Johnson Controls 2015 Annual Report Download - page 62

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62
Johnson Controls, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson Controls, Inc. and its domestic and non-U.S. subsidiaries
that are consolidated in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
All significant intercompany transactions have been eliminated. Investments in partially-owned affiliates are accounted for by the
equity method when the Company’s interest exceeds 20% and the Company does not have a controlling interest.
Under certain criteria as provided for in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
810, "Consolidation," the Company may consolidate a partially-owned affiliate. To determine whether to consolidate a partially-
owned affiliate, the Company first determines if the entity is a variable interest entity (VIE). An entity is considered to be a VIE
if it has one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity;
3) equity holders are shielded from economic losses or do not participate fully in the entity’s residual economics; or 4) the entity
was established with non-substantive voting. If the entity meets one of these characteristics, the Company then determines if it is
the primary beneficiary of the VIE. The party with the power to direct activities of the VIE that most significantly impact the VIE’s
economic performance and the potential to absorb benefits or losses that could be significant to the VIE is considered the primary
beneficiary and consolidates the VIE. If the entity is not considered a VIE, then the Company applies the voting interest model to
determine whether or not the Company shall consolidate the partially-owned affiliate.
Consolidated VIEs
Based upon the criteria set forth in ASC 810, the Company has determined that it was the primary beneficiary in three VIEs for
the reporting periods ended September 30, 2015 and 2014, as the Company absorbs significant economics of the entities and has
the power to direct the activities that are considered most significant to the entities.
Two of the VIEs manufacture products in North America for the automotive industry. The Company funds the entities’ short-term
liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to
the entities through its key customer supply relationships.
In fiscal 2012, a pre-existing VIE accounted for under the equity method was reorganized into three separate investments as a
result of the counterparty exercising its option to put its interest to the Company. The Company acquired additional interests in
two of the reorganized group entities. The reorganized group entities are considered to be VIEs as the other owner party has been
provided decision making rights but does not have equity at risk. The Company is considered the primary beneficiary of one of
the entities due to the Company’s power pertaining to decisions over significant activities of the entity. As such, this VIE has been
consolidated within the Company’s consolidated statements of financial position. The impact of consolidation of the entity on the
Company’s consolidated statements of income for the years ended September 30, 2015, 2014 and 2013 was not material. The VIE
is named as a co-obligor under a third party debt agreement of $160 million, maturing in fiscal 2020, under which it could become
subject to paying more than its allocated share of the third party debt in the event of bankruptcy of one or more of the other co-
obligors. The other co-obligors, all related parties in which the Company is an equity investor, consist of the remaining group
entities involved in the reorganization. As part of the overall reorganization transaction, the Company has also provided financial
support to the group entities in the form of loans totaling $60 million, which are subordinate to the third party debt agreement.
The Company is a significant customer of certain co-obligors, resulting in a remote possibility of loss. Additionally, the Company
is subject to a floor guaranty expiring in fiscal 2022; in the event that the other owner party no longer owns any part of the group
entities due to sale or transfer, the Company has guaranteed that the proceeds received from the sale or transfer will not be less
than $25 million. The Company has partnered with the group entities to design and manufacture battery components for the Power
Solutions business.