FY2021 10-K Document - FINAL 11 15 21 - Flipbook - Page 50
Table of Contents
Note 2 - Revenue from Contracts with Customers
We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606. The first step
is identifying the contract. The identification of a contract with a customer requires an assessment of each party’s
rights and obligations regarding the products or services to be transferred, including an evaluation of termination
clauses and presently enforceable rights and obligations. Each party’s rights and obligations and the associated terms
and conditions are typically determined in purchase orders. For sales that are governed by master supply agreements
under which provisions define specific program requirements, purchase orders are issued under these agreements to
reflect presently enforceable rights and obligations for the units of products and services being purchased.
Contracts are sometimes modified to account for changes in contract specifications and requirements. When this
occurs, we assess the modification as prescribed in ASC 606 and determine whether the existing contract needs to be
modified (and revenue cumulatively caught up), whether the existing contract needs to be terminated and a new
contract needs to be created, or whether the existing contract remains and a new contract needs to be created. This is
determined based on the rights and obligations within the modification as well as the associated transaction price.
The next step is identifying the performance obligations. A performance obligation is a promise to transfer goods or
services to a customer that is distinct in the context of the contract, as defined by ASC 606. We identify a performance
obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of our
assessment, we consider all goods and/or services promised in the contract, regardless of whether they are explicitly
stated or implied by customary business practices. The products and services in our contracts are typically not distinct
from one another due to their complexity and reliance on each other or, in many cases, we provide a significant
integration service. Accordingly, many of our contracts are accounted for as one performance obligation. In limited
cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities
that are not highly complex or interrelated or involve different product life cycles. Warranties are provided on certain
contracts, but do not typically provide for services beyond standard assurances and are therefore not distinct
performance obligations under ASC 606.
The third step is determining the transaction price, which represents the amount of consideration we expect to be
entitled to receive from a customer in exchange for providing the goods or services. There are times when this
consideration is variable, for example a volume discount, and must be estimated. Sales, use, value-added, and excise
taxes are excluded from the transaction price, where applicable.
The fourth step is allocating the transaction price. The transaction price must be allocated to the performance
obligations identified in the contract based on relative stand-alone selling prices when available, or an estimate for
each distinct good or service in the contract when standalone prices are not available. Our contracts with customers
generally require payment under normal commercial terms after delivery. Payment terms are typically within 30 to 60
days of delivery. The timing of satisfaction of our performance obligations does not significantly vary from the typical
timing of payment.
The final step is the recognition of revenue. We recognize revenue as the performance obligations are satisfied. ASC
606 provides guidance to help determine if we are satisfying the performance obligation at a point in time or over time.
In determining when performance obligations are satisfied, we consider factors such as contract terms, payment
terms and whether there is an alternative use of the product or service. In essence, we recognize revenue when or as
control of the promised goods or services transfer to the customer.
Revenue is recognized either over time using the cost-to-cost method, or point in time method. The over-time method
of revenue recognition is predominantly used in Aircraft Controls and Space and Defense Controls. We use this
method for U.S. Government contracts and repair and overhaul arrangements as we are creating or enhancing assets
that the customer controls as the assets are being created or enhanced. In addition, many of our large commercial
contracts qualify for over-time accounting as our performance does not create an asset with an alternative use and we
have an enforceable right to payment for performance completed to date. Our over-time contracts are primarily firm
fixed price.
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