Note 1 – Summary of Significant Accounting Policies

Principles of consolidation The consolidated financial statements of The Boeing Company, together with its subsidiaries (herein referred to as the “Company”) include the accounts of all majority-owned subsidiaries. Investments in joint ventures for which the Company does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Accordingly, the Company’s share of net earnings and losses from these ventures is included in the Consolidated Statements of Operations. Intercompany profits, transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to prior periods to conform with current reporting.

Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statments. Significant estimates for which changes in the near term are considered reasonably possible and that may have a material impact on the financial statements are addressed in these notes to the consolidated financial statements.

Contract accounting Contract accounting is used predominantly by the Military Aircraft and Missile Systems and Space and Communications segments. The majority of the business conducted in these segments is performed under contracts for the U.S. Government and foreign governments that extend over a number of years.

The process to estimate the total contract cost-revenue relationship results in the development of gross margin and cost of sales percentages. These percentages are utilized in the recognition of earnings and are significant factors in contract accounting. The amount reported as cost of sales is determined by applying the estimated cost of sales percentages to the amount of revenue recognized for each contract.

Revenues under contracts with fixed prices are generally recognized as deliveries are made. For certain fixed-price contracts that require substantial performance over an extended period before deliveries begin, revenues are recorded based on the attainment of performance milestones. Revenues under contracts with terms that reimburse for costs incurred plus an agreed upon profit are recorded as costs are incurred. Contracts may contain provisions to earn incentive and award fees if targets are achieved. Incentive and award fees that can be reasonably estimated are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded.

Program accounting The Company uses program accounting for its 7-series commercial airplane products. Program accounting is a method of accounting for the costs of certain products manufactured for delivery under production type contracts where profitability is realized over multiple contracts and years. Under program accounting, inventoriable production costs (including overhead), program tooling costs and warranty costs are accumulated and charged to revenue by program instead of by individual units or contracts. A program consists of the estimated number of units (accounting quantity) of a product to be produced in a continuing, long-term production effort for delivery under existing and anticipated contracts. To establish the relationship of revenue to cost of sales, program accounting requires estimates of (a) the number of units to be produced and sold in a program, (b) the period over which the units can reasonably be expected to be produced, and (c) their expected selling prices, production costs, program tooling, and warranty costs for the total program.

The Company recognizes revenue for commercial airplanes when a unit is completed and accepted by the customer. The revenue recognized is the price negotiated with the customer including special features adjusted by an escalation formula. The amount reported as cost of sales is determined by applying the estimated cost of sales percentage for the total remaining program to the amount of revenue recognized for the quarter.

Inventories Inventoried costs on commercial aircraft programs and long-term contracts include direct engineering, production and tooling costs, and applicable overhead, not in excess of estimated net realizable value. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year.

Because of the higher unit production costs experienced at the beginning of a new airplane program (known as the learning curve effect) and the substantial investment required for initial tooling and special equipment, the costs incurred for production of the early units in the program will exceed the amount reported as cost of sales for those units. This difference known as deferred production costs is included in inventory along with unamortized tooling costs.

Commercial spare parts and general stock materials are stated at average cost not in excess of net realizable value.

Research and development Research and development costs are expensed as incurred unless the costs are related to a contractual arrangement. Costs that are incurred pursuant to a contractual arrangement are recorded as inventory costs and charged to cost of products and services under contract accounting.

Share-based compensation The Company uses a fair value based method of accounting for stock-based compensation provided to its employees in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company values stock options issued based upon an option-pricing model and recognizes this value as an expense over the period in which the options vest. Potential distributions from the ShareValue Trust described in Note 17 have been valued based upon an option-pricing model, with the related expense recognized over the life of the trust. Share-based expense associated with Performance Shares described in Note 17 is determined based on the market value of the Company’s stock at the time of the award applied to the maximum number of shares contingently issuable based on stock price and is amortized over a five-year period.