Honeywell 2002 Annual Report Download - page 226

parties, and procedures to monitor concentrations of credit risk. Our
counterparties are substantial investment and commercial banks with significant
experience using such derivative instruments. We monitor the impact of market
risk on the fair value and cash flows of our derivative and other financial
instruments considering reasonably possible changes in interest and currency
exchange rates and restrict the use of derivative financial instruments to
hedging activities.
The following table illustrates the potential change in fair value for interest
rate sensitive instruments based on a hypothetical immediate
one-percentage-point increase in interest rates across all maturities, the
potential change in fair value for foreign exchange rate sensitive instruments
based on a 10 percent increase in U.S. dollar per local currency exchange rates
across all maturities, and the potential change in fair value of contracts
hedging commodity purchases based on a 20 percent decrease in the price of the
underlying commodity across all maturities at December 31, 2002 and 2001.
Estimated
Increase
Face or (Decrease)
Notional Carrying Fair In Fair
(Dollars in millions) Amount Value(1) Value(1) Value
--------------------------------------------------------------------------------------------
December 31, 2002
Interest Rate Sensitive Instruments
Long-term debt (including current
maturities)(2) .................... $(4,764) $(4,812) $(5,261) $(247)
Interest rate swap agreements ................ 1,132 76 76 (40)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(3) ....... 1,203 (8) (8) (36)
Commodity Price Sensitive Instruments
Forward commodity contracts(4) ............... -- 5 5 (10)
December 31, 2001
Interest Rate Sensitive Instruments
Long-term debt (including current
maturities)(2) ............................ $(5,133) $(5,121) $(5,407) $(250)
Interest rate swap agreements ................ 1,096 (5) (5) (37)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(3) ....... 1,507 (6) (6) (8)
Commodity Price Sensitive Instruments
Forward commodity contracts(4) ............... -- (6) (6) (4)
(1) Asset or (liability).
(2) Excludes capitalized leases.
(3) Changes in the fair value of foreign currency exchange contracts are offset
by changes in the fair value or cash flows of underlying hedged foreign
currency transactions.
(4) Changes in the fair value of forward commodity contracts are offset by
changes in the cash flows of underlying hedged commodity transactions.
The above discussion of our procedures to monitor market risk and the estimated
changes in fair value resulting from our sensitivity analyses are
forward-looking statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ materially from these
estimated results due to actual developments in the global financial markets.
The methods used by us to assess and mitigate risk discussed above should not be
considered projections of future events.
OTHER MATTERS
Litigation
See Note 21 of Notes to Financial Statements for a discussion of litigation
matters.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with
generally accepted accounting principles is based on the selection and
application of accounting policies that require us to make significant estimates
and assumptions about the effect of matters that are inherently uncertain. We
consider the accounting policies discussed below to be critical to the
understanding of our financial statements. Actual results could differ from our
estimates and assumptions, and any such differences could be material to our
consolidated financial statements.
We have discussed the selection, application and disclosure of these critical
accounting policies with the Audit Committee of our Board of Directors. We did
not initially adopt any accounting policies with a material impact during 2002