Honeywell 2010 Annual Report Download - page 65

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
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 terms of the trade accounts receivable program permit the
repurchase of receivables from the third parties at our discretion. As a result, these program receivables are not accounted for as a sale and remain on the
Consolidated Balance Sheet with a corresponding amount recorded as either Short-term borrowings or Long-term debt.
At times we also transfer trade and other receivables that qualify as a sale and are thus are removed from the Consolidated Balance Sheet at the time
they are sold. The value assigned to any subordinated interests and undivided interests retained in 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 tax filings of 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.
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.
62