Boeing Definitions Fin 160-01 PDF

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Boeing definitions throughout 10K...

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Boeing Definitions Edward Bruner Research & Development: Research & Development in terms of Boeing is used to cover expenses that are related to expenditures which involve “experimentation, design, development and related test activities” for the created products. These products include defense systems, both commercial and military jet aircraft, space related projects, and other Boeing related types of product development. R&D is used like many companies use, as a way of getting through either being reimbursed on contracts, and also is used to take advantage of loopholes in the US tax code, which allows companies that perform R&D to pay little to no tax on this incurred amount of investment. Such an example is when Boeing fulfils a contract for the US or other governments, typically the costs of R&D are incurred as an expense, and therefore are most of the time reimbursed in the contract. An actual example of this is the incurring of the cost of test flight Boeing 787’s which were not able to be manufactured for production, due to being modified from the standard which was to be sold. Boeing therefore took the costs of the production of these three test planes, and allocated the cost under R&D instead, allowing them to be reimbursed for these costs instead of having to pay them. Revenue Recognition: Revenue Recognition in terms of Boeing is used by breaking down their revenue stream into categories in which they are from. For example, when Boeing has multiple contracts open with a company, the revenue is then combined from all the contracts to make it simpler. Other examples are related to what type of contract is involved with a company. There are fixed price contracts, which have a set goal involved, and therefore the revenue stream is recorded based on

what “performance milestones” are achieved. These milestones if achieved are then awarded with previously agreed terms which include incentive and award fees. More advanced contracts for Boeing such as sales of commercial airplanes are done on by each unit sold. These sales recognized represent the value of the products sold as well as the costs incurred from the sale. So from most of the above sales and others, both the costs as well as the obtained revenues are not incurred until after the service/ delivery is performed, with the exception of a few contracts such as with the US government. Pension: Most of Boeing’s workforce is covered under some type of pension plan, except for nonunion workers and also some union workers which were hired after December 31st, 2008. Pension plans at Boeing are calculated by recognizing the change in the fair value of assets over a five-year period. The differences between the actual returns and the expected returns of a company like Boeing overall will affect the future year’s pension cost. Such an example is the crisis of 2008 which caused losses across the board for Boeing. And even though in future years such as 2010 and 2011 the company was performing better, it still had to make up for the losses incurred from 2008. This results in the amortization of actuarial losses, which increased the costs of many of Boeing’s commitments, including its net periodic pension cost. Along with this, not all of the costs of pension plans are allocated in the net earnings of that same year in which they are incurred, as some of it is allocated into production costs and is shown in inventory at the end of the reporting period. Pension cash requirements are based on an estimate of Boeing’s minimum funding requirements, according to ERISA regulations.

Basic vs. Diluted: Basic and Diluted shares are both included throughout Boeing’s 10k filing. Basic and Diluted shares are used to measure the number of shares investors hold in a company. The difference between the two is that basic shares include the stock held by all shareholders, while the diluted shares include the total number of shares of the company, including all securities that could be converted if the company were to be exercised. Boeing shows both of these share counts throughout their filing to show not only the difference between the amount of total value of the shares, but also for another reason. This reason includes the fact that the basic shares are looked at to see how much revenue at the end of each recording period reach the actual shareholders, as this shows how profitable a company is. If only a little to none of the profits reach the shareholders, then that can be seen in the diluted share view as it includes all of the convertible shares as well. Basic earnings per share is found by calculating the overall sum of net earnings and then subtracts declared dividends and dividend equivalents related to share-based compensation which is then divided by the basic weighted average shares outstanding. Declared dividends and dividend equivalents related to share-based compensation are divided by the weighted average shares outstanding. Operating Income & EBIT: Operating Income or better known as Operating Earnings for the most part in this filing is mostly used by Boeing to point out what business segments in which they did better in than years/quarters prior, as well as what business segments they were reimbursed in or took a loss in. In the earnings/loss table it can be seen that commercial airplane earnings in 2010 were better than both 2008 and 2009 combined. 2009 Boeing actually took a loss in the commercial airplane segment of their business. But then in 2010 bounced back to $3,006 in earnings from $(583) in

2009. The loss allocated in 2009 if looked at closer can actually be attributed to the related costs of three 787 test flight aircraft, which decreased the overall revenue of 2009 by $1,854. These costs from the test aircraft are allocated to R&D as the cost cannot be recovered through a sale of the planes, as they are too different than the ones being manufactured to sell. Other losses can be attributed to things such as the recognition of pre-tax expense from the prior year, as this allows the write off for losses on customer financing receivable’s as well as lower environmental remediation charges compared with the prior year. All of these numbers are in millions. NI from Continued Operations: Net Income from continues operations is used by Boeing to allocate the sum of all of the earnings/losses taken during a fiscal period. Besides this, Net Income also includes earnings made both before taxes as well as after taxes. Showing the tax expense helps to show why one year may more taxed than another due to a higher amount of earnings before taxes. The effective income tax rate was “26.5%, 22.9% and 33.6% for the years ended December 31, 2010, 2009 and 2008, respectively.” Segment Reporting: Boeing uses segment reporting to differentiate between different aspects of their financial reporting. Such examples are recording commercial airplane revenues as a segment and then taking cost of sales for airplanes transferred to other segments. Airplanes accounted for as operating leases and considered are transferred to the BCC segment, which stands for Boeing Capital Corporation. Airplanes are transferred to the BDS segment if they are due for further modification prior to delivery to the customer. Any revenues as well as the cost of sales for these transfers are eliminated in the unallocated and the eliminations segment. Segment reporting also has revenues and cost of sales from the BDS segment from modifications placed on airplanes to

not be received until after the airplane is delivered and/or there is a performance milestone that has been reached. Valuation Allowance: Boeing uses valuation allowances to account for losses on customer financing receivables (valuation provision) which are used to provide for potential impairment of a customer’s financing position. This balance represents an expected but still unconfirmed losses in the customer’s receivables portfolio. These estimated losses are based on factors such as historical loss experience, collateral values, and results of individual credit and collectability reviews. These estimates are done quarterly. Three factors which influence the amount of the allowance are a customer’s credit rating, collateral values and default rates. Changes in any of these factors may cause an increase or decrease in the amount of allowance for that customer. At the end of each fiscal period, the valuation allowance is subtracted from the rest of the receivables on Boeing’s Accounts Receivable. Impairment (Undisc CFs): Impairment is used by Boeing to measure a company’s assets which are under operating lease or are assets held for re-lease when events as well as changes in circumstances indicate that the value of that said asset may be less than expected. Various assumptions are used by Boeing to calculate the future value of these leased assets, as well as the value of the lease rates, residual value, maintenance costs, remaining economic life of asset, etc. When impairment is indicated for an asset, the amount of expense from it is recorded as the excess carrying value over the fair value of the said asset. An example is that if said lease rates were lowered by 10%, it is estimated that Boeing would have to incur an additional impairment expense of $30 million for year ending

December 31, 2010. Residual values are calculated in order to find the life span on a said leased asset as well as to find the depreciation expense for leased equipment. Goodwill Impairment: Goodwill impairment for Boeing is tested by comparing the book value of net assets to the fair value of the related operations. If the value of this test is determined to be less than the book value, then a second step is therefore performed to compute the amount of the impairment. This process is an estimated figure, as there is no actual one complete answer to this calculation. The answer to this calculation is therefore then the amount of goodwill which is impaired. The estimation of the fair values of these calculations through using the discounted cash flows. These future estimations cover a variety of aspects such as future orders, contracts with suppliers, labor agreements, etc. Many of the forecasts involved that change could also end up causing the impairment to change. Cash flow forecasts along with this (which are calculated by using the correct market capitalization discount rate and then added to a premium at the date of evaluation) may also be affected by a stock price change. Though this is the case for many of the financial aspects of the company, even with a 10% decrease in any of the operations fair values of operations were to occur, it will have no impact on the carrying value of Goodwill. Pension Asset: Pension Assets are used for the benefit of the majority of Boeing’s employees, with the exceptions of a few which were hired after the financial crisis of 2008, as well as some nonunion workers. These payments from the company are made for each employee as a contribution to each individual employee’s pension fund. These pension payments are made to maintain liquidity as well as is more than sufficient enough to pay financial obligations to many of the plan’s participants involved. The pension assets are also structured to maintain the pace of keeping up

with future benefit payments over the long term. The main objective involved with Boeing’s pension assets is to earn a rate of return over time, which is then used to satisfy the benefit obligations of the pension plans. The objective also is to maintain sufficient liquidity to pay benefits and address other cash requirements of the pension fund. Par, APIC, etc.: APIC stands for Additional Paid in Capital, which is the value of shares capital that is above its par value, as well as allocated under shareholders’ equity on the balance sheet. The par value is the value in which Boeing plans to repay its bondholders at a given date. This APIC is calculated by subtracting the Par value of the issued shares by the issue price, and then multiplying that by the number of shares being acquired by investors. Boeing specifically used APIC when issuing 1,012,261,159 shares of common stock at $5.00 par value. These shares are valued under shareholders’ equity at $5,061 in 2010 in millions. This translates to APIC in 2010 to being $3,866 in millions. Operating Cycle: An operating cycle is typically how long a contract duration may last for, which in Boeing’s case, is anywhere from one year to three years plus. Boeing’s operating cycles are typically long term among all of their contract aspects, which include many different types of development and production contracts with varying delivery and milestone schedules. Because of this, the indication to future operating results from these yearly cycles may not be as helpful as would be anticipated. Backlogging these cycles are not necessarily indicative of future results/workloads.

Depreciation Estimates/PPE (Cost or FV): Depreciation estimates are used by Boeing to see the degrading of value of Boeing’s Assets going into the future. This section of the 10k is known as Property, Plant, and Equipment. These assets are recorded at costs throughout the years they are acquired, to see the decrease in value over time. The formula used for this depreciation is applicable construction-period interest, less accumulated depreciation and are depreciated principally over the following estimated useful lives: new buildings and land improvements, from 10 to 40 years; and new machinery and equipment, from 3 to 20 years. The methods of which Boeing follow for Depreciation are the following: buildings and land improvements, 150% declining balance; and machinery and equipment, sum-of-the-years’ digits. Along with this, a straight-line method over a five year period is used to include capitalized internal use software with other assets and amortized at the same time. HTM, AFS: Investments at Boeing are classified as two things, either held-to-maturity or availablefor-sale. Held-to-maturity securities include time deposits and are carried at cost. Available-forsale securities include marketable debt and equity securities and Enhanced Equipment Trust Certificates and are recorded at their fair values, with unrealized gains and losses reported as part of Accumulated other comprehensive loss on the Consolidated Statements of Financial Position. Realized gains and losses on marketable securities are recognized based on the cost of securities using the first-in, first-out method. Realized gains and losses on all other available-for-sale securities are recognized based on specific identification. Available-for-sale securities are assessed for impairment quarterly by Boeing.

Equity Accounting: Boeing uses Equity accounting in order to account for investments on which Boeing has significant influence over an investee. This influence is generally deemed significant if Boeing has an ownership interest of between 20% and 50%. Income or losses from equity accounting is integrated into Boeing’s consolidated statements of operations. Boeing’s main companies in which it has a significant stake in is United Launch Alliance as well as United Space Alliance. Boeing has 50% stakes in each company. Goodwill Adjustment: Boeing records good will on an annual basis as well as tested for impairment. Typically, April 1st of each year is the date in which this testing takes place. The Goodwill is tested for impairment by comparing the book value of net assets to the fair value of the related operations. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Changes in the forecasts or decreases in the value of our common stock could cause book values of certain operations to exceed their fair values which may result in goodwill impairment charges in future 45 periods. A 10% decrease in the estimated fair value of any of our operations would have no impact on the carrying value of goodwill. EPS Dilution: Boeing uses dilution of EPS in order to gauge the actual EPS if all convertible securities were exercised. These convertible securities are outstanding preferred shares, convertible debentures, stock options, as well as warrants. Typically, the diluted EPS is lower than the basic

EPS. The basic EPS is calculated by adding the net earnings and then subtracting from that declared dividend and Statutory dividend equivalents. This is then divided by the basic weighted shares outstanding. DTA: DTA is a deferred tax asset, which is an item on the balance sheet that results from overpayment or a payment of taxes in advance. The opposite of this is deferred tax liability, which instead represents taxes that are owed. In valuating Net Deferred Tax Assets, Boeing takes both the credits from the assets and the liabilities and combine them to get the net total. A valuation allowance is added in cases where there is evidence where a refund is due. In such cases, the allowance is allocated into the net total to make up for the error. Statutory -> Effective Income Tax Reconciliation: Statutory financial statements are the annual, quarterly or bi-annual consolidated financial statements of your company. These statements provide information on the income, expenses, balance sheets, budgets, and are reviewed by a statutory auditor. The statutory auditor then provides an audit verification after approving the documents. Statutory financial statements enable your company to do many things such as: Track the financial health of your company and benchmark it against your peers, mitigate any legal and operational risks related to any regulatory non-compliance across jurisdictions, provide information on your company’s financial performance, investments, loans and executive compensation to your stakeholders and regulators, formulate effective strategies to achieve both short and long-term financial objectives, and improve your company’s corporate governance. Income Tax Reconciliation is the act of reconciling the net income on the books to the income reported on the tax return by adding and subtracting the non-tax items. Boeing has applied for this tax reconciliation on multiple occasions. The years 2007-2008 are currently

being examined by the Internal Revenue Service (IRS), as well as Boeing having filed appeals with the IRS for 2004-2006. Boeing is also subject to examination in major state and international jurisdictions for the 2001-2010 tax years. Sales-lease Type: In the Sales-lease Type, Boeing is assumed to be selling a product (an airplane) to a lessee, which then needs to be recognized financially as a profit or loss. Boeing recognizes a net investment in the lease. Along with this is that Boeing also recognizes any direct costs from this lease as an expense. This expense is calculated by the difference between the carrying amount of the underlying asset and the fair value. If the two amounts are equal to each other, then the direct costs are deferred to being included in Boeing’s investment in the lease. Along with these inputs, Boeing must also allocate for interest income, variable lease payments, and impairment. If the lease is canceled before the contract is expired, then Boeing must test for impairment to recognize a loss, if necessary. Included with this is the present value of the lease payments which remain unpaid. Boeing allocates sales-leases in financing receivables. Discontinued Operations: Boeing’s use of Discontinued Operations on this 10k filing is in the 2004 purchase and sale agreement with General Electric Capital Corporation related to the sale of Boeing Capital Corporation’s (BCC) Commercial Financial Services business. This BCC is involved in a loss sharing arrangement for losses on transferred portfolio assets, such as asset sales, provisions for loss or asset impairment charges offset by gains from asset sales. The loss from these operations being no longer operational is allocated under Total Revenues. The discontinued operations are...