Honeywell 2014 Annual Report Download - page 48

Asbestos Related Contingencies and Insurance Recoveries—We recognize a liability for any
asbestos related contingency that is probable of occurrence and reasonably estimable. In connection
with the recognition of liabilities for asbestos related matters, we record asbestos related insurance
recoveries that are deemed probable. For additional information, see Note 19 Commitments and
Contingencies.
Aerospace Sales Incentives—We provide sales incentives to commercial aircraft manufacturers
and airlines in connection with their selection of our aircraft equipment, predominately wheel and
braking system hardware, avionics, and auxiliary power units, for installation on commercial aircraft.
These incentives consist of free or deeply discounted products, credits for future purchases of product
and upfront cash payments. These costs are recognized in the period incurred as cost of products sold
or as a reduction to sales, as appropriate.
Research and Development—Research and development costs for company-sponsored
research and development projects are expensed as incurred. Such costs are principally included in
Cost of Products Sold and were $1,892 million, $1,804 million and $1,847 million in 2014, 2013 and
2012, respectively.
Stock-Based Compensation Plans—The principal awards issued under our stock-based
compensation plans, which are described in Note 18 Stock-Based Compensation Plans, are non-
qualified stock options and restricted stock units (RSUs). The cost for such awards is measured at the
grant date based on the fair value of the award. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods (generally the vesting
period of the equity award) and is included in selling, general and administrative expense in our
Consolidated Statement of Operations. Forfeitures are estimated at the time of grant to recognize
expense for those awards that are expected to vest and are based on our historical forfeiture rates.
Pension Benefits—We recognize net actuarial gains or losses in excess of 10% of the greater of
the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the
fourth quarter each year (MTM Adjustment), and, if applicable, in any quarter in which an interim
remeasurement is triggered. The remaining components of pension (income) expense, primarily
service and interest costs and assumed return on plan assets, are recognized on a quarterly basis
(Pension ongoing (income) expense).
Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the
United States with a functional currency other than U.S. dollars are translated into U.S. dollars using
year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in
effect during the year. Foreign currency translation gains and losses are included as a component of
Accumulated Other Comprehensive Income (Loss). For subsidiaries operating in highly inflationary
environments, inventories and property, plant and equipment, including related expenses, are
remeasured at the exchange rate in effect on the date the assets were acquired, while monetary
assets and liabilities are remeasured at year-end exchange rates. Remeasurement adjustments for
these subsidiaries are included in earnings.
Derivative Financial Instruments—We minimize our risks from interest and foreign currency
exchange rate fluctuations through our normal operating and financing activities and, when deemed
appropriate through the use of derivative financial instruments. Derivative financial instruments are
used to manage risk and are not used for trading or other speculative purposes and we do not use
leveraged derivative financial instruments. Derivative financial instruments that qualify for hedge
accounting must be designated and effective as a hedge of the identified risk exposure at the inception
of the contract. 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.
39
HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)