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Note 7 - Equity Method Investments and Variable Interest Entities
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Nov. 30, 2011
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| Equity Method Investments Disclosure [Text Block] |
Note 7 —
Equity Method Investments and Variable Interest
Entities
As
is common in the engineering and construction industries, we
execute certain contracts jointly with third parties through
joint ventures, limited partnerships and limited liability
companies. We evaluate each partnership and joint venture to
determine whether the entity is a VIE. Most of the entities
we assess are incorporated or unincorporated joint ventures
formed by us and our partner(s) for the purpose of executing
a project or program for a client, such as a government
agency or a commercial enterprise, and are generally
dissolved upon completion of the project or program. Our
partnerships or joint ventures are typically characterized by
a 50% or less non-controlling ownership or participation
interest, with decision making and distribution of expected
gains and losses typically being proportionate to the
ownership or participation interest. Many of the partnership
and joint venture agreements require little or no equity
investment by the joint venture partners but provide for
capital calls to fund operations, as necessary, and may
require subordinated financial support from the joint venture
partners such as letters of credit, financial guarantees or
obligations to fund losses incurred by the joint venture.
Such funding is infrequent and is not anticipated to be
material.
Under
ASC 810-10, a partnership or joint venture is considered a
VIE if either (a) the total equity investment is not
sufficient to permit the entity to finance its activities
without additional subordinated financial support, (b)
characteristics of a controlling financial interest are
missing (either the ability to make decisions through voting
or other rights, the obligation to absorb the expected losses
of the entity or the right to receive the expected residual
returns of the entity), or (c) the voting rights of the
equity holders are not proportional to their obligations to
absorb the expected losses of the entity and/or their rights
to receive the expected residual returns of the entity, and
substantially all of the entity’s activities either
involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
If
the entity is determined to be a VIE, we assess whether we
are the primary beneficiary and whether we need to
consolidate the entity. ASC 810-10, as amended by ASU
2009-17, requires companies to utilize a qualitative approach
to determine if it is the primary beneficiary of a VIE. A
company is deemed to be the primary beneficiary and must
consolidate its partnerships and joint ventures if the
company has both (1) the power to direct the economically
significant activities of the entity and (2) the obligation
to absorb losses of, or the right to receive benefits from,
the entity that could potentially be significant to the VIE.
The contractual agreements that define the ownership
structure and equity investment at risk, distribution of
profits and losses, risks, responsibilities, indebtedness,
voting rights and board representation of the respective
parties are used to determine if the entity is a VIE and
whether we are the primary beneficiary and must consolidate
the entity. Additionally, we consider all parties that have
direct or implicit variable interests when determining
whether we are the primary beneficiary. Upon the occurrence
of certain events outlined in ASC 810-10, we reassess our
initial determination of whether the entity is a VIE and
whether consolidation is required. If consolidation of the
VIE or joint venture is not required, we generally account
for these joint ventures using the equity method of
accounting with our share of the earnings (losses) from these
investments reflected in one line item on the consolidated
statement of operations.
The
majority of our partnerships and joint ventures are 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. However,
some of the VIEs do not meet the consolidation requirements
of ASC 810-10 because we are not deemed to be the primary
beneficiary. Some of our VIEs have debt, but the debt is
typically non-recourse in nature. At times, our participation
in VIEs requires agreements to provide financial or
performance assurances to clients.
During
the first quarter of fiscal year 2011, we prospectively
adopted ASU 2009-17. As a result of our adoption of ASU
2009-17, we deconsolidated several VIEs as we determined we
were no longer the primary beneficiary under ASC 810-10. The
impact of the deconsolidation on our consolidated statements
of operations was minimal. The impacts on our consolidated
balance sheet upon adoption of ASU 2009-17 were a decrease to
assets of $56.3 million and a decrease to liabilities of
$35.2 million.
ASC
810-10, as amended, requires that we continuously assess
whether we are the primary beneficiary of our VIEs. Prior to
the amendment, reassessment of whether we were the primary
beneficiary was required only upon the occurrence of certain
events. Accordingly, we analyzed all of our VIEs at November
30, 2011, and classified them into two groups:
Consolidated
Joint Ventures
The
following table presents the total assets and liabilities of
our consolidated joint ventures (in thousands):
Total
revenues of the consolidated ventures were $206.0 and $153.2
million for the three months ended November 30, 2011, and
2010, respectively.
For
the three months ended November 30, 2011 and 2010, there were
no material changes in our ownership interests in our
consolidated joint ventures. In addition, we have
immaterial amounts of other comprehensive income attributable
to the noncontrolling interests.
Generally,
the assets of our consolidated joint ventures are restricted
for use only in the joint venture and are not available for
general corporate purposes.
Unconsolidated
Joint Ventures
We
use the equity method of accounting for our unconsolidated
joint ventures. Under GAAP, use of the equity method is
appropriate in circumstances in which an investor has the
ability to exercise significant influence over the operating
and financial policies of an investee. GAAP presumes
significant influence exists as a result of holding an
investment of 20% or more in the voting stock of an investee,
absent predominant evidence to the contrary. Management must
exercise its judgment in determining whether a minority
holder has the ability to exercise significant influence over
the operating and financial policies of an investee. Under
the equity method, we recognize our proportionate share of
the net earnings of these joint ventures in two line items,
Income from 20% Investment in Westinghouse, net of income
taxes and earnings (losses) from other unconsolidated
entities, in our consolidated statements of
operations.
Investment
in Westinghouse
Our
most significant investment accounted for under the equity
method is our wholly-owned, special purpose subsidiary
Nuclear Energy Holdings’ (NEH) 20% equity interest in
Westinghouse. Factors supporting our assessment that we have
the ability to exercise significant influence within
Westinghouse include: (i) our CEO’s position as one of
three Directors on the Boards of Directors of the companies
comprising Westinghouse and ongoing participation in these
Boards’ deliberations; (ii) NEH’s right to
appoint a representative to an advisory committee (the Owner
Board), whose functions are to advise as to the
administration and supervision of matters regarding the
Westinghouse Group and provide advice on other matters,
including supervision of the business, and our ongoing
exercise of that right; (iii) the material number of
consortium agreements we have entered into with Westinghouse
over time; (iv) our participation in periodic Westinghouse
management reviews; and (v) the requirement that the Owner
Board review and approve certain defined business
transactions. We review the accounting treatment for this
investment on a quarterly basis. Based upon our analysis of
these factors and our expectations for the future, we
concluded that no change from the equity method of accounting
is warranted at November 30, 2011.
In
the event we conclude we can no longer account for this
investment under the equity method, our Investment in
Westinghouse would be treated as a cost method investment
with the initial basis being our previous carrying amount of
the investment under the equity method of accounting offset
by our share of Westinghouse’s accumulated other
comprehensive income (loss) then recorded in our accumulated
other comprehensive income (loss). Under the cost method of
accounting, we would no longer include our proportionate
share of Westinghouse’s earnings in our statements of
operations. Dividends relating to Westinghouse’s
earnings from the date we are under the cost method would be
reflected as earnings in our statement of operations.
Dividends received in excess of our share of those earnings
would result in a reduction of the carrying amount of the
investment.
Westinghouse
maintains its accounting records for reporting to its
majority owner, Toshiba, on a calendar quarter basis with a
March 31 fiscal year end. Financial information about
Westinghouse’s operations is available to us for
Westinghouse’s calendar quarter periods. We record our
20% interest of the equity earnings (loss) and other
comprehensive income (loss) reported to us by Westinghouse
two months in arrears of our current periods. Under this
policy, Westinghouse’s operating results for the three
months ended September 30, 2011, and September 30, 2010, are
included in our financial results for the three months ended
November 30, 2011, and 2010, respectively.
Summarized
unaudited income statement information for Westinghouse,
before applying our Westinghouse Equity Interest, was as
follows (in thousands):
Our
investments in and advances to unconsolidated entities, joint
ventures, and limited partnerships and our overall percentage
ownership of these ventures that are accounted for under the
equity method were as follows (in thousands, except
percentages):
Earnings
(losses) from unconsolidated entities, net of income taxes,
are summarized as follows (in thousands):
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