Fluor 2013 Annual Report Download - page 73

provisions. The company recognizes revenue, but not profit, for certain significant claims (including change
orders in dispute and unapproved change orders in regard to both scope and price) when it is determined
that recovery of incurred cost is probable and the amounts can be reliably estimated. Under
ASC 605-35-25, these requirements are satisfied when the contract or other evidence provides a legal basis
for the claim, additional costs were caused by circumstances that were unforeseen at the contract date and
not the result of deficiencies in the company’s performance, claim-related costs are identifiable and
considered reasonable in view of the work performed, and evidence supporting the claim is objective and
verifiable. Cost, but not profit, associated with unapproved change orders is accounted for in revenue when
it is probable that the cost will be recovered through a change in the contract price. In circumstances where
recovery is considered probable, but the revenue cannot be reliably estimated, cost attributable to change
orders is deferred pending determination of the impact on contract price. If the requirements for
recognizing revenue for claims or unapproved change orders are met, revenue is recorded only to the
extent that costs associated with the claims or unapproved change orders have been incurred. There were
no recognized claims against clients as of December 31, 2013. Recognized claims against clients amounted
to $20 million as of December 31, 2012.
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, revisions to project scope and cost, and deferrals, as appropriate. As of December 31, 2013,
the company began including the unfunded portion of multi-year government contract awards in its
backlog to be more comparable to industry practice.
Engineering and Construction Partnerships and Joint Ventures Certain contracts are executed jointly
through partnership and joint venture arrangements with unrelated third parties. Generally, these
arrangements are characterized by a 50 percent or less ownership interest that requires only a small initial
investment. The arrangements are often formed for the single business purpose of executing a specific
project and allow the company to share risks and secure specialty skills required for project execution.
The company evaluates each partnership and joint venture at inception to determine if it qualifies as a
variable interest entity (‘‘VIE’’) under ASC 810. 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 who
are not required to provide sufficient financial resources for the entity to support its activities without
additional subordinated financial support. The majority of the company’s partnerships and joint ventures
qualify as VIEs because the total equity investment is typically nominal and not sufficient to permit the
entity to finance its activities without additional subordinated financial support. Upon the occurrence of
certain events outlined in ASC 810, the company reassesses its initial determination of whether the
partnership or joint venture is a VIE.
The company also evaluates whether it is the primary beneficiary of each VIE and consolidates the
VIE if the company has both (a) the power to direct the economically significant activities of the entity and
(b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially
be significant to the VIE. The company considers the contractual agreements that define the ownership
structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board
representation of the respective parties in determining whether it qualifies as the primary beneficiary. The
company also considers all parties that have direct or implicit variable interests when determining whether
it is the primary beneficiary. In most cases, the company does not qualify as the primary beneficiary. When
the company is determined to be the primary beneficiary, the VIE is consolidated. As required by
ASC 810, management’s assessment of whether the company is the primary beneficiary of a VIE is
continuously performed.
For partnerships and joint ventures in the construction industry, unless full consolidation is required,
the company generally recognizes its proportionate share of revenue, cost and profit in its Consolidated
Statement of Earnings and uses the one-line equity method of accounting in the Consolidated Balance
Sheet, which is a common application of ASC 810-10-45-14 in the construction industry. At times, the cost
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