Honeywell 2005 Annual Report Download - page 68

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
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. Service sales,
principally representing repair, maintenance and engineering activities in our Aerospace and Automation and Control Solutions
reportable segments, are recognized over the contractual period or as services are rendered. 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 Sales Incentives—We provide sales incentives to commercial aircraft manufacturers and airlines in connection with
their selection of our aircraft wheel and braking system hardware and auxiliary power units for installation on commercial aircraft.
These incentives consist of free or deeply discounted products, product credits and upfront cash payments. The cost of these incentives
are capitalized (in the case of auxiliary power units only when we are the sole source supplier) at the time we deliver the products to
our customers or, in the case of product credits, at the time the credit is issued, or in the case of upfront cash payments, at the time the
payment is made. In the case of free or deeply discounted product, the cost to manufacture less any amount recovered from the
airframe manufacturer or airline is capitalized. Product credits and upfront cash payments are capitalized at exchanged value.
Research, design, development and qualification costs related to these products are expensed as incurred, unless contractually
guaranteed of reimbursement. The cost of the sales incentives described above is capitalized because the selection of our aircraft
wheel and braking system hardware and auxiliary power units for installation on commercial aircraft results in the creation of future
revenues and cash flows through aftermarket sales to fulfill long-term product maintenance requirements mandated by the Federal
Aviation Administration (FAA) and other similar international organizations over the useful life of the aircraft. Once our products are
certified and selected on an aircraft, the recovery of our investment is virtually guaranteed over the useful life of the aircraft. The
likelihood of displacement by an alternative supplier is remote due to contractual sole-sourcing, the high cost to alternative suppliers
and aircraft operators of product retrofits, and/or rigorous regulatory specifications, qualification and testing requirements. We
amortize the cost of these capitalized sales incentives over their useful lives on a straight-line basis, up to 25 years, representing the
estimated minimum service life of the aircraft. This useful life is the period over which we are virtually assured to earn revenues from
the aftermarket sales of certified products necessary to fulfill the maintenance required by the FAA and other similar international
organizations. We classify the amortization expense associated with free and discounted products as cost of goods sold and the
amortization expense associated with product credits and upfront cash payments as a 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 2005, 2004
and 2003.
On February 17, 2006, Honeywell announced its intention to change its method of accounting for these sales incentives in the first
quarter of 2006 to recognize the cost of these incentives as provided. While we consider the existing policy acceptable, we believe that
the new policy is preferable and will
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