-accounting-idUSKCN0VL2K0, accessed March 2017.

55 Ibid.

56 AICPA Accounting Standard Division, Program Accounting Task Force, “Proposed Statement of Position Program Accounting,” June 1981.

57 Ibid.

58 Ibid.

59 Ibid.

60 Ibid.

61 Ibid.

62 Ibid.

63 The Boeing Company, December 31, 2015 Form 10-K, p. 56, https://www.sec.gov/Archives/edgar/data/12927/000001292716000099/a201512dec3110k.htm, accessed March 2017.

64 The Boeing Company, December 31, 2015 Form 10-K, p. 28, https://www.sec.gov/Archives/edgar/data/12927/000001292716000099/a201512dec3110k.htm, accessed March 2017.

65 International Institute for Strategic Leadership, “Learning Variation across Enterprise Architectures Programme Accounting,” n.d., http://ii-sl.org/ii-sl/Programme_Accounting.html, accessed April 2017.

66 The Boeing Company, Annual Report 2016, Notes to Consolidated Financial Statement, Note 1, Inventories, p. 60 – 61. http://investors.boeing.com/investors/financial-reports/default.aspx, accessed May 2017.

67 Stanley Holmes and Mike France, “Boeing’s Secret,” Bloomberg.com, May 20, 2002, https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret, accessed April 2017.

68 Ibid.

69 Ibid.

70 Ibid.

71 Ibid.

72 Ibid.

73 Dominic Gates, “Boeing Will Cut 747 Jumbo Output to One Every Two Months,” The Seattle Times, January 21, 2016, http://www.seattletimes.com/business/boeing-aerospace/boeing-will-cut-747-jumbo-output-to-one-every-two-months/, accessed April 2017.

74 Ibid. Do N

ot C

op y

or P

os t

http://www.boeing.com/commercial/#/orders-deliveries
https://www.wsj.com/articles/SB10001424052702303649504577494862829051078
http://www.reuters.com/article/us-boeing-probe-accounting-idUSKCN0VL2K0
https://www.sec.gov/Archives/edgar/data/12927/000001292716000099/a201512dec3110k.htm
https://www.sec.gov/Archives/edgar/data/12927/000001292716000099/a201512dec3110k.htm
http://ii-sl.org/ii-sl/Programme_Accounting.html
http://investors.boeing.com/investors/financial-reports/default.aspx
https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret
http://www.seattletimes.com/business/boeing-aerospace/boeing-will-cut-747-jumbo-output-to-one-every-two-months/
Accounting Turbulence at Boeing 118-020

75 “Boeing’s Accounting of 747 and Dreamliner Investigated,” The Guardian, February 11, 2016, https://www.theguardian.com/business/2016/feb/11/sec-boeing-investigation-accounting-methods-shares-drop, accessed April 2017.

76 The Boeing Company, December 31, 2011, Form 10-K, p. 72.

77 The Boeing Company, December 31, 2009 Form 10-K, p. 9.

78 The Boeing Company, December 31, 2016 Form 10-K, p. 20.

79 The Boeing Company, December 31, 2016 Form 10-K, p. 29.

80 The Boeing Company, December 31, 2016 Form 10-K, p. 29.

81 The Boeing Company, Annual Report 2016, Notes to Consolidated Financial Statement, Note 1, Inventories, p. 72. http://investors.boeing.com/investors/financial-reports/default.aspx, accessed May 2017.

82 Jon Ostrower, “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” The Wall Street Journal, October 4, 2016, https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362, accessed April 2017.

83 Stanley Holmes and Mike France, “Boeing’s Secret,” Bloomberg.com, May 20, 2002, https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret, accessed April 2017.

84 Airbus Annual Report 2016, “Note 2: Significant Accounting Policies on Inventories,” p. 16, accessed May 2017.

85 Morningstar Corporate Credit Research, “Business Analysis on Airbus SE AIR (XPAR),” p. 5, February 2017.

86 Airbus Annual Report 2016, “Note 20: Inventories,” p. 40, accessed May 2017.

87 Airbus Annual Report 2016, Airbus Group SE Financial Statements 2016, “Note 2: Significant Accounting Policies on Research and Development Expenses,” p .16, http://company.airbus.com/investors/Annual-reports-and-registration- documents.html, accessed May 2017.

88 Airbus Annual Report 2016, “Note 2: Significant Accounting Policies on Development Costs,” p.16, accessed May 2017.

89 Airbus Annual Report 2016, “Management’s Discussion and Analysis of Financial Condition and Results of Operation, 2.1.6 Operating and Financial Review, Liquidity and Capital Resources, Cash Used for Investing Activities,” p. 73, accessed May 2017.

90 Airbus Annual Report 2016, “Note 17: Intangible Assets,” p. 35, accessed May 2017.

91 Carter Copeland of Barclays Capital, quoted in Jon Ostrower, “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” The Wall Street Journal, October 4, 2016, https://www.wsj.com/articles/boeings-unique-accounting-method-helps- improve-profit-picture-1475522362, accessed April 2017.

92 Lynn E. Turner, quoted in Stanley Holmes and Mike France, “Boeing’s Secret,” Bloomberg, May 20, 2002, https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret, accessed April 2017

93 Dominic Gates, “Will 787 Program Ever Show an Overall Profit? Analysts Grow More Skeptical,” The Seattle Times, October 17, 2015, http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts- grow-more-skeptical/, accessed June 2017.

94 Ibid.

95 Ibid.

96 Ibid.

97 Jon Ostrower, “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” The Wall Street Journal, October 4, 2016, https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362, accessed April 2017.

98 Thomson Reuters Streetevents, “Edited Transcript BA – Boeing Co at Barclays Industrial Select Conference,” February 17, 2016, p. 9, accessed April 2017.

99 Ibid. D o

No t C

op y

or P

os t

https://www.theguardian.com/business/2016/feb/11/sec-boeing-investigation-accounting-methods-shares-drop
http://investors.boeing.com/investors/financial-reports/default.aspx
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
https://www.bloomberg.com/news/articles/2002-05-19/boeings-secret
http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/
http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/
118-020 Accounting Turbulence at Boeing

100 Jon Ostrower, “Boeing Chief Defends Accounting Practice,” The Wall Street Journal, February 17, 2016, https://www.wsj.com/articles/boeing-chief-defends-accounting-practice-1455724675, accessed July 2017.

101 Dominic Gates, “Will 787 Program Ever Show an Overall Profit? Analysts Grow More Skeptical,” The Seattle Times, October 17, 2015, http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts- grow-more-skeptical/, accessed June 2017.

102 Jon Ostrower, “Boeing Chief Defends Accounting Practice,” The Wall Street Journal, February 17, 2016, https://www.wsj.com/articles/boeing-chief-defends-accounting-practice-1455724675, accessed July 2017.

103 Alwyn Scott, “Boeing Shares Drop on Accounting Fears, Competitive Threats,” Reuters, February 11, 2016, http://www.reuters.com/article/us-boeing-probe-sec-idUSKCN0VK1R7, accessed April 2017.

104 Barclays Equity Research, “Update: Why Boeing’s margin expansion potential is undeniable,” p. 6, May 2017.

105 Figures updated from the following original news reportage to reflect Boeing data in Exhibit 9. Jon Ostrower, “Boeing’s Unique Accounting Method Helps Improve Profit Picture,” The Wall Street Journal, October 4, 2016, https://www.wsj.com/ articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362, accessed April 2017.

Do N

ot C

op y

or P

os t

https://www.wsj.com/articles/boeing-chief-defends-accounting-practice-1455724675
http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/
http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/
https://www.wsj.com/articles/boeing-chief-defends-accounting-practice-1455724675
http://www.reuters.com/article/us-boeing-probe-sec-idUSKCN0VK1R7
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
https://www.wsj.com/articles/boeings-unique-accounting-method-helps-improve-profit-picture-1475522362
Accounting Turbulence at Boeing
Market Structure
Boeing
Airbus
Industry dynamics
The Boeing 787 Dreamliner
Program Accounting under U.S. GAAP
RationaleLengthy program periods made it likely that substantial learning would occur during the program, and that units produced late in the program would require fewer resources than those produced early in the program. If unit sales prices stayed a…
CriteriaThe AICPA recommended use of program accounting only in very limited circumstances. In general, the method applied to routine production that required substantial commitment of resources and more than several years to complete. Pricing assumed…
Program Accounting at Boeing
Accounting Rules under IFRS
Airbus Accounting
What to Believe?
Exhibit 1Program Accounting Example
Table 1Year 1 initial estimate (in $ million)
Table 2Year 1 financials (in $ million)
Exhibit 2Commercial Aircraft Deliveries by Year, 1997-2015
Exhibit 3aBoeing Balance Sheet, 2011–2016 (in $ million)
Exhibit 3bBoeing Income Statement, 2011-2016 (in $ million)
Exhibit 3cBoeing Cash Flow, 2011-2016 (in $ million)
Exhibit 4Boeing’s Note on Program Accounting in its 2016 Annual Report
Exhibit 5Boeing, Annual Program Production Units, 2000-2016
Exhibit 6Deferred Production Balances Disclosed by Boeing, 2000-2016
Exhibit 7Deferred Production Balances by Quarter, 2011-2016 (in $ million)
Exhibit 8Boeing Annual Commercial Earnings from Operations, Program vs. Unit-Cost Accounting, 2012-2016 (in $ million)
Exhibit 9aAirbus Balance Sheet, 2011-2016 (in $ million)
Exhibit 9bAirbus Income Statement, 2011-2016 (in $ million)
Exhibit 9cAirbus Cash Flow, 2012-2016 (in $ million)
Endnotes
Blog ArchiveCopyright © 2019 HomeworkMarket.com Read More
Applied SciencesArchitecture and DesignBiologyBusiness & FinanceChemistryComputer ScienceGeographyGeologyEducationEngineeringEnglishEnvironmental scienceSpanishGovernmentHistoryHuman Resource ManagementInformation SystemsLawLiteratureMathematicsNursingPhysicsPolitical SciencePsychologyReadingScienceSocial Science

The post case study:Accounting turbulance-ACCT 303 Intermediate Accounting I appeared first on Versed Writers.

Plagiarism Free Assignment Help

Expert Help With This Assignment — On Your Terms

✓ Native UK, USA & Australia writers ✓ Deadline from 3 hours ✓ 100% Plagiarism-Free — Turnitin included ✓ Unlimited free revisions ✓ Free to submit — compare quotes

Write My Assignment FREE Get A Free Quote →

Expert Help With This Assignment — On Your Terms

Share this:

Like this:

Related Posts