NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued) Foreign Operations Income Taxes Derivatives and Hedging Activities Valuation of Stock Option Grants New Accounting Pronouncements NOTE C — ACQUISITIONS OF BUSINESSES The financial statements and transactions of EMCOR’s foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” Translation adjustments have been accumulated as a separate component of Stockholders’ equity as Accumulated other comprehensive loss. EMCOR accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are recognized in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income as a component of Accumulated other comprehensive loss. As of December 31, 2001, EMCOR did not have any forward contracts in effect, and forward contracts in effect during 2000 were not material to the Consolidated Financial Statements. EMCOR accounts for its stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). See Note I for pro forma information relating to treatment of EMCOR’s stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination be During 2001 and 2000, EMCOR paid additional consideration by reason of earn-outs for prior year acquisitions of an aggregate of $6.2 million and $4.2 million in cash, respectively. The purchase price of certain acquisitions is subject to finalization based on certain contingencies provided for in the purchase agreements. These acquisitions were accounted for by the purchase method, and the purchase price has been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at the dates of acquisition. Goodwill, representing the excess purchase recognized as assets apart from goodwill. SFAS 141 was effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The annual reduction in expense due to the discontinuance of goodwill amortization beginning in 2002 should be approximately $3.4 million to $4.4 million. SFAS 142 is effective for fiscal years beginning after December 15, 2001. All companies have six months subsequent to the date of adoption to complete the initial goodwill impairment test. EMCOR has not yet determined any further impact SFAS 142 will have on its existing goodwill. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 establishes a single accounting model, based on the framework established in Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”), for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS 121. This statement also supercedes the accounting reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” (“APB 30”) for the disposal of a segment of a business. The provisions of SFAS No. 144 are effective for the fiscal years beginning after December 15, 2001. EMCOR believes that the adoption of SFAS 144 will not have a material impact on its results of operations, financial position or cash flows. 33 EMCOR ANNUAL REPORT 2001 