United Technologies 2008 Annual Report Download - page 72

We have used derivative instruments, including swaps, forward contracts and options, to
manage certain foreign currency, interest rate and commodity price exposures. Derivative
instruments are viewed as risk management tools by us and are not used for trading or
speculative purposes. Derivatives used for hedging purposes may be designated and effective as
a hedge of the identified risk exposure at the inception of the contract.
All derivative instruments are recorded on the balance sheet at fair value. Derivatives used to
hedge foreign-currency-denominated balance sheet items are reported directly in earnings
along with offsetting transaction gains and losses on the items being hedged. Derivatives used
to hedge forecasted cash flows associated with foreign currency commitments or forecasted
commodity purchases may be accounted for as cash flow hedges, as deemed appropriate. Gains
and losses on derivatives designated as cash flow hedges are recorded in other comprehensive
income and reclassified to earnings in a manner that matches the timing of the earnings impact
of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently
in earnings.
Environmental. Environmental investigatory, remediation, operating and maintenance costs
are accrued when it is probable that a liability has been incurred and the amount can be
reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of
currently available facts with respect to each individual site, including existing technology,
current laws and regulations and prior remediation experience. Where no amount within a
range of estimates is more likely, the minimum is accrued. For sites with multiple responsible
parties, we consider our likely proportionate share of the anticipated remediation costs and the
ability of the other parties to fulfill their obligations in establishing a provision for those costs.
Liabilities with fixed or reliably determinable future cash payments are discounted. Accrued
environmental liabilities are not reduced by potential insurance reimbursements.
Asset Retirement Obligations. We record the fair value of legal obligations associated with the
retirement of tangible long-lived assets in the period in which it is determined to exist, if a
reasonable estimate of fair value can be made. Upon initial recognition of a liability, we
capitalize the cost of the asset retirement obligation by increasing the carrying amount of the
related long-lived asset. Over time, the liability is increased for changes in its present value and
the capitalized cost is depreciated over the useful life of the related asset. We have determined
that conditional legal obligations exist for certain of our worldwide owned and leased facilities
related primarily to building materials. As of December 31, 2008 and 2007, the outstanding
liability for asset retirement obligations was $163 million and $171 million, respectively.
Pension and Postretirement Obligations. In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statement Nos. 87, 88, 106 and 132(R)” (SFAS 158). This statement
requires balance sheet recognition of the overfunded or underfunded status of pension and
postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or
credits, and any remaining transition assets or obligations that have not been recognized under
previous accounting standards must be recognized in Accumulated Other Non-Shareowners’
Changes in Equity, net of tax effects, until they are amortized as a component of net periodic
benefit cost. SFAS 158 was effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which were effective for fiscal
years ending after December 15, 2008. Based on the funded status of our plans as of
December 31, 2006, the adoption of SFAS 158 decreased total assets by approximately $2.4
billion, decreased total liabilities by approximately $549 million and reduced total
shareowners’ equity by approximately $1.8 billion, net of taxes. SFAS 158 also requires the
measurement date (the date at which plan assets and the benefit obligation are measured) to be
the company’s fiscal year end. We early-adopted the measurement date provisions of SFAS 158
effective January 1, 2007. The majority of our pension and postretirement plans previously
used a November 30 measurement date. All plans are now measured as of December 31,
consistent with our company’s fiscal year end. The non-cash effect of the adoption of the
measurement date provisions of SFAS 158 increased shareowners’ equity by approximately
$425 million and decreased long-term liabilities by approximately $620 million in 2007. The
adoption of SFAS 158 did not affect our results of operations.
Note 2. Business Acquisitions, Goodwill and Intangible Assets
Business Acquisitions. Our investments in businesses in 2008, 2007 and 2006 totaled $1.4
billion, $2.3 billion and $1.0 billion, including debt assumed of $196 million, $300 million and
$138 million, respectively.
The 2008 investments consisted primarily of a number of small acquisitions in our commercial
businesses. The 2007 investments consisted principally of the acquisition of Initial Electronic
Security Group (IESG), a division of Rentokil Initial, plc, and Marioff Corporation, Oy
(Marioff) both now part of the UTC Fire & Security segment, and a number of small
acquisitions in both the commercial and aerospace businesses.
On July 2, 2007, we completed the acquisition of IESG with the exception of the French
operations, the acquisition of which was completed on December 27, 2007 after receiving
regulatory approval. The total purchase price was approximately $1.2 billion including
approximately $250 million of debt assumed. We recorded approximately $1.0 billion of
goodwill and approximately $300 million of identified intangible assets in connection with this
acquisition. The acquisition of IESG enhances UTC Fire & Security’s scale and capability in the
electronic security business in key markets where we have a significant presence. IESG sells
70 United Technologies Corporation