Honeywell 2010 Annual Report Download - page 50

CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and
application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We
consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates
and assumptions, and any such differences could be material to our consolidated financial statements.
We have discussed the selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors
and our Independent Registered Public Accountants. New accounting standards effective in 2010 which had a material impact on our consolidated financial
statements are described in the Recent Accounting Pronouncements section in Note 1 to the financial statements.
Contingent Liabilities—We are subject to a number of lawsuits, investigations and claims (some of which involve substantial dollar amounts) that arise
out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government
contracts, product liability (including asbestos), prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health
and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood
of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for
these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis
includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of
pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities
may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial
system), changes in assumptions or changes in our settlement strategy. For a discussion of our contingencies related to environmental, asbestos and other
matters, including management's judgment applied in the recognition and measurement of specific liabilities, see Notes 1 and 21 to the financial statements.
Asbestos Related Contingencies and Insurance Recoveries—We are a defendant in personal injury actions related to products containing asbestos
(refractory and friction products). We recognize a liability for any asbestos related contingency that is probable of occurrence and reasonably estimable.
Regarding North American Refractories Company (NARCO) asbestos related claims, we accrued for pending claims based on terms and conditions, including
evidentiary requirements, in definitive agreements or agreements in principle with current claimants. We also accrued for the probable value of future
NARCO asbestos related claims through 2018 based on the disease criteria and payment values contained in the NARCO trust as described in Note 21 to the
financial statements. In light of the inherent uncertainties in making long term projections regarding claims filing rates and disease manifestation, we do not
believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. Regarding Bendix asbestos related claims, we accrued for the
estimated value of pending claims based on expected claim resolution values and historic dismissal rates. We also accrued for the estimated cost of future
anticipated claims related to Bendix for the next five years based on our assessment of additional claims that may be brought against us and anticipated
resolution values in the tort system. We value Bendix pending and future claims using the average resolution values for the previous five years. We will
continue to update the expected resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year. For
additional information see Note 21 to the financial statements. We continually assess the likelihood of any adverse judgments or outcomes to our
contingencies, as well as potential ranges of probable losses and recognize a liability, if any, for these contingencies based on an analysis of each individual
issue with the assistance of outside legal counsel and, if applicable, other experts.
In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable.
In assessing the probability of insurance recovery, we make judgments concerning insurance coverage that we believe are reasonable and consistent with our
historical experience with our insurers, our knowledge of any pertinent solvency issues surrounding insurers, various judicial determinations relevant to our
insurance programs and our consideration of the impacts of any settlements with our insurers. At December 31, 2010, we have recorded insurance receivables
of $718 million that can be specifically allocated to NARCO related asbestos liabilities. We also have $1.9 billion in coverage remaining for Bendix related
asbestos liabilities although there are gaps in our coverage due to insurance company insolvencies, certain uninsured periods and insurance settlements. Our
insurance is with both the domestic insurance market and the London excess market. While the substantial majority of our insurance carriers are solvent, some
of our individual carriers are insolvent, which has been considered in our analysis of
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