Honeywell 2007 Annual Report Download - page 79

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
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 do not meet the minimum probability threshold, as defined by
FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which is a tax position
that is more likely than not to be sustained upon examination by the applicable taxing authority. 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 and amount of potential adjustments and adjust the income tax provision, the current tax liability
and deferred taxes in the period in which the facts that give rise to a revision become known.
Earnings Per Share—Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding.
Use of Estimates—The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts in the financial statements and related disclosures in the accompanying notes. Actual results
could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of
revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Reclassifications—Certain prior year amounts have been reclassified to conform to the current year
presentation.
Recent Accounting Pronouncements—In June 2006, the Financial Accounting Standards Board ("FASB")
issued FIN 48, which establishes a single model to address accounting for uncertain tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required
to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon
adoption as of January 1, 2007, we reduced our existing reserves for uncertain tax positions by $33 million,
largely related to a reduction in state income tax matters, partially offset by a net increase for federal and
international tax reserves.
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