Johnson Controls 2012 Annual Report Download - page 58

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58
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 period ended September 30, 2012 and two VIEs for the reporting period ended
September 30, 2011, 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.
During the three month period ended December 31, 2011, 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, the VIE has been
consolidated within the Company’s consolidated statements of financial position. The impact of the consolidation of
the entity on the Company’s consolidated statements of income for the year ended September 30, 2012 was not
material. The VIE is named as a co-obligor under a third party debt agreement of $135 million, maturing in fiscal
2019, in 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 $101 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.