Boeing’s Unique Accounting Helped Lift Profit
SUMMARY: Being records Deferred Production Costs (DPCs) on a program accounting approach for its airliners. This program accounting is designed to defer the big costs incurred at the outset of a product’s life to match against profitability over planned production. “Boeing calculates its Dreamliner earnings based on 10-year forecasts of supplier contracts, aircraft orders and options productivity improvements, labor contracts, and market conditions…” all of which are reviewed by its auditors. In contrast, other aerospace and defense contractors such as Bombardier and Airbus Group use a different accounting system and “report losses on new aircraft programs as they accrue during development and production.”
1. Summarize the points in the article describing Boeing’s accounting process for commercial airliners it builds and sells. You may also obtain a further description by accessing Boeing’s 10-K filing with the SEC for the year ended December 31, 2015, available at https://www.sec.gov/cgi-bin/viewer?action=view&cik=12927&accession_number=0000012927-16-000099&xbrl_type=v# Click on Summary of Significant Accounting Policies and Read the section describing Program Accounting.
2. How is Boeing’s accounting for significant upfront costs of new aircraft different from accounting done by competitors Airbus and Bombardier? Hint: Focus on deferred production costs. The difference can occur by two companies who both use U.S. GAAP under FASB Accounting Standards Codification section 605-20-25-4
3. Based on comments in the article, what estimates used in Boeing’s program accounting system do analysts focus on?
4. Refer to the related graphic entitled “Moving Target” What is happening to the account balance Deferred Production Costs? Why is that trend disconcerting over the time period 2012 to 2016? Specifically relate the discussion to the bottom part of the graphic highlighting profit per plane needed from future airplane sales.
5. What accounting standards allow for Boeing’s treatment of pre-production costs even after implementation of the new revenue recognition accounting requirements found in FASB Accounting Standards Codification (ASC) 606? In your answer, make specific reference to FASB Accounting Standards Codification Section 340-10-25.
6. he U.S. Securities and Exchange Commission would not comment on a possible inquiry or investigation into Boeing’s accounting practices. Why do you think the SEC declines such inquiries?