QUANTA SERVICES INC, QUANTA SERVICES MANAGEMENT ...

QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
inception of the contract, with the objective and strategy stated, along with an explicit description of the
methodology used to assess hedge effectiveness. The dates (or periods) for the expected forecasted events and the
nature of the exposure involved (including quantitative measures of the size of the exposure) must also be
documented. At the inception of the hedge and on an ongoing basis, the hedge must be deemed to be “highly
effective” at minimizing the risk of the identified exposure. Effectiveness measures relate the gains or losses of
the derivative to changes in the cash flows associated with the hedged item, and the forecasted transaction must
be probable of occurring.
For forward contracts that qualify as cash flow hedges, Quanta accounts for the change in fair value of the
forward contracts directly in equity as part of accumulated other comprehensive income (loss). Any ineffective
portion of cash flow hedges is recognized in earnings in the period in which ineffectiveness occurs. For instance,
if a forward contract is discontinued as a cash flow hedge because it is probable that the original forecasted
transaction will not occur by the end of the originally specified time period, the related amounts in accumulated
other comprehensive income (loss) would be reclassified to other income (expense) in the consolidated statement
of operations in the period such determination is made. When a forecasted transaction occurs, the portion of the
accumulated gain or loss applicable to the forecasted transaction is reclassified from equity to earnings. Changes
in fair value related to transactions that do not meet the criteria for cash flow hedge accounting are recorded in
the consolidated results of operations and are included in other income (expense).
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those resulting from
investments by and distributions to stockholders. Quanta records other comprehensive income (loss), net of tax,
for foreign currency translation adjustments related to its foreign operations and changes in fair value of Quanta’s
derivative contracts that were classified as cash flow hedges, as applicable.
Litigation Costs and Reserves
Quanta records reserves when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Costs incurred for litigation are expensed as incurred. Further details are presented in
Note 14.
Fair Value Measurements
The carrying values of cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to the short-term nature of those instruments. For disclosure purposes, qualifying
assets and liabilities are categorized into three broad levels based on the priority of the inputs used to determine
their fair values. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). All of
Quanta’s cash equivalents are categorized as Level 1 assets at December 31, 2011 and 2010, as all values are
based on unadjusted quoted prices for identical assets in an active market that Quanta has the ability to access.
In connection with Quanta’s acquisitions, identifiable intangible assets acquired include goodwill, backlog,
customer relationships, trade names, covenants not to compete and software. Quanta utilizes the fair value
premise as the primary basis for its valuation procedures, which is a market-based approach to determining the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. Quanta periodically engages the services of an independent valuation firm when a new business is
acquired to assist management with this valuation process, which includes assistance with the selection of
appropriate valuation methodologies and the development of market-based valuation assumptions. Based on
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