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Significant Accounting Policies | 12 Months Ended
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Sep. 30, 2011
Significant Accounting Policies |
Significant Accounting Policies | 2. Significant Accounting Policies Revenue Accounting for Contracts and Use of Joint Ventures In general, we recognize revenues at the time we provide services. Depending on the commercial terms of the contract, we recognize revenues either when costs are incurred, or using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. Contract losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. For multiple contracts with a single customer we account for each contract separately. We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. Certain cost-reimbursable contracts include incentive-fee arrangements. The incentive fees in such contracts can be based on a variety of factors but the most common are the achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets can result in unrealized incentive fees. We recognize incentive fees based on expected results using the percentage-of-completion method of accounting. As the contract progresses and more information becomes available, the estimate of the anticipated incentive fee that will be earned is revised as necessary. We bill incentive fees based on the terms and conditions of the individual contracts. In certain situations, we are allowed to bill a portion of the incentive fees over the performance period of the contract. In other situations, we are allowed to bill incentive fees only after the target criterion has been achieved. Incentive fees which have been recognized but not billed are included in receivables in the accompanying Consolidated Balance Sheets. Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment. In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. Revenues are not recognized for non-recoverable costs. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such nonbillable costs and adjust our revenues accordingly. When we are directly responsible for subcontractor labor or third-party materials and equipment, we reflect the costs of such items in both revenues and costs (and we refer to such costs as "pass-through" costs). On those projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not reflected in either revenues or costs. The following table sets forth pass-through costs included in revenues during fiscal 2011, 2010, and 2009 (in millions):
|  | 2011 |  |  | 2010 |  |  | 2009 |
Pass-through costs included in revenues |  | $ | 2,118.5 |  |  | $ | 2,723.3 |  |  | $ | 4,017.0 |
As is common to the industry, we execute certain contracts jointly with third parties through various forms of joint ventures and consortiums. Although the joint ventures own and hold the contracts with the clients, the services required by the contracts are typically performed by us and our joint venture partners, or by other subcontractors under subcontracting agreements with the joint ventures. The assets of our joint ventures, therefore, consist almost entirely of cash and receivables (representing amounts due from clients), and the liabilities of our joint ventures consist almost entirely of amounts due to the joint venture partners (for services provided by the partners to the joint ventures under their individual subcontracts) and other subcontractors. In general, at any given time, the equity of our joint ventures represents the undistributed profits earned on contracts the joint ventures hold with clients. Very few of our joint ventures have employees. None of our joint ventures have third-party debt or credit facilities. Our joint ventures, therefore, are simply mechanisms used to deliver engineering and construction services to clients. Rarely do they, in and of themselves, present any risk of loss to us or to our partners separate from those that we would carry if we were performing the contract on our own. Under U.S. GAAP, our share of losses associated with the contracts held by the joint ventures, if and when they occur, has always been reflected in our Consolidated Financial Statements. On October 2, 2010, we adopted the FASB's new accounting guidance relating to the consolidation of variable interest entities ("VIE"). This guidance replaces the quantitative-based assessment for determining which participant in a VIE has a controlling interest in the VIE with an approach that is primarily qualitative in nature. The Company has reassessed its VIEs using the new guidance. The adoption of this new guidance did not have a material effect on the Company's consolidated financial statements. In evaluating our VIEs, we perform a qualitative analysis to determine whether or not we have a controlling financial interest in the VIE. We are deemed to have a controlling financial interest in a VIE if we have (i) the power to direct those activities of the VIE that most significantly impact the VIE's economic performance; and (ii) the right to receive benefits from the VIE, or obligation to absorb losses, that could potentially be significant to the VIE. In making our qualitative analysis, we assess each VIE to determine those activities that most significantly impact the VIE's economic performance and whether we, another party, or multiple parties have the power to direct such activities. If we determine that we have the power to direct those activities of the VIE that most significantly impact its financial performance and have the right or obligation to receive benefits or absorb losses that could potentially be significant to the VIE then we are the primary beneficiary of the VIE and we consolidate the VIE. If we determine that we do not have the power to direct the most significant activities of the VIE or power is shared by two or more unrelated parties then we are not the primary beneficiary and we do not consolidate the VIE. For the Company's unconsolidated joint ventures, we use either the equity method of accounting or proportional consolidation. The Company does not currently participate in any significant VIEs in which it has a controlling financial interest that it does not consolidate. There were no changes in facts and circumstances during the period that caused the Company to reassess the method of accounting for its VIEs. Fair Value Measurements Certain amounts included in the accompanying consolidated financial statements are presented at "fair value". Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as of the date fair value is determined (the "measurement date"). When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider only those assumptions we believe a typical market participant would consider when pricing an asset or liability. In measuring fair value, we use the following inputs in the order of priority indicated:
| Level 1 | Quoted prices in active markets for identical assets or liabilities.
| Level 2 | Observable inputs other than quoted prices in active markets included in Level 1, such as (i) quoted prices for similar assets or liabilities; (ii) quoted prices in markets that have insufficient volume or infrequent transactions (i.e., less active markets); and (iii) model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data for substantially the full term of the asset or liability.
| Level 3 | Unobservable inputs to the valuation methodology that are significant to the fair value measurement.
The net carrying amounts of cash and cash equivalents, receivables, and notes payable approximate fair value due to the short-term nature of these instruments. Similarly, we believe the carrying value of notes payable also approximates fair value based on the interest rates and scheduled maturities applicable to the outstanding borrowings. Certain other assets and liabilities, such as forward contracts and an interest rate swap agreement we purchased as cash-flow hedges discussed in Note 10 —Commitments and Contingencies, and Derivative Financial Instruments, are required to be carried in our consolidated financial statements at fair value. The fair value of the Company's reporting units (needed for purposes of determining whether there is an indication of possible impairment of the carrying value of goodwill) is determined using a market approach that multiplies the after-tax earnings of each reporting unit for the trailing twelve months by the Company's overall average market earnings multiple. With respect to share-based payments, we estimate the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model. Like all option-pricing models, the Black-Scholes model requires the use of highly subjective assumptions including (i) the expected volatility of the market price of the underlying stock, and (ii) the expected term of the award, among others. Accordingly, changes in assumptions and any subsequent adjustments to those assumptions can cause drastically different fair values to be assigned to our stock option awards. For restricted stock units containing service and performance conditions, compensation expense is based on the fair value of such units using a Monte Carlo Simulation. Due to the uncertainties inherent in the use of assumptions and the results of applying Monte Carlo Simulations, the amount of expense recorded in the accompanying consolidated financial statements may not be representative of the effects on our future consolidated financial statements because equity awards tend to vest over several years and additional equity awards may be made in the future. The fair values of the assets owned by the various pension plans that the Company sponsors are determined based on the type of asset. Publicly traded corporate equity securities and publicly traded debt securities are valued at the last reported sale price on the last business day of the year of the plans. Securities not traded on the last business day are valued at the last reported bid price. Insurance contracts and investments in "with profits" funds are valued using actuarial assumptions and values reported by the fund managers. Real estate assets (which consist primarily of common or collective trusts with underlying investments in real estate), commodities, industrial/raw goods, and foreign exchange forward contracts are valued using the best information available, including quoted market prices or market prices for similar assets when available or internal cash flow estimates discounted at an appropriate interest rate or independent appraisals, as appropriate. The methodologies described above and elsewhere in these Notes to Consolidated Financial Statements may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement. Cash Equivalents We consider all highly liquid investments with original maturities of less than three months to be cash equivalents. Cash equivalents at September 30, 2011 and October 1, 2010 consisted primarily of money market mutual funds and overnight bank deposits. Receivables and Billings in Excess of Costs "Receivables" include billed receivables, unbilled receivables, and retentions. Billed receivables represent amounts invoiced to clients in accordance with the terms of our client contracts. They are recorded in our financial statements when they are issued. Unbilled receivables and retentions receivable represent reimbursable costs and amounts earned and reimbursable under contracts in progress as of the respective balance sheet dates. Such amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project. We anticipate that substantially all of such unbilled amounts will be billed and collected over the next fiscal year. Certain contracts allow us to issue invoices to clients in advance of providing services. "Billings in excess of costs" represent billings to and cash collected from clients in advance of work performed. We anticipate that substantially all such amounts will be earned over the next twelve months. Property, Equipment, and Improvements Property, equipment and improvements are carried at cost, and are shown net of accumulated depreciation and amortization in the accompanying Consolidated Balance Sheets. Depreciation and amortization is computed primarily by using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the estimated useful life of the asset or the remaining term of the related lease. Estimated useful lives range from 20 to 40 years for buildings, from 3 to 10 years for equipment and from 4 to 10 years for leasehold improvements. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill and the cost of intangible assets with indefinite lives are not amortized, but are instead tested for possible impairment annually (or more frequently if events occur or circumstances change that would more likely than not reduce the fair values of our reporting units below their respective carrying values). The first step in the impairment test process is to compare the fair value of each of the Company's reporting units to their respective carrying amount, including goodwill. In the event that the carrying value of a reporting unit exceeds its fair value, a second test is performed to measure the amount of the impairment loss, if any. In performing the annual impairment test, the Company evaluates goodwill at the reporting unit level. We have determined that our operating segment is comprised of two reporting units based on geography. Based on the results of these tests, we have determined that the fair value of our reporting units substantially exceeded their respective carrying values for fiscal years 2011, 2010, and 2009. The following table provides certain information related to the Company's acquired intangible assets for each of the fiscal years presented (in thousands):
|  | Customer Relationships, Contracts, and Backlog |  |  | Developed Technology |  |  | Trade Names |  |  | Other |  |  | Total |
Balances, September 26, 2008 |  | $ | 54,250 |  |  | $ | — |  |  | $ | 2,789 |  |  | $ | 2,864 |  |  | $ | 59,903 |
Acquisitions |  |  | 7,173 |  |  |  | — |  |  |  | 478 |  |  |  | 87 |  |  |  | 7,738 |
Amortization |  |  | (6,416 | ) |  |  | — |  |  |  | (1,674 | ) |  |  | (630 | ) |  |  | (8,720 | )
Foreign currency translation |  |  | (1,332 | ) |  |  | — |  |  |  | (85 | ) |  |  | (45 | ) |  |  | (1,462 | )
Balances, October 2, 2009 |  |  | 53,675 |  |  |  | — |  |  |  | 1,508 |  |  |  | 2,276 |  |  |  | 57,459 |
Acquisitions |  |  | 50,600 |  |  |  | — |  |  |  | 2,400 |  |  |  | 1,100 |  |  |  | 54,100 |
Amortization |  |  | (8,619 | ) |  |  | — |  |  |  | (1,851 | ) |  |  | (736 | ) |  |  | (11,206 | )
Foreign currency translation |  |  | (178 | ) |  |  | — |  |  |  | (5 | ) |  |  | (125 | ) |  |  | (308 | )
Balances, October 1, 2010 |  |  | 95,478 |  |  |  | — |  |  |  | 2,052 |  |  |  | 2,515 |  |  |  | 100,045 |
Acquisitions |  |  | 155,512 |  |  |  | 23,000 |  |  |  | 2,744 |  |  |  | 2,542 |  |  |  | 183,798 |
Amortization |  |  | (21,239 | ) |  |  | (1,023 | ) |  |  | (1,214 | ) |  |  | (1,225 | ) |  |  | (24,701 | )
Foreign currency translation |  |  | (13 | ) |  |  | — |  |  |  | (109 | ) |  |  | (14 | ) |  |  | (136 | )
Balances, September 30, 2011 |  | $ | 229,738 |  |  | $ | 21,977 |  |  | $ | 3,473 |  |  | $ | 3,818 |  |  | $ | 259,006 |
Estimated remaining useful lives (years) |  |  | 1- 14 |  |  |  | 15 |  |  |  | 1- 20 |  |  |  | 1- 8 |  |  |  |  |
The above table excludes the values assigned to those intangible assets embedded in the Company's investment in AWE Management Ltd. ("AWE"). Those amounts are included in the carrying value of the Company's investment in AWE. The amount of amortization expense we estimate we will record during each of the next five fiscal years relating to intangible assets existing at September 30, 2011 including those associated with AWE is: fiscal 2012 - $40.5 million; fiscal 2013 - $27.2 million; fiscal 2014 - $24.6 million; fiscal 2015 - $24.2 million; and fiscal 2016 - $24.1 million. The change in goodwill during the period is predominately related to businesses acquired during fiscal 2011. Foreign Currencies In preparing our consolidated financial statements, it is necessary to translate the financial statements of our subsidiaries operating outside the United States, which are denominated in currencies other than the U.S. dollar, into the U.S. dollar. In accordance with U.S. GAAP, revenues and expenses of operations outside the United States are translated into U.S. dollars using weighted-average exchange rates for the applicable period(s) being translated while the assets and liabilities of operations outside the United States are generally translated into U.S. dollars using period-end exchange rates. The net effect of foreign currency translation adjustments is included in stockholders' equity as a component of accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets. Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted EPS gives effect to all dilutive securities that were outstanding during the period. Our dilutive securities consist of nonqualified stock options and restricted stock (including restricted stock units). Share-Based Payments We measure the value of services received from employees and directors in exchange for an award of an equity instrument based on the grant-date fair value of the award. The computed value is recognized as a non-cash cost over the period the individual provides services, which is typically the vesting period of the award. The grant date fair value of the instruments is recognized on a straight-line basis over the vesting period of the award. The Company has two incentive plans whereby eligible employees and directors of Jacobs may be granted stock options, restricted stock, and/or restricted stock units. Assumptions Used to Value Stock Options Granted to Employees and Directors— The majority of stock options granted during the year are awarded on the same date (although the date is different for employees and directors). The assumptions used in the Black-Scholes option-pricing model were as follows:
|  | Awards Made to Employees |  |  | Awards Made to Directors |
|  | 2011 |  |  | 2010 |  |  | 2009 |  |  | 2011 |  |  | 2010 |  |  | 2009 |
Dividend yield |  |  | 0 | % |  |  | 0 | % |  |  | 0 | % |  |  | 0 | % |  |  | 0 | % |  |  | 0 | %
Expected volatility |  |  | 41.54 | % |  |  | 43.12 | % |  |  | 45.42 | % |  |  | 41.97 | % |  |  | 40.78 | % |  |  | 47.62 | %
Risk-free interest rate |  |  | 2.00 | % |  |  | 2.54 | % |  |  | 2.94 |  |  |  | 2.40 | % |  |  | 2.85 | % |  |  | 2.44 |
Expected term of options (in years) |  |  | 5.82 |  |  |  | 6.14 |  |  |  | 6.25 |  |  |  | 5.82 |  |  |  | 6.29 |  |  |  | 6.29 |
With respect to stock units containing service and performance conditions, the number of restricted stock units in which the employee may ultimately vest is determined using a stock performance multiplier ("SPM"). The SPM is the quotient obtained by dividing the 60 calendar day average market price of our common stock ending on the vesting date ("Ending Average Stock Price") by the 60 calendar day average market price of our common stock ending on the grant date ("Beginning Average Stock Price"). The maximum SPM is 2 and will be zero if the Ending Average Market Price of our common stock is less than 50% of the Beginning Average Market Price. The number of restricted stock units earned is equal to the target restricted stock units awarded to an employee multiplied by the SPM. Assumptions Used to Value Restricted Stock Units with Service and Performance Conditions— The majority of restricted stock units with performance conditions granted during the year are awarded on the same date. With respect to these annual awards, the fair value of each restricted stock unit was estimated on the date of the grant using the following assumptions:
|  | 2011 |
Dividend yield |  |  | 0 | %
Expected volatility |  |  | 46.67 | %
Risk-free interest rate |  |  | 0.83 | %
Expected term (in years) |  |  | 3.0 |
Concentrations of Credit Risk Our cash balances and short-term investments are maintained in accounts held by major banks and financial institutions located primarily in North America, South America, Europe, Australia, and Asia. In the normal course of business, and consistent with industry practices, we grant credit to our clients without requiring collateral. Concentrations of credit risk is the risk that, if we extend a significant amount of credit to clients in a specific geographic area or industry, we may experience disproportionately high levels of default if those clients are adversely affected by factors particular to their geographic area or industry. Concentrations of credit risk relative to trade receivables are limited due to our diverse client base, which includes the U.S. federal government and multi-national corporations operating in a broad range of industries and geographic areas. Additionally, in order to mitigate credit risk, we continually evaluate the credit worthiness of our major commercial clients. Use of Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires us to employ estimates and make assumptions that affect the reported amounts of certain assets and liabilities; the revenues and expenses reported for the periods covered by the financial statements; and certain amounts disclosed in these Notes to the Consolidated Financial Statements. Although such estimates and assumptions are based on management's most recent assessment of the underlying facts and circumstances utilizing the most current information available and past experience, actual results could differ significantly from those estimates and assumptions. Our estimates, judgments, and assumptions are evaluated periodically and adjusted accordingly. Earlier in these Notes to Consolidated Financial Statements, we discussed three significant accounting policies that rely on the application of estimates and assumptions: revenue accounting for contracts; the process for testing goodwill for possible impairment; and the accounting for share-based payments to employees and directors. The following is a discussion of certain other significant accounting policies that rely on the use of estimates: Accounting for Pensions— We use certain assumptions and estimates in order to calculate periodic pension cost and the value of the assets and liabilities of our pension plans. These assumptions involve discount rates, investment returns, and projected salary increases, among others. Changes in the actuarial assumptions may have a material effect on the plans' liabilities and the projected pension expense. Accounting for Income Taxes— We determine our consolidated income tax provision using the asset and liability method prescribed by U.S. GAAP. Under this method, deferred tax assets and liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Such deferred tax assets and liabilities are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. If and when we determine that a deferred tax asset will not be realized for its full amount, we will recognize and record a valuation allowance with a corresponding charge to earnings. Judgment is required in determining our worldwide provision for income taxes. In the normal course of business, we may engage in numerous transactions every day for which the ultimate tax outcome (including the period in which the transaction will ultimately be included in taxable income or deducted as an expense) is uncertain. Additionally, we file income, franchise, gross receipts and similar tax returns in many jurisdictions. Our tax returns are subject to audit and investigation by the Internal Revenue Service, most states in the United States, and by various government agencies representing many jurisdictions outside the United States. Contractual Guarantees, Litigation, Investigations, and Insurance—In the normal course of business, we are subject to certain contractual guarantees and litigation. We record in the Consolidated Balance Sheets amounts representing our estimated liability relating to such guarantees, litigation, and insurance claims. We perform an analysis to determine the level of reserves to establish for both insurance-related claims that are known and have been asserted against us as well as for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to our claims administrators as of the respective balance sheet dates. We include any adjustments to such insurance reserves in our Consolidated Statements of Earnings. In addition, as a contractor providing services to various agencies of the United States federal government, we are subject to many levels of audits, investigations, and claims by, or on behalf of, the U.S. federal government with respect to contract performance, pricing, costs, cost allocations, and procurement practices. We adjust revenues based upon the amounts we expect to realize considering the effects of any client audits or governmental investigations.

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