BA Boeing Co

By Doug Cameron and Jon Ostrower 

Boeing Co. shares fell sharply Thursday as fresh concerns about the company's accounting method for its jetliners added to investor anxiety about the outlook for the commercial-aircraft market.

The world's largest aerospace company long has employed a system called program accounting that averages out expected costs and revenue on airplane programs over years of production, enabling it to book anticipated future profits as part of current earnings.

The system is compliant with Generally Accepted Accounting Principles but rarely used by other companies, and some investors and shareholders have raised concerns that it builds long-term assumptions into Boeing's financial reporting about factors that are too uncertain.

Attention to the accounting method renewed on Thursday after a report that the Securities and Exchange Commission is investigating whether Boeing properly accounted for the long-term costs and expected sales of two of its most prominent jet programs--the 787 Dreamliner and the 747 aircraft. The report, by Bloomberg News, which cited people with knowledge of the matter, said SEC enforcement officials hadn't reached conclusions and could decide against bringing a case.

Boeing and the SEC declined to comment. "We typically do not comment on media inquiries of this nature," said John Dern, a Boeing spokesman.

Boeing shares ended down 6.8% in Thursday trading--after recovering from much steeper declines--to their lowest closing price since September 2013. The stock is down 25% this year on concerns that years of record jet deliveries may be petering out due to strong competition and global economic weakness.

Boeing declined Thursday to comment on its accounting methods. In the past, Boeing has said that program accounting, which it has used for decades, is critical to avoiding big swings in earnings that could make it difficult to pursue projects that can stretch over years but require huge outlays up front.

Several analysts on Thursday called the stock selloff overblown, saying that even if Boeing had to change its accounting practices the likely impact on its cash flow would be small.

However, accounting method aside, if Boeing's cost-saving projections fall short, then it won't meet cash-generation goals, eagerly awaited by investors.

Program accounting requires Boeing to estimate cost levels, sales volumes, and anticipated productivity improvements and pricing for jets that might be made years in the future. Some analysts and investors have said that the difficulty of predicting such long-term factors could make such accounting conclusions arbitrary.

From the Dreamliner's start, Boeing has had to spend more producing each of the technologically advanced,fuel-efficient jets than it gets selling them. Boeing tallies the accumulated shortfall as "deferred production costs."

For the Dreamliner, that tally grew to $28.5 billion as of the fourth quarter after delivery of more than 350 of the aircraft since 2011.

Boeing expects to erase that deficit over time because costs for making jets generally drop as manufacturers scale up output and learn to produce more efficiently. The company said last month that it expects to start making money on a unit basis on each 787 delivery later this year.

Those record costs mean Boeing must average $30.4 million in profit per plane on its outstanding order backlog, all before it expects to recover another $8.7 billion on 158 jets it hasn't yet sold, according to its SEC filings.

Some analysts are concerned that the pace of cost reduction has fallen short. Boeing's cost-cutting to date is more in line with its recent jetliner programs, such as its 777, not a more aggressive decline required to recover its costs, said UBS analyst David Strauss.

Credit Suisse analyst Rob Spingarn in a December investor note wrote that Boeing "may be overly optimistic" about its ability to recover all of its deferred costs, potentially falling short by an estimated $7.5 billion over its next nearly 1,000 deliveries.

Boeing in 2002 paid $92.5 million to settle a class-action suit alleging it manipulated program accounting on the 777 jet to shield the timing of cost overruns and production problems five years earlier, according to court documents. The company didn't admit wrongdoing.

Jeff Wilks, director of the School of Accountancy at Brigham Young University, said program accounting "was trying to recognize how perverse that reporting would be" if the huge initial costs of production were reflected in a company's earnings. The risk, he said, could come if a company "didn't foreshadow or give a good sense of its expectations" for what it costs and revenues would be.

Few other companies use program accounting. Rival Airbus accounts for its jet programs differently, using International Financial Reporting Standards, booking cost overruns as they occur rather than trying to amortize them over the life of future aircraft production.

Airbus took repeated hits to earnings during the development of the A380 superjumbo as the plane's development and production costs grew. Airbus last year began delivering the first A380 jets that no longer lose money.

Boeing has adjusted its expectations for the Dreamliner several times. It initially set the accounting block--the number of planes over which it averages costs and revenue--at 1,100 aircraft, already far larger than it has for earlier programs. It raised that in 2013 to 1,300 aircraft when it announced plans to boost output, amounting to about a decade of planned production. Boeing said those estimates were driven by forecast demand for the jet.

The gap between accounting methods can be sizable. Boeing says that earnings from operations in its commercial airplanes segment last year would have been $2.67 billion on a unit-cost accounting basis, compared with the $5.16 billion it reported using program accounting.

In 2014, unit accounting would have created a $122 million loss, compared with the $6.41 billion operating profit Boeing reported.

Robert Wall and Aruna Viswanatha contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com and Jon Ostrower at jon.ostrower@wsj.com

(END) Dow Jones Newswires

February 11, 2016 19:49 ET (00:49 GMT)

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