average unit cost incurred in the early stage of the program will exceed the estimated average unit cost for the entire program. This difference, referred to as excess over-average production costs, is included in inventories and is expected to be recovered from sales of aircraft anticipated to be produced later at lower-than-average production costs. 

Management conducts quarterly reviews as well as a detailed annual review in the fourth quarter as part of its annual budget process of its cost estimates and program quantities. The effect of any revision is accounted for by way of a cumulative catch-up adjustment in the period in which the revision takes place. 

A 1% change in the estimated future costs to produce the remaining aircraft program quantities for all aircraft programs would have increased or decreased the Corporation’s cost of sales by approximately $70 million, including $50 million relating to cumulative catch-up adjustments for prior years. 

## Aerospace program tooling 

A significant portion of the Corporation’s prop- erty, plant and equipment relates to aerospace program tooling. Management conducts quar- terly reviews as well as a detailed annual review in the fourth quarter as part of its annual budget process of the recoverability of aero- space program tooling. The recoverability of aerospace program tooling is assessed together with the recoverability of program inventories for each program. An impairment charge is recorded when the undiscounted value of the expected future cash flows is less than the carrying value of program tooling. Estimates of net future cash flows over the remaining useful life of program tooling are subject to similar estimates and judgments as described in the average cost accounting section above, as well as estimates with respect to expected selling prices. 

## Sales incentives 

The Corporation offers sales incentives including credit guarantees, residual value guarantees, and repurchase commitments, mostly in the aerospace segment. Management reviews the value of these commitments relative to the aircraft’s expected future value and, in the case of credit guarantees, the credit- worthiness of the borrower. Provisions are recorded at the time of sale of the underlying aircraft, and are reviewed quarterly. The air- craft’s future value is estimated using internal and external aircraft valuations, including information developed from the sale of similar aircraft in the secondary market. The creditworthiness of borrowers, for which credit guarantees have been provided, is based on credit ratings published by credit rating agencies, when available. The creditworthiness of other borrowers is estimated based on internal evaluation models. See note 24 to the Consolidated Financial Statements for addi- tional information on these guarantees. 

As at January 31, 2004, had the expected residual value used to calculate the provision for credit and residual value guarantees pro- vided in connection with aircraft sales decreased by 5%, cost of sales would have increased by approximately $90 million. 

## Long-term contracts 

The transportation segment conducts most of its business under long-term contracts. Revenues from long-term contracts are recog- nized using the percentage-of-completion method. The long-term nature of contracts involves considerable use of estimates in determining total costs, revenues and per- centage of completion. Recognized revenues and profit are subject to revisions as the contract progresses to completion. 

Contract costs include raw material, direct labour, manufacturing overhead and other 

costs such as warranty and freight. Total con- tract costs are estimated based on forecasted costs of raw materials, inflation rates, labour productivity and cost and are influenced by the nature and complexity of the work to be performed, the impact of change orders, and the impact of delayed delivery. Cost estimates are based mainly on historical performance trends, economic trends, labour agreements and information provided by suppliers. 

Revenue estimates are based on the nego- tiated contract price adjusted for change orders and contract terms that provide for the adjust- ment of prices in the event of variations from projected inflationary trends. Contract change orders and claims are included in revenue when they can be reliably estimated and real- ization is probable. 

The percentage of completion is generally determined by comparing the costs incurred to date to the total estimated cost for the contract, excluding costs that are not repre- sentative for the measure of performance. 

Management conducts quarterly reviews as well as a detailed annual review in the fourth quarter as part of its annual budget process of its estimated costs to complete, percentage of completion estimates, revenues and mar- gins recognized on a contract-by-contract basis. The effect of any revision is accounted for by way of a cumulative catch-up adjustment in the period in which the revision takes place. If a contract review indicates a negative gross margin, the entire expected loss on the con- tract is recognized in the period in which the negative gross margin is identified. 

A 1% increase in the estimated future costs for all ongoing contracts in the transportation segment would have increased cost of sales by approximately $90 million, while a 1% decrease in the estimated future costs would have decreased cost of sales by approximately $80 million. 

