Fluor 2004 Annual Report Download - page 49

material based on unvested options outstanding at December 31, 2004. Had SFAS 123-R been adopted in prior
periods, the impact would be as presented in the disclosure of pro forma earnings and earnings per share in the Stock
Plan footnote under Major Accounting Policies in the accompanying Consolidated Financial Statements.
SFAS 123-R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as
a financing cash flow, rather than as an operating cash flow as currently required. This requirement will generally
impact cash provided or utilized by operating activities with offsets in cash flows from financing activities in periods
after adoption. While the company cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in
prior periods for such excess tax deductions were $14 million, $4 million, and $2 million in 2004, 2003 and 2002,
respectively.
Discussion of Critical Accounting Policies
The company’s discussion and analysis of its financial condition and results of operations is based upon its
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The company’s significant accounting policies are described in the Notes to
Consolidated Financial Statements. The preparation of the Consolidated Financial Statements requires management
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of
the financial statements, and accordingly, actual results in future periods could differ from these estimates.
Significant judgments and estimates used in the preparation of the Consolidated Financial Statements apply the
following critical accounting policies.
Engineering and Construction Contracts Engineering and construction contract revenues are recognized on
the percentage-of-completion method based on contract costs incurred to date compared with total estimated
contract costs. This method of revenue recognition requires the company to prepare estimates of costs to complete
contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential
variances in schedule and the cost of materials, labor costs and productivity, the impact of change orders, liability
claims, contract disputes, or achievement of contractual performance standards. Changes in total estimated contract
costs and losses, if any, are recognized in the period they are determined. The majority of the company’s engineering
and construction contracts provide for reimbursement of costs plus a fixed or percentage fee. In the highly
competitive markets served by the company, there is an increasing trend for cost-reimbursable contracts with
incentive-fee arrangements. As of December 31, 2004, 73 percent of the company’s backlog was cost reimbursable
while 27 percent was for guaranteed maximum, fixed or unit price contracts. In certain instances, the company has
provided guaranteed completion dates and/or achievement of other performance criteria. Failure to meet schedule or
performance guarantees or increases in contract costs can result in unrealized incentive fees or non-recoverable
costs, which could exceed revenues realized from the projects.
Claims arising from engineering and construction contracts have been made against the company by clients,
and the company has made certain claims against clients for costs. The company recognizes certain significant
claims for recovery of incurred costs when it is probable that the claim will result in additional contract revenue and
when the amount of the claim can be reliably estimated. Recognized claims amounted to $105 million and
$24 million at December 31, 2004 and 2003, respectively. Unapproved change orders are accounted for in revenue
and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances
where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable to change
orders are deferred pending determination of the impact on contract price.
Backlog in the engineering and construction industry is a measure of the total dollar value of work to be
performed on contracts awarded and in progress. Although backlog reflects business that is considered to be firm,
cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations,
deferrals and revised project scope and costs, both upward and downward.
Engineering and Construction Partnerships and Joint Ventures Certain contracts are executed jointly
through partnerships and joint ventures with unrelated third parties. The company accounts for its interests in the
operations of these ventures on a proportional consolidation basis. Under this method of accounting, the company
consolidates its proportional share of venture revenues, costs and operating profits in the Consolidated Statement of
Earnings and generally uses the one-line equity method of accounting in the Consolidated Balance Sheet. The most
significant application of the proportional consolidation method is in the Power, Oil & Gas and Industrial &
Infrastructure segments.
21