Honeywell 2009 Annual Report Download - page 106

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
We hedge monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into
U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet
date. The effects of changes in spot rates are recognized in earnings and included in Other (Income) Expense.
We partially hedge forecasted sales and purchases, which predominantly occur in the next twelve months
and are denominated in non-functional currencies, with currency forward contracts. Changes in the forecasted
non-functional currency cash flows due to movements in exchange rates are substantially offset by changes in
the fair value of the currency forward contracts designated as hedges. Market value gains and losses on these
contracts are recognized in earnings when the hedged transaction is recognized.
Open foreign currency exchange forward contracts mature predominantly in the next twelve months. At
December 31, 2009 and 2008, we had contracts with notional amounts of $2,959 and $3,030 million, respectively
to exchange foreign currencies, principally the U.S. dollar, Euro, British pound, Canadian dollar, Hong Kong
dollar, Mexican peso, Swiss franc, Czech koruna, Chinese renminbi, Indian rupee and Singapore dollar.
Commodity Price Risk Management—Our exposure to market risk for commodity prices can result in
changes in our cost of production. We primarily mitigate our exposure to commodity price risk through the use of
long-term, fixed-price contracts with our suppliers and formula price agreements with suppliers and customers.
We also enter into forward commodity contracts with third parties designated as hedges of anticipated purchases
of several commodities. Forward commodity contracts are marked-to-market, with the resulting gains and losses
recognized in earnings when the hedged transaction is recognized. At December 31, 2009 and 2008, we had
contracts with notional amounts of $52 and $8 million, respectively, related to forward commodity agreements,
principally base metals and natural gas.
Interest Rate Risk Management—We use a combination of financial instruments, including long-term,
medium-term and short-term financing, variable-rate commercial paper, and interest rate swaps to manage the
interest rate mix of our total debt portfolio and related overall cost of borrowing. At December 31, 2009, interest
rate swap agreements designated as fair value hedges effectively changed $600 million of fixed rate debt at a
rate of 3.875 percent to LIBOR based floating debt. Our interest rate swaps mature in 2014. At December 31,
2008, we had no interest rate swap agreements.
Fair Value of Financial Instrument—The FASB's accounting guidance defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The FASB's guidance classifies the inputs used to measure fair
value into the following hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical assets or
liabilities
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities,
or
Unadjusted quoted prices for identical or similar assets or liabilities in
markets that are not active, or
Inputs other than quoted prices that are observable for the asset or
liability
Level 3 Unobservable inputs for the asset or liability
The Company endeavors to utilize the best available information in measuring fair value. Financial and
nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The Company has determined that our financial assets and
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