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. . . . . . . . . . . NOTE J. . . . . . . . . . . . . . . . . . . . . I. . I. I. '. . . . I. ,. I. I. I. . I. ,. '. I. :. I. .. ,. .. .n BERMELLO, AJAMIL & PARTNERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006 AND 2005 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impaim,ellt of Long-Lived Assets The Company's long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impainnent charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheets. Income Taxes The Company, with the consent of its stockholders, has elected Subchapter "S" corporate status. In lieu of corporate income taxes, the individual stockholders of the Company are taxed on their proportionate share of the Company's taxable income. Therefore, no federal income taxes are imposed in the Company. Due to its operations in New York, the Company is subject to state income taxes. During the years ended December 31, 2006 and 2005, the Company had income of approximately $1,302,000 and a net loss of $293,000, respectively, related to its New York operations. As of December 31, 2006 there was a provision recorded of approximately $162,000 and no provision as of December 31, 2005. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant estimates are used for, but not limited to, the allowance for doubtful accounts and the application of the percentage of completion method. -9-