Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Vendor Penalties The decrease in production rates on certain commercial airplane models and related products triggered contractual penalty clauses with various vendors and subcontractors, and the Company recorded a charge of $68 for these penalties. The decrease in production rates resulted directly from the change in aircraft demand after the events of September 11, 2001.

Guarantee Commitments The Company has extended certain guarantees and commitments such as asset value guarantees discussed in Note 24. Based upon the impact of the events of September 11, 2001, on aircraft market prices and aircraft demand of customers who are counterparties in these guarantees, the Company recorded a charge of $49 associated with an adverse exposure under these guarantees.

Ongoing Assessment The Company will continue to assess other potential losses and costs it might incur in relation to the attacks. These future costs are not yet accruable; however, the Company expects that such costs may be incurred throughout 2002. Liabilities totaling $542 were established as of December 31, 2001, associated with these charges and are expected to be settled by the end of 2002. Any costs or adjustments in estimates will continue to be recognized as a separate component of earnings from operations entitled ‘Special charges due to events of September 11, 2001.’

Note 5 – Standards Issued and Not Yet Implemented

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The Company is required to adopt SFAS No. 141 for all business combinations completed after June 30, 2001. This standard requires that business combinations initiated after June 30, 2001, be accounted for under the purchase method. Goodwill and other intangible assets that resulted from business combinations before July 1, 2001, must be reclassified to conform to the requirements of SFAS No. 142, as of the statement adoption date.

The Company will adopt SFAS No. 142 at the beginning of 2002 for all goodwill and other intangible assets recognized in the Company’s statement of financial position as of January 1, 2002. This standard changes the accounting for goodwill from an amortization method to an impairment-only approach, and introduces a new model for determining impairment charges.

The new impairment model requires performance of a two-step test for operations that have goodwill assigned to them. First, it requires a comparison of the book value of net assets to the fair value of the related operations. Fair values are estimated using discounted cash flows, subject to adjustment based on the Company’s market capitalization at the date of evaluation. If fair value is determined to be less than book value, a second step is performed to compute the amount of impairment. In this process, the fair value of goodwill is estimated, and is compared to its book value. Any shortfall of the book value below fair value represents the amount of goodwill impairment.

Upon transition to the new impairment model as of January 1, 2002, the Company projects that it will recognize a reduction of goodwill and a pretax charge in the range of $2,100 to $2,600, identified as a cumulative effect of an accounting change. This charge results from the change from the prior impairment method, whose first step was based on undiscounted cash flows, to the new one that is based on fair value. The fair value measurement will reflect the estimates and expectations of the marketplace participants as of January 1, 2002, the date of adoption.

In June 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement Obligations, and in August 2001, the FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company does not believe that the implementation of these standards will have a significant impact on the financial statements.

Note 6 – Acquisitions

On October 6, 2000, the Company acquired the Hughes Electronics Corporation (Hughes) space and communications and related businesses. The acquisition was accounted for under the purchase method, by which the purchase price was allocated to the net assets acquired based on preliminary estimates of their fair values. The original purchase price was $3,849, initial goodwill was valued at $740 and the other intangible assets were valued at $631. During the period from acquisition to the third quarter of 2001, the Company completed its assessment of the net assets acquired and goodwill was increased to a balance of $2,166. Included in goodwill are certain claims submitted to Hughes for resolution as contractual purchase price contingencies. The Company anticipates finalizing the Hughes purchase price allocation during late 2002 or early 2003, at the conclusion of arbitration procedures related to these contingencies. Other adjustments were recorded to reflect finalization of fair value assessments for the net assets acquired and the impact of the Company’s accounting policies on acquired balances.

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