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. . . . . . . . . . . NOTE 1. . .. I. I. .. . ~. . '. ,. . . .. .. .. . . . .. e . . . . . . . . . . . . . . . . . . . .. . . . - BERMELLO, AJAMIL & PARTNERS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006 AND 2005 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Consolidation of Variable Interest Entities In December 2003, the Financial Accounting Standards Board ("F ASB") issued F ASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities". FIN 46R revises the original FIN 46R that was issued in January 2003. FIN 46R provides guidance in detennining when variable interest entities should be consolidated in the consolidated financial statements of the primary beneficiary. Private companies with an interest in a variable interest entity that is subject to the provisions of FIN 46R created on or before December 31, 2003, must implement the consolidation provisions within FIN 46R no later than the beginning of the first annual period beginning after December 15, 2004. BAP implemented FIN 46R as of January 1,2005. As a result of the implementation of FIN 46R, BAP consolidated BAPAE with BAP, the primary beneficiary. BAPAE is an entity fonned to perfonn similar services as BAP in the slate of New York. FIN 46R requires the consolidating enterprise (BAP) to initially measure the assets, liabilities, and non- controlling interests of the variable interest entity (VIE) at the VIE's carrying amounts. In this context, the carrying amounts refer to the amounts at which the assets, liabilities, and non-controlling interests would have been carried in the consolidated financial statements if this Interpretation had been effective when the enterprise first met Ihe conditions to be the primary beneficiary. Management adopted this statement effective January 1, 2005. As of December 31, 2006 and 2005, BAP had net income of $1,011,331 and $1,456,188, respectively, excluding the income (loss) of BAPAE of $1,140,146 and $(292,793), respectively. Concentrations of Credit Risk Two customers accounted for approximately 21 % and 15% of total revenue for the years ended December 31, 2006 and 2005, respectively. Most of the Company's business activity is with customers located within its primary market area, which generally includes Miami and the surrounding area in Miami-Dade County, Florida. This market area does not depend heavily on any particular industry nor are the Company's customers concentrated in any particular market segment. Two customers accounted for approximately 23% and 14% of net contract receivables as of December 31, 2006 and 2005, respectively. The Company conducts ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. The Company does not require collateral and has historically nol experienced significant losses on contract receivables. Such credit risk is considered by management to be limited due to the Company's broad customer base and its customers' financial resources. -10-