United Technologies 2011 Annual Report Download - page 64

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. Certain
reclassifications have been made to prior year amounts to
conform to current year presentation.
Consolidation. The Consolidated Financial Statements include
the accounts of United Technologies Corporation (UTC) and
its 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 with respect to contractual obligations related
to acquisitions or divestitures or other legal obligations. As of
December 31, 2011 and 2010, the amount of such restricted
cash was approximately $37 million and $75 million,
respectively. At both December 31, 2011 and 2010, all
restricted cash is included in current assets.
Accounts Receivable. Current and long-term accounts
receivable include retainage of $154 million and $165 million
and unbilled receivables of $1,060 million and $862 million as
of December 31, 2011 and 2010, 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
Carrier entities 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 $144 million and $137 million at December 31, 2011 and
2010, 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
recorded over the fixed assets’ useful lives using the straight-
line method.
Goodwill and 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 the Intangibles – Goodwill and Other Topic of the FASB
ASC. This testing compares carrying values to fair values and,
when appropriate, the carrying value of these assets is
reduced to fair value. We early adopted the FASB ASU
No. 2011-08, “Testing Goodwill for Impairment,” in connection
with the performance of our annual goodwill impairment test.
Under ASU 2011-08, entities are provided with the option of
first performing a qualitative assessment on none, some, or all
of its reporting units to determine whether further
quantitative impairment testing is necessary. An entity may
also bypass the qualitative assessment for any reporting unit
in any period and proceed directly to the quantitative
impairment test. During 2011, 2010, and 2009, we were not
required to record any significant impairments to the carrying
value of goodwill or indefinite-lived intangible assets.
Intangible assets 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 generally range from 3 to 40 years. Estimated
useful lives of customer relationships and other assets
generally 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. Included within other
intangible assets are commercial aerospace payments made
to secure certain contractual rights to provide product on
new aircraft platforms. Payments made on these contractual
commitments are to be amortized as the related units are
delivered.
Other Long-Lived Assets. We evaluate the potential
impairment of other long-lived assets when appropriate. If the
carrying value of other long-lived assets exceeds the sum of
the undiscounted expected future cash flows, the carrying
value is written down to fair value. During the years ended
December 31, 2011 and 2010, we had certain non-recurring
measurements resulting in impairment charges of $66 million
and $245 million, respectively. See Note 13 to the
Consolidated Financial Statements for additional information.
Income Taxes. In the ordinary course of business there is
inherent uncertainty in quantifying our income tax positions.
62 UNITED TECHNOLOGIES CORPORATION