Honeywell 2009 Annual Report Download - page 80

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
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 authoritative guidance for the transfers and servicing of financial assets and extinguishments
of liabilities. We sell interests in 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 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
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