United Technologies 2008 Annual Report Download - page 70

Notes to Consolidated Financial Statements
Note 1. Summary of Accounting Principles
The preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates.
Consolidation. The Consolidated Financial Statements include the accounts of UTC and our
controlled subsidiaries. Intercompany transactions have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand, demand
deposits and short-term cash investments that are highly liquid in nature and have original
maturities of three months or less.
On occasion, we are required to maintain cash deposits with certain banks in respect to
contractual obligations related to acquisitions or divestitures or other legal obligations. As of
December 31, 2008, the amount of restricted cash was approximately $310 million, of which
approximately $35 million is included in current assets and $275 million is included in long-
term assets. Restricted cash as of December 31, 2007 was not significant.
Accounts Receivable. Current and long-term accounts receivable include retainage of $154
million and $121 million in 2008 and 2007, respectively, and unbilled receivables of $852
million and $643 million in 2008 and 2007, respectively.
Retainage represents amounts that, pursuant to the applicable contract, are not due until
project completion and acceptance by the customer. Unbilled receivables represent revenues
that are not currently billable to the customer under the terms of the contract. These items are
expected to be collected in the normal course of business. Long-term accounts receivable are
included in other assets in the Consolidated Balance Sheet.
Marketable Equity Securities. Equity securities that have a readily determinable fair value and
that we do not intend to trade are classified as available for sale and carried at fair value.
Unrealized holding gains and losses are recorded as a separate component of shareowners’
equity, net of deferred income taxes.
Inventories and Contracts In Progress. Inventories and contracts in progress are stated at the
lower of cost or estimated realizable value and are primarily based on first-in, first-out (FIFO)
or average cost methods; however, certain subsidiaries use the last-in, first-out (LIFO) method.
If inventories that were valued using the LIFO method had been valued under the FIFO
method, they would have been higher by $176 million and $173 million at December 31, 2008
and 2007, respectively.
Costs accumulated against specific contracts or orders are at actual cost. Inventory in excess of
requirements for contracts and current or anticipated orders have been reserved as
appropriate. Manufacturing costs are allocated to current production and firm contracts.
Fixed Assets. Fixed assets are stated at cost. Depreciation is computed over the assets’ useful
lives using the straight-line method, except for aerospace assets acquired prior to January 1,
1999, which are depreciated using accelerated methods.
Goodwill and Other Intangible Assets. Goodwill represents costs in excess of fair values
assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets
deemed to have indefinite lives are not amortized. Goodwill and indefinite-lived intangible
assets are subject to annual impairment testing using the guidance and criteria described in
Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible
Assets.” This testing compares carrying values to fair values and, when appropriate, the
carrying value of these assets is reduced to fair value. During 2008, we were not required to
record any impairment on goodwill or indefinite-lived intangibles.
Intangible assets other than goodwill consist of service portfolios, patents and trademarks,
customer relationships and other intangible assets. Useful lives of finite lived intangible assets
are estimated based upon the nature of the intangible asset and the industry in which the
intangible asset is used. Estimated useful lives of service portfolios generally range from 5 to 30
years. Estimated useful lives of patents and finite-lived trademarks range from 3 to 40 years.
Estimated useful lives of customer relationships and other assets range from 2 to 32 years.
These intangible assets are amortized based on the pattern in which the economic benefits of
the intangible assets are consumed. If a pattern of economic benefit cannot be reliably
determined, a straight-line amortization method is used.
Other Long-Lived Assets. We evaluate the potential impairment of other long-lived assets when
appropriate. If the carrying value of assets exceeds the sum of the undiscounted expected
future cash flows, the carrying value of the asset is written down to fair value.
Income Taxes. In the ordinary course of business there is inherent uncertainty in quantifying
our income tax positions. We assess our income tax positions and record tax benefits for all
years subject to examination based upon management’s evaluation of the facts, circumstances,
and information available at the reporting date. For those tax positions where it is more-likely-
than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit
with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions
where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been
recognized in the financial statements. Where applicable, associated interest has also been
recognized.
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