Fluor 2004 Annual Report Download - page 50

The company’s accounting for project specific joint venture or consortium arrangements is closely integrated
with the accounting for the underlying engineering and construction project for which the joint venture was
established. The company engages in project specific joint venture or consortium arrangements in the ordinary
course of business to share risks and/or to secure specialty skills required for project execution. Frequently, these
arrangements are characterized by a 50 percent or less ownership or participation interest that requires only a small
initial investment. Execution of a project is generally the single business purpose of these joint venture
arrangements. When the company is the primary contractor responsible for execution, the project is accounted for as
part of normal operations and included in consolidated revenues using appropriate contract accounting principles.
Foreign Currency The company generally limits its exposure to foreign currency fluctuations in most of its
engineering and construction contracts through provisions that require client payments in U.S. dollars or other
currencies corresponding to the currency in which costs are incurred. As a result, the company generally does not
need to hedge foreign currency cash flows for contract work performed. Under certain limited circumstances, such
foreign currency payment provisions could be deemed embedded derivatives. As of December 31, 2004 and 2003,
the company had no significant foreign currency arrangements that constitute embedded derivatives in any of its
contracts. Managing foreign currency risk on projects requires estimates of future cash flows and judgments about
the timing and distribution of expenditures of foreign currencies.
The company generally uses forward exchange contracts to hedge foreign currency transactions where contract
provisions do not contain foreign currency provisions or the transaction is for a non-contract-related expenditure.
The objective of this activity is to hedge the foreign exchange currency risk due to changes in exchange rates for
currencies in which anticipated future cash payments will be made. The company does not engage in currency
speculation.
In connection with the Hamaca Crude Upgrader Project located in Jose, Venezuela, the company has incurred
foreign currency exposures and related translation losses due to weakness in the Venezuelan Bolivar compared with
the U.S. dollar. See additional discussion concerning the Hamaca project below under Results of Operations – Oil &
Gas.
Deferred Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of
events that have been recognized in the company’s financial statements or tax returns. At December 31, 2004 the
company had deferred tax assets of $272.8 million which were partially offset by a valuation allowance of
$57.9 million and further reduced by deferred tax liabilities of $55.4 million. The valuation allowance reduces
certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to
the deferred tax assets established for certain tax credit carryforwards, net operating and capital loss carryforwards
for U.S. and non-U.S. subsidiaries, and certain project performance reserves. The company evaluates the
realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of realization are the company’s forecast of future
taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.
Failure to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate
realization of deferred tax assets and could result in an increase in the company’s effective tax rate on future
earnings.
Retirement Benefits The company accounts for its defined benefit pension plans in accordance with
Statement of Financial Accounting Standards No. 87, ‘‘Employers’ Accounting for Pensions,’’ as amended
(SFAS 87). As permitted by SFAS 87, changes in retirement plan obligations and assets set aside to pay benefits are
not recognized as they occur but are recognized over subsequent periods. Assumptions concerning discount rates,
long-term rates of return on assets and rates of increase in compensation levels are determined based on the current
economic environment in each host country at the end of each respective annual reporting period. The company
evaluates the funded status of each of its retirement plans using these current assumptions and determines the
appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations
and other factors. Recent decreases in long-term interest rates have the effect of increasing plan liabilities and if
expected returns on plan assets are not achieved, future funding obligations could increase substantially. Assuming
no changes in current assumptions, the company expects to fund between $35 million and $70 million for the
calendar year 2005. If the discount rate were reduced by 25 basis points, plan liabilities would increase by
approximately $32 million.
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