B787 Now Unit Production Cash-positive?

StTim · Sun Mar 27, 2016 8:50 pm

Quoting Finn350 (Reply 99):

Boeing believes that they are able to recover the deferred production cost and other items worth $32,400 million from the remaining 937 deliveries of the program accounting quantity of 1,300. That is an average profit of around $35 million per frame. If they didn't believe, they would have to book a reach-forward loss.

They would have two options. Increase the accounting block or take a forward loss, or of course some of both.

Who knows at this point - apart from Boeing.

Planesmart · Mon Mar 28, 2016 12:39 am

Quoting Finn350 (Reply 99):
Boeing believes that they are able to recover the deferred production cost and other items worth $32,400 million from the remaining 937 deliveries of the program accounting quantity of 1,300. That is an average profit of around $35 million per frame. If they didn't believe, they would have to book a reach-forward loss.

Which is part of the reason the SEC are asking questions.

mjoelnir · Mon Mar 28, 2016 1:19 am

Quoting Finn350 (Reply 99):
Work in process decreased by $626 million from $35,282 million to $34,656 million. In other words, there was a positive cash flow of around $18 million per frame delivered (this includes negative cash flow from production, as deferred production cost is part of work in process).

Boeing sold more frames than they produced in 2015. So a reduction of work in progress can just simple be early frames sold, rather than any single frame producing positive cash flow.

[Edited 2016-03-27 18:39:17]

Finn350 · Mon Mar 28, 2016 5:36 am

Quoting mjoelnir (Reply 102):
Boeing sold more frames than they produced in 2015. So a reduction of work in progress can just simple be early frames sold, rather than any single frame producing positive cash flow.

In 2015, Boeing had 71 net orders and 135 deliveries for the 787 program, so they actually sold less frames than they produced.

You probably tried to say that the number of frames under production reduced, and this was one of the reasons that led to reduction in work in process and contributed to the positive cash flow.

speedbored · Mon Mar 28, 2016 8:41 am

Quoting spacecookie (Reply 85):
I still don't know if they gain or loose money with the 787

Quoting Finn350 (Reply 88):
So the answer is no, yes or maybe.

Personally, I think the answer is probably: Yes, No andMaybe.

It all depends on exactly what you mean by "money", and what you mean by "gain or lose".

If by "money", you mean "cash" then, as of the end of 2015 (the last complete reporting period), Boeing were still losing money on each individual frame produced (unit production), but gaining money on the program (on a month-month basis), mainly due to factors such as reduced supplier advances, increased customer advances, and reductions in "inventory" (such as sales of early frames that needed lots of rework).

If by "money", you mean "profit" then, again as of the end of 2015, Boeing were still making a profit on each individual frame produced (though entirely due to program accounting allowing excess costs to be deferred) but were still making a program loss (on a month-month basis) due to those deferred costs. They are a very long way from making a profit on the program as a whole (15-20 years, or more, would be my guess, if we include development costs - though I would not be at all surprised if the program never hits break-even).

Quoting Finn350 (Reply 99):
That is an average profit of around $35 million per frame. If they didn't believe, they would have to book a reach-forward loss.

I struggle to see how Boeing can possibly genuinely believe that that sort of average profit per frame is even remotely likely now. Given the current list price of ~$250m, average sales prices must currently be ~$140 - $160m, maybe even lower due to the sales pressures from the A330neo and A350. At those prices, Boeing would need to be making an average margin of ~20-25%, which seems unlikely, especially when you factor in the fact that the majority of the current backlog was sold at very significantly lower list prices, and that they are currently only close to break-even on unit production.

WIederling · Mon Mar 28, 2016 8:49 am

Quoting Finn350 (Reply 99):
That is an average profit of around $35 million per frame. If they didn't believe, they would have to book a reach-forward loss.

See that in scope of zero real profit at the moment,
( IMU the next stepping stone is when they reach cost + averaged profits.)
gains from production scaling probably realized to a large part
and a bit of learning curve applied:

To the end per item profits must go beyond 1.5.. 2. times the computed for the future average ( $35m):
$50..70m per item delivered if not a tad more even.

What price are 787 sold today?

scotron11 · Mon Mar 28, 2016 9:39 am

Quoting WIederling (Reply 105):
What price are 787 sold today?

Seems Boeing can sell one for $19.99.....and still make a profit!!!

Flyglobal · Mon Mar 28, 2016 1:39 pm

The only thing I will do for my reference is to check Boeing's 1st quarter results 2016.

I will simply check the deferred cost section and will see if it is added or reduced.

Added deferred cost: Not 'positive' yet
Reduced deferred cost: now 'positrive'

If it is enough to reduce it to 0 within the accounting block may cause us another 10 emotional threads then (per month, week?) which I will kook forward to then.

Flyglobal

morrisond · Mon Mar 28, 2016 2:17 pm

What was the size of the original accounting block?

600 Frames? How many have they now produced?

It seems ludicrous that they can keep extending the size of the block.

StTim · Mon Mar 28, 2016 3:30 pm

Quoting morrisond (Reply 108):
It seems ludicrous that they can keep extending the size of the block.

Not really - they will keep it in line with the sales/expected sales.

WIederling · Mon Mar 28, 2016 4:24 pm

Quoting morrisond (Reply 108):
What was the size of the original accounting block?
600 Frames? How many have they now produced?

No idea. For all previous projects the accounting block was initially set to 400.

What google finds ( where did they put the options for selecting a date range? ) :
"Boeing initially set the 787 accounting block at 1,100 units when it began deliveries in 2011. It increased the accounting block to 1,300 in late ..."

Then we have:
Lately there has been much discussion in the media about what would be the Boeing’s “accounting block” size (finally it was announced to be 1,100 aircraft units).
via:
http://theblogbyjavier.com/2011/10/28/will-boeing-787-ever-break-even/

speedbored · Mon Mar 28, 2016 4:50 pm

Quoting WIederling (Reply 110):
where did they put the options for selecting a date range?

Click on "Search Tools"

mjoelnir · Mon Mar 28, 2016 5:33 pm

Quoting WIederling (Reply 110):
Then we have:
Lately there has been much discussion in the media about what would be the Boeing’s “accounting block” size (finally it was announced to be 1,100 aircraft units).
via:
http://theblogbyjavier.com/2011/10/28/will-boeing-787-ever-break-even/

gruesome reading that analysis from 2011. The most likely scenario was break even, excluding development cost, in 2046 after production of 3,650 units. He used the cost learning curve of the 777, 84%, and predicted deferred cost topping out at somewhere slightly above 25 billion USD in about 2016.
Boeing at that time predicted a learning curve of 75% producing much rosier numbers.
The real numbers have past his prediction on the bad side.

Boeing has last year produced the 120 frames a year his prediction is based upon. With production of 135 frames this year and 145 frames the next years, Boeing can perhaps turn this around, but will it be possible to sell 4000 to 5000 frames of the 787?

scotron11 · Mon Mar 28, 2016 10:23 pm

Quoting mjoelnir (Reply 112):
Boeing has last year produced the 120 frames a year his prediction is based upon. With production of 135 frames this year and 145 frames the next years, Boeing can perhaps turn this around, but will it be possible to sell 4000 to 5000 frames of the 787?

Gruesome reading indeed! I can understand why the SEC would be having a looksee at what is going on at Boeing and their 787 scenario.........scary!

justloveplanes · Tue Mar 29, 2016 12:21 am

Quoting WIederling (Reply 110):
No idea. For all previous projects the accounting block was initially set to 400.

You can't set the accounting block lower than the amount of frame sold. Impossible. That's why it was over 400. Accounting block is a prediction of sales and is not related to other metrics like margins, break even, etc. Its for amortizing program accounting costs.

The airplane had 800 sales or so booked before delivery in 2011, so it had to be at least that. One would think there should be at least a year of predicted sales over the current sales, which seems to be Boeing's current practice.

My guess is Boeing has some longstanding rules and those account for the extra 250 frames or so. perhaps the average sales at delivery for 777, 767, 757, etc are about 150. 400-150 = 250 ish and that's the number they added to the 800 plus frames at delivery time to set the accounting block at 1100.

mjoelnir · Tue Mar 29, 2016 3:58 pm

Quoting justloveplanes (Reply 114):
You can't set the accounting block lower than the amount of frame sold. Impossible.

There is no lower limit. Nothing hinders setting a lower accounting block than expected sales or already received orders.

WIederling · Tue Mar 29, 2016 4:34 pm

Quoting mjoelnir (Reply 115):

The "hard" limit is on the other end. you can't extend the accounting block beyond expectable sales.
( i.e. that specific lack pushes the 748 into forward loss. But anything else seems to really tax what
the limits."hardness" )

Finn350 · Tue Mar 29, 2016 5:11 pm

Quoting mjoelnir (Reply 115):

There is no lower limit. Nothing hinders setting a lower accounting block than expected sales or already received orders.

I looked at US GAAP guidance on Program Accounting, and there is (at least) one condition that effectively requires the program accounting quantity exceed sales of the program:

Quote:
At the beginning of a program, the enterprise will have obtained firm contracts for units of the product that will not, by themselves, recover the costs of the initial and early production effort.

Source: http://www.ifrs.org/Meetings/Meeting...nition/RevED/RR-0611310102b04B.pdf

In other words, you cannot use program accounting if your current orders are enough to make the program profitable. On the other hand, you cannot start program accounting in a forward loss position either, so in effect the accounting quantity has to be greater than received orders.

speedbored · Tue Mar 29, 2016 6:00 pm

Quoting mjoelnir (Reply 115):
There is no lower limit. Nothing hinders setting a lower accounting block than expected sales or already received orders.

That is my understanding too. I can't see any logical reason why it should not be possible to switch from program accounting to unit accounting once you get to the end of the current block, or even at any time before that, as long as you declare a forward loss for any outstanding deferred costs. It probably even makes sense to do so once the deferred costs have reduced to an insignificant amount, as it simplifies the required accounting effort.

Quoting Finn350 (Reply 117):
In other words, you cannot use program accounting if your current orders are enough to make the program profitable. On the other hand, you cannot start program accounting in a forward loss position either, so in effect the accounting quantity has to be greater than received orders.

Surely, if your current orders are not enough to make your program profitable then you are currently in a forward loss position? If both of these statements were true then it would only ever be possible to start program accounting when you have zero orders and have not yet incurred any costs.

My reading of the document that you linked is that you can only use program accounting if you have some "firm contracts for units of the product that will not, by themselves, recover the costs of the initial and early production effort", but I see nothing that excludes the possibility of also already having other orders that would allow you to recover those costs.

I also see nothing that says that you can't start program accounting from a forward loss position. Given that most new aircraft programs begin with launch orders that are almost always loss making, I suspect that it is probably actually normal to do so.

Finn350 · Tue Mar 29, 2016 6:11 pm

Quoting speedbored (Reply 118):
My reading of the document that you linked is that you can only use program accounting if you have some "firm contracts for units of the product that will not, by themselves, recover the costs of the initial and early production effort", but I see nothing that excludes the possibility of also already having other orders that would allow you to recover those costs.

If you would be able to set up program accounting quantity lower than orders, you would end up in a situation where you included contracts you have only partially into program accounting calculation and ignore rest of contracts (or part of contracts). As far as I can understand that is not the way program accounting is supposed to be handled.

Quoting speedbored (Reply 118):
I also see nothing that says that you can't start program accounting from a forward loss position. Given that most new aircraft programs begin with launch orders that are almost always loss making, I suspect that it is probably actually normal to do so.

As far as I can see, this paragraph prevents starting from a forwad-loss position:

Quote:
The enterprise can demonstrate an estimated demand for its product, expressed by customers, in a number of units, or a range of the number of units, that will recover costs to be incurred under the program.

[Edited 2016-03-29 11:17:06]

Planesmart · Tue Mar 29, 2016 6:52 pm

In a 'perfect' world, there would be a 788 block which included all 787 family deferred costs. Then, with the launch of the 789, there would be a new 789 block, with 789 specific deferred costs, plus a transfer of shared 787 family deferred costs from the 788 block. And so on, for the 787-10. Plus top-ups for future developments.

Very messy.

You can dress up program accounting any way you like, but it's legalised tax smoothing, for the benefit of the corporate / cost of other tax payers. A subsidy.

I'm sure the magnitude of the deferred costs in this project, are at levels never seen in the USA before (or anywhere), and are making authorities nervous, and probably the Boeing board too.

I think it likely, that either the authorities, the Boeing board, or both, may impose (or already have imposed) a program accounting deferred costs cap, either informally (not disclosed to the market), or formally, on the specific project.

Given every current commercial project will be carrying (787, 748) or increasing (777, 787, 737) deferred costs, it's not beyond the realms of possibility a cap has been applied to the entire commercial division.

justloveplanes · Tue Mar 29, 2016 6:58 pm

Quoting mjoelnir (Reply 115):
There is no lower limit. Nothing hinders setting a lower accounting block than expected sales or already received orders.

Why would anyone do that? It renders the program accounting method meaningless if you are not accounting for the program.

speedbored · Tue Mar 29, 2016 8:10 pm

Quoting Finn350 (Reply 119):
As far as I can see, this paragraph prevents starting from a forward-loss position:
Quote:
The enterprise can demonstrate an estimated demand for its product, expressed by customers, in a number of units, or a range of the number of units, that will recover costs to be incurred under the program.

I'm not sure that it does. Prior to actually using program accounting, estimated demand, no matter how likely, doesn't count when looking at whether or not the program is currently in a forward loss position.

That is one of the major benefits of using program accounting - it allows you to spread a forward loss out of existence by adding in those orders.

Quoting justloveplanes (Reply 121):
Why would anyone do that? It renders the program accounting method meaningless if you are not accounting for the program.

"Program accounting" is a bit of a misnomer - it's not the same as "Accounting for the program". It is just one of the options available to accountants to maximise shareholder value, as and when they think it will do so.

Given that program accounting adds significant complexity to the accounting, why would they not switch if the benefits of using program accounting have reduced such that they no longer outweigh the drawbacks? There could also be significant tax advantages, in relation to the timing of tax breaks (and not necessarily just ones related to the program), from taking a one-off hit of the remaining deferred expenses at the right point in time.

Stitch · Tue Mar 29, 2016 9:58 pm

Quoting morrisond (Reply 108):
What was the size of the original accounting block?

1100 units

Quoting WIederling (Reply 110):
No idea. For all previous projects the accounting block was initially set to 400.

The 737NG's was 800 due to the 1997 production melt-down.

The 777 started at 400, as I recall, but was quickly raised first to 500 and then 600 to reflect production issues (partly from 1997).

Quoting morrisond (Reply 108):
It seems ludicrous that they can keep extending the size of the block.

They are required to extend it if they add firm sales that push the total number of orders beyond the existing accounting block.

[Edited 2016-03-29 15:58:22]

scotron11 · Wed Mar 30, 2016 12:05 am

Quoting Stitch (Reply 123):
They are required to extend it if they add firm sales that push the total number of orders beyond the existing accounting block.

Smells a little like bullshit to me...and they get away with it!

enzo011 · Wed Mar 30, 2016 8:42 am

Quoting scotron11 (Reply 124):
Smells a little like bullshit to me...and they get away with it!

They have booked profits when they were in fact making losses. In the future when they are making huge profits they will book the losses from the past. As we have seen with discussions here its all mumbo jumbo for most of us and we rely on the bottom line, which is a fabrication. So, yeah...I guess you are right that it is bullshit at the end of the day.

Stitch · Wed Mar 30, 2016 1:30 pm

Quoting Stitch (Reply 123):
They are required to extend it if they add firm sales that push the total number of orders beyond the existing accounting block.

Quoting scotron11 (Reply 124):
Smells a little like bullshit to me...and they get away with it!

Why is it bullshit? Program Accounting is based on spreading the costs across the number of airframes sold. So if Boeing sells more airframes, they are required to increase the accounting block to reflect that.

The other option is to allow Boeing to set a ridiculously large artificial accounting block size at the start to account for every possible frame they think they could sell. So they could have started the 787 at, say, 3300 units instead of 1100 and each frame delivered so far would be showing a seriously nice profit. An added benefit would be that Boeing could just shift all the program costs off the books until the last 787 rolls off the assembly line in a couple of decades and then "clean up the books" then by taking a charge for whatever was left.

That would be my idea of bullshit.

scotron11 · Wed Mar 30, 2016 2:11 pm

Quoting Stitch (Reply 126):
Why is it bullshit? Program Accounting is based on spreading the costs across the number of airframes sold. So if Boeing sells more airframes, they are required to increase the accounting block to reflect that.

Im no accountant....but just seems to me that they can shift the goalposts to suit their objective....hiding a lot of red ink. Many analysts are happy that the 787 series will generate huge cash flow, they don't care a hoot on the deferred costs. And estimates do vary on the amount of frames Boeing needs to sell to see any real profit from the 787 series, if ever.

mjoelnir · Wed Mar 30, 2016 2:35 pm

Quoting Stitch (Reply 126):
Why is it bullshit? Program Accounting is based on spreading the costs across the number of airframes sold. So if Boeing sells more airframes, they are required to increase the accounting block to reflect that.

www.ifrs.org/Meetings/MeetingDocs/IA...nition/RevED/RR-0611310102b04B.pdf

There are no hard rules to program accounting. The rules were taken together in a draft SOP and never codified. There are some parts of the draft rules you can hardly expect to apply for civil airliner production, like (e) to not need to expect competition having influence on the sales price during the run of the program.
The real conditions are only regarding declaring forward loss and that should be when the deferred cost should not be recoverable in the used accounting block. That point is also not codified, but you will get the SEC on your neck if your projections get to optimistic.

The only aim of the program accounting for cost is the ability to move cost into the future and profits into the present, to smooth out the earnings over the run of that products production time. The aim of program accounting for cost is not to provide a tool to account for the profitability of the program, to measure when frame break even occurs or when production break even occurs. All of that you can possible infer, but that is not the objective.

The SEC will not react when you choose the accounting block to small, or not extend it when you sell more frames, or stop to use program accounting when the deferred cost are getting manageable for a unit cost view. Or move in any other way nearer to unit cost accounting, the standard accounting practice.

racercoup · Wed Mar 30, 2016 2:52 pm

Dehierin breaks in down nicely in a recent post:

The bad - "Up to and including Q4 2015 Boeing delivered 363 airframes. If we were to express the deferred costs on a unit basis it means that on average each Boeing 787 bled about $89 mln in cash."

The not so bad - "Currently the accounting block is 1300 units. Out of these 1300, 363 airframes already have been delivered to customers. This leaves 937 airframes in the accounting block to recoup all costs. If we translate this to a unit basis, each Dreamliner that rolls out of the factory now has to draw a $34.6 mln profit.

This is quite a task given that just like cutting costs, ramping up profit is an incremental process. This means that Boeing has to draw profits in excess of $34.6 mln on later airframes to compensate for lower profits on earlier profitable deliveries."

The good - Deliveries through Q4 2015 were mostly 787-8's the least profitable model. Starting in Q1 2016 that changes as the balance of the order book indicates more deliveries will be 787-9's and 787-10's. I find it entirely reasonable for Boeing to have paid off the $32 billion over the first 1,300 units.

Those 4,500 layoffs weren't janitors.

speedbored · Wed Mar 30, 2016 3:23 pm

Quoting Stitch (Reply 126):
So if Boeing sells more airframes, they are required to increase the accounting block to reflect that.

I'd be very interested to hear what it is that makes you think that. Nothing official that I have seen suggests that there is any requirement to increase the accounting block at any time, or for any reason. As far as I can determine, it is simply a choice that Boeing are making.

If anything, some of the wording in the draft SOP suggests that the intention might be that you make your initial estimates and stick to them until the block ends - e.g. "during the estimated production period for the program accounting quantity".

But, as mjoelnir says:

Quoting mjoelnir (Reply 128):
There are no hard rules to program accounting.

and the various statements and draft rules that are available are all pretty vague, and open to interpretation. So it is mostly down to what you can convince your auditors to accept

scotron11 · Wed Mar 30, 2016 3:31 pm

Quoting racercoup (Reply 129):
The good - Deliveries through Q4 2015 were mostly 787-8's the least profitable model. Starting in Q1 2016 that changes as the balance of the order book indicates more deliveries will be 787-9's and 787-10's. I find it entirely reasonable for Boeing to have paid off the $32 billion over the first 1,300 units.

Those 4,500 layoffs weren't janitors.

Fingers crossed then! A whole load of uncertainties on the assumption that Boeing will eliminate the $32Billion deferred costs......many analysts are predicting a "loss" even if they sell over 2000

moo · Wed Mar 30, 2016 3:38 pm

Quoting Stitch (Reply 126):
Why is it bullshit? Program Accounting is based on spreading the costs across the number of airframes sold. So if Boeing sells more airframes, they are required to increase the accounting block to reflect that.

The other option is to allow Boeing to set a ridiculously large artificial accounting block size at the start to account for every possible frame they think they could sell. So they could have started the 787 at, say, 3300 units instead of 1100 and each frame delivered so far would be showing a seriously nice profit. An added benefit would be that Boeing could just shift all the program costs off the books until the last 787 rolls off the assembly line in a couple of decades and then "clean up the books" then by taking a charge for whatever was left.

Why dont we just drop the accounting fiction that an investment doesn't require immediate debt if the forecast sales are good enough?

Companies should be required to literally say "this investment cost us $X, and we chipped off $y of that debt in the most recent financial year - at our current production rates, the investment will be paying off in 5 financial years".

The debt exists, it shouldn't be subjected to some fictional accounting practice that magics it away until some mystical point in the future. I have no problem with not all excess income from a delivery going to paying down the debt, so long as this is said - "we delivered X aircraft this year each with excess income, of which we used $Y to pay down the investment, and $Z for other things". Still works.

Stitch · Wed Mar 30, 2016 3:58 pm

Quoting scotron11 (Reply 127):
Im no accountant....but just seems to me that they can shift the goalposts to suit their objective....hiding a lot of red ink.

They can't - see below.

Quoting mjoelnir (Reply 128):
The SEC will not react when you choose the accounting block to small, or not extend it when you sell more frames, or stop to use program accounting when the deferred cost are getting manageable for a unit cost view.

But the SEC will react if they believe you choose to set the accounting block too high - witness their current investigation into the 787 and 747-8 programs.

So in answer to your comment, scotron11, Boeing could not "set the goalposts" for the 787 to whatever they wanted in order to "cover" the programs current costs.

Quoting speedbored (Reply 130):
I'd be very interested to hear what it is that makes you think that. Nothing official that I have seen suggests that there is any requirement to increase the accounting block at any time, or for any reason. As far as I can determine, it is simply a choice that Boeing are making.

Boeing's own Accounting Guidelines state why they do it - it's based (in part) on actual firm sales to date. So as that total rises, so does the accounting block.

Not doing so would also defeat the main purpose of using Program Accounting as Boeing would have to declare a forward loss once they reached the number of deliveries (1100 in the case of the 787) should they not have recorded sufficient revenue to cover the costs. And if Boeing has sold more than 1100 frames, there is a risk (probably a real risk) that the costs for those frames beyond 1100 might be more than Boeing has received for the 1100 frames they have delivered - hence triggering a forward loss, even if overall the program is tracking profitably (projected revenues from those 200 frames would be more than the production cost).

kaitak · Wed Mar 30, 2016 4:12 pm

(Please delete - posted in the wrong thread. Copied over to production thread).

[Edited 2016-03-30 09:15:07]

mjoelnir · Wed Mar 30, 2016 5:23 pm

Quoting Stitch (Reply 133):
Not doing so would also defeat the main purpose of using Program Accounting as Boeing would have to declare a forward loss once they reached the number of deliveries (1100 in the case of the 787) should they not have recorded sufficient revenue to cover the costs. And if Boeing has sold more than 1100 frames, there is a risk (probably a real risk) that the costs for those frames beyond 1100 might be more than Boeing has received for the 1100 frames they have delivered - hence triggering a forward loss, even if overall the program is tracking profitably (projected revenues from those 200 frames would be more than the production cost).

But if the judgment was right at the time the number for the block was set at the beginning of the production run, that size of the accounting block should have been enough to return the deferred cost. Having to increase the accounting block to remove the risk of having to declare a forward loss, proves that the initial numbers were too optimistic.

roseflyer · Wed Mar 30, 2016 5:40 pm

Quoting mjoelnir (Reply 135):

But if the judgment was right at the time the number for the block was set at the beginning of the production run, that size of the accounting block should have been enough to return the deferred cost. Having to increase the accounting block to remove the risk of having to declare a forward loss, proves that the initial numbers were too optimistic.

I don't think anyone projected 787 development costs to be as high as they were. They obviously were wrong when the original accounting block was set for what development costs would be. If they knew how much the total development would have cost, they would never have sold planes as cheaply as they did. There is no expectation that they would correctly forecast how many planes would be produced over the life of production at program launch or even at first delivery.

tortugamon · Wed Mar 30, 2016 5:43 pm

Quoting StTim (Reply 98):
I hope to have an enquiring but critical mind. I don't just accept what is poated.

So lets debate those points instead of people's motivations. Its more interesting that way.

Quoting mjoelnir (Reply 135):
Having to increase the accounting block to remove the risk of having to declare a forward loss, proves that the initial numbers were too optimistic.

Increasing an accounting block isn't done so that you can prevent a forward loss; its done because the investment has increased in cost and the number of aircraft that are expected to be reasonably sold also shifted with that investment so the accounting block is shifted.

tortugamon

roseflyer · Wed Mar 30, 2016 5:47 pm

Quoting tortugamon (Reply 137):
Increasing an accounting block isn't done so that you can prevent a forward loss; its done because the investment has increased in cost and the number of aircraft that are expected to be reasonably sold also shifted with that investment so the accounting block is shifted.

When the accounting block was first set, there was a 787-3 in development instead of a 787-10. The product, design and production costs and projected sales have all changed.

StTim · Wed Mar 30, 2016 5:49 pm

Quoting tortugamon (Reply 137):
Increasing an accounting block isn't done so that you can prevent a forward loss; its done because the investment has increased in cost and the number of aircraft that are expected to be reasonably sold also shifted with that investment so the accounting block is shifted.

I do not think it has anything to do with increased investment. It is all to do with sales - and reasonably forseen sales. That orders have been a little thin recently (for all wide bodies really and no specific dig at the 787) then the scope to increase the block size is limited at the moment.

I do remember reading that Boeing continued to raise the accounting block on the 777 as sales increased. I wonder if they will incorporate the 777X into the overall 777 block or create a new one for it.

So many questions, so little real facts.

Stitch · Wed Mar 30, 2016 5:55 pm

Quoting mjoelnir (Reply 135):
But if the judgment was right at the time the number for the block was set at the beginning of the production run, that size of the accounting block should have been enough to return the deferred cost. Having to increase the accounting block to remove the risk of having to declare a forward loss, proves that the initial numbers were too optimistic.

In general I am in agreement with that view, however we should take into account that at the time the 787 Accounting Block was set, the program had secured close to 1000 gross orders (at one time) so setting it to 1100 as opposed to a lower number was not necessarily an incorrect move as there was clearly strong demand for the family represented by the market.

Now if the program's gross orders had been, say, 500, then I agree a 1100 frame initial AB could very well have been viewed as overly optimistic on Boeing's part.

Then again, the 707, 727, 737, 747, 757, 767 and 777 have all secured north of 1000 orders so even if the current gross order book had been 500, Boeing probably could have reasonably said the 787 would also be a 1000+ frame program and justified to the market and investors a 1100 unit IAB.

Finn350 · Wed Mar 30, 2016 5:56 pm

Here are the program accounting quantities (a.k.a acconting blocks) from Boeing's latest financial report:

For each program -
- Program accounting quantity
- Undelivered units under firm orders
- Cumulative firm orders

737
- 8,400
- 4,392
- 10,105

747
- 1,574
- 20
- 1,539

767
- 1,147
- 80
- 1,163

777
- 1,650
- 218
- 1,579

777X
- The accounting quantity for the 777X will be determined in the year of first airplane delivery, targeted for 2020.
- 306
- 306

787
- 1,300
- 779
- 1,142

Source: http://www.sec.gov/Archives/edgar/da...01292716000099/a201512dec3110k.htm

As can be seen, in some programs (737, 767) firm orders exceed program accounting quantities. According to Boeing filing, the determination of the accounting quantity is limited by the ability to make reasonably dependable estimates of the revenue and cost of existing and anticipated contracts.

EDIT: Further to note, accounting quantity matters most for those program that have deferred production cost, that is 747 and 787. Other programs don't have deferred production cost and are profitable.

[Edited 2016-03-30 11:12:30]

speedbored · Wed Mar 30, 2016 5:59 pm

Quoting roseflyer (Reply 136):
I don't think anyone projected 787 development costs to be as high as they were. They obviously were wrong when the original accounting block was set for what development costs would be.

program accounting has nothing to do with development costs. Those are accounted for independently of the program accounting block, which is all to do with production costs.

Quoting roseflyer (Reply 136):
There is no expectation that they would correctly forecast how many planes would be produced over the life of production at program launch or even at first delivery.

Not only is there an expectation, it is actually a requirement of being able to start using program accounting in the first place:
"The enterprise is able to make reasonably dependable estimates of the number of, or range of numbers of, units to be produced and sold, the length of time to produce and sell them, and their associated production costs and selling prices"

Quoting tortugamon (Reply 137):
Increasing an accounting block isn't done so that you can prevent a forward loss; its done because the investment has increased in cost and the number of aircraft that are expected to be reasonably sold also shifted with that investment so the accounting block is shifted.

As far as I can tell, the only real reason for there to be any need to change the accounting block is because management got their estimates very badly wrong in the first place. To have to change the accounting block more than once really ought to be taken as a bad sign.

The difficulty that Boeing have with estimating things anywhere near correctly now is that they have extended the accounting block to be far longer (~10 years) than the 3-5 years that program accounting was really intended to be used for. My understanding is that this is one of the particular aspects of the 787 program accounting that the SEC are investigating.

roseflyer · Wed Mar 30, 2016 6:02 pm

Quoting speedbored (Reply 142):
Not only is there an expectation, it is actually a requirement of being able to start using program accounting in the first place:
"The enterprise is able to make reasonably dependable estimates of the number of, or range of numbers of, units to be produced and sold, the length of time to produce and sell them, and their associated production costs and selling prices"

I believe it is a requirement that they build at least as many airplanes as estimated.

Planesmart · Wed Mar 30, 2016 6:41 pm

Quoting Finn350 (Reply 141):
Further to note, accounting quantity matters most for those program that have deferred production cost, that is 747 and 787. Other programs don't have deferred production cost and are profitable.

777X has deferred production cost. Where from Boeing documents do you obtain the information the 737 has no deferred costs? Historically yes. Currently?

Finn350 · Wed Mar 30, 2016 6:48 pm

Quoting Planesmart (Reply 144):
777X has deferred production cost. Where from Boeing documents do you obtain the information the 737 has no deferred costs? Historically yes. Currently?

777X couldn't possibly have deferred production cost as it is not in production (it is in development and has development cost only, and development cost is written off straight away).

Boeing has to disclose all the deferred production cost in their annual and quarterly filings. Currently, there is deferred production cost in the 747 and 787 programs only, as you can verify by looking at the source I provided. Of course, all the programs have started the production at loss, and that really is the point of program accounting.

[Edited 2016-03-30 11:51:10]

Stitch · Wed Mar 30, 2016 7:35 pm

Quoting Planesmart (Reply 144):
Where from Boeing documents do you obtain the information the 737 has no deferred costs? Historically yes. Currently?

The 737 should not start to generate them until the MAX goes into production. Speculation from some of the more optimistic financial analysts is the MAX could have an initial accounting block as low as 250 (they believe Boeing can recover said costs with that many deliveries).

Finn350 · Wed Mar 30, 2016 7:43 pm

Quoting Stitch (Reply 146):
The 737 should not start to generate them until the MAX goes into production. Speculation from some of the more optimistic financial analysts is the MAX could have an initial accounting block as low as 250 (they believe Boeing can recover said costs with that many deliveries).

Based on 2015 10-K (see link previously), 737MAX will not have a separate accounting quantity. It is all combined into current 737 program.

Stitch · Wed Mar 30, 2016 9:12 pm

Quoting Finn350 (Reply 147):
Based on 2015 10-K (see link previously), 737MAX will not have a separate accounting quantity. It is all combined into current 737 program.

I would think Boeing should still have one internally to track the costs of the program. For example, the 747-8 is counted as part of the 747 program on the 10-K, but Boeing has been required to report over $2.5 billion in losses on the program and is currently being investigated by the SEC over that frame's current accounting block being too optimistic based on market analyst's belief of the true demand for the family.

Planesmart · Thu Mar 31, 2016 9:58 am

Quoting Finn350 (Reply 145):
777X couldn't possibly have deferred production cost as it is not in production (it is in development and has development cost only, and development cost is written off straight away).

So zero deferred production costs until model production starts? Surely deferred production costs include tooling, testing equipment, training, etc for which commitments are being entered into now, and progress payments made, in relation to the 777X and 737MAX projects. If they don't appear as such, then presumably treated for now as development costs, and then written back as deferred production costs when production actually starts.

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