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Chapter 9. Goosing, Stuffing, and Faking... > Red Flag 12: When Plane Makers Use W...

Red Flag 12: When Plane Makers Use Wrong Assumptions to Spread Project Costs

Investors in aircraft makers can sometimes get a rude awakening when they realize the companies have been using over-optimistic assumptions in their accounting for spending on aircraft production. Under a controversial accounting method known as “program accounting,” the plane makers can use an assumed average cost of production in any one period rather than declaring the cost actually incurred in that period. The argument is that initial costs of a project are greater than costs incurred once production has been cranked up. That reasoning is all very well as long as the average cost is at least matched by revenue from sales, but if it isn’t, the company could suddenly be forced into a big write-down of these deferred costs that investors weren’t expecting. This was the case with defense contractor Lockheed in the 1970s and also contributed to a $2.6 billion charge announced by Boeing Co. in October 1997 because of a surge in production costs that started some time before.


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