Honeywell 2006 Annual Report Download - page 58

significantly under-performing or were in industries with negative economic trends and subsequently these businesses were
significantly restructured, sold or are in the process of being sold.
Goodwill Impairment Testing—Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets
and identifiable intangible assets acquired in a business combination. Goodwill is not amortized, but is subject to impairment testing.
Our Goodwill balance, $8.4 billion as of December 31, 2006, is subject to impairment testing annually as of March 31, or whenever
events or changes in circumstances indicate that the carrying amount may not be fully recoverable, using the guidance and criteria
described in Statement of Financial Accounting Standards No. 142, (SFAS No. 142) “Goodwill and Other Intangible Assets”. This
testing compares carrying values to fair values and, when appropriate, the carrying value is reduced to fair value. The fair value of our
reporting units is estimated utilizing a discounted cash flow approach incorporating historic and projected future operating
performance. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially
impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We completed
our annual impairment test as of March 31, 2006 and determined that there was no impairment as of that date.
Income Taxes—Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Our
provision for income taxes is based on domestic and international statutory income tax rates and tax planning opportunities in the
jurisdictions in which we operate. Significant judgment is required in determining income tax provisions as well as deferred tax asset
and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
As of December 31, 2006, we recognized a net deferred tax asset of $2,414 million, less a valuation allowance of $516 million.
Net deferred tax assets are primarily comprised of net deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation
allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of
taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. A valuation
allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the
need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections
of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a
number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred
tax assets can be impacted by changes to tax laws.
Our net deferred tax asset of $2,414 million is comprised of $1,624 million related to U.S. operations and $790 million related to
non-U.S. operations. The U.S. net deferred tax asset of $1,624 million is comprised of net deductible temporary differences, tax credit
carryforwards and state tax net operating losses which we believe will more likely than not be realized through the generation of
future taxable income in the U.S. and tax planning strategies. We maintain a valuation allowance of $35 million against such asset
related to state tax net operating losses. The non-U.S. net deferred tax asset of $790 million is comprised principally of net operating
and capital loss carryforwards, mainly in Germany, France and the United Kingdom. We maintain a valuation allowance of $481
million against these deferred tax assets reflecting our historical experience and lower expectations of taxable income over the
applicable carryforward periods. As more fully described in Note 6 to the financial statements, our valuation allowance increased by
$39, $139 and $39 million in 2006, 2005 and 2004, respectively. In the event we determine that we will not be able to realize our net
deferred tax assets in the future, we will reduce such amounts through a charge to income in the period such determination is made.
Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease
the recorded valuation allowance through a credit to income or a credit to goodwill in the period that such determination is made. If a
valuation allowance is recognized for the net deferred tax asset for an acquired entity's deductible temporary differences, operating
loss, capital loss, or tax credit carryforwards at the acquisition date, the tax benefits for those items recognized after the acquisition
date shall be applied first to reduce to zero goodwill related to the
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