That is one thing I haven't got my head around. The book costs in money value at the time but pay in back 1:1 with current value money. Effectively this deflates the deferred costs naturally.

StTim wrote:

I would suspect that it may take a hit as the first production -10's come down the line as these will be more costly to build as early examples.

I'm sure you are right.

But Boeing do seem to have got the distributed supply chain under control now, and I know that they have been selling 787s at far more realistic prices over the last few years than they did early on, so I suspect that the hit will be relatively small - to the extent that I doubt it will result in any increase in overall deferred costs.

Yes - it will be a much smaller delta uplift than building the original version. But there will be a new learning curve to go through.

StTim wrote:

That is one thing I haven't got my head around. The book costs in money value at the time but pay in back 1:1 with current value money. Effectively this deflates the deferred costs naturally.

Yes. That is a function of the fact that the cash is spent now and the costs are only deferred for accounting purposes, hence no interest to pay.

WIederling wrote:

Stitch wrote:

And yes, as the largest revenue generator the 737 is picking up most of the tab. But the A320 picked up most of the tab for the A330, A340, A350 and A380 as it to was is Airbus' largest revenue generator.

I'd doubt that a frame having EIS in 1987 obviously still in sink money mode financed the TA9/TA11 developement
or A320 devel fueled by A3*0 sales either.
IMU the majority of Airbus investments into new frames happened on borrowed money ( those pesky RLI things.).

That cannot be correct.

With overruns the A380 must have cost $20Bn or more, and the A350 $12Bn-$15Bn
RLI on the A380 was only E3.4Bn, and the A350XWB similar
For these two programmes together, RLI was a maximum of about $7Bn out of some $35Bn spent.
The other $28Bn was funded from revenue

By the way, revenue was also paying back earlier RLI during both the A380 and A350 programmes.
RLI outstanding in the balance sheet went from about E4Bn at the beginning of the A380 development to about E5.5Bn at the end, implying that about E2Bn of earlier RLI was repaid during the A380's development - from A320 revenue

I'd like to modify Stitch's comment in one way though.
Given the numbers being delivered and programme maturity, it is pretty clear that both the A320 AND A330 have paid for the A380 and A350XWB.

Rgds

StTim wrote:

It is only daft to undercut the competition if it places your company at risk from doing so. If you are still making profits then there is no harm.

Acting as stated above and garnering above market rate profits will encourage new entrants.

Thanks, St Tim. As it happens, I hold a different view on each of your paragraphs.

It is daft to price lower than necessary as it results in value destruction of shareholders funds.

In a duopoly, the market price it set by one or other of the two players. Boeing have been the weak seller from the start of of 787. They should have been market price makers. By being weak sellers they have been destroying shareholder value, big time. The A330 family, which in general has up to now been slightly less capable than the 787, are market takers not market makers. So it falls to Boeing to change its strategy, thus allowing Airbus and Boeing to both gain from a less daft market price.

Yes, there is always in any market the possibility of a new entrant. Given the experience of Lockheed and then Douglas, it would be unwise for a new entrant to attempt to prove me wrong. Indeed, the 777-9 looks likely be the first to prove my point merely because of the untimely accident of history of low oil. Lady luck was not with them, not their fault. But the launch of any new competitor is always high risk.

Boeing will have to solve this before they can launch the MoM, as the MoM will have its own deferred costs and the markets do overlap. So a MoM sold might mean a 787 not sold. And if you price the MoM so competitively that it pulls in orders from single aisle planes, the price pressure on the 787 will be enormous.

Egerton wrote:

StTim wrote:

It is only daft to undercut the competition if it places your company at risk from doing so. If you are still making profits then there is no harm.

Acting as stated above and garnering above market rate profits will encourage new entrants.

Thanks, St Tim. As it happens, I hold a different view on each of your paragraphs.

It is daft to price lower than necessary as it results in value destruction of shareholders funds.

In a duopoly, the market price it set by one or other of the two players. Boeing have been the weak seller from the start of of 787. They should have been market price makers. By being weak sellers they have been destroying shareholder value, big time. The A330 family, which in general has up to now been slightly less capable than the 787, are market takers not market makers. So it falls to Boeing to change its strategy, thus allowing Airbus and Boeing to both gain from a less daft market price.

Yes, there is always in any market the possibility of a new entrant. Given the experience of Lockheed and then Douglas, it would be unwise for a new entrant to attempt to prove me wrong. Indeed, the 777-9 looks likely be the first to prove my point merely because of the untimely accident of history of low oil. Lady luck was not with them, not their fault. But the launch of any new competitor is always high risk.

Perhaps my choice of the word "only" was injudicious. I agree your main remit is to create shareholder value. But if you sell at a price lower than your competitor and still earn a unit profit you do so in the expectation of increased volume and hence overall greater shareholder value in the longer term.

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

Agree with this in the main - I work in a business unit that uses programme accounting for the reasons you describe.
I thus have no issue with Boeing using it (I suspect it was standard on their defence programmes a long time ago)

I should point out that (up until the A350) Airbus don't use it.
What they have historically done is load the programme development costs into the "loss" side of the P+L account in that year - hence contributing to the long and strong held view that "Boeing is more profitable".
My understanding is that they adopted it for the first 11 frames of the A350XWB (which have of course gone now)

https://leehamnews.com/2014/12/10/analy ... ors-day-1/

Rgds

sxf24 wrote:

The biggest challenge to selling the 787 is a lack of availability. The number of A330neo sales is anemic as most airlines understand there is no opportunity to finance the aircraft: it is a good airplane, but with such a niche engine/operator market that the residual value will poor. Strong demand from banks and lessors to finance 787s helps sales (the same sentiment applies to the A350-900).

But do we not have a situation that the residential value of the delivered 787s must be going down fast? I mean that only the latest 787s have the RR 1000 TEN engines equal in efficiency to the RR 7000. This means that A330NEO should be equal or even better compared to most RR equipped 787 delivered until recent and still sells for much less. The banks is then up to a surprise in a few years time.

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

Mostly agree but not for the R&D - that is expensed as it occurs.

I have known where companies categorize IT work as an asset to amortize it.

Here programme accounting is used because the production of early examples af the final item is way more expensive than when it is in serial production with the issues sorted out.

Considering that until today the 2 most successful production runs, B777 and the A330/340 has around 2000 produced / on order how many 100 787 can be considered as early examples?

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

Hi, I agree with your second and your last paragraphs. On your third paragraph, you may well be correct in the USA its not in my bailiwick, but International Financial Reporting Standards (IFRS) do not permit this, thus USA is out on a limb. As ever with investments, buyer beware!

StTim wrote:

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

Mostly agree but not for the R&D - that is expensed as it occurs.

I have known where companies categorize IT work as an asset to amortize it.

Here programme accounting is used because the production of early examples af the final item is way more expensive than when it is in serial production with the issues sorted out.

That is right, program accounting is not related to R&D expenditure at all. It is used only for production costs.

Astuteman wrote:

the long and strong held view that "Boeing is more profitable".

Boeing is now, consistently has been, worth ~2x Airbus. There has to something to that. Part of it, to be sure, is Boeing's bigger defense business. And part of it is surely Boeing's more favorable labor law environment. Maybe that's all of it but there's at least enough to see some validity to the common wisdom absent some countervailing arguments more strongly supported than my foregoing hypotheses.

speedbored wrote:

sxf24 wrote:

Under program accounting rules, Boeing can't sell 787s at a loss and add that amount to deferred production costs. Total deferred production costs have increased because of other development programs. The 787 deferred production costs have not increased for quit a while, even with the development cost of the -10 being added.

Actually, they can, and that is exactly what they have been doing for the majority of the frames sold so far. Up to the start of 2016, almost every 787 was sold at a loss and the losses added to the deferred production costs. The clue is in the name "deferred production costs".

The fact that deferred costs are no longer increasing is nothing to do with other development programs, it is entirely down to the fact that Boeing are now producing frames at a profit (albeit at significantly less of a profit than is needed to clear the outstanding costs within the current accounting block size).

I think there's different definitions of loss depending on whether you talking about it from a cash or accrual (accounting) basis.

Until the 787 deferred production costs started declining, Boeing was taking in less cash for a sale than cost that had previously been incurred. This is a loss on a cash basis. However, on an accrual basis, a sale can't be below the per-airplane costs determined by the accounting block and total deferred costs. That could trigger big accounting losses.

Said another way, if you've accrued an average of $1,000 in costs per airplane, you can't sell airplanes for $500 and add $500 to deferred costs. Auditors would probably require you to reduce the average cost being accrued to $500 and immediately expense any surplus costs as a large loss.

StTim wrote:

speedbored wrote:

sxf24 wrote:

Under program accounting rules, Boeing can't sell 787s at a loss and add that amount to deferred production costs. Total deferred production costs have increased because of other development programs. The 787 deferred production costs have not increased for quit a while, even with the development cost of the -10 being added.

Actually, they can, and that is exactly what they have been doing for the majority of the frames sold so far. Up to the start of 2016, almost every 787 was sold at a loss and the losses added to the deferred production costs. The clue is in the name "deferred production costs".

The fact that deferred costs are no longer increasing is nothing to do with other development programs, it is entirely down to the fact that Boeing are now producing frames at a profit (albeit at significantly less of a profit than is needed to clear the outstanding costs within the current accounting block size).

Also - as has been repeatedly pointed out above - development costs go to the bottom line in the quarter they occur. So this bucket has nothing to do with development of the -10. Indeed I would suspect that it may take a hit as the first production -10's come down the line as these will be more costly to build as early examples.

Just because something is repeatedly pointed out does not make it true. Different costs are treated differently. All of the inventory for the -10, including the test airplanes flying around, have probably not been expensed. Engineering costs are probably treated differently.

olle wrote:

sxf24 wrote:

The biggest challenge to selling the 787 is a lack of availability. The number of A330neo sales is anemic as most airlines understand there is no opportunity to finance the aircraft: it is a good airplane, but with such a niche engine/operator market that the residual value will poor. Strong demand from banks and lessors to finance 787s helps sales (the same sentiment applies to the A350-900).

But do we not have a situation that the residential value of the delivered 787s must be going down fast? I mean that only the latest 787s have the RR 1000 TEN engines equal in efficiency to the RR 7000. This means that A330NEO should be equal or even better compared to most RR equipped 787 delivered until recent and still sells for much less. The banks is then up to a surprise in a few years time.

Yeah, just because the RR 7000 is based on the TEN does not mean it is as efficient.

sxf24 wrote:

I think there's different definitions of loss depending on whether you talking about it from a cash or accrual (accounting) basis.

Nope. I'm pretty sure that a loss is a loss whether you are talking cash or accounting.

sxf24 wrote:

However, on an accrual basis, a sale can't be below the per-airplane costs determined by the accounting block and total deferred costs. That could trigger big accounting losses.
Said another way, if you've accrued an average of $1,000 in costs per airplane, you can't sell airplanes for $500 and add $500 to deferred costs. Auditors would probably require you to reduce the average cost being accrued to $500 and immediately expense any surplus costs as a large loss.

Then you probably ought to tell Boeing that they "can't" do this as it is exactly what they have been doing for many years, and their auditors have been accepting it. Personally, I don't see anything in the program accounting rules that says that they can't do it.

sxf24 wrote:

Just because something is repeatedly pointed out does not make it true. Different costs are treated differently. All of the inventory for the -10, including the test airplanes flying around, have probably not been expensed.

But it is true. The fact that non-development costs are treated differently does not mean that it is not true that development costs are accounted for as they are incurred. The test frames for the -10 are production costs, not development.

speedbored wrote:

sxf24 wrote:

I think there's different definitions of loss depending on whether you talking about it from a cash or accrual (accounting) basis.

Nope. I'm pretty sure that a loss is a loss whether you are talking cash or accounting.

sxf24 wrote:

However, on an accrual basis, a sale can't be below the per-airplane costs determined by the accounting block and total deferred costs. That could trigger big accounting losses.
Said another way, if you've accrued an average of $1,000 in costs per airplane, you can't sell airplanes for $500 and add $500 to deferred costs. Auditors would probably require you to reduce the average cost being accrued to $500 and immediately expense any surplus costs as a large loss.

Then you probably ought to tell Boeing that they "can't" do this as it is exactly what they have been doing for many years, and their auditors have been accepting it. Personally, I don't see anything in the program accounting rules that says that they can't do it.

sxf24 wrote:

Just because something is repeatedly pointed out does not make it true. Different costs are treated differently. All of the inventory for the -10, including the test airplanes flying around, have probably not been expensed.

But it is true. The fact that non-development costs are treated differently does not mean that it is not true that development costs are accounted for as they are incurred. The test frames for the -10 are production costs, not development.

Cash and accrual/accounting losses are different. If someone can't understand the distinctions, they have no business participating in a discussion about Boeing's accounting. It is a complicated subject that requires significant thought and understanding.

olle wrote:

But do we not have a situation that the residential value of the delivered 787s must be going down fast? I mean that only the latest 787s have the RR 1000 TEN engines equal in efficiency to the RR 7000. This means that A330NEO should be equal or even better compared to most RR equipped 787 delivered until recent and still sells for much less.

A 787 with Trent 1000 engines is a more efficient combination than an A330 with Trent 700 engines, however. So that helps buoy those 787 residual valuations.

WIederling wrote:

diverdave wrote:

That will clear the books, and Boeing can start to book larger profits going forward and more importantly justifying larger bonuses for management.

Hasn't that card been played already? ( larger bonuses for larger profits)

Under project accounting rules "profits" are distributed evenly over all items in the block
_and_ they are a "comanded" value.
( in regular accounting you balance real cost against real revenue and a positive remainder is "profit".
in that context an "at the moment" result. In project accounting you project cost, revenue, _expected profits_, ... over the block
and more or less distribute that evenly over all frames moving effectively profits left and outlay to the right into the future. A hidden debt.
When reality diverges from the projection this turns into a ballooning problem.)

IMU coping with runaway cost in scope of project accounting would have required to take the divergence from projections
as a direct loss. But Boeing wrote profits from day one so to speak and just build a larger bow wave of deferred cost.
They also sunk significant amounts of workforce time and money into keeping the terrible teens as tradeable items in the accounting block.
Only the prototypes were finally written off as unsellable.
Time spent on the TTeens would have been better spent on fixing issues in the production process.
But Boeing is slave to its lifestyle here.

It appears that so much money was spent on the Terrible Teens that Boeing would have been better to scrap them. Certainly on 7 thru 11, and most certainly on the 6 test aircraft. Some reports say as much as $700 million was spent refurbishing a single terrible teen. No way were they going to get that money back in the sale. So why not scrap such planes??? That's water under the bridge (the last terrible teen is in pre flight prep), but it appears to be a LOT of money (billions, certainly) down the drain.

sxf24 wrote:

Just because something is repeatedly pointed out does not make it true. Different costs are treated differently. All of the inventory for the -10, including the test airplanes flying around, have probably not been expensed.

I suspect they haven't been expensed as there is an expectation they will be sold.

Every test to certify a something that Boeing did should have been expensed.

As ever with accounting the answer depends on the question you ask and what you want that answer to be.

sxf24 wrote:

speedbored wrote:

sxf24 wrote:

I think there's different definitions of loss depending on whether you talking about it from a cash or accrual (accounting) basis.

Nope. I'm pretty sure that a loss is a loss whether you are talking cash or accounting.

sxf24 wrote:

However, on an accrual basis, a sale can't be below the per-airplane costs determined by the accounting block and total deferred costs. That could trigger big accounting losses.
Said another way, if you've accrued an average of $1,000 in costs per airplane, you can't sell airplanes for $500 and add $500 to deferred costs. Auditors would probably require you to reduce the average cost being accrued to $500 and immediately expense any surplus costs as a large loss.

Then you probably ought to tell Boeing that they "can't" do this as it is exactly what they have been doing for many years, and their auditors have been accepting it. Personally, I don't see anything in the program accounting rules that says that they can't do it.

sxf24 wrote:

Just because something is repeatedly pointed out does not make it true. Different costs are treated differently. All of the inventory for the -10, including the test airplanes flying around, have probably not been expensed.

But it is true. The fact that non-development costs are treated differently does not mean that it is not true that development costs are accounted for as they are incurred. The test frames for the -10 are production costs, not development.

Cash and accrual/accounting losses are different. If someone can't understand the distinctions, they have no business participating in a discussion about Boeing's accounting. It is a complicated subject that requires significant thought and understanding.

I actually prefer to have the discussion on 787 program accounting here. There are a number of threads discussing problems with other planes like the A320NEO groundings due to PW issues or A350 production issues end up in a comparison with 787 and a program accounting discussion begins. Here we can talk about it where at least a few numbers are knowledgeable on the topic.

What may allow Boeing to break even in an achievable block (not 1300 - they will not break even at 1300) is the 787-10. It may be normally profitable. Which would be $30 million to $50 million per plane. That's the secret ingredient which would allow Boeing to break even at or before 1500 aircraft - particularly since they don't plan to up the run rate.

jagraham wrote:

It appears that so much money was spent on the Terrible Teens that Boeing would have been better to scrap them.

Scrapping the first 20 787s would have resulted in accounting charges probably in the neighborhood of $10 billion based on the almost $3.5 billion "scrapping" LN001 through LN005 incurred.

Stitch wrote:

jagraham wrote:

It appears that so much money was spent on the Terrible Teens that Boeing would have been better to scrap them.

Scrapping the first 20 787s would have resulted in accounting charges probably in the neighborhood of $10 billion based on the almost $3.5 billion "scrapping" LN001 through LN005 incurred.

There probably would have been a very large charge to scrap the first 22 aircraft, or even a portion (the first 11 caused most of the trouble). But the way they did it they spent billions on refurbishing that they could not get back from selling the aircraft, then reclassified the losses as marketing expenses. Better to take the paper loss than lose that much real money.

sxf24 wrote:

Cash and accrual/accounting losses are different.

Sometimes they are and sometimes they are not - it depends on what you are accounting for.

But I was not making any claim about the numbers. I was rebutting your assertion that the definition of a loss is different when talking about cash and accounting. It is not. In the context of what we are discussing here, the definition is exactly the same - it is a loss when cost exceeds revenue, basic maths. The numbers differ because when looking at cash, we are using real costs and when looking at program accounting, we are looking at a spread costs figure.

sxf24 wrote:

If someone can't understand the distinctions, they have no business participating in a discussion about Boeing's accounting. It is a complicated subject that requires significant thought and understanding.

It is. Some of the people posting here have spent the time reading up on, and understanding, the rules of program accounting. Perhaps you should too.

Egerton wrote:

StTim wrote:

It is only daft to undercut the competition if it places your company at risk from doing so. If you are still making profits then there is no harm.

Acting as stated above and garnering above market rate profits will encourage new entrants.

Thanks, St Tim. As it happens, I hold a different view on each of your paragraphs.

It is daft to price lower than necessary as it results in value destruction of shareholders funds.

In a duopoly, the market price it set by one or other of the two players. Boeing have been the weak seller from the start of of 787. They should have been market price makers. By being weak sellers they have been destroying shareholder value, big time. The A330 family, which in general has up to now been slightly less capable than the 787, are market takers not market makers. So it falls to Boeing to change its strategy, thus allowing Airbus and Boeing to both gain from a less daft market price.

Yes, there is always in any market the possibility of a new entrant. Given the experience of Lockheed and then Douglas, it would be unwise for a new entrant to attempt to prove me wrong. Indeed, the 777-9 looks likely be the first to prove my point merely because of the untimely accident of history of low oil. Lady luck was not with them, not their fault. But the launch of any new competitor is always high risk.

Spot on. Ignore the cost side, it's now spent, though someone has to deal with the cosmetics and the numbers.

Where Boeing really departed from the optimum, is allowing the business into clear model teams, which discourages technology, production, facility and sales sharing. Or as some of you refer to it - shareholder value optimisation.

For example, the 788 was priced too low from the very start. Even when achieving record sales before first flight, sales were still being written at launch style discounts, which is why there was disharmony from early on between the 787 and 777 teams.

Sales were recorded on soft contracts, and most softened over time, as Boeing induced delays occurred, rather than using this as an opportunity to get the order book into a more manageable condition, and taking the lesson from the Frozen movie, and letting some customers go.

Having determined the 787 couldn't viably shrink and steal 737 and A320 customers, they opted to go up, aware they couldn't touch A330 production costs, so would be eating away at the A350, and their own 777 model line, potentially, and in hindsight, bringing it to an early demise.

In the last three years, Boeing has undergone a transformation. The model supremos no longer reign supreme. But unfortunately Boeing have much baggage, dollars, orders and current models to be worked through.

The bar for launching new models has been lifted dramatically, with a whole raft of collateral damage conditions to be identified and satisfied. Prices have increased, and are firmer. Launch discounts have shrunk. Contract terms and flexibility have been reviewed and are firmer. Deferrals and model hopping is now 'priced' into contracts, and is valued. Boeing has copied the Airbus 'helicopter' (my term) approach to valuing and pricing relationships, rather than on a model by model, or sale by sale basis.

Boeing are not out of the woods yet. They still employ senior people who haven't made the transformation. They still have 787 orders on the books, with soft contract terms, including free deferrals and model hopping conditions. They still have 777X orders, the majority of which are recorded at what now, would be considered to be written at heavily discounted launch prices (or lower). And of course they have all the financial baggage associated with the development of the 777X and 787, which is still being incurred.

Airbus has always had a more integrated view of customers and models. Recent senior management changes have sent a clear message to doubters, that there will be no changes.

The A330 and A350 would be an example of where the old Boeing (but not the new Boeing) and Airbus philosophies would have diverged. Airbus have a raft of A350 product and pricing enhancements, which will be drip fed to the market, as required to meet competitor activity and optimise production (fill gaps and cap).

Airbus have even more A330NEO product and pricing enhancements, which will be drip fed into the market, a finite time after A350 enhancements are announced, though banked as a different strategy if Boeing launch a new mid-range model (they won't).

In contrast, if the A330NEO was a Boeing (the old Boeing, not the new) product, it would already be cheaper and more capable. No drip feed. And the A350 would be cheaper, model improvements cancelled, but new, larger versions already launched.

speedbored wrote:

sxf24 wrote:

Cash and accrual/accounting losses are different.

Sometimes they are and sometimes they are not - it depends on what you are accounting for.

But I was not making any claim about the numbers. I was rebutting your assertion that the definition of a loss is different when talking about cash and accounting. It is not. In the context of what we are discussing here, the definition is exactly the same - it is a loss when cost exceeds revenue, basic maths. The numbers differ because when looking at cash, we are using real costs and when looking at program accounting, we are looking at a spread costs figure.

sxf24 wrote:

If someone can't understand the distinctions, they have no business participating in a discussion about Boeing's accounting. It is a complicated subject that requires significant thought and understanding.

It is. Some of the people posting here have spent the time reading up on, and understanding, the rules of program accounting. Perhaps you should too.

In the context of this discussion, cash and accounting losses are completely different. Any early delivery sold at any price will result in a cash loss, because under cash accounting you have to record all income and expenses immediately.

Under accrual accounting, Boeing can't sell airplanes for less than the accrued costs. Boeing can compete aggressively and sell zero margin airplanes, but not below that. Full stop. End of story.

sxf24 wrote:

speedbored wrote:

sxf24 wrote:

Cash and accrual/accounting losses are different.

Sometimes they are and sometimes they are not - it depends on what you are accounting for.

But I was not making any claim about the numbers. I was rebutting your assertion that the definition of a loss is different when talking about cash and accounting. It is not. In the context of what we are discussing here, the definition is exactly the same - it is a loss when cost exceeds revenue, basic maths. The numbers differ because when looking at cash, we are using real costs and when looking at program accounting, we are looking at a spread costs figure.

sxf24 wrote:

If someone can't understand the distinctions, they have no business participating in a discussion about Boeing's accounting. It is a complicated subject that requires significant thought and understanding.

It is. Some of the people posting here have spent the time reading up on, and understanding, the rules of program accounting. Perhaps you should too.

In the context of this discussion, cash and accounting losses are completely different. Any early delivery sold at any price will result in a cash loss, because under cash accounting you have to record all income and expenses immediately.

Under accrual accounting, Boeing can't sell airplanes for less than the accrued costs. Boeing can compete aggressively and sell zero margin airplanes, but not below that. Full stop. End of story.

And yet many stores have loss leaders - products that they sell below cost to tempt you in where you are likely to buy additional highly profitable products.

It could be said that getting an air;ine to switch supplier is worth selling some frames below cost.

They also say that most engines are supplied at a price which is registered as a loss on the books. They make money on the parts and service.

Planesmart wrote:

For example, the 788 was priced too low from the very start. Even when achieving record sales before first flight, sales were still being written at launch style discounts, which is why there was disharmony from early on between the 787 and 777 teams.

The 787 list prices were indeed low, but so were the discounts from that list (average was around 25% when other widebodies were closer to 40%). The end result was still a low price that certainly didn't help when the production cost for those frames skyrocketed with all the change incorporation. Boeing did do significant price hikes in 2006 and 2007 (in terms of percentage), but they might have been holding the line a bit as Airbus was matching 787 pricing in A350XWB RFPs to try and win launch orders so there would have been some competitive pressures.

Planesmart wrote:

Having determined the 787 couldn't viably shrink and steal 737 and A320 customers, they opted to go up, aware they couldn't touch A330 production costs, so would be eating away at the A350, and their own 777 model line, potentially, and in hindsight, bringing it to an early demise.

Between the A330-300IGW and the A350-900, the 777-200ER had no future so the 787-9 and 787-10 were important for Boeing to stay relevant in that product category. And the 777-300ER was pretty much dead the day Airbus launched the A350-1000: with Jet A spiking towards USD3 a gallon, a 20% SFC reduction was way too much to counter. Boeing has been very lucky that fuel prices have cratered, making the 777-300ER attractive again and allowing Boeing to secure orders necessary to help support the move to the 777X.

astuteman wrote:

Agree with this in the main - I work in a business unit that uses programme accounting for the reasons you describe.
I thus have no issue with Boeing using it (I suspect it was standard on their defence programmes a long time ago)

I should point out that (up until the A350) Airbus don't use it.
What they have historically done is load the programme development costs into the "loss" side of the P+L account in that year - hence contributing to the long and strong held view that "Boeing is more profitable".
My understanding is that they adopted it for the first 11 frames of the A350XWB (which have of course gone now)

https://leehamnews.com/2014/12/10/analy ... ors-day-1/

Rgds

I thought Airbus moved to contract accounting for the first few contracts with some airlines that would spread the costs over the whole contract. This would probably have been done for those contracts that has lots of deliveries over many years where it is possible to spread the cost over a few years to help with the profit margins.

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Program accounting is or was a standard way of accounting, especially for those things whose R and D all occurs before first sales. i.e., It may cost $10 Billion to develop a major software program. You don't sell the first copy for $10 Billion and the rest of them for a penny. In one way or another you account for that R and D in most of the subsequent sales.

Wall Street, investors, and reporters (as well as Airbus and anyone who reads) knew almost exactly all of this, because all of Boeings financial reports contained all of the information.

Program accounting is not a standard way of accounting. Only industry it exists is the aerospace industry and there only in the USA. No new company is aloud to take it up. It is grandfathered for those having used it. Your example of the software program is faulty, as development is not deferred, but production cost.

StTim wrote:

Mostly agree but not for the R&D - that is expensed as it occurs.

I have known where companies categorize IT work as an asset to amortize it.

Here programme accounting is used because the production of early examples af the final item is way more expensive than when it is in serial production with the issues sorted out.

In the US R&D must be expensed is if is "R": it is not used to develop a specific product sold to multiple customers.

"D" can be an asset if the expenses are incurred to develop a specific product or subsystem sold to more than one customer, but you can also expense it. If R&D is used to develop a product sold to one customer only, it must be expensed and can not become an asset.

I went through this exercise for one US company where we tried to identify reusable software modules where the development costs could be capitalised to ensure a one off boost to the financial numbers (long term it made no difference because R&D expenses were pretty flat year on year anyway). It did not help and 2 years later the company entered chapter 11.

I later repeated this for the complete R&D portfolio of another company were we had to distinguish between Research and Development. We had to clean up the numbers because a lot of research which never made it into products capitalised.

StTim wrote:

sxf24 wrote:

speedbored wrote:

Sometimes they are and sometimes they are not - it depends on what you are accounting for.

But I was not making any claim about the numbers. I was rebutting your assertion that the definition of a loss is different when talking about cash and accounting. It is not. In the context of what we are discussing here, the definition is exactly the same - it is a loss when cost exceeds revenue, basic maths. The numbers differ because when looking at cash, we are using real costs and when looking at program accounting, we are looking at a spread costs figure.


It is. Some of the people posting here have spent the time reading up on, and understanding, the rules of program accounting. Perhaps you should too.

In the context of this discussion, cash and accounting losses are completely different. Any early delivery sold at any price will result in a cash loss, because under cash accounting you have to record all income and expenses immediately.

Under accrual accounting, Boeing can't sell airplanes for less than the accrued costs. Boeing can compete aggressively and sell zero margin airplanes, but not below that. Full stop. End of story.

And yet many stores have loss leaders - products that they sell below cost to tempt you in where you are likely to buy additional highly profitable products.

It could be said that getting an air;ine to switch supplier is worth selling some frames below cost.

They also say that most engines are supplied at a price which is registered as a loss on the books. They make money on the parts and service.

Stores don't use program accounting, thus your analogy is flawed.

Boeing can't sell airplanes below cost without triggering reach forward losses.

I see all the stuff you folks are posting and note Boeing stock has gone from 140 to 200 in the last year. I have listened to you doomsayers and missed out on the the run up. Woe is me.

frmrCapCadet wrote:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow

While I agree that Boeing has paid for some of its R&D, some is paid for from government grants (e.g. NASA). It certainly has not paid for the R&D for the 787, I would suggest a sizeable amount would have been paid for by risk sharing partners. The Japanese Government alone put around 5 billion into the 787 project of which none has historically been repaid.

There has still been zero repayment on the 767/777 investments their governments have made.

sxf24 wrote:

Under accrual accounting, Boeing can't sell airplanes for less than the accrued costs. Boeing can compete aggressively and sell zero margin airplanes, but not below that. Full stop. End of story.

sxf24 wrote:

Boeing can't sell airplanes below cost without triggering reach forward losses.

You keep saying "Boeing can't" but, with the exception of the flight test frames which were written off, that is exactly what they have done with every single frame that has been produced so far. And this has been perfectly acceptable to their auditors.

The accrued costs per frame in the current accounting block are ~$40m. Recent cash margin per frame (i.e. ignoring accrued costs) is averaging less than $5m. So Boeing are currently selling frames for ~$35m less than your "can't" point and the difference is being added back in to the deferred costs, to be spread over the remaining frames. This is why, even though the total of deferred costs is now gradually reducing, the deferred cost per frame remaining in the block is still increasing.

If you actually read the rules, you will see that there is nothing in there to say that they "can't" do this - in fact, the rules explain how it should be done. Boeing only has to take a forward loss when the remaining production in the block will no longer be sufficient to cover the remaining deferred costs. Even then, they also have the option of extending the block instead of taking the write-off.

MrBretz wrote:

I see all the stuff you folks are posting and note Boeing stock has gone from 140 to 200 in the last year. I have listened to you doomsayers and missed out on the the run up. Woe is me.

I am not suggesting Boeing will fail, but is a stock price really an indicator of how well a company is doing? (Enron, before the GFC most banks seemed to be fine on the stock exchange, especially Lehman Brothers)

frmrCapCadet wrote:

Three things we will never persuade everyone on this site:

Boeing pretty well paid for all of its R and D, and production costs for the 787 out of it current cash flow.

Being the most subsidized airframe ever that is probably not true.
nations all over the world added money to that budget ( usually for
some risksharing partner ) reducing the final bill to Boeing.

WIederling wrote:

nations all over the world added money to that budget ( usually for
some risksharing partner ) reducing the final bill to Boeing.

Are you suggesting foreign governments subsidized Boeing?

Jayafe wrote:

WIederling wrote:

nations all over the world added money to that budget ( usually for
some risksharing partner ) reducing the final bill to Boeing.

Are you suggesting foreign governments subsidized Boeing?

Look at the incentives that Japan provided to the 787 program

enzo011 wrote:

astuteman wrote:

Agree with this in the main - I work in a business unit that uses programme accounting for the reasons you describe.
I thus have no issue with Boeing using it (I suspect it was standard on their defence programmes a long time ago)

I should point out that (up until the A350) Airbus don't use it.
What they have historically done is load the programme development costs into the "loss" side of the P+L account in that year - hence contributing to the long and strong held view that "Boeing is more profitable".
My understanding is that they adopted it for the first 11 frames of the A350XWB (which have of course gone now)

https://leehamnews.com/2014/12/10/analy ... ors-day-1/

Rgds

I thought Airbus moved to contract accounting for the first few contracts with some airlines that would spread the costs over the whole contract. This would probably have been done for those contracts that has lots of deliveries over many years where it is possible to spread the cost over a few years to help with the profit margins.

Yes, IFRS CONTRACT accounting was used for the first time by Airbus on a few airline contracts for early deliveries of the A350-900. To clarify, International Financial Reporting Standards CONTRACT accounting is not comparable to US PROGRAM accounting rules.

sxf24 wrote:

Yeah, just because the RR 7000 is based on the TEN does not mean it is as efficient.

What is the difference in efficiency between RR1000 RR1000TEN RR7000?

RR1000 < RR1000TEN == RR7000
specifically: The TEN is up to 3% over RR1000 Package _B_ engines. ( so the Pack C pip must sit in between?)
Going by what information RR offered the bleed expansion to the plane has no discernible impact on engine performance.
( what difference does the strongly reduced power off take for the dual 250kW generators on the 787 make?)
commonality is down to 25%. i.e. they seem to have mostly dumped the initial 1000 design and rebuild with TXW and the "Advance 3" proof of concept design elements.

Some simple facts that seemed to get drowned in the displeasure of Boeing fan boys at there company being "attacked". Facts unfavourable to Boeing seem to constitute an attack.

Fact: all the produced and sold up to now 787, have cost Boeing 30 billion USD more to produce than the revenue of the sales. This has nothing to do with development costs, as they are booked differently.
Fact: Boeing has to book this 30 billion USD one day, booking it will reduce Boeing's profits at that time, all the same if it is booked in small slices and reducing future profits on the 787 or in big chunks as forward losses or wright offs.
Fact: This 30 billion USD deferrals has given Boeing 30 billion additional profits in the past years, that have been spend on bonuses, dividends and share buy backs. All of it, as there is no meaningful equity left.

My take (or attack according to Boeing fans) The third point is where I talk about the expenditure of 30 billion extra cash, because to pay dividends, bonuses and buy back shares you have to use cash, cash you could and would not have spend if you would not have had the inflated profits. If this 30 billion USD would be sitting quietly in equity, there would be no case to discuss.
Talking about cash, the cash Boeing uses, is to the biggest part not there own, but capital that is on loan, be it outright loans, prepayments by customers, long term deferred payment terms at suppliers and so on. Own capital or cash is defined by the equity. As long as Boeing can lend money and I have little doubt that they will be able to, that system works. I personally would sell shares to bolster own capital, but that is me.

Matt6461 wrote:

Astuteman wrote:

the long and strong held view that "Boeing is more profitable".

Boeing is now, consistently has been, worth ~2x Airbus. There has to something to that. Part of it, to be sure, is Boeing's bigger defense business. And part of it is surely Boeing's more favorable labor law environment. Maybe that's all of it but there's at least enough to see some validity to the common wisdom absent some countervailing arguments more strongly supported than my foregoing hypotheses.

To be quite clear, I was arguing that Airbus accounting for development in the year spent has a more immediate impact on the bottom line than accounting for it via Programme accounting does. Boeing Commercial Aircraft may well have a stronger underlying profitability than Airbus Commercial Aircraft, but a) because of the variables we can't "know this for a fact", and b) the stronger share value won't tell you either.

I think we are all very clear that the very purpose - the primary intent - of Programme accounting is to provide shareholders with "a smooth journey". That in itself inspires confidence.
And yes, there is a loose relationship between share price and underlying performance. But it is loose.
Share price is an emotional thing. It will be sensitive to HEADLINE profit figures, and will be sensitive to macroeconomic factors as well as microeconomic ones.

I don't think there is any doubt that Boeing's larger and much more profitable defence business is the single biggest driver in the relative share value

2016 highlights were:-

Boeing Commercial - $65Bn revenue, $3.1Bn earnings (note - this includes a $1.2Bn charge taken on the 787 programme - included as it is an airliner programme)
Airbus Commercial - E49Bn ($54Bn) revenue, E2.8Bn ($3.1Bn) earnings (note - this is pre a E1.4Bn charge made on the A400M, which I excluded to illustrate underlying airliner profitability)

We can argue over whether including the 787 charge and excluding the A400 charge is fair or not - I don't mind - it was done to keep these figures related to airliners - I won't fight over it.

Boeing Military and other - $30Bn revenue, $3Bn earnings

Airbus Military and other - E17Bn ($19Bn) revenue, E1Bn ($1.1Bn) earnings

Accepting there may be variables, this clearly shows that in 2016 at least the earnings difference was focussed in military aircraft.
It also shows the 787 effect coming into play.

Another reason the immediate reporting of development costs might have historically impacted the Airbus profit figure more, is that they been making the very expensive journey from being an A320 manufacturer, to being a worldwide player in every market segment.
That must have cost a lot of money. In terms of underlying profitability I go back to the observation that the A320 and A330 paid for the A380 and A350.

I think it would also be reasonable to make the argument that in growing from c. 20% market share to 50% market share, keen pricing must be considered to be part of the market share growth strategy embarked upon (which is why I won't get too defensive about assertions that history shows Boeing CA to be more profitable).

I think another factor that might relatively depress the Airbus share value is exchange rate fluctuation.
It is another uncertainty that might impact that shareholder confidence much more for Airbus than it does for Boeing.

I think labour flexibility is a red herring.
In the last decade I know which company has been plagued by labour issues, and it isn't Airbus.
Also in my experience, the underlying cost of employing someone in the USA is higher than in Europe.
That pesky "socialist high-tax" paradigm might not appeal to Americans, but it does mean that the state picks up quite a bit of the pensions, health care, sick pay tabs that in the USA the employer has to pick up.

All in all, that is a pretty complex environmental picture (in the economic sense).

to cut to the chase in summary, Programme accounting has a key part to play in keeping shareholder confidence up through a reasonable amount of predictability in the headline figures yes, even if the analysts are capable of digging underneath)

mjoelnir wrote:

Program accounting is not a standard way of accounting. Only industry it exists is the aerospace industry and there only in the USA. No new company is aloud to take it up. It is grandfathered for those having used it. Your example of the software program is faulty, as development is not deferred, but production cost.

working for a UK company that uses programme accounting, i'm obliged to disagree

I suspect it would be more accurate to say it exists worldwide, but primarily in the DEFENCE industry ...

Rgds

Revelation wrote:

zeke wrote:

glbltrvlr wrote:

This is a pretty good explanation about why investors question changing the size of accounting blocks: https://seekingalpha.com/article/390118 ... erent-time

That's the guy who is being laughed at around the globe for announcing that EK has ordered the 787 when both the airline and Boeing deny it ?

http://www.strategicaeroresearch.com/ is the site that has the "done deal" announcement, not https://seekingalpha.com ....

https://seekingalpha.com/article/390118 ... erent-time seems to be a good discussion of accounting blocks.

And what people here seem to be missing is that the expectation is that the by the time all frames in the accounting block are sold, you are supposed to have covered all the deferred costs. If you can't, you need to take the excess uncovered cost as a loss. An alternate is to increase the accounting block size. You can do that if you can legitimately claim that you expect to sell more frames. Clearly Boeing is over 1300 already so expanding the accounting block is a viable approach.

It is called an accounting block, not an accounting piece of string of indeterminate length. By repeatedly increasing the block size rather than creating a new block once this block is finished you are just admitting up front there is a loss.

mjoelnir wrote:

Fact: Boeing has to book this 30 billion USD one day, booking it will reduce Boeing's profits at that time, all the same if it is booked in small slices and reducing future profits on the 787 or in big chunks as forward losses or wright offs.

You seem to be projecting an image of everyone waking up one day and seeing "OMG, BOEING JUST TOOK A $30B HIT!!!" but it won't play out that way. We will see the $30B reduced as the current accounting block gets produced and we will see one or more bumps to the size of the accounting block and we may see Boeing use some other opportunity to take a 'big chunk' as a loss. Meanwhile every competent investor knows all about this and factors it in to their investing decision so it's already factored in to the stock price.

But hey, if it makes you fell better to dramatize it, go for it. I personally am enjoying reading your take on it, and I imagine others do too.

RickNRoll wrote:

By repeatedly increasing the block size rather than creating a new block once this block is finished you are just admitting up front there is a loss.

Yes, the whole point is to cover what everyone knows is a loss, the fact that the first planes are deeply loss-making. My later post gives Boeing's spin on it, that the accounting block is not to cover the loss of production of the N frames, it is just to spread the costs across the N frames for which it feels it can confidently predict both revenue and cost, and as you get more confidence in your ability to predict you can increase the accounting block. Boeing's spin is that the accounting block doesn't end with the break-even frame, it just covers the frames over which you feel confident you can predict revenue and cost. Yes, there is room for a lot of shenanigans here. It is spreading out the pain of the colossal fuck up that was the earlier phase of the 787 program. Yes, it is causing lower profits to be declared, but not lower cash flow. The cash has been paid, the accounting is just that, the accounting for how the cash was paid, and every competent person involved knows how it is being done.