United Technologies 2008 Annual Report Download - page 71

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) on January 1, 2007. As a
result of this adoption, we recognized a charge of approximately $19 million to the January 1,
2007 retained earnings balance. We recognize interest accrued related to unrecognized tax
benefits in interest expense. Penalties, if incurred, would be recognized as a component of
income tax expense.
Revenue Recognition. Sales under government and commercial fixed-price contracts and
government fixed-price-incentive contracts are recorded at the time deliveries are made or, in
some cases, on a percentage-of-completion basis. Sales under cost-reimbursement contracts
are recorded as work is performed.
Sales under elevator and escalator sales, installation and modernization contracts are
accounted for under the percentage-of-completion method.
Losses, if any, on contracts are provided for when anticipated. Loss provisions on original
equipment contracts are recognized to the extent that estimated inventoriable manufacturing,
engineering, product warranty and product performance guarantee costs exceed the projected
revenue from the products contemplated under the contractual arrangement. For new
commitments, we generally record loss provisions at the earlier of contract announcement or
contract signing. For existing commitments, anticipated losses on contracts are recognized in
the period in which losses become evident. Products contemplated under contractual
arrangement include products purchased under contract and, in the large commercial engine
business, future highly probable sales of replacement parts required by regulation that are
expected to be purchased subsequently for incorporation into the original equipment. Revenue
projections used in determining contract loss provisions are based upon estimates of the
quantity, pricing and timing of future product deliveries. Losses are recognized on shipment to
the extent that inventoriable manufacturing costs, estimated warranty costs and product
performance guarantee costs exceed revenue realized. Contract accounting requires estimates
of future costs over the performance period of the contract as well as estimates of award fees
and other sources of revenue. These estimates are subject to change and result in adjustments
to margins on contracts in progress. The extent of progress toward completion on our long-
term commercial aerospace equipment and helicopter contracts is measured using units of
delivery. In addition, we use the cost-to-cost method for development contracts in the
aerospace businesses and for elevator and escalator sales, installation and modernization
contracts in the commercial businesses. For long-term aftermarket contracts, revenue is
recognized over the contract period in proportion to the costs expected to be incurred in
performing services under the contract. We review our cost estimates on significant contracts
on a quarterly basis, and for others, no less frequently than annually or when circumstances
change and warrant a modification to a previous estimate. Adjustments to contract loss
provisions are recorded in earnings upon identification.
Service sales, representing aftermarket repair and maintenance activities, are recognized over
the contractual period or as services are performed. In the commercial businesses, revenue is
generally recognized on a straight line basis. In the aerospace businesses, revenue is generally
recognized in proportion to cost.
Revenues from engine programs under collaboration agreements are recorded as earned and
the collaborator share of revenue is recorded as a reduction of revenue at that time. The
collaborator share of revenues under Pratt & Whitney’s engine programs was approximately
$1.1 billion, $.9 billion and $.8 billion for 2008, 2007 and 2006, respectively. Costs associated
with engine programs under collaboration agreements are expensed as incurred. The
collaborator share of program costs is recorded as a reduction of the related expense item at
that time.
Research and Development. Research and development costs not specifically covered by
contracts and those related to the company sponsored share of research and development
activity in connection with cost-sharing arrangements are charged to expense as incurred.
Government research and development support, not associated with specific contracts, is
recorded as a reduction to research and development expense in the period earned.
Repayment, if any, is in the form of future royalties and is conditioned upon the achievement
of certain financial targets.
Research and development costs incurred under contracts with customers are expensed as
incurred and are reported as a component of cost of products sold. Revenue from such
contracts is recognized as product sales when earned.
Foreign Exchange and Hedging Activity. We conduct business in many different currencies
and, accordingly, are subject to the inherent risks associated with foreign exchange rate
movements. The financial position and results of operations of substantially all of our foreign
subsidiaries are measured using the local currency as the functional currency. Foreign currency
denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing
at the respective balance sheet dates, and income and expense items are translated at the
average exchange rates during the respective periods. The aggregate effects of translating the
balance sheets of these subsidiaries are deferred as a separate component of Shareowners’
Equity.
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