page 93 Bombardier Inc. Annual Report 2003-04 Revenues from long-term contracts consisting of designing, engineering or manufacturing of products, including major refurbishments, are recognized using the percentage-of-completion method of accounting consistent with Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1) published by the American Institute of Certified Public Accountants (AICPA). The degree of completion is generally determined by comparing the costs incurred to the total costs anticipated for the entire contract, excluding costs that are not representative for the measure of performance. Revenues from long-term service contracts are recognized based on service performance over the term of the contract for service contracts entered into on or after December 17, 2003. Service contracts entered into prior to December 17, 2003, are accounted for using the percentage-of-completion method of accounting. Estimated revenues from long-term contracts include revenues from change orders and claims when it is probable that they will result in additional revenues in an amount that can be reliably estimated. Average unit cost for commercial and business aircraft is determined based on the estimated total production costs for a predetermined program quantity. Program quantities are established based on Management’s assessment of market conditions and foreseeable demand at the beginning of the production stage for each program, taking into consideration, among other factors, existing firm orders and options.  The average unit cost is recorded to cost of sales at the time of each aircraft delivery. Under the learning curve concept, which anticipates  a predictable decrease in unit costs as tasks and production techniques become more efficient through repetition and management action, excess over-average production costs during the early stages of a program are deferred and recovered from sales of aircraft anticipated  to be produced later at lower-than-average costs. Estimates of average unit production costs and of program quantities are an integral component of average cost accounting. 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, and the effect of any revisions are accounted for by way of a cumulative catch-up adjustment to income in the period in which the revision takes place. Cost of sales for long-term contracts is established based on cost incurred, including material, direct labour and manufacturing overhead costs. If a contract review indicates a negative gross margin, the entire expected loss on the contract is recognized in the period in which the negative gross margin is identified. 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 the effect of any revisions are accounted for by way of a cumulative catch-up adjustment to income in the period in which the revision takes place. Inventory, determined under the average cost accounting method, is recorded at the lower of cost or net recoverable value. It includes raw materials, direct labour and manufacturing overhead. To the extent that inventory costs are expected to exceed their recoverable amount, charges are made to current period income to reduce inventoried costs to their estimated recoverable amount. Long-term contracts inventory is recorded at cost which includes material, direct labour, manufacturing overhead incurred and related estimated margins. Raw material and finished product inventories, other than those included in long-term contracts and aerospace programs, are valued at the lower of cost (specific cost, average cost or first-in, first-out) and replacement cost (raw materials) or net realizable value (finished products). The cost of finished products includes the cost of raw materials, direct labour and related manufacturing overhead. Pre-owned aircraft available for sale are stated at the lower of cost or net realizable value. The Corporation determines net realizable value by using third-party appraisals of aircraft value and by reviewing current and future market conditions, including information developed from the sale of similar aircraft in the secondary market.  Cost of sales a) Aerospace programs  b) Long-term contracts Inventory valuation a) Aerospace programs b) Long-term contracts c) Other inventories