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scbriml
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 1:32 pm

mjoelnir wrote:
To put it just very simple, you are wrong. If Boeing owns the tools at the supplier, it is not booked under deferred production cost, but under unamortized tooling and other non recurring cost. This you can activate and amortize over time. Does not depend on using program for cost accounting and is done the same way for unit cost accounting.

The Boeing financial reports mention both cost amounts separately: http://www.boeing.com/investors/account ... ions.page/

4Q 2017 deferred production cost 27.3 billion USD and tooling and other non recurring cost 3.6 billion USD.


However, Boeing is clearly lumping deferred production costs and unamortised tooling together for the 787. Per their statement, they expect to recover $23,818million from the first 1,200 787 deliveries and a further $7,115million from the remaining 100 in the accounting block. Those two figures combine to give a total of $30,933million which is exactly the combination of deferred production costs ($27,308million) and unamortised tooling ($3,625million) at the end of 2016.
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Revelation
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 2:21 pm

speedbored wrote:
If they do not believe that this is a realistic outlook then they are obliged to either change the accounting block, or to take a write-off


You said it all in one sentence.

Since they haven't done either, then they must have a (marginally) plausible way to claim this is a realistic outlook, and since this works in their favor, we can presume they'll stick to that position till it's wholly unfeasible, like till they sell the next 100 frames. And of course once they sell 100 more frames the accounting block is full so they can grow it again, so the problem is solved.

So many long posts here about the evils of program accounting, but in the end they are without effect, outside of the benefit of those who feel better by typing in those statements just to vent some bad feelings.
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zeke
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 3:20 pm

speedbored wrote:
Yes, they did:
"At December 31, 2016, $23,818 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $7,115 is expected to be recovered from units included in the program accounting quantity that represent expected future orders."

Given that the accounting block is 1300 frames and that there are currently 1200 orders, they are explicitly stating that they expect the 1200 orders to recover ~$24bn of the deferred costs and the remaining 100 frames in the block, for which they currently do not have orders, to recover the remaining ~$7bn.


That is what I had thought (1200 frames) however another user stated I was wrong and that is over the 500 frames that have been ordered but undelivered.

I still don't see how that statement can read 70 million in profit per frame per the thread title.
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scotron11
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 3:27 pm

4Q 2016 27.3BN USD which they project they will recover by 1300 current block of which only 1200 are sold to date. Seeing as 500 787s have already been delivered and they still have 700 deliveries to go, they will need average 29Mil per unit profit to end up with with 7.3BN left over when they have delivered that 1200th frame. And no competiton? Dream on that will happen.
 
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Finn350
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 3:46 pm

zeke wrote:
speedbored wrote:
Yes, they did:
"At December 31, 2016, $23,818 of 787 deferred production costs, unamortized tooling and other non-recurring costs are expected to be recovered from units included in the program accounting quantity that have firm orders and $7,115 is expected to be recovered from units included in the program accounting quantity that represent expected future orders."

Given that the accounting block is 1300 frames and that there are currently 1200 orders, they are explicitly stating that they expect the 1200 orders to recover ~$24bn of the deferred costs and the remaining 100 frames in the block, for which they currently do not have orders, to recover the remaining ~$7bn.


That is what I had thought (1200 frames) however another user stated I was wrong and that is over the 500 frames that have been ordered but undelivered.

I still don't see how that statement can read 70 million in profit per frame per the thread title.


The first 500 frames delivered by December 31, 2016, accumulated $30 933 million deferred production costs, unamortized tooling and other non-recurring costs, as the production costs of those frames greatly exceeded average revenue of those frames.

The next 700 frames ordered but not yet delivered are expected to recover $23 818 million of the deferred production costs, unamortized tooling and other non-recurring costs.

The last 100 frames of the accounting block not yet ordered are expected to recover $7 115 million (the rest) of the deferred production costs, unamortized tooling and other non-recurring costs.

I hope you can follow the math. The previous sentences are just re-stating the quote in the very first post in a more obvious way and complementing them with the number of frames.
 
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speedbored
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 3:47 pm

zeke wrote:
That is what I had thought (1200 frames) however another user stated I was wrong and that is over the 500 frames that have been ordered but undelivered.

Well it probably amounts to roughly the same thing. Given that they have recovered very little of the deferred costs from the frames that have been delivered so far, it is the ordered but undelivered frames that will actually recover most of the $24bn due to be recovered from the already ordered frames.

zeke wrote:
I still don't see how that statement can read 70 million in profit per frame per the thread title.

Because that is what Boeing are saying. After the currently ordered frames have recovered ~$24bn of deferred costs, there will still be ~$7bn of deferred costs to be recovered and 100 frames left in the accounting block. That will require a profit of $70m per frame for the next 100 frames to be ordered in order to clear the remaining deferred costs by the end of the accounting block. Boeing currently think that should be achievable, many others disagree.
 
ikramerica
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Tue Feb 14, 2017 4:19 pm

I see why it's not an allowable accounting method for a long term program anymore. It seems like it allows you to book production costs of late frames at below their actual production cost. This then allows you to claim only those planes are profitable. Then as orders come in past your blocks, you pull those into a new block and spread their cost into your program and lower the profit per frame.

It reminds me of Hollywood accounting. The more a movie makes, the more it loses money "net" even though in reality it's long since recovered production costs. This is because gross participants are constantly skimming all the money off.
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zeke
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 1:12 am

speedbored wrote:
Because that is what Boeing are saying. After the currently ordered frames have recovered ~$24bn of deferred costs, there will still be ~$7bn of deferred costs to be recovered and 100 frames left in the accounting block. That will require a profit of $70m per frame for the next 100 frames to be ordered in order to clear the remaining deferred costs by the end of the accounting block. Boeing currently think that should be achievable, many others disagree.


Still don't see how anyone can call this profit. What they are saying they expect the income from sales to sufficiently exceed the cost of production to allowed the remaining deferred costs to be paid back. Boeing has not used the word profit at all.

My personal experience with deferred costs has been with my commercial property developments where the interest is accounted for upfront as a deferred cost. I have not had to pay "profits tax" on paying off those deferred interest expenses.

There is also an additional 20+ billion in R&D which is not included in these deferred costs, last year they transferred 1 billion from deferred costs into R&D with the treatment of two of the test airframes.
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Finn350
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 3:48 am

zeke wrote:
speedbored wrote:
Because that is what Boeing are saying. After the currently ordered frames have recovered ~$24bn of deferred costs, there will still be ~$7bn of deferred costs to be recovered and 100 frames left in the accounting block. That will require a profit of $70m per frame for the next 100 frames to be ordered in order to clear the remaining deferred costs by the end of the accounting block. Boeing currently think that should be achievable, many others disagree.


Still don't see how anyone can call this profit. What they are saying they expect the income from sales to sufficiently exceed the cost of production to allowed the remaining deferred costs to be paid back. Boeing has not used the word profit at all.


If you sell something, the amount by which your revenue exceeds your costs is customarily called "profit", and in the case your costs exceed your profit, it is called "loss". You could call it also "margin", "positive margin", "breakeven margin" or "negative margin" depending on the case, but whichever term you use doesn't change the essence of what we are discussing here.
 
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zeke
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 5:03 am

Finn350 wrote:
If you sell something, the amount by which your revenue exceeds your costs is customarily called "profit", and in the case your costs exceed your profit, it is called "loss". You could call it also "margin", "positive margin", "breakeven margin" or "negative margin" depending on the case, but whichever term you use doesn't change the essence of what we are discussing here.


That is my point, Boeing in no way has stated the revenue will exceeded costs, both production and deferred. All they have said is they expect the revenue to be sufficient to pay the remaining deferred costs within the program accounting block. They have made no statement at all about the additional R&D expenses or actual profit.

Boeing as a business only has a profit margin of around 5%.
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Finn350
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 5:07 am

zeke wrote:
Finn350 wrote:
If you sell something, the amount by which your revenue exceeds your costs is customarily called "profit", and in the case your costs exceed your profit, it is called "loss". You could call it also "margin", "positive margin", "breakeven margin" or "negative margin" depending on the case, but whichever term you use doesn't change the essence of what we are discussing here.


That is my point, Boeing in no way has stated the revenue will exceeded costs, both production and deferred. All they have said is they expect the revenue to be sufficient to pay the remaining deferred costs within the program accounting block. They have made no statement at all about the additional R&D expenses or actual profit.

Boeing as a business only has a profit margin of around 5%.


The deferred production cost cannot be recovered without revenue exceeding the cost. It is not stated in the quote as it is self-evident. R&D expenses are written off as they occur and not part of the deferred production cost.
 
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zeke
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 5:18 am

Finn350 wrote:
The deferred production cost cannot be recovered without revenue exceeding the cost.


That is not profit, that is using excess cash flow to pay for deferred expenses. There is no statement from Boeing on profit being generated.

No different to when I sold my commercial property, the profit I made only came after paying the development, legal, commissions, marketing, and deferred interest costs. My profit was not the sale price minus development cost.
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 6:39 am

zeke wrote:
That is not profit, that is using excess cash flow to pay for deferred expenses. There is no statement from Boeing on profit being generated.
No different to when I sold my commercial property, the profit I made only came after paying the development, legal, commissions, marketing, and deferred interest costs. My profit was not the sale price minus development cost.

The difference is simply down to unit cost vs. program cost accounting. When people are saying that Boeing are expecting to make a profit of $70m per frame, they are talking about the unit cost profitability (i.e. excluding deferred costs). When talking about program accounting profitability, you are of course correct that the $70m unit "profit" would be cancelled out by that unit's share of the deferred costs.

Regardless of the semantics, Boeing are saying that they expect to be able to deliver the last 100 frames of the accounting block with a per-frame production cost $70m lower than the per-frame sales revenue - that is what many people are questioning.
 
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Ncfc99
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 12:21 pm

If it costs Boeing $50m to produce a 787 frame and it sells it at $120m, Boeing has made $70m profit on that frame which is what the thread title states. I cant see how this can be misunderstood. The fact that this $70m goes towards reducing the deffered production costs is not relevent to the title.

My numbers are hyperthetical and I do mot believe they will make $70m on any 787.
 
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hOMSaR
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 12:49 pm

Ncfc99 wrote:
If it costs Boeing $50m to produce a 787 frame and it sells it at $120m, Boeing has made $70m profit on that frame which is what the thread title states. I cant see how this can be misunderstood. The fact that this $70m goes towards reducing the deffered production costs is not relevent to the title.

My numbers are hyperthetical and I do mot believe they will make $70m on any 787.


No, that would be $70 million in positive cash flow. Not profit. There is a difference between the two. If Boeing writes off $70 million in deferred expenses in your example, then their profit is actually $0.
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zeke
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 2:29 pm

speedbored wrote:
[quote="zeke"The difference is simply down to unit cost vs. program cost accounting. When people are saying that Boeing are expecting to make a profit of $70m per frame, they are talking about the unit cost profitability (i.e. excluding deferred costs). When talking about program accounting profitability, you are of course correct that the $70m unit "profit" would be cancelled out by that unit's share of the deferred costs.


The inventory notes are in the report to account for the the sold and unsold aircraft in the program block, i.e. program accounting.
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frmrCapCadet
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 3:31 pm

Mythical Seattle software company builds a new operating system for $20 Billion. Does the first copy costs that much, whereas copies 2 -10 million cost 5 cents each to produce and distribute with a $150 or such profit per copy? Accounting in such cases really is a second or third order reality. Cash flow keeps it honest.

In the longer haul, I think Boeing is going to need to drop the price on the 787, but it will happen gradually.
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Re: Boeing expects $70M profit per a 787 frame in the future orders

Wed Feb 15, 2017 9:37 pm

Not a big fan of Richard Aboulafia but this quote made me laugh:

Always fluent and funny in his exposition, Aboulafia came up with a novel metaphor for Boeing’s pushing out nearly $30 billion in 787 production costs to be paid back from future revenue.

“It’s like, ‘We can’t save the patient, but we can put his head in a jar and hope future generations can revive him,’” Aboulafia said.


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