Moderators: jsumali2, richierich, ua900, PanAm_DC10, hOMSaR

 
j1960amme
Topic Author
Posts: 20
Joined: Sat Dec 20, 2014 6:35 pm

B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 2:44 pm

All:

An article yesterday by Dhierin Bechai on SeekingAlpha claims that Boeing went cash-positive on the 787 production line as of 2015q4. His article is available at:

http://seekingalpha.com/author/dhierin-bechai/articles

The article seems credible on the face of it, but I'm no expert. Comments by those who are would be welcomed.

== Cordially, j1960
 
Planesmart
Posts: 2891
Joined: Sun Dec 05, 2004 3:18 am

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 6:41 pm

Wouldn't get too excited on the strength of this report. There must be some -9 and a lot of -10 deferred costs still to be added.
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 6:56 pm

Quoting Planesmart (Reply 1):
Wouldn't get too excited on the strength of this report. There must be some -9 and a lot of -10 deferred costs still to be added.

I'm sure there is, but we're referring to production costs of each airframe, for which Boeing has generally been considered to have been losing money up until now.

So the deferred costs should now start to go down as the production profit per frame is applied to them.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 7:33 pm

This was discussed earlier in a separate thread.

There is a difference between the program being cash positive and there being a profit on a production cost basis. The reason is that the program cash flow includes production profit or loss, inventory increase or decrease, and supplier advances increase or decrease. At the moment, inventory decrease and supplier advances decrease exceed production loss, so the program is cash positive although there is a production loss on each frame and deferred production cost is still increasing. Boeing expects later this year to turn profitable on production cost basis, too.
 
aklrno
Posts: 1559
Joined: Sat Dec 04, 2010 11:18 pm

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 9:42 pm

I have a question about the meaning of deferred program costs. I had originally assumed this was R&D, loss on early frames, and interest. Now I am hearing it includes inventory and supplier advances. In my businesses (very much simpler than Boeing!) we talk about "working capital" a lot. It covers inventory, equipment, facilities, labor and accounts payable, among others that is spent before we can collect any money. As a business grows, even one that makes money on each sale, working capital has to grow as well. If the company grows slowly, it comes out of profit. If it grows quickly, it comes from investment. When a manager comes to me and tells me sales will double this year, the next words I expect to hear are that more money is needed immediately. I once had to sell a company that was on track to triple every year because I couldn't afford it. I did make some nice money, but if I had the capital I would have made even more.

If deferred program means working capital, then even if there is a profit on each aircraft I would not be surprised to see deferred program costs continue to rise and cash flow to be negative since production is still ramping up.

I was at Oracle in the early days when sales grow by 130-140% per year for many years. It was done on borrowed money and by 1989 the bank loans were around half a billion dollars. When growth leveled off to 40% a year we nearly went broke adjusting but then the working capital needs plunged and we made tons of cash. I believe that company is now sitting on a cash hoard of around $40 billion. Boeing is in for the very long haul on this. Don't judge the program for another 10 years or so.
 
justloveplanes
Posts: 1014
Joined: Thu Jul 08, 2004 5:38 am

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 10:04 pm

The chart shows a steep decline in deferred production costs, which means in essence that cost is now getting smaller. Profitability is still a long ways off, but heading that way now. The steepness of the current decline in the last year is definitely good news. A chart like that next year (assuming it's accurate) will have more to tell about when we can expect profitability.

No

Quoting Planesmart (Reply 1):

Wouldn't get too excited on the strength of this report. There must be some -9 and a lot of -10 deferred costs still to be added.

Don't think 787-9 will see any more deferred costs. It's in production now. It's deferred costs were part of the big chart blob. Whatever deferred costs are building for the 787-10, the program cash flow is more than enough to cover them (substantially more due to the steepness of the curve).

All this is predicated on whether this reporter's chart is accurate!
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Wed Mar 23, 2016 11:00 pm

Quoting aklrno (Reply 4):
I have a question about the meaning of deferred program costs. I had originally assumed this was R&D, loss on early frames, and interest. Now I am hearing it includes inventory and supplier advances.

Deferred production cost is production cost exceeding revenue in the program accounting Boeing is using. It doesn't include work in process or supplier advances.

Program cash flow is not only dependent on production profit or loss but also changes in work in process and supplier advances (when I said "inventory" in my previous reply, I should have said "work in process", as inventory consists of deferred production cost, work in process and supplier advances). For example, if there are less supplier advances paid at end of given quarter compared to the previous quarter, this makes a positive contribution to the program cash flow. R&D is not part of the inventory, it is written off as it occurs.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Thu Mar 24, 2016 12:44 am

Quoting j1960amme (Thread starter):

Cash positive does not equal profits. Boeing still deferred production cost on the 787 in Q4 2015. I assume the positive cash flow regarding the 787 program in Q4 2015 comes from selling stock, frames not produced in 2015, like for example the teens. Positive cash flow can also result from increased prepayments and advances. As Finn350 mentioned.

Quoting aklrno (Reply 4):
I have a question about the meaning of deferred program costs. I had originally assumed this was R&D, loss on early frames, and interest. Now I am hearing it includes inventory and supplier advances

Deferred production cost does not include R&D or investments. It is exactly what it is called, production cost. The first frames are more expensive to produce than they are sold for. The difference is not presented as a loss, but deferred and written to inventory.
 
Ruscoe
Posts: 1747
Joined: Sun Aug 22, 1999 5:41 pm

RE: B787 Now Unit Production Cash-positive?

Thu Mar 24, 2016 1:22 am

These are extracts from the Boeing 2015 Financials. As always the devil is in the detail.

"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 program, 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."

"Inventoried costs on commercial aircraft programs and long-term contracts include direct engineering, production and tooling and other nonrecurring
costs, and applicable overhead, which includes fringe benefits, production related indirect and plant management salaries and plant
services, not in excess of estimated net realizable value. To the extent a material amount of such costs are related to an abnormal event or are fixed
costs not appropriately attributable to our programs or contracts, they are expensed in the current period rather than inventoried. Inventoried costs
include amounts relating to programs and contracts with long-term production cycles, a portion of which is not expected to be realized within one
year."

I would be interested to know how Airbus are handling the 350 costs, and the quantum of those figures, from someone who takes a closer interest in Airbus Financials.

Ruscoe
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Thu Mar 24, 2016 1:35 am

Quoting Ruscoe (Reply 8):
I would be interested to know how Airbus are handling the 350 costs, and the quantum of those figures, from someone who takes a closer interest in Airbus Financials.

Simple, Airbus uses unit cost accounting, if the A350 frames cost more to produce than they are sold for, their will be a loss on those frames.
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Thu Mar 24, 2016 4:41 pm

Quoting Ruscoe (Reply 8):
I would be interested to know how Airbus are handling the 350 costs...

The early development and production frames are being accounted for using “contract accounting” to spread the much higher production costs of those frames over a longer period so as to not as adversely impact 2015's profit margins.

http://leehamnews.com/2015/10/12/ana...roduction-and-accounting-strategy/

As mjoelnir noted above, the serial production frames are handled by unit accounting so each frame's actual costs and actual revenues are accounted for.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Thu Mar 24, 2016 6:49 pm

Quoting Stitch (Reply 10):
The early development and production frames are being accounted for using “contract accounting” to spread the much higher production costs of those frames over a longer period so as to not as adversely impact 2015's profit margins.

Yes regarding single frames. The contract accounting allows to book revenue on a frame according to completion status. It was used to moved at Airbus about 400 million EUR revenue from 2016 to 2015. The moment the frame gets delivered the "contract" is ended. Have a look how many A350 early frames stand around in TLS. All the teens are gone and of the early frames to be sold only MSN2, 4 and 5 are left. About 30 frames started before 2016 could have carried contract accounting revenues forward to 2015, all of them but perhaps MSN2, 4 and 5 will be delivered in 2016. The main difference to program accounting for cost is, that no cost are deferred. Contract accounting influences when you can recognize revenue. With shortening FAL times, the possibility to move revenue with contract accounting between the years, gets reduced.

One point one has to remember with contract accounting is, that it concerns revenue recognition. If an early frame is produced for 500 million and sold for 120 million, contract accounting can move part of the 120 million revenue between the years or quarters, the 500 million cost are booked as they come.


[Edited 2016-03-24 11:57:59]

[Edited 2016-03-24 12:11:48]

[Edited 2016-03-24 12:12:30]

[Edited 2016-03-24 12:13:11]
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 8:51 am

Quoting mjoelnir (Reply 11):
One point one has to remember with contract accounting is, that it concerns revenue recognition.

Why does it then use the tag "deferred cost" ?  


edit: barking up the wrong tree. sorry.

##################################


edit: for program accounting this still is relevant as a correction:

What program accounting effectively does is move future profits into the present.

All under the narrative that it is used to even out profits.

Only all projects are heavily frontloaded with cost.
Nice side effect is that it hides a project going pearshaped.

A more transparent solution would be to only push planned cost into the deferred bucket.
Anything beyond planned should be accounted as it "appears".

Better balance and you stay in the type domain:
projected cost accounted against projected production.

[Edited 2016-03-25 02:04:11]
Murphy is an optimist
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 8:53 am

Quoting mjoelnir (Reply 11):
One point one has to remember with contract accounting is, that it concerns revenue recognition. If an early frame is produced for 500 million and sold for 120 million, contract accounting can move part of the 120 million revenue between the years or quarters, the 500 million cost are booked as they come.

I don't think that is an accurate description of contract accounting.

This is what Airbus says in their financial statement:

Quote:
Construction contract accounting is applied for military programmes, space projects as well as for launch customer contracts in the civil aircraft business if customers have significantly influenced the structural design and technology of the aircraft type under the contract. Considering certain airline customer’s increasing involvement in the development and production process of the A350 XWB programme, Airbus applies IAS 11 to a fixed number of launch customer contracts of the A350 XWB programme for existing backlog. This change in accounting policy has no material effect on Airbus Group Financial Statements and is thus applied prospectively.

Source: http://www.airbusgroup.com/dam/asset...ancial%2520Statements%25202014.pdf

The rules according to IAS 11 contract accounting (which Airbus uses) are here:
http://www.iasplus.com/en/standards/ias/ias11

As an example, when they have delivered 50 % of the frames of the contract, they recognize 50 % of the contract revenue and 50 % of the expected contract costs (not the actual costs of the first half of the frames, which is higher than the cost of the second half of the frames because of the learning curve, ramp-up etc.).
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 9:24 am

Quoting Finn350 (Reply 13):

Airline payments to airframers appear to follow completion status per frame.
without a stationary established production process these payments
will be further apart for early frames. Revenue stream will build up slowly
following production speed / transition time.

Production cost to the airframer will be the inverse of this function.
Only way out of this is booking cost linearly over the time needed
to produce this customers order to complement the more or less
linear revenue stream.
Murphy is an optimist
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 9:27 am

Quoting WIederling (Reply 12):
Why does it then use the tag "deferred cost" ?

It does not.

http://www.iasplus.com/en/standards/ias/ias11

quote:

IAS 11 Construction Contracts provides requirements on the allocation of contract revenue and contract costs to accounting periods in which construction work is performed. Contract revenues and expenses are recognised by reference to the stage of completion of contract activity where the outcome of the construction contract can be estimated reliably, otherwise revenue is recognised only to the extent of recoverable contract costs incurred.

no deferral of cost mentioned. The cost is always allocated to the period the work is done and you can recognise revenue at the time the work is done instead of only at the end.
It was really not set up for aircraft manufacturers, but for companies where a single contract consumes several years, like infrastructure projects.

Quoting WIederling (Reply 12):
Which imho is a fib too.
What program accounting effectively does is move future profits into the present.

All under the narrative that it is used to even out profits.

Only all projects are heavily frontloaded with cost.
Nice side effect is that it hides a project going pearshaped.

A more transparent solution would be to only push planned cost into the deferred bucket.
Anything beyond planned should be accounted as it "appears".

Better balance and you stay in the type domain:
projected cost accounted against projected production.

The points about contract accounting are mainly made in the defence of the use of Boeing of the inventory measure "program accounting for cost".
"Contract accounting" is quite limited in scope and rigorously defined. Using it for hiding a program going pear shaped would be quite useless.

[Edited 2016-03-25 02:31:08]
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 9:37 am

Quoting mjoelnir (Reply 15):
Contract revenues and expenses are recognised by reference to the stage of completion of contract activity

Effectively this means that there is "deferred production cost" just as in Boeing's program accounting.

The reason Airbus uses contract accounting is to defer cost, there would be no point of using it to defer revenue.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 9:39 am

Quoting Finn350 (Reply 13):
As an example, when they have delivered 50 % of the frames of the contract, they recognize 50 % of the contract revenue and 50 % of the expected contract costs (not the actual costs of the first half of the frames, which is higher than the cost of the second half of the frames because of the learning curve, ramp-up etc.).

You should read IAS11 instead of trying to interpretate what Airbus is saying. IAS11 does NOT allow moving cost from the time it occurs to the future, it ONLY allows to move revenue in proportion to the work done to the present.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 9:59 am

Quoting Finn350 (Reply 16):
Quoting mjoelnir (Reply 15):
Contract revenues and expenses are recognised by reference to the stage of completion of contract activity

Effectively this means that there is "deferred production cost" just as in Boeing's program accounting.

The reason Airbus uses contract accounting is to defer cost, there would be no point of using it to defer revenue.

To make it very simple for an avid Boeing fan boy desperately searching for Airbus doing something similar as Boeing with its program accounting for cost.

Example: Contract accounting. One early frame loss making, total cost 500 expected sales value 120 million. Production cost 300 million in 2014 and 200 million in 2015.
You have to book 300 million cost in 2014, you can book the corresponding part of the revenue 72 million. 2015 you book 200 million cost and 48 million revenue. At the sale of the asset, one frame, the corresponding cost have been booked.

Program for cost accounting same numbers, but you estimate average production cost at 100 million (example).
You defer 300 million cost in 2014 and write that to inventory. In 2015 you defer 100 million and write that to inventory. You recognize 100 million in cost, 120 million revenue and 20 million in profit. At the sale of the asset you have 400 million deferred cost booked in inventories, waiting for later sales.

If you can now tell me in what form those two ways to book cost and revenue are similar I am waiting for it dear Finn350.

best regards

Mjoelnir
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 10:19 am

Quoting mjoelnir (Reply 18):
If you can now tell me in what form those two ways to book cost and revenue are similar I am waiting for it dear Finn350.

According to IAS 11.30, the stage of completion to be determined by a method that reliably measures work performed.

You are using proportion of costs incurred to date to total estimated contract costs ("cost to cost" method). I believe Airbus is using completion of a physical portion of the total contract which leads to different cost recognition.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 11:23 am

Quoting Finn350 (Reply 19):
According to IAS 11.30, the stage of completion to be determined by a method that reliably measures work performed.

You are using proportion of costs incurred to date to total estimated contract costs ("cost to cost" method). I believe Airbus is using completion of a physical portion of the total contract which leads to different cost recognition.

But it does not lead to the possibility of moving cost incurred for example in 2014 to the year 2015. Cost has to be booked as they occur.
The point is, contract accounting is used to allocate revenue, you use cost or completion status or an other accepted measurement for the percentage of the expected revenue you can allocate.
If there is talk about allocating cost to a contract, you have to distinguish between cost you can allocate to the contract and for example cost you have to allocate to development.
There are no provisions for not booking cost and deferring it to a later date, only what you allocate to the contract or to other things.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 11:42 am

Quoting mjoelnir (Reply 20):

But it does not lead to the possibility of moving cost incurred for example in 2014 to the year 2015. Cost has to be booked as they occur.

IAS 11 allows deferring costs, see IAS 11.27

Quote:
A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be recovered. Such costs represent an amount due from the customer and are often classified as contract work in progress.

Airbus 2014 Financial Statement says following about gross amount due from customers:

Quote:
The gross amount due from customers for construction work amounts to € 3,828 million (in 2013 adjusted: € 4,690 million) and relates to construction contracts where incurred contract costs plus recognised profits less the sum of recognised losses exceed progress billings. Due to the nature of certain contracts and the respective recognition of revenues, these incurred costs also include associated work in progress and respective contract losses.

As I understand it, Airbus has recognized some costs as assets (effectively deferring them).
 
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 11:48 am

And here is an analyst writing:

Quote:
But the key takeaways from the event came in the form of Airbus’ announcements and commentary on accounting and production costs for the A350 program. First, for several early A350 deliveries, Airbus will be shifting from unit accounting to IAS 11 accounting, which uses average costs over an entire contract for aircraft deliveries. The change is mostly a minor cosmetic one (Boeing uses IAS 11 accounting for all of its aircraft programs over their lifetimes), but it will boost Airbus’ profits by about 600 million Euros in 2015 and 2016 at the expense of the same figures in 2017 and 2018. Airbus likely shifted the accounting in this manner as a subtle cover for lower than expected profitability and cash flows in 2015 and 2016 as noted earlier. Still, this is mostly a minor change.
http://airwaysnews.com/blog/2014/12/...duction-cut-mixed-signals-on-a380/

[Edited 2016-03-25 04:48:42]
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 12:42 pm

Quoting Finn350 (Reply 21):
Quoting Finn350 (Reply 23):

I see you try and try and try and on the way produce misunderstanding after misunderstanding.

First, any provision regarding the contract ends with the contract. Revenue is recognised as revenue, profit as profit, loss as loss.
You seem to be able to read without understanding the text.

Your quote:

Quoting Finn350 (Reply 21):
Quote:
A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be recovered. Such costs represent an amount due from the customer and are often classified as contract work in progress.

In plain English, it can only be recognised as an asset if it is recoverable inside the contract. The absolut limit is the expected revenue in the contract. Again where is the provision to defer cost? The cost is booked not deferred, you can book an asset connected to the amount of work done against the expected revenue. That is exactly the same as recognising part of the revenue, nothing new.

If analyst after analyst does not understand the difference between contract accounting and program for cost accounting one can only say that quite a few analysts are quite stupid.
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 1:18 pm

Quoting WIederling (Reply 12):
A more transparent solution would be to only push planned cost into the deferred bucket.
Anything beyond planned should be accounted as it "appears".

Some of that is accounted for as it appears, which is why Boeing has taken billions in write downs on the 787 program and close to a billion in write downs on the 747-8 program over the past decade.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 1:33 pm

We have differing understanding of IAS 11 and I don't see that can be reconcilded. There is no reason to continue this deany further.

Quoting mjoelnir (Reply 24):
If analyst after analyst does not understand the difference between contract accounting and program for cost accounting one can only say that quite a few analysts are quite stupid.

Program accounting covers the whole program, contract accounting covers individual contracts, but there is no fundamental difference between them.

IAS 11 mandates the stage of completion to be determined by a method that reliably measures work performed. Share of units delivered of the total units to be delivered (under program or contract) is such a method.

If the share of the costs incurred of the total estimated program or contract cost exceeds the stage of completion, the remaining costs can be capitalized as an asset due from customers to be recovered later (provided that the contract / program is expected to be profitable, if not then the loss has to be recognized immediately).

I don't see we are able to reconcile our different views on this matter.
 
tommy1808
Posts: 12887
Joined: Thu Nov 21, 2013 3:24 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 2:14 pm

Quoting Finn350 (Reply 26):
Program accounting covers the whole program, contract accounting covers individual contracts, but there is no fundamental difference between them.

Sorry, but they are drastically different. Under contract accounting no revenue will be booked that isn´t physically parked in the assembly facility. Under programm accounting you can book assumed distance future profits into todays balance sheet.

If there wasn´t a fundamental difference, both methods would be legal. But programm accounting is illegal unless you can gradfather the right to use it in in some (?) juristictions and was never legal in most.

best regards
Thomas
Well, there is prophecy in the bible after all: 2 Timothy 3:1-6
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 3:09 pm

Quoting Finn350 (Reply 26):
Program accounting covers the whole program, contract accounting covers individual contracts, but there is no fundamental difference between them.

I am quite astounded about your ideas.

Contract accounting is as different from program accounting as can be. It follows straight the unit accounting practices. It is furthermore rather about limitation than opening up ways to write cost to assets.

It was always possible under unit accounting to write work in progress to assets. You produce a wing, a MLG, fuselage and you can move that to assets. The hard limitation in contract accounting is the expected revenue.
You buy or produce a set of wings, it accounts for 25% of the worth of the frame, you can put it into assets for 25% of the expected revenue. If your expected revenue is 120 million you can book the wing for 30 million, not depending on its real cost, but depending on revenue. If the wing set, being the first production example, costs 70 million you make a 40 million loss, if the wing set is number 100 and costs 15 million, you can book a profit of 15 million as part of the expected revenue.

There is no deferral of cost whatsoever. Behind the booked asset is work done.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 3:10 pm

Quoting tommy1808 (Reply 27):
Sorry, but they are drastically different. Under contract accounting no revenue will be booked that isn´t physically parked in the assembly facility. Under programm accounting you can book assumed distance future profits into todays balance sheet.

The difference is that under program accounting you can defer costs to expected future contracts (orders) provided that the program is expected to be profitable. In contact accounting, you can defer costs only within existing contracts (orders) provided that the contracts are expected to be profitable.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 3:26 pm

Quoting Finn350 (Reply 29):
Quoting tommy1808 (Reply 27):
Sorry, but they are drastically different. Under contract accounting no revenue will be booked that isn´t physically parked in the assembly facility. Under programm accounting you can book assumed distance future profits into todays balance sheet.

The difference is that under program accounting you can defer costs to expected future contracts (orders) provided that the program is expected to be profitable. In contact accounting, you can defer costs only within existing contracts (orders) provided that the contracts are expected to be profitable.

Once again in contract accounting you do not defer cost, not one cent, you are aloud to recognize revenue in proportion to how far the contracted work has been finished.

In program accounting for cost the deferred cost has no physical recognisable value.

The asset in contract accounting is physical there, you can touch it.

Find an accountant and get it explained.

[Edited 2016-03-25 08:27:35]
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 3:37 pm

Quoting tommy1808 (Reply 27):
If there wasn´t a fundamental difference, both methods would be legal. But programm accounting is illegal unless you can gradfather the right to use it in in some (?) juristictions and was never legal in most.

Program accounting may be very rare now (Boeing is the only major US company to still use it), but it is certainly not illegal. It was commonly used by aerospace companies for decades and Boeing was actually an outlier in that they used unit accounting (like Airbus) up until 2003, so I would not consider that a "grandfathering".

I expect Boeing will eventually adopt "percentage of completion" accounting for their commercial airliner programs as it recognizes revenue from the project as it is moving along rather than only at the project's completion. This is the accounting method defense aerospace companies like Lockheed-Martin and Northrup have moved to in order to account for their defense programs or construction companies building major structures as they also have large, upfront costs attached to them.
 
tommy1808
Posts: 12887
Joined: Thu Nov 21, 2013 3:24 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 3:57 pm

Quoting Stitch (Reply 31):
so I would not consider that a "grandfathering".

iirc correctly you have to have been using it before march 15th 1993 to legally use it today. I would would consiered that grandfathering.

best regards
Thomas
Well, there is prophecy in the bible after all: 2 Timothy 3:1-6
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 4:16 pm

Let's take an example (with hypothetical round figures):

An airline orders 40 frames at $6 billion contract value or $150 million each frame paid upon delivery.

During Year 1,10 frames delivered at production cost of $200 million each, or $2 billion total.

During Year 2, 30 frames delivered at production cost of $100 million each, or $3 billion total.

Average revenue per unit is $150 million and average cost per unit is $5 billion / 40 frames = $125 million.

What is the revenue, cost, profit and liabilities change at the end of Year 1 and Year 2?

Under program accounting (assuming the unit revenue and cost present the whole accounting quantity), Year 1:
- revenue 10 x $150 million = $1.5 billion
- cost 10 x $125 million = $1.25 billion
- profit $1.5 billion - $1.25 billion = $250 million
- deferred production cost increase $2 billion (real cost) - $1.25 billion (average cost) = $750 million

And Year 2:
- revenue 30 x $150 million = $4.5 billion
- cost 30 x $125 million = $3.75 billion
- profit $4.5 billion - $3.75 billion = $750 million
- deferred production cost decrease $3 billion (real cost) - $3.75 billion (average cost) = -$750 million

Under contract accounting, when using cost-to-cost method, Year 1:
- revenue $2 billion / $5 billion x $6 billion = $2.4 billion (40% of completion)
- cost $2 billion
- profit $2.4 billion - $2 billion = $400 million
- assets due from customers increase $2.4 billion - $1.5 billion = $900 million

And Year 2:
- revenue $6 billion - $2.4 billion = $3.6 billion
- cost $5 billion - $2 billion = $3 billion
- profit $3.6 billion - $3 billion = $600 million
- assets due from customers decrease $3.6 billion - $4.5 billion = -$900 million

If anything, contract accounting based on cost-to-cost method inflates early profit compared to the program accounting in this example.

I don't understand what you mean by "The asset in contract accounting is physical there, you can touch it."

EDIT: And to add unit accounting perspective (Boeing discloses unit accounting, Airbus doesn't disclose as IAS 11 is perfectly "legal"):

Year 1:
- revenue $1.5 billion
- cost $2 billion
- loss -$500 million

Year 2:
- revenue $4.5 billion
- cost $3 billion
- profit $1.5 billion

[Edited 2016-03-25 09:56:00]
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 4:26 pm

Quoting Stitch (Reply 31):
Quoting tommy1808 (Reply 27):
If there wasn´t a fundamental difference, both methods would be legal. But programm accounting is illegal unless you can gradfather the right to use it in in some (?) juristictions and was never legal in most.

Program accounting may be very rare now (Boeing is the only major US company to still use it), but it is certainly not illegal. It was commonly used by aerospace companies for decades and Boeing was actually an outlier in that they used unit accounting (like Airbus) up until 2003, so I would not consider that a "grandfathering".

I expect Boeing will eventually adopt "percentage of completion" accounting for their commercial airliner programs as it recognizes revenue from the project as it is moving along rather than only at the project's completion. This is the accounting method defense aerospace companies like Lockheed-Martin and Northrup have moved to in order to account for their defense programs or construction companies building major structures as they also have large, upfront costs attached to them.

Program accounting is completely legal. There is no question about the right of Boeing using it. Boeing must have used it before 1993, otherwise they could not use it now. For people like me Boeing conveniently produces the unit accounting numbers too, being the only numbers I, and that is me, take seriously.
The point were I start getting irritated is, if people use Boeing program accounting numbers to compare it with Airbus unit accounting numbers, one should compare apples with apples.
The second point often done here is confusing cash flow with revenue stream or earnings. A company should produce profits and have an adequate cash flow. Cash flow tells us if a company is liquid, but profit or earnings defines ultimately the success of a company.
I do not expect Boeing to move away from program accounting before the 787 numbers have been equalized or accounting rules in the USA change.
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 5:00 pm

Quoting Finn350 (Reply 33):

You get it wrong right from the start.

Quote:

Under IAS 11, if a contract covers two or more assets, the construction of each asset should be accounted for separately if (a) separate proposals were submitted for each asset, (b) portions of the contract relating to each asset were negotiated separately, and (c) costs and revenues of each asset can be measured. Otherwise, the contract should be accounted for in its entirety.

You can definitively measure each asset, in this case a frame separately. So each frame is accounted by itself per definition.
Furthermore you can only assign cost in proportion to revenue. If in the first year the frames do cost 200 millions to build and expected revenue per frame is 150 million, you can only value the asset in relation to expected revenue. So you would have to declare a loss of 50 million per frame. In contract accounting you are not aloud to exceed expected revenue proportional to work done. So once again, no deferral of cost.

Stop your wild ideas, go to an certified accountant and get it explained.

Quoting Finn350 (Reply 33):
I don't understand what you mean by "The asset in contract accounting is physical there, you can touch it."

Perhaps you should think a little bit about it, perhaps the light will turn on.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 5:08 pm

Quoting mjoelnir (Reply 35):
You can definitively measure each asset, in this case a frame separately. So each frame is accounted by itself per definition.

Per your definition, there would be virtually no difference to unit accounting. Why then would they start using contract accounting for launch customer contracts? Think about that.
 
tommy1808
Posts: 12887
Joined: Thu Nov 21, 2013 3:24 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 5:35 pm

Quoting Finn350 (Reply 36):
Per your definition, there would be virtually no difference to unit accounting.

There is actually no difference at all if you look at the run time of the contract. Any difference that does show up, is because said contract may span over more than one business year.
But you still just show what you actually have in your pocket or on the assembly line.

Quoting Finn350 (Reply 36):
Why then would they start using contract accounting for launch customer contracts?

because over the run time of the project it leads to a *better* representation of the companys earnings during the ramp up phase.

Quoting Finn350 (Reply 36):
Think about that.

Done.

Quoting Finn350 (Reply 33):
I don't understand what you mean by "The asset in contract accounting is physical there, you can touch it."

Contract accounting: for every dime you show on your balance sheet, you either have a stack of money, or a piece of the aircraft you are currently building to fulfill that contact. Every dime you pull into an earlier earning report has already been earned (all contracts re asigned and binding).
I

Programm accounting: for every dime you show on your balance sheet, you either have a stack of money, a piece of an Aircraft or the realistic hope to make that money in the future. A good deal of the dimes you pull into an earlier earning statement are not earned yet.

Simple example:

Boeing sells a 787, Airbus sells an A350. Both spend 140 million building it. Both charge 120 Million for the frame. Both expect that building a frame will cost them an average of 100 Million over the project life time.

Airbus: 120 Million in Revenue, 140 million in cost, 20 million in losses

Boeing: 120 million in revenues, 100 million in cost, 20 million in profit (!), 40 million deferred production cost.

How can you even think for a moment that both methods are even remotely comparable, considering that the exact same business transaction yields a 20 million profit under one set of rules and a 20 million loss under an other?

best regards
Thomas
Well, there is prophecy in the bible after all: 2 Timothy 3:1-6
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 5:47 pm

Quoting Finn350 (Reply 36):
Quoting mjoelnir (Reply 35):
You can definitively measure each asset, in this case a frame separately. So each frame is accounted by itself per definition.

Per your definition, there would be virtually no difference to unit accounting. Why then would they start using contract accounting for launch customer contracts? Think about that.

Contract accounting is a part of unit cost accounting, so there is no principle difference. Contract accounting defines how you are able to recognise revenue during a contract until it is finished, it clarifies the rules.

The main difference contract accounting offers you is that you can recognise a profit before the contract ends. Usually if you do part of the work or buy parts for a contract, you recognise the assets, work in progress, in regards to the cost.
In contract accounting you recognise the assets in relation to expected revenue. You recognise profit or loss while you are producing instead of only at the end of the contract.

If we leave the realm of aerospace and look at building infrastructure it gets more clear.
Just an example: You build a road tunnel. Estimated build time about five years. It costs you to build 500 million and you get 120 million paid each year according to the work progress, if the work slows done you get less paid. The first year the work is going as planned, you spend 100 millions and have finished 20% of the contract. You book 100 million to cost, 120 million as revenue and book a 20 million profit.
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 6:07 pm

Quoting Stitch (Reply 25):
Some of that is accounted for as it appears, which is why Boeing has taken billions in write downs on the 787 program and close to a billion in write downs on the 747-8 program over the past decade.

Wasn't the write down for frames that against initial plans could not be sold?

Boeings initial planning IMU was to not have "prototypes" but deliverable pilot production.
Afair one of the prototypes was removed from the books via a $1b write down.

One reason to hold onto the terrible teens and not just salvage them for parts.
They present significant book value.
Afair one of the prototypes was removed from the books via a $1b write down.
The TTs should still be worth $3..400m.  
Murphy is an optimist
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 6:13 pm

Quoting WIederling (Reply 39):
Wasn't the write down for frames that against initial plans could not be sold?

Some of the 787's write downs were (the $2.5 billion for ZA001, ZA002 and ZA003). But the 787 program has wracked up other significant write downs unrelated to those NTUs. The 747-8 program has written down close to $2.6 billion, but not due to NTUs. Instead, like the non-NTU 787 costs, it has come about from having to buy out suppliers, contractual penalties, and additional R&D and testing to address design deficiencies in both families.

[Edited 2016-03-25 11:18:29]
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 6:29 pm

Quoting Stitch (Reply 31):
Program accounting may be very rare now (Boeing is the only major US company to still use it), but it is certainly not illegal. It was commonly used by aerospace companies for decades and Boeing was actually an outlier in that they used unit accounting (like Airbus) up until 2003, so I would not consider that a "grandfathering".

Hmm.
From
http://ii-sl.org/ii-sl/Programme_Accounting.html
begin cite:
Boeing’s History with Program Accounting

Boeing has used program accounting since the 1960’s. Boeing selects the program accounting quantity using conservative program assumptions of 3-5 years of sales. The program accounting quantity of the 747, 757, 767, 777, and 737 NG were all 400 airplanes.
:end cite
Murphy is an optimist
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 6:36 pm

Quoting Stitch (Reply 40):
it has come about from having to buy out suppliers,

A buy out comes with assets as substitute for outlay. No writedown.
Murphy is an optimist
 
User avatar
Stitch
Posts: 27090
Joined: Wed Jul 06, 2005 4:26 am

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 7:23 pm

Quoting Stitch (Reply 31):
Boeing was actually an outlier in that they used unit accounting (like Airbus) up until 2003, so I would not consider that a "grandfathering".
Quoting WIederling (Reply 41):
Boeing has used program accounting since the 1960’s.

Yeah that 2003 quote came from a Seeking Alpha article and it sounded flaky, but I was unable to confirm my suspicions until after the one hour editing window had closed.
 
Flaps
Posts: 1639
Joined: Sat Feb 05, 2000 1:11 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 7:30 pm

Nothing ruins a perfectly good aviation conversation like the discussion of accounting and finance.



  
 
WIederling
Posts: 9291
Joined: Sun Sep 13, 2015 2:15 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 8:36 pm

Quoting Flaps (Reply 44):

Hurr!

Quoting Stitch (Reply 43):
Yeah that 2003 quote came from a Seeking Alpha article and it sounded flaky,

No bother.

Seeking Alpha is flaky. No exception, no redemption. Funny that.
( has been referenced for other more than flaky analysis. ( probably doesn't go beyond the first 5 letters of analysis.)

Can we adapt the "you are what you eat" saying in a fitting way  
Murphy is an optimist
 
mjoelnir
Posts: 9391
Joined: Sun Feb 03, 2013 11:06 pm

RE: B787 Now Unit Production Cash-positive?

Fri Mar 25, 2016 10:08 pm

Quoting Flaps (Reply 44):
Nothing ruins a perfectly good aviation conversation like the discussion of accounting and finance.

This thread is about 787 accounting.
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Sat Mar 26, 2016 8:28 am

Quoting mjoelnir (Reply 35):
Boeing sells a 787, Airbus sells an A350. Both spend 140 million building it. Both charge 120 Million for the frame. Both expect that building a frame will cost them an average of 100 Million over the project life time.

Airbus: 120 Million in Revenue, 140 million in cost, 20 million in losses

Boeing: 120 million in revenues, 100 million in cost, 20 million in profit (!), 40 million deferred production cost.

This is not correct. In Airbus case you present "Unit accounting" perspective. However, for launch customers Airbus is using "Contract accounting", where the contract profit is shared evenly on all the frames of the contract.

The difference is that Boeing estimates the average profit per frame for the whole program (or more precisely, for the accounting quantity of the program), and Airbus estimates the average profit per frame for launch customer contracts, as I have already stated earlier.

It can be said that Airbus contract accounting is more conservative than Boeing program accounting, as program accounting is based on estimates on contracts (orders) to be signed in the future, whereas Airbus estimates are based on signed contracts. In both cases, costs are estimated based on expected production ramp-up efficiencies etc.
 
tommy1808
Posts: 12887
Joined: Thu Nov 21, 2013 3:24 pm

RE: B787 Now Unit Production Cash-positive?

Sat Mar 26, 2016 8:51 am

Quoting Finn350 (Reply 47):
In both cases, costs are estimated based on expected production ramp-up efficiencies etc.

Yeah.. and in one case your balance sheet is correct at all times, in the other it show's profit you may never have. The difference between both couldn't be any bigger.

And in contract accounting costs are not estimated, you book actual costs vs. actually created product value.

Programm accounting is accounting with estimated costs and estimated revenue. That is "accounting" straight out of the marketing brochure, and that is currently biting Boeing in the Butt. The 787 may very well become the most successful wide body Programm of all times in terms of qty, and yet may never make a dime in profit.

Best regards
Thomas
Well, there is prophecy in the bible after all: 2 Timothy 3:1-6
 
User avatar
Finn350
Posts: 1601
Joined: Tue Jul 09, 2013 4:57 am

RE: B787 Now Unit Production Cash-positive?

Sat Mar 26, 2016 9:07 am

Quoting tommy1808 (Reply 48):
And in contract accounting costs are not estimated, you book actual costs vs. actually created product value.

Even in contract accounting, the profit that ends up in the P&L statement is an estimate. That is due to the fact that the revenue that ends up in P&L is estimated based on percentage-of-completion, i.e. incurred costs divided by the estimated total costs of the contract (when using cost-to-cost method). The estimated total cost of the contract depends on the future expected ramp-up efficiency etc.

Popular Searches On Airliners.net

Top Photos of Last:   24 Hours  •  48 Hours  •  7 Days  •  30 Days  •  180 Days  •  365 Days  •  All Time

Military Aircraft Every type from fighters to helicopters from air forces around the globe

Classic Airliners Props and jets from the good old days

Flight Decks Views from inside the cockpit

Aircraft Cabins Passenger cabin shots showing seat arrangements as well as cargo aircraft interior

Cargo Aircraft Pictures of great freighter aircraft

Government Aircraft Aircraft flying government officials

Helicopters Our large helicopter section. Both military and civil versions

Blimps / Airships Everything from the Goodyear blimp to the Zeppelin

Night Photos Beautiful shots taken while the sun is below the horizon

Accidents Accident, incident and crash related photos

Air to Air Photos taken by airborne photographers of airborne aircraft

Special Paint Schemes Aircraft painted in beautiful and original liveries

Airport Overviews Airport overviews from the air or ground

Tails and Winglets Tail and Winglet closeups with beautiful airline logos