Honeywell 2006 Annual Report Download - page 72

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for these subsidiaries are included in
earnings.
Derivative Financial Instruments—As a result of our global operating and financing activities, we are exposed to market risks
from changes in interest and foreign currency exchange rates and commodity prices, which may adversely affect our operating results
and financial position. We minimize our risks from interest and foreign currency exchange rate and commodity price fluctuations
through our normal operating and financing activities and, when deemed appropriate through the use of derivative financial
instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes and
we do not use leveraged derivative financial instruments. Derivative financial instruments used for hedging purposes must be
designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value
of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge
and over the life of the hedge contract.
All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as
hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in
current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives
are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items
impact earnings.
Transfers of Financial Instruments—Sales, transfers and securitization of financial instruments are accounted for under
Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”. We sell interests in designated pools of trade accounts receivables to third parties. The receivables are
removed from the Consolidated Balance Sheet at the time they are sold. The value assigned to our subordinated interests and
undivided interests retained in trade receivables sold is based on the relative fair values of the interests retained and sold. The carrying
value of the retained interests approximates fair value due to the short-term nature of the collection period for the receivables.
Income Taxes—Deferred tax liabilities or assets reflect temporary differences between amounts of assets and liabilities for
financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the
temporary differences reverse. A valuation allowance is established to offset any deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The determination of the amount of a
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. 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.
Significant judgment is required in determining income tax provisions under Statement of Financial Accounting Standards
No. 109 “Accounting for Income Taxes” (SFAS No. 109) and in evaluating tax positions. We establish additional provisions for
income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that are likely to be
challenged and that may not be sustained on review by tax authorities. In the normal course of business, the Company and its
subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these
examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income
taxes. We continually assess the likelihood
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