FY2021 10-K Document - FINAL 11 15 21 - Flipbook - Page 23
Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these consolidated financial statements requires us to make estimates,
assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are
affected by our application of accounting policies, which are discussed in Note 1, Summary of Significant Accounting
Policies, of Item 8, Financial Statements and Supplementary Data, of this report. We believe the accounting policies
discussed below are the most critical in understanding and evaluating our financial results. These critical accounting
policies have been reviewed with the Audit Committee of our Board of Directors.
Revenue Recognition on Over-Time Contracts
We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. For contracts
that qualify for over time treatment, we recognize revenue as control of the promised goods or services is being
transferred to the customer. Revenue recognized over time for the year ended October 2, 2021 was 63% of total
revenue. The cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to
estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative
revenue recognized in prior periods. We believe this is an appropriate measure of progress toward satisfaction of
performance obligations as this measure most accurately depicts the progress of our work and transfer of control to
our customers. Changes in estimates affecting sales, costs and profits are recognized in the period in which the
change becomes known using the cumulative catch-up method of accounting. Revenue and cost estimates for
substantially all over-time contract performance obligations are reviewed and updated quarterly. For further
information, refer to Note 2, Revenue from Contracts with Customers and Note 21,Segments, of Item 8, Financial
Statements and Supplementary Data, of this report.
Contract Reserves
At October 2, 2021, we had contract reserves of $59 million. Contract reserves are comprised of contract loss
reserves, recall reserves, and contract-related reserves. Contract loss reserves are recorded for open contracts where
it is anticipated that contract costs will be greater than contract income and are determined considering all direct and
indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period
expenses. In accordance with ASC 606, we calculate contract losses at the contract level, versus the performance
obligation level. Recall reserves are recorded when additional work is needed on completed products for them to meet
contract specifications. Contract-related reserves are recorded for other reasons, such as delivery issues outside of
the ordinary scope of the contract. For all three types of reserves, a provision for the entire amount of the loss is
charged against income in the period in which the loss becomes known and can be reasonably estimated by
management. For further information, refer to Note 2, Revenue from Contracts with Customers, of Item 8, Financial
Statements and Supplementary Data, of this report.
Reserves for Inventory Valuation
At October 2, 2021, we had net inventories of $613 million, or 36% of current assets. Reserves for inventory were
$156 million, or 20% of gross inventories. Inventories are stated at the lower of cost or net realizable value with cost
determined primarily on the first-in, first-out method of valuation.
We record valuation reserves to provide for slow-moving or obsolete inventory by principally using a formula-based
method that increases the valuation reserve as the inventory ages. We also take specific circumstances into
consideration. We consider overall inventory levels in relation to firm customer backlog in addition to forecasted
demand including aftermarket sales. Changes in these and other factors, such as low demand and technological
obsolescence, could cause us to increase our reserves for inventory valuation, which would negatively impact our
gross margin. As we record provisions within cost of sales to increase inventory valuation reserves, we establish a
new, lower cost basis for the inventory.
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