philidor
in service - 6 years
Posts: 8,950
|
Post by philidor on Mar 9, 2014 10:09:30 GMT 1
Well, believe me, I know that. I don't intend to have a detailed discussion on accounting principles, which might be boring to some forum members. I was just making the point that using program accounting requires management to officially break (most) costs down by programme in the first place, and to provide information to investors accordingly.
|
|
|
Post by Flying Dutchman on Mar 9, 2014 17:02:29 GMT 1
Development, after completed, is a sunk cost, you can't change it and it is no use to calculate when that "breaks even" considering interest rates, exchange rates, what products it has benefited etcetera. Is that correct Mjoelnir and Philidor?
|
|
mjoelnir
in service - 2 years
Posts: 4,089
|
Post by mjoelnir on Mar 9, 2014 18:25:53 GMT 1
Development, after completed, is a sunk cost, you can't change it and it is no use to calculate when that "breaks even" considering interest rates, exchange rates, what products it has benefited etcetera. Is that correct Mjoelnir and Philidor? In my company we talk about program break even when all cost including development, production line tools, introduction, advertisement, etc. have been returned. It is a company internal accounting not to be made public. As I said before, program break even has nothing to do with program accounting.
|
|
philidor
in service - 6 years
Posts: 8,950
|
Post by philidor on Mar 10, 2014 11:41:12 GMT 1
In my company we talk about program break even when all cost including development, production line tools, introduction, advertisement, etc. have been returned. It is a company internal accounting not to be made public. Exactly. Different companies may have slightly different definitions, financial costs or research and development costs being areas of frequent differences. If program break even happens a long time after the first costs were incurred, the company may still be far away from a successful investment ... This is true. Again the point I was making is that companies in general are not required to use the kind of sophisticated analytical accounting necessary to determine program break even, but may do so for management purposes. As you mention, usually this kind of information is not made public. By contrast, a listed company electing to use program accounting is required to have a strong and stable methodology, and the results will be part of its public financial records. Analysts will be informed of the moment break even is achieved (or forecast to be achieved) for any program, and of underlying assumptions.
|
|
|
Post by vlafollower on Mar 10, 2014 12:51:18 GMT 1
"Program accounting does not take cost like development cost of the air plane in account."
I would disagree. The total non-recurring costs for the program are divided by the anticipated units to be sold over the life of the aircraft; and that number is added to the other fixed and variable costs to manufacturer the aircraft being sold. Total costs to manufacture the aircraft are then subtracted from the sales price of the aircraft to determine profit or loss.
I've often wondered if one of the reasons Airbus is overstating the market potential for VLA's over the next 20 years - is to reduce the non-recurring costs per aircraft; and pull the program break-even point in a decade or two.
|
|
mjoelnir
in service - 2 years
Posts: 4,089
|
Post by mjoelnir on Mar 10, 2014 17:00:57 GMT 1
"Program accounting does not take cost like development cost of the air plane in account." I would disagree. The total non-recurring costs for the program are divided by the anticipated units to be sold over the life of the aircraft; and that number is added to the other fixed and variable costs to manufacturer the aircraft being sold. Total costs to manufacture the aircraft are then subtracted from the sales price of the aircraft to determine profit or loss. I've often wondered if one of the reasons Airbus is overstating the market potential for VLA's over the next 20 years - is to reduce the non-recurring costs per aircraft; and pull the program break-even point in a decade or two. "Program accounting" is a very specialized accounting method used by USA aircraft manufacturers: www.fasri.net/index.php/2011/06/program-accounting-for-costs/it is neither used in other industries in the USA nor by European aircraft manufacturers. I talk about deferring production cost, because in the case of the B787 only production related cost (in the moment about 20 billion USD), but not development cost, have been deferred. So again, program accounting is a specialised accounting practice not to be confused with a program break even calculation. Program accounting is not used by Airbus. Airbus is writing off the cost, with very few exceptions, in the year they occur.
|
|
|
Post by vlafollower on Mar 11, 2014 15:18:25 GMT 1
There was a time when I did literally hundreds of EAC's (Estimates At Completion) using Program Accounting as the accounting method - stateside. I understand Program Accounting as it is applied in the Aerospace Industry in the United States. I do not understand your definition of "deferred costs". Contract incurred to date costs plus estimated cost to complete (ETC) equals Estimated Costs at Completion (EAC) in any program cost accounting I have ever done here state-side.
However, I do not know how the non-recurring costs (primarily tooling and engineering) are treated when subcontractors "buy-in" to program participation and do not charge the prime contractor for those costs - upfront. I doubt that Boeing is or has recognized all of the monetary "contributions" of the three Japanese heavies on the Boeing 787! Boeing's suppliers shared the development costs on the B787 more than any other commercial aircraft in history - from what I have read.
|
|
mjoelnir
in service - 2 years
Posts: 4,089
|
Post by mjoelnir on Mar 12, 2014 1:24:28 GMT 1
There was a time when I did literally hundreds of EAC's (Estimates At Completion) using Program Accounting as the accounting method - stateside. I understand Program Accounting as it is applied in the Aerospace Industry in the United States. I do not understand your definition of "deferred costs". Contract incurred to date costs plus estimated cost to complete (ETC) equals Estimated Costs at Completion (EAC) in any program cost accounting I have ever done here state-side. However, I do not know how the non-recurring costs (primarily tooling and engineering) are treated when subcontractors "buy-in" to program participation and do not charge the prime contractor for those costs - upfront. I doubt that Boeing is or has recognized all of the monetary "contributions" of the three Japanese heavies on the Boeing 787! Boeing's suppliers shared the development costs on the B787 more than any other commercial aircraft in history - from what I have read. It would help when people would read the official definition of program accounting when one talks together. The reference I gave is a good start. I do not talk about what somebody may have used it for or somebody may have called program accounting for cost. I talk about the official usage of this term. The term is used in the context of inventory cost accounting I call it deferring cost because cost is not written off in the year it occurs but accumulated and than written off in the future against sales to occur in the future during the run of the program. I call it deferring cost because you can not activate this positions like for example a building you bought or machine tooling but they are inventory and intangible assets. This are positions which would in other industries or other countries be directly written to cost. This practices are accepted in the USA GAAP, but not in the IFRS standards and have never been accepted in European GAAP. Here is another link giving a good explanation: www.ifrs.org/Meetings/MeetingDocs/IASB/Archive/Revenue-Recognition/RevED/RR-0611310102b04B.pdfIn this link in appendix A it is explained the difference between "program accounting" used by USA Aircraft and Defence Manufacturers and "inventory accounting" used by everybody else.
|
|
|
Post by vlafollower on Mar 12, 2014 2:13:31 GMT 1
I did program accounting for 8 years of my life and have no interest in refreshing my skills in this specialized accounting arena - general accounting principals, and standard cost accounting principals in high volume industries - automobiles - are so much easier to understand and execute. I have dealt with all and accounting is a necessary evil but something I would never do with a life. I did it - cost analyst - operations analyst - financial analyist. None of us have a clue on how Airbus has tweaked the Program Accounting Methodology, but they have to be using it as an Accounting and Management Tool. These kinds of projects require this method of accounting as do large ships and skyscrapers!! Form follows function and need! My primary interest in the A380 is it's long term success - period!! Love that VLA!!
|
|
mjoelnir
in service - 2 years
Posts: 4,089
|
Post by mjoelnir on Mar 12, 2014 10:55:49 GMT 1
I did program accounting for 8 years of my life and have no interest in refreshing my skills in this specialized accounting arena - general accounting principals, and standard cost accounting principals in high volume industries - automobiles - are so much easier to understand and execute. I have dealt with all and accounting is a necessary evil but something I would never do with a life. I did it - cost analyst - operations analyst - financial analyist. None of us have a clue on how Airbus has tweaked the Program Accounting Methodology, but they have to be using it as an Accounting and Management Tool. These kinds of projects require this method of accounting as do large ships and skyscrapers!! Form follows function and need! My primary interest in the A380 is it's long term success - period!! Love that VLA!! There are certain standards in accounting and if you do not accept them to be there it is absolutely useless to talk and to refer to how things are accounted for. Airbus accounts to IFRS, there the principles used in "program accounting" in the USA GAAP do not exist, so there is no use to start talking about how Airbus is using the program accounting methodology, because they do not use it. Airbus accounts are set up according to IFRS. Boeing accounts are set up according to USA GAAP. It is absolutely useless to refer to the numbers in those accounts without referring to the different principles of accounting. Accounting to USA GAAP gives not a better or worse picture of the accounts than IFRS, but it gives a different one.
|
|