By Dan Catchpole
Nov. 6, 2018, © Leeham News: Like countless other businesses, Boeing this year adopted new accounting standards, known by the acronym ASC 606. The new rules did not significantly affect the company’s balance sheet. However, it did result in some noticeable changes to its orders and deliveries page.
Boeing added a line—dubbed ASC 606 Adjustment—to its total order table. It also moved some orders around within the order book, shifting them from the operators to Boeing Capital Corp., the aerospace giant’s financing arm.
Now on the company’s orders page, there are three lines in its total order book table. The first line is labeled “Total Unfilled Orders.” It represents all firm orders with a financial commitment. It is the tally that the company used prior to implementing the ASC 606 changes this year.
The next row is the ASC 606 Adjustment line, which captures orders from customers that actually wind up with Boeing’s leasing arm, Boeing Capital Corp. Some customers may have less than stellar credit. The idea is that these orders pose some risk of falling through. Boeing has not disclosed how it determines which orders are considered at risk. But others, like American Airlines, chose BCC to lease the airplanes for fleet planning reasons. Twenty-two of an order by American for 47 787s will be leased from BCC. These don’t show up on the Boeing orders website under American, but rather under BCC. Boeing declined to comment on the record for this article.
The final line is labeled “Backlog.” It represents the difference between the first two lines. So, it, in theory, represents firm orders from customers with solid financing.
When the new standard was implemented, the company removed 66 orders from the backlog. By August, there were 70 ASC 606 orders. That tally is now 83. That is a tiny fraction of Boeing’s 5,932 total unfilled orders—1.4%, to be precise. The ASC 606 orders are not skewed toward any single program.
Most—60—are for 737s; five are for 777s; and 18 are for 787s. So, ASC 606 orders make up a slightly higher percentage of the 787 program’s order book—2.7%—than they do for the other programs. Still, that is a little more than one month’s work at the planned production rate of 14 airplanes per month. There is no indication how these 14 are spread through the production line. In either case, it’s hardly enough to keep Boeing CEO Dennis Muilenburg up at night.
Boeing won’t say whose orders are broken out under the ASC 606 Adjustment. The order page on the company’s public website allows visitors to generate reports using different variables. Those reports are drawn from all firm orders, including ASC 606 orders, a Boeing spokesman said.
It is possible for an order to be designated under the ASC 606 adjustment, and then later moved into the Backlog row if the customer’s credit improves, the spokesman said.
Within the backlog, some orders shifted around, as Boeing now has to report the orders by the entity that buys the airplanes, rather than the operator. So, Boeing Capital Corp. now is listed as a customer with 104 unfilled orders—75 737s, 1 777 and 28 787s, as of Nov. 2.
At least 25 of the 737s are advance sale leasebacks to the financially-struggling Jet Airways.
Embraer in its latest quarterly earnings report scrubbed 134 jets from its order backlog. Most of the orders—100 E175-E2s for SkyWest Airlines of the US, which were “conditional”—were stripped out due to new international accounting standards, known as IFRS 15. That standard is similar to ASC 606.
Both reforms have been several years in the making and largely deal with how and when revenue is logged. Boeing’s accountants have been working to implement the new standards for more than two years. Boeing Defense’s balance sheet was more affected than Boeing Commercial Airplanes due to how many of the defense division’s contracts are structured.
The changes make bookkeeping a lot more complicated, said David Burgstahler, an accounting professor at the University of Washington’s Foster School of Business.
Burgstahler cautioned that while he is familiar with the ASC 606 changes, he is not an expert in them.
The intent of the changes was to harmonize revenue recognition based on the principle that revenue from goods and services should be recorded when they are transferred to the customer and relative to how much has been handed over.
That is fairly straightforward for a company that makes lots of disposable widgets but becomes more complicated for really expensive durable goods like airplanes and has been much more complex for many in the digital economy.