Honeywell 2003 Annual Report Download - page 332

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 and our
Independent Auditors. We did not initially adopt any accounting policies with a
material impact during 2003 other than those described in Note 1 of Notes to
Financial Statements.
Contingent Liabilities
We are subject to a number of lawsuits, investigations and claims (some of which
involve substantial dollar amounts) that arise out of the conduct of our global
business operations or those of previously owned entities. These contingencies
relate to product liabilities, including asbestos, commercial transactions,
government contracts and environmental health and safety matters. We recognize a
liability for any contingency that is probable of occurrence and reasonably
estimable. We continually assess the likelihood of any adverse judgments or
outcomes to our contingencies, as well as potential ranges of probable losses,
and recognize a liability, if any, for these contingencies based on a careful
analysis of each matter with the assistance of outside legal counsel and, if
applicable, other experts. Such analysis includes making judgments concerning
matters such as the costs associated with environmental matters, the outcome of
negotiations, the number and cost of pending and future asbestos claims (where
possible) and the impact of evidentiary requirements. Because most contingencies
are resolved over long periods of time, liabilities may change in the future due
to new developments or changes in our settlement strategy. For a discussion of
our contingencies related to shareowners litigation, environmental and asbestos
matters, including management's judgment applied in the recognition and
measurement of specific liabilities, see Notes 1 and 21 of Notes to Financial
Statements.
Insurance for Asbestos Related Liabilities
In connection with recognition of liabilities for asbestos related matters, we
record asbestos related insurance recoveries that are deemed probable. In
assessing the probability of insurance recovery, we make judgments concerning
insurance coverage that we believe are reasonable and consistent with our
historical dealings with our insurers, our knowledge of any pertinent solvency
issues surrounding insurers and various judicial determinations relevant to our
insurance programs. We have approximately $1.3 billion in insurance coverage
remaining that can be specifically allocated to North American Refractories
Company (NARCO) related asbestos liabilities. We also have $1.9 billion in
coverage remaining for Bendix related asbestos liabilities although there are
gaps in our coverage due to insurance company insolvencies, a comprehensive
policy buy-back settlement with Equitas as discussed in Note 21 of Notes to
Financial Statements and certain uninsured periods, resulting in approximately
50 percent of these claims being reimbursable by insurance. Our insurance is
with both the domestic insurance market and the London excess market. While the
substantial majority of our insurance carriers are solvent, some of our
individual carriers are insolvent, which has been considered in our analysis of
probable recoveries. Some of our insurance carriers have challenged our right to
enter into settlement agreements resolving all NARCO related asbestos claims
against Honeywell. However, we believe there is no factual or legal basis for
such challenges and that it is probable that we will prevail in the resolution
of, or in any litigation that is brought regarding these disputes and have
recognized approximately $100 million in probable insurance recoveries from
these carriers. We are in advanced ongoing settlement discussions with these
carriers and while we cannot predict the outcome of these discussions we expect
that a substantial majority of the carriers will participate in the settlement
agreement that is being negotiated. The amounts that we expect to realize
through the settlement process are consistent with our recognized insurance
recoveries. Projecting future events is subject to various uncertainties that
could cause the insurance recovery on asbestos related liabilities to be higher
or lower than that projected and recorded. Given the inherent uncertainty in
making future projections, we reevaluate our projections concerning our probable
insurance recoveries in light of any changes to the projected liability, our
recovery experience or other relevant factors that may impact future insurance
recoveries. See Note 21 of Notes to Financial Statements for a discussion of
management's judgments applied in the recognition and measurement of insurance
recoveries for asbestos related liabilities.
Defined Benefit Pension Plans
We maintain defined benefit pension plans covering a majority of our employees