United Technologies 2008 Annual Report Download - page 88

performance and operating cost guarantees is based upon future product performance and
durability, and is estimated largely based upon historical experience. Adjustments are made to
accruals as claim data and historical experience warrant. The changes in the carrying amount
of service and product warranties and product performance guarantees for the years ended
December 31, 2008 and 2007, are as follows:
(in millions of dollars) 2008 2007
Balance as of January 1 $1,252 $1,321
Warranties and guarantees issued 429 450
Settlements made (551) (531)
Adjustments to provision 612
Balance as of December 31 $1,136 $1,252
Note 14. Fair Value Measurement
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157),
which is effective for fiscal years beginning after November 15, 2007 and for interim periods
within those years. This statement defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. This statement applies under other
accounting pronouncements that require or permit fair value measurements. The statement
indicates, among other things, that a fair value measurement assumes that the transaction to
sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in
the absence of a principal market, the most advantageous market for the asset or liability. SFAS
157 defines fair value based upon an exit price model.
Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) FAS 157-1, FAS 157-2, and
FAS 157-3. FSP FAS 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases”
(SFAS 13), and its related interpretive accounting pronouncements that address leasing
transactions, while FSP FAS 157-2 delays the effective date of the application of SFAS 157 to
fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial statements on a
non-recurring basis. FSP FAS 157-3 clarifies the application of SFAS 157 as it relates to the
valuation of financial assets in a market that is not active for those financial assets. This FSP is
effective immediately and includes those periods for which financial statements have not been
issued. We currently do not have any financial assets that are valued using inactive markets,
and as such are not impacted by the issuance of this FSP.
We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the
statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring
nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of
SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived
intangible assets measured at fair value for impairment testing, asset retirement obligations
initially measured at fair value, and those non-recurring nonfinancial assets and nonfinancial
liabilities initially measured at fair value in a business combination.
Valuation Hierarchy. SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability, including interest rates, yield
curves and credit risks, or inputs that are derived principally from or corroborated by
observable market data through correlation. Level 3 inputs are unobservable inputs based on
our own assumptions used to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the lowest level input that
is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a
recurring basis as of December 31, 2008:
Total Carrying
Value at
December 31,
Quoted prices
in active
markets
Significant
other
observable
inputs
Significant
unobservable
inputs
(in millions of dollars) 2008 (Level 1) (Level 2) (Level 3)
Available for sale securities $317 $317 $— $—
Derivative assets 188 — 188 —
Derivative liabilities 680 — 680 —
Valuation Techniques. Our available for sale securities include equity investments that are
traded in an active market. They are measured at fair value using closing stock prices from
active markets and are classified within Level 1 of the valuation hierarchy.Our derivative assets
and liabilities include foreign exchange and commodity derivatives that are measured at fair
value using observable market inputs such as forward rates, interest rates, our own credit risk
and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities
are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade
securities and enter into forward contracts, we consider the markets for our fair value
instruments to be active.
86 United Technologies Corporation