Johnson Controls 2012 Annual Report Download - page 44

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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.
Goodwill and Other Intangible Assets
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired.
The Company reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or
changes in circumstances indicate the asset might be impaired. The Company performs impairment reviews for its
reporting units, which have been determined to be the Company’s reportable segments or one level below the
reportable segments in certain instances, using a fair-value method based on management’s judgments and
assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to
sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating
the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of
earnings of comparable entities with similar operations and economic characteristics. In certain instances, the
Company uses discounted cash flow analyses to further support the fair value estimates. The inputs utilized in the
analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, ―Fair Value
Measurements and Disclosures.‖ The estimated fair value is then compared with the carrying amount of the
reporting unit, including recorded goodwill. The Company is subject to financial statement risk to the extent that the
carrying amount exceeds the estimated fair value. The impairment testing performed by the Company in the fourth
quarter of fiscal year 2012, 2011 and 2010 indicated that the estimated fair value of each reporting unit substantially
exceeded its corresponding carrying amount including recorded goodwill, and as such, no impairment existed at
September 30, 2012, 2011 and 2010. No reporting unit was determined to be at risk of failing step one of the
goodwill impairment test. While at September 30, 2012 the estimated fair value of each reporting unit substantially
exceeded its corresponding carrying amount including recorded goodwill, a prolonged significant decline in the
European automotive industry could put the Company at risk of not achieving future growth assumptions and could
result in impairment of goodwill or other long-lived assets, or result in additional restructuring actions, within the
Automotive Experience Europe segment, which could be material to the consolidated financial statements.
Indefinite lived other intangible assets are also subject to at least annual impairment testing. Other intangible assets
with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing if
events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management
judgment and assumptions are required in performing the impairment tests. While the Company believes the
judgments and assumptions used in the impairment tests are reasonable and no impairment existed at September 30,
2012, 2011 and 2010, different assumptions could change the estimated fair values and, therefore, impairment
charges could be required, which could be material to the consolidated financial statements.