Honeywell 2009 Annual Report Download - page 68

million is comprised of net deductible temporary differences, tax credit carryforwards and state tax net operating
losses which we believe will more likely than not be realized through the generation of future taxable income in
the U.S. and tax planning strategies. We maintain a valuation allowance of $8 million against such asset related
to state net operating losses. The non-U.S. net deferred tax asset of $896 million is comprised principally of net
operating and capital loss carryforwards, mainly in Germany, Luxembourg, Netherlands and the United Kingdom.
We maintain a valuation allowance of $570 million against these deferred tax assets reflecting our historical
experience and lower expectations of taxable income over the applicable carryforward periods. As more fully
described in Note 6 to the financial statements, our valuation allowance increased by $133 million in 2009 and
decreased by $45 million and $26 million in 2008 and 2007, respectively. In the event we determine that we will
not be able to realize our net deferred tax assets in the future, we will reduce such amounts through a charge to
income in the period such determination is made. Conversely, if we determine that we will be able to realize net
deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance
through a credit to income in the period that such determination is made.
Significant judgment is required in determining income tax provisions 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 the authoritative
guidance for uncertainty in income taxes, 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.
Sales Recognition on Long-Term Contracts—In 2009, we recognized approximately 15 percent of our
total net sales using the percentage-of-completion method for long-term contracts in our Automation and Control
Solutions, Aerospace and Specialty Materials segments. These long-term contracts are measured on the cost-to-
cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting
for these contracts involves management judgment in estimating total contract revenue and cost. Contract
revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions
regarding contract options, change orders, incentive and award provisions associated with technical performance
and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred over a
period of time, which can be several years, and the estimation of these costs requires management judgment.
Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance
trends and other economic projections. Significant factors that influence these estimates include inflationary
trends, technical and schedule risk, internal and subcontractor performance trends, business volume
assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly
monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are
recognized when such losses become evident. We maintain financial controls over the customer qualification,
contract pricing and estimation processes to reduce the risk of contract losses.
OTHER MATTERS
Litigation
See Note 21 to the financial statements for a discussion of environmental, asbestos and other litigation
matters.
Recent Accounting Pronouncements
See Note 1 to the financial statements for a discussion of recent accounting pronouncements.
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