Honeywell 2003 Annual Report Download - page 371

Long-Lived Assets
We periodically evaluate the recoverability of the carrying amount of long-lived
assets (including property, plant and equipment, and intangible assets with
determinable lives) whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable. We evaluate events
or changes in circumstances based on a number of factors including operating
results, business plans and forecasts, general and industry trends and, economic
projections and anticipated cash flows. An impairment is assessed when the
undiscounted expected future cash flows derived from an asset are less than its
carrying amount. Impairment losses are measured as the amount by which the
carrying value of an asset exceeds its fair value and are recognized in
earnings. We also continually evaluate the estimated useful lives of all
long-lived assets and periodically revise such estimates based on current
events.
Sales Recognition
Product and service sales are recognized when persuasive evidence of an
arrangement exists, product delivery has occurred or services have been
rendered, pricing is fixed or determinable, and collection is reasonably
assured. Sales under long-term contracts in the Aerospace and Automation and
Control Solutions reportable segments are recorded on a percentage-of-completion
method measured on the cost-to-cost basis for engineering-type contracts and the
units-of-delivery basis for production-type contracts. Provisions for
anticipated losses on long-term contracts are recorded in full when such losses
become evident. Revenues from contracts with multiple element arrangements are
recognized as each element is earned based on the relative fair value of each
element and when the delivered elements have value to customers on a standalone
basis. Amounts allocated to each element are based on its objectively determined
fair value, such as the sales price for the product or service when it is sold
separately or competitor prices for similar products or services.
Aerospace Customer Incentives
We offer sales incentives to commercial aircraft manufacturers and airlines in
connection with their selection of our products for installation on commercial
aircraft. These incentives may consist of free products, credits, discounts or
upfront cash payments. The cost of these incentives is recognized in the period
incurred unless the incentive is subject to recovery through a long-term product
maintenance requirement mandated by the Federal Aviation Administration for
certified replacement equipment and service. Amounts capitalized at December 31,
2003 and 2002 were $719 and $662 million, respectively, and are being recognized
over the estimated minimum service life of the aircraft (up to 25 years) as a
reduction in future sales or an increase in cost of goods sold based on the type
of incentive granted. We routinely evaluate the recoverability of capitalized
amounts based on forecasted replacement equipment sales over the estimated
minimum life of the aircraft considering estimated aircraft flight hours, number
of landings, as well as actual aircraft retirements. See Note 13 for additional
details.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not provide future benefits, are expensed
as incurred. Liabilities are recorded when environmental assessments are made or
remedial efforts are probable and the costs can be reasonably estimated. The
timing of these accruals is generally no later than the completion of
feasibility studies. The undiscounted liabilities for environmental costs
recorded in Accrued Liabilities and Other Liabilities at December 31, 2003 were
$90 and $503 million, respectively, and at December 31, 2002 were $75 and $360
million, respectively.
Asbestos Related Contingencies and Insurance Recoveries
Honeywell is a defendant in personal injury actions related to asbestos
containing products (refractory products and friction products). We recognize a
liability for any asbestos related contingency that is probable of occurrence
and reasonably estimable. Regarding North American Refractories Company (NARCO)
asbestos related claims, we accrue for pending claims based on terms and
conditions, including evidentiary requirements, in definitive agreements or
agreements in principle with current claimants. We also accrued for the probable
value of future asbestos related claims through 2018 based on the disease
criteria and payment values contained in the NARCO trust as described in Note
21. In light of the inherent uncertainties in making long term projections
regarding claims filing rates and disease manifestation, we do not believe that
we have a reasonable basis for estimating asbestos claims beyond 2018 under
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies" (SFAS No. 5). Regarding Bendix asbestos related claims, we accrue
for the estimated value of pending claims based on expected claim resolution
values and dismissal rates. We have not accrued for future Bendix asbestos
related claims as we cannot reasonably predict how many additional claims may be