Honeywell 2006 Annual Report Download - page 67

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
Note 1—Summary of Significant Accounting Policies
Accounting Principles—The financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America. The following is a description of the significant accounting policies of Honeywell
International Inc.
Principles of Consolidation—The consolidated financial statements include the accounts of Honeywell International Inc. and all
of its subsidiaries and entities in which a controlling interest is maintained. Our consolidation policy requires the consolidation of
entities where a controlling financial interest is obtained as well as consolidation of variable interest entities in which we bear a
majority of the risk to the entities' potential losses or stand to gain from a majority of the entities' expected returns. All intercompany
transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and on deposit and highly liquid, temporary cash
investments with an original maturity of three months or less.
Inventories—Inventories are valued at the lower of cost or market using the first-in, first-out or the average cost method and the
last-in, first-out (LIFO) method for certain qualifying domestic inventories.
Investments—Investments in affiliates over which we have a significant influence, but not a controlling interest, are accounted for
using the equity method of accounting. Other investments are carried at market value, if readily determinable, or cost. All equity
investments are periodically reviewed to determine if declines in fair value below cost basis are other-than-temporary. Significant and
sustained decreases in quoted market prices or a series of historic and projected operating losses by investees are strong indicators of
other-than-temporary declines. If the decline in fair value is determined to be other-than-temporary, an impairment loss is recorded
and the investment is written down to a new carrying value.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost less accumulated depreciation. For financial
reporting, the straight-line method of depreciation is used over the estimated useful lives of 10 to 50 years for buildings and
improvements and 2 to 15 years for machinery and equipment. Statement of Financial Accounting Standards No. 143, “Accounting
for Asset Retirement Obligations” (SFAS No. 143) and FASB Interpretation No. 47 (“FIN 47”) require recognition of the fair value of
obligations associated with the retirement of tangible long-lived assets when there is a legal obligation to incur such costs. Upon
adoption of FIN 47 on December 31, 2005, we recorded an increase of $14 million to property, plant and equipment and recognized
an asset retirement obligation liability of $46 million. This resulted in the recognition of a non-cash charge of $32 million ($21 million
after tax) that was reported as a cumulative effect of an accounting change. Upon initial recognition of a liability the cost is capitalized
as part of the related long-lived asset and depreciated over the corresponding asset's useful life. See Note 17 for additional details.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill represents the excess of acquisition costs over the fair value of
tangible net assets and identifiable intangible assets of businesses acquired. Goodwill and certain other intangible assets deemed to
have indefinite lives are not amortized. Intangible assets determined to have definite lives are amortized over their useful lives.
Goodwill and indefinite lived intangible assets are 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, “Goodwill and Other Intangible Assets”. This testing compares carrying values
to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. We completed our annual goodwill
impairment test as of March 31, 2006 and determined that there was no impairment as of that date. See Note 12 for additional details
on goodwill balances.
Other Intangible Assets with Determinable Lives—Other intangible assets with determinable lives consist of customer lists,
technology, patents and trademarks and other intangibles and are amortized over their estimated useful lives, ranging from 2 to
24 years.
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