Johnson Controls 2014 Annual Report Download - page 65

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Refer to Note 17, "Impairment of Long-Lived Assets," of the notes to consolidated financial statements for information regarding
the impairment testing performed in fiscal years 2014, 2013 and 2012.
Percentage-of-Completion Contracts
The Building Efficiency business records certain long-term contracts under the percentage-of-completion (POC) method of
accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual
costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted
contracts primarily within accounts receivable and billings in excess of costs and earnings on uncompleted contracts primarily
within other current liabilities in the consolidated statements of financial position. Costs and earnings in excess of billings related
to these contracts were $507 million and $503 million at September 30, 2014 and 2013, respectively. Billings in excess of costs
and earnings related to these contracts were $363 million and $250 million at September 30, 2014 and 2013, respectively.
Revenue Recognition
The Company’s Building Efficiency business recognizes revenue from certain long-term contracts over the contractual period
under the percentage-of-completion method of accounting. This method of accounting recognizes sales and gross profit as work
is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues
that will not be billed under the terms of the contract until a later date are recorded primarily in accounts receivable. Likewise,
contracts where billings to date have exceeded recognized revenues are recorded primarily in other current liabilities. Changes to
the original estimates may be required during the life of the contract and such estimates are reviewed monthly. Sales and gross
profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values. Estimated
losses are recorded when identified. Claims against customers are recognized as revenue upon settlement. The amount of accounts
receivable due after one year is not significant. The use of the POC method of accounting involves considerable use of estimates
in determining revenues, costs and profits and in assigning the amounts to accounting periods. The periodic reviews have not
resulted in adjustments that were significant to the Company’s results of operations. The Company continually evaluates all of the
assumptions, risks and uncertainties inherent with the application of the POC method of accounting.
The Building Efficiency business enters into extended warranties and long-term service and maintenance agreements with certain
customers. For these arrangements, revenue is recognized on a straight-line basis over the respective contract term.
The Company’s Building Efficiency business also sells certain heating, ventilating and air conditioning (HVAC) and refrigeration
products and services in bundled arrangements, where multiple products and/or services are involved. In accordance with ASU
No. 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - A Consensus of the FASB
Emerging Issues Task Force," the Company divides bundled arrangements into separate deliverables and revenue is allocated to
each deliverable based on the relative selling price method. Significant deliverables within these arrangements include equipment,
commissioning, service labor and extended warranties. In order to estimate relative selling price, market data and transfer price
studies are utilized. Approximately four to twelve months separate the timing of the first deliverable until the last piece of equipment
is delivered, and there may be extended warranty arrangements with duration of one to five years commencing upon the end of
the standard warranty period.
In all other cases, the Company recognizes revenue at the time title passes to the customer or as services are performed.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged against income as incurred and
included within selling, general and administrative expenses in the consolidated statement of income. Such expenditures for the
years ended September 30, 2014, 2013 and 2012 were $792 million, $791 million and $834 million, respectively. A portion of the
costs associated with these activities is reimbursed by customers and, for the fiscal years ended September 30, 2014, 2013 and
2012 were $352 million, $347 million and $426 million, respectively.
Earnings Per Share
The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income
attributable to Johnson Controls, Inc. by the weighted average number of common shares outstanding during the reporting period.
Diluted EPS is calculated by dividing net income attributable to Johnson Controls, Inc. by the weighted average number of common
shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method
for stock options and unvested restricted stock. See Note 13, "Earnings per Share," of the notes to consolidated financial statements
for the calculation of earnings per share.