Boeing program accounting

Professors Jonas Heese and Suraj Srinivasan, Senior Case Researcher David Lane (Case Research & Writing Group), and Associate Case Researcher James Barnett (Case Research & Writing Group) prepared this case with the assistance of Research Associate Quinn Pitcher. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. Laurie Pitcher and Eastport Capital Management are fictional. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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J O N A S H E E S E

S U R A J S R I N I V A S A N

D A V I D L A N E

J A M E S B A R N E T T

Accounting Turbulence at Boeing

Laurie Pitcher, a vice president at Eastport Capital Management, a leading investment advisory firm, sat back after listening to the hour-long earnings conference call for Boeing’s 2016 financial results. Laurie was Eastport’s senior aerospace analyst, with over 20 years of experience covering the industry. It was January 25, 2017 and Boeing had some good news to report. Boeing CFO Greg Smith had announced that the company achieved its first deferred production cost reductions on the 787 Dreamliner.1 Laurie thought back to February 11, 2016 when Boeing’s stock had dropped almost 7% on word that the U.S. Securities and Exchange Commission (SEC) was investigating the aircraft manufacturer’s accounting for its 787 Dreamliner model. She had spent that day fielding anxious calls from her clients who were trying to assess the implications for the company.2

Unlike its rival Airbus, Boeing had used an accounting methodology called program accounting to record its commercial aircraft expenses since the 1980s. Accepted by the U.S. Financial Accounting Standards Board (FASB) and the SEC, program accounting allowed Boeing to expense estimated average costs instead of the actual production costs of an aircraft. This practice lowered the effect of the initially high costs of tooling and manufacturing a new model of aircraft on Boeing’s profitability and reflected potential learning efficiencies that could drive down manufacturing costs over time. (See Exhibit 1 for an example illustrating the mechanics of program accounting.)

Boeing had estimated that it would sell 1,300 Dreamliners over the lifetime of the program. Various obstacles had delayed 787 development substantially, however, increasing its costs from the $5 billion expected when development began in 2004 to $30 billion by the start of production in 2011.3 In 2016, average production cost per plane was nearly double the $40 million initially anticipated, for an aircraft that had a list price upwards of $200 million but often sold for substantially less.4

Laurie’s investors had wondered about how Boeing applied program accounting, the judgment required to apply it accurately, and the implications of the probe on Boeing’s value and ongoing rivalry with Airbus. The intervening year had done little to quell concerns: the company had been critiqued in the press and by analysts and the fate of the SEC enquiry, which involved tips from a whistleblower, was still unknown. Laurie knew that her clients would need help interpreting this latest news and braced herself for the flurry of calls soon to come.

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118-020 Accounting Turbulence at Boeing

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Market Structure

In 2000, 13,600 commercial jets were in service worldwide.5, 6 As of 2015, this figure had increased to 22,510 commercial aircraft,7 and was expected to more than double by 2035.8 Boeing and Airbus were the only manufacturers of “heavy” and wide-bodied commercial aircraft.a The two companies held a joint market share of nearly 60% of the overall market for passenger jets (including commuter/regional and business jets). Boeing aircraft comprised 31.5% of the world’s jets in 2016, followed closely by Europe’s Airbus with 27%, and more distantly by Canada’s Bombardier with 7.7%, and Brazil’s Embraer with 6.8%.9 (Exhibit 2 shows commercial aircraft deliveries by year.) Bombardier, Embraer, and other jet makers specialized in smaller jets than Boeing and Airbus, though their largest aircraft were beginning to overlap the 100+ passenger minimum capacity of the smallest Boeing and Airbus models.10, 11