United Technologies 2011 Annual Report Download - page 65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 expense has also been recognized. We recognize
accrued interest 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 for elevators, escalators,
installation and modernization contracts are accounted for
under the percentage-of-completion method.
Losses, if any, on long-term 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, as appropriate, 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 except for certain
requirements contracts under which losses are recorded
upon receipt of the purchase order. 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 generally recognized on shipment to the extent
that inventoriable manufacturing costs, estimated warranty
costs and product performance guarantee costs, as
appropriate, 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 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. We record
changes in contract estimates using the cumulative catch-up
method in accordance with the Revenue Recognition Topic of
the FASB ASC.
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.
Sales generated from engine programs, spare parts sales, and
aftermarket business under collaboration arrangements are
recorded as earned in our financial statements. Amounts
attributable to our collaborative partners for their share of
revenues are recorded as an expense in our financial
statements based upon the terms and nature of the
arrangement. Costs associated with engine programs under
collaborative arrangements are expensed as incurred. Under
these arrangements, collaborators contribute their program
share of engine parts, incur their own production costs and
make certain payments to Pratt & Whitney for shared or joint
program costs. The reimbursement of a collaborator’s 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 included as a contract cost and reported
as a component of cost of products sold when revenue from
such contracts is recognized.
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
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