Fluor 2004 Annual Report Download - page 47

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion and analysis is provided to increase understanding of, and should be read in
conjunction with, the Consolidated Financial Statements and accompanying Notes. For purposes of reviewing this
document, ‘‘operating profit’’ is calculated as revenues less cost of revenues excluding: corporate administrative and
general expense; interest expense; interest income; domestic and foreign income taxes; other non-operating income
and expense items; earnings or loss from discontinued operations; and the cumulative effect of a change in
accounting principle.
Accounting Pronouncements
Following is a discussion of the impact of accounting and financial reporting pronouncements that have been
applied in the preparation of the company’s Consolidated Financial Statements and accompanying Notes. This
information is provided to assist in an understanding of the impact such changes have had on the company’s
financial reporting. Unless a specific reference is made to a new pronouncement, the company has determined that
the pronouncement either does not apply to its business or that the impact of applying the pronouncement is not
significant.
In November 2002, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 45,
‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebted-
ness of Others’’ (FIN 45 or the ‘‘Interpretation’’). FIN 45 expands on the accounting and disclosure requirements
under existing accounting standards. It clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation. Disclosures required by the Interpretation are provided
below in the Financial Position and Liquidity section of this Management’s Discussion and Analysis and in the
footnotes to the accompanying financial statements. The accounting requirements of the Interpretation are applicable
to transactions entered into beginning January 1, 2003. Application of this Interpretation did not have a significant
effect on the company’s consolidated results of operations or financial position in 2004 or 2003.
In December 2003, the FASB issued Interpretation No. 46 (Revised), ‘‘Consolidation of Variable Interest
Entities’’ (FIN 46-R). FIN 46-R provides the principles to consider in determining when variable interest entities
must be consolidated in the financial statements of the primary beneficiary. In general, a variable interest entity is an
entity used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity
investors that are not required to provide sufficient financial resources for the entity to support its activities without
additional subordinated financial support. FIN 46-R requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or
entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest
entity is called the primary beneficiary of that entity.
The company’s engineering office facilities in Aliso Viejo, California (‘‘Aliso Viejo’’) and Calgary, Canada
(‘‘Calgary’’) were leased through arrangements involving variable interest entities. Beginning in the first quarter of
2003, the company consolidated these entities in its financial statements as prescribed by FIN 46-R. At
December 31, 2003, the effect of this consolidation resulted in an increase of $100 million and $27 million in
reported short-term and long-term debt, respectively, and an increase in Property, Plant and Equipment of
$107 million. None of the terms of the leasing arrangements or the company’s obligations as a lessee were impacted
by this change in accounting. The cumulative impact of the difference in earnings, amounting to a charge of
$10.4 million net of tax, relating to prior years was reported in the first quarter of 2003 as the cumulative effect of a
change in accounting principle.
During 2004, the company exercised options to purchase both the Aliso Viejo ($100 million) and Calgary
($29 million) engineering and office facilities. These amounts are reported as repayments of facilities financing in
the accompanying Consolidated Statement of Cash Flows.
Contracts that are executed jointly through partnerships and joint ventures are proportionally consolidated in
accordance with Emerging Issues Task Force (‘‘EITF’’) Issue 00-01, ‘‘Investor Balance Sheet and Income Statement
Display under the Equity Method for Investments in Certain Partnerships and Other Ventures’’ (EITF 00-01) and
Statement of Position 81-1, ‘‘Accounting for Performance of Construction Type and Certain Production Type
Contracts’’ (SOP 81-1) issued by the American Institute of Certified Public Accountants. The company evaluates the
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