Honeywell 2007 Annual Report Download - page 77

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
No. 5). Regarding Bendix asbestos related claims, we accrue for the estimated value of pending claims based on
expected claim resolution values and historic dismissal rates. Since the fourth quarter of 2006, we also accrue for
the estimated cost of future anticipated claims related to Bendix for the next five years based on our assessment
of additional claims that may be brought against us and anticipated resolution values in the tort system. In
December 2006, we also changed our methodology for valuing Bendix pending and future claims from using
average resolution values for the previous five years to using average resolution values for the previous two
years. The claims filing experience and resolution data for Bendix related claims has become more reliable over
the past several years. Accordingly, in the fourth quarter of 2007, we updated our methodology for valuing Bendix
pending and future claims using the average resolution values for the past three years. We will continue to
update the expected resolution values used to estimate the cost of pending and future Bendix claims during the
fourth quarter each year. For additional information see Note 21. 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 an 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
experience with our insurers, our knowledge of any pertinent solvency issues surrounding insurers, various
judicial determinations relevant to our insurance programs and our consideration of the impacts of any
settlements with our insurers.
Aerospace Sales Incentives—We provide sales incentives to commercial aircraft manufacturers and
airlines in connection with their selection of our aircraft equipment, predominately wheel and braking system
hardware and auxiliary power units, for installation on commercial aircraft. These incentives principally consist of
free or deeply discounted products, but also include credits for future purchases of product and upfront cash
payments. These costs are expensed as provided. For aircraft manufacturers, incentives are recorded when the
products are delivered; for airlines, incentives are recorded when the associated aircraft are delivered by the
aircraft manufacturer to the airline.
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 $1,459, $1,411 and $1,072 million in 2007, 2006 and 2005, respectively.
Stock-Based Compensation Plans—Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R) requiring that compensation cost relating to share-based payment
awards made to employees and directors be recognized in the financial statements. The principal awards issued
under our stock-based compensation plans, which are described in Note 20 include non-qualified stock options
and restricted stock units (RSUs). The cost for such awards is measured at the grant date based on the fair value
of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service periods (generally the vesting period of the equity award) in our Consolidated
Statement of Operations.
Prior to January 1, 2006, we accounted for share-based compensation cost using the intrinsic value method
in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" (APB No.
25), and related interpretations. We also followed disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—
Transition and Disclosure". Under APB No. 25 there was no compensation cost recognized in our Consolidated
Statement of Operations for our stock option awards. Compensation cost for RSUs is recognized in our
Consolidated Statement of Operations and
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