Honeywell 2007 Annual Report Download - page 78

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
is included in selling, general and administrative expenses, and was not affected by our adoption of FAS No.
123R.
We adopted SFAS No. 123R using the modified prospective method and, accordingly, the 2005
Consolidated Statement of Operations has not been restated to reflect the fair value method of recognizing
compensation cost relating to stock options. Share-based compensation cost relating to stock options recognized
in 2007 and 2006 is based on the value of the portion of the award that is ultimately expected to vest. SFAS No.
123R requires forfeitures to be estimated at the time of grant in order to estimate the portion of the award that will
ultimately vest. The estimate is based on our historical rates of forfeiture. In our pro forma information required
under SFAS No. 123 for 2005, we accounted for forfeitures as they occurred.
Pension and Other Postretirement Benefits—We sponsor both funded and unfunded U.S. and non-U.S.
defined benefit pension plans covering the majority of our employees and retirees. We also sponsor
postretirement benefit plans that provide health care benefits and life insurance coverage to eligible retirees. For
our U.S. defined benefit pension plans we use the market-related value of plan assets reflecting changes in the
fair value of plan assets over a three-year period. Further, net actuarial (gains) or losses in excess of 10 percent
of the greater of the market-related value of plan assets or the plans' projected benefit obligation (the corridor)
are recognized over a six year period. We adopted SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans" (SFAS No. 158) as of December 31, 2006. See Note 22 for additional
disclosures.
Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the United States
with a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates.
Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign
currency translation gains and losses are included as a component of Accumulated Other Comprehensive
Income (Loss). For subsidiaries operating in highly inflationary environments, inventories and property, plant and
equipment, including related expenses, are remeasured at the exchange rate in effect on the date the assets
were acquired, while monetary 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. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged
item.
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
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