Honeywell 2014 Annual Report Download - page 49

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.
Income Taxes—Significant judgment is required 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 which
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 change in estimate 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.
Reclassifications—Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements—Changes to accounting principles generally accepted in
the United States of America (U.S. GAAP) are established by the Financial Accounting Standards
Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting
Standards Codification.
The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on our
consolidated financial position or results of operations.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will
supersede most current revenue recognition guidance, including industry-specific guidance. The
underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods or
services. The guidance provides a five-step analysis of transactions to determine when and how
revenue is recognized. Other major provisions include capitalization of certain contract costs,
consideration of time value of money in the transaction price, and allowing estimates of variable
consideration to be recognized before contingencies are resolved in certain circumstances. The
guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for
the interim and annual periods beginning on or after December 15, 2016 (early adoption is not
permitted). The guidance permits the use of either a retrospective or cumulative effect transition
method. We have not yet selected a transition method and are currently evaluating the impact of the
amended guidance on our consolidated financial position, results of operations and related disclosures.
Note 2. Divestiture
In 2014, the Company sold its Friction Materials business to Federal Mogul Corporation for
$155 million and recognized a pre-tax and after-tax loss of $33 million (of which $5 million was
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HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)