Honeywell 2008 Annual Report Download - page 79

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
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.
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.
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 September 2006, the FASB issued Statement of Financial
Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 establishes
a common definition for fair value to be applied to US GAAP requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. Issued in February 2008, FSP 157-1 "Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13" removed leasing
transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157. FSP
157-2 "Partial Deferral of the Effective Date of Statement 157" (FSP 157-2), deferred the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.
In October 2008, the FASB issued FSP 157-3 "Determining Fair Value of a Financial Asset in a Market That
is Not Active" (FSP 157-3). FSP 157-3 clarified the application of SFAS No. 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the market
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