Honeywell 2011 Annual Report Download - page 83

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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, 2011 and 2010, we had contracts with notional amounts of $7,108 million and $5,733 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, Singapore dollar, Swedish krona, Korean won and Thai baht.
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, 2011 and 2010, we had contracts with notional amounts of $59 million and $23 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, 2011 and 2010, interest rate swap agreements designated as fair value hedges effectively changed $1,400 and $600 million, respectively, of fixed rate debt
at a rate of 4.09 and 3.88 percent, respectively, to LIBOR based floating rate debt. Our interest rate swaps mature through 2021.
Fair Value of Financial Instruments— 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 available for sale
investments in marketable equity securities are level 1 and our remaining financial assets and liabilities are level 2 in the fair value hierarchy. The following
table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 and 2010:
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