Thursday, February 11, 2016

Boeing Flunks Accounting 110

Accounting is a confusing subject but not a difficult one, once a student can determine the rules. Evidently, Boeing accountants are asked if they are confused and are having difficulty following the rules by the SEC. It is important that an accountant knows if plant improvements, tools and technology are sunk costs or are expenses directly applied to a project such as the 787. An accountant can assign plant improvements with long term costs written-off over years through an asset type program accounting system rather than writing it off against as a program expense during the course of the 787 program.

Boeing accounting class 110 homework example:


However, the 787 program has slammed into rough financial air as the SEC is frowning over Boeing's sophomoric attempts of classifying its balance sheets and Income statements using a liberal application for discerning what is a program related cost for producing a 787 or 747 or the actual cost of building a plant or facility for that end. Either way the process of recognizing cost has a tremendous effect on company profitability upfront or pushing it to the back-end of an accounting cycle. 

Assigning cost concurrent with a program will demonstrate immediately when an aircraft will reach profitability, and in how many units. Currently Boeing has about 28.5 to 30 billion in deferred cost against the 787, which does not affect its profit/loss line from the questioned programs. The 747 program also has a deferral of costs causing the SEC some questions about how Boeing does its accounting. The stock market reacted in a downward spiral for Boeing shareholders from these accounting questions today, as reported in the news by various sources.

Is plant improvement becomes an asset driven item subject to depreciation rather assigned against a particular cost of production for an airplane type? The SEC will soon determine what Boeing has cooked up in its books for stockholders.

The question of Boeing accounting has sent the stocks tumbling today. It should be made clear Boeing stock should fairly represents the affected programs questioned in this manner, and "no change" will be made to the book or where a "no" break-even change against its programs is hoped for, if they are fairly represented per SEC oversight.

It is also noted the break-even points for the affected programs must set accurately, and each frame delivered contributes to paying off the deferred cost bundle. If the SEC finds Boeing inappropriately has assigned its investments for the questioned programs, then it will affect when in time the 787 or 747 programs will become profitable. 

Either way of realizing it up front, or from a deferred cost perspective it will take about 1,300 787 to pay down all costs affecting the 787 and some other unit number for the other program questioned. Boeing has chosen showing a cash positive flow sooner rather than later, by pushing the reduction of deferred costs to the back to end of this saga. Making a unit by unit delivery "contribution margin", at least until Boeing obtains a zero balance on its deferred costs account. The contribution margin comes from a 787 delivered cash mechanism applied to the deferred cost reduction from each of the frames delivered.

The significance of this affects the stockholder’s perception over the affected programs. It becomes a "how it feels situation", rather than the actual reality of how it will play out over the years. Boeing pushed the accounting books forward making the 787 look profitable, by reaching a positive cash contribution at the earliest possible moment during December 2015. It's an aggressive effort sustaining a positive financial outlook for the programs. 

This is done by making many factory expenses depreciable as an asset and not a direct program cost. Deeper analysis is required by the investor for understanding the financial picture. The SEC wants to know the length in time, the 787 will become profitable from the accounting perspective. It also wants Boeing to adjust its books for fairly representing its case before the investor, using real time program activity applied against the cost of building each type. 

I told you in the beginning it was simple when basic accounting is in play. That's why it's so confusing. The SEC wants to know some answers because they have a problem with Boeing's basic accounting, which appears to be plain accounting entries from the Boeing perspective.