Honeywell 2012 Annual Report Download - page 64

Our net deferred tax asset of $2,473 million consists of $1,422 million related to U.S. operations
and $1,051 million related to non-U.S. operations. The U.S. net deferred tax asset of $1,422 million
consists of net deductible temporary differences, tax credit carryforwards, state tax net operating
losses which we believe will more likely than not be realized through the generation of future taxable
income in the U.S. and tax planning strategies. The non-U.S. net deferred tax asset of $1,051 million
consists principally of net operating loss, capital loss and tax credit carryforwards, mainly in Canada,
France, Germany, Luxembourg, Netherlands and the United Kingdom. We maintain a valuation
allowance of $598 million against these deferred tax assets reflecting our historical experience and
lower expectations of taxable income over the applicable carryforward periods. As more fully described
in Note 6 to the financial statements, our valuation allowance increased by $7 million in 2012,
decreased by $45 million in 2011 and increased by $58 million in 2010, respectively. In the event we
determine that we will not be able to realize our net deferred tax assets in the future, we will reduce
such amounts through a charge to income in the period such determination is made. Conversely, if we
determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we
will decrease the recorded valuation allowance through a credit to income in the period that such
determination is made.
Significant judgment is required in determining income tax provisions and in evaluating tax
positions. We establish additional reserves for income taxes when, despite the belief that tax positions
are fully supportable, there remain certain positions that do not meet the minimum recognition
threshold. The approach for evaluating certain and uncertain tax positions is defined by the
authoritative guidance and this guidance determines when a tax position 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 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.
Sales Recognition on Long-Term Contracts—In 2012, we recognized approximately 16 percent
of our total net sales using the percentage-of-completion method for long-term contracts in our
Automation and Control Solutions, Aerospace and Performance Materials and Technologies segments.
These long-term contracts are measured on the cost-to-cost basis for engineering-type contracts and
the units-of-delivery basis for production-type contracts. Accounting for these contracts involves
management judgment in estimating total contract revenue and cost. Contract revenues are largely
determined by negotiated contract prices and quantities, modified by our assumptions regarding
contract options, change orders, incentive and award provisions associated with technical performance
and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred
over a period of time, which can be several years, and the estimation of these costs requires
management judgment. Cost estimates are largely based on negotiated or estimated purchase
contract terms, historical performance trends and other economic projections. Significant factors that
influence these estimates include inflationary trends, technical and schedule risk, internal and
subcontractor performance trends, business volume assumptions, asset utilization, and anticipated
labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes
in circumstances. Anticipated losses on long-term contracts are recognized when such losses become
evident. We maintain financial controls over the customer qualification, contract pricing and estimation
processes to reduce the risk of contract losses.
OTHER MATTERS
Litigation
See Note 22 to the financial statements for a discussion of environmental, asbestos and other
litigation matters.
55