Honeywell 2012 Annual Report Download - page 60

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 2012 which had a material impact on our
consolidated financial statements are described in the Recent Accounting Pronouncements section in
Note 1 Summary of Significant Accounting Policies of Notes 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
Summary of Significant Accounting Policies and 22 Commitments and Contingencies of Notes 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 in agreements with NARCO, its former parent company,
and certain asbestos claimants, and an estimate of the unsettled claims pending as of the time
NARCO filed for bankruptcy protection. We also accrued for the estimated value of future NARCO
asbestos related claims expected to be asserted against the NARCO trust through 2018 as described
in Note 22 Commitments and Contingencies of Notes to the Financial Statements. In light of the
inherent uncertainties in making long term projections and in connection with the initial operation of a
524(g) trust, as well as the stay of all NARCO asbestos claims since January 2002, 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 using average
resolution values for the previous five years. We also accrued for the estimated value of future
anticipated claims related to Bendix for the next five years based on historic claims filing experience
and dismissal rates, disease classifications, and average resolution values in the tort system for the
previous five years. In light of the uncertainties inherent in making long-term projections, as well as
certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable
basis for estimating asbestos claims beyond the next five years. We will continue to update the
resolution values used to estimate the cost of pending and future Bendix claims during the fourth
quarter each year. For additional information see Note 22 Commitments and Contingencies of Notes 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
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