Honeywell 2004 Annual Report Download - page 67

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
reduction of sales. We regularly evaluate the recoverability of capitalized amounts whenever events or changes in circumstances
indicate that the carrying amount of the incentives may not be fully recoverable. There were no impairment charges related to these
capitalized incentives recognized during 2004, 2003 and 2002. 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 remedial efforts or damage claim payments are probable and the
costs can be reasonably estimated. Such liabilities are based on our best estimate of the undiscounted future costs required to complete
the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal
information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of
other potentially responsible parties, technology and information related to individual sites, we do not believe it is possible to develop
an estimate of the range of reasonably possible environmental loss in excess of our accruals. The undiscounted liabilities for
environmental costs recorded in Accrued Liabilities and Other Liabilities at December 31, 2004 were $267 and $628 million,
respectively, and at December 31, 2003 were $90 and $503 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 brought against us, the allegations in such claims or their probable
outcomes and resulting settlement values in the tort system. 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 individual issue with the assistance of outside legal counsel and, if applicable, other experts.
In connection with the 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.
Research and Development—Research and development costs for company-sponsored research and development projects are
expensed as incurred. Such costs are principally included in Cost of Products Sold and were $917, $751 and $757 million in 2004,
2003 and 2002, respectively.
Stock-Based Compensation Plans—We account for our fixed stock option plans under Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees” (APB No. 25). Under APB No. 25, there is no compensation cost recognized for our
fixed stock option plans, because the options granted under these plans have an exercise price equal to the market value of the
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