United Technologies 2011 Annual Report Download - page 82

Download and view the complete annual report

Please find page 82 of the 2011 United Technologies annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: FINANCIAL INSTRUMENTS
We enter into derivative instruments for risk management
purposes only, including derivatives designated as hedging
instruments under the Derivatives and Hedging Topic of the
FASB ASC and those utilized as economic hedges. We
operate internationally and, in the normal course of business,
are exposed to fluctuations in interest rates, foreign exchange
rates and commodity prices. These fluctuations can increase
the costs of financing, investing and operating the business.
We have used derivative instruments, including swaps,
forward contracts and options to manage certain foreign
currency, interest rate and commodity price exposures.
By their nature, all financial instruments involve market and
credit risks. We enter into derivative and other financial
instruments with major investment grade financial institutions
and have policies to monitor the credit risk of those
counterparties. We limit counterparty exposure and
concentration of risk by diversifying counterparties. While
there can be no assurance, we do not anticipate any material
non-performance by any of these counterparties.
Foreign Currency Forward Contracts. We manage our
foreign currency transaction risks to acceptable limits
through the use of derivatives that hedge forecasted cash
flows associated with foreign currency transaction exposures
which are accounted for as cash flow hedges, as deemed
appropriate. To the extent these derivatives are effective in
offsetting the variability of the hedged cash flows, and
otherwise meet the hedge accounting criteria of the
Derivatives and Hedging Topic of the FASB ASC, changes in
the derivatives’ fair values are not included in current
earnings but are included in Accumulated other
comprehensive loss. These changes in fair value will
subsequently be reclassified into earnings as a component of
product sales or expenses, as applicable, when the forecasted
transaction occurs. To the extent that a previously
designated hedging transaction is no longer an effective
hedge, any ineffectiveness measured in the hedging
relationship is recorded currently in earnings in the period it
occurs.
To the extent the hedge accounting criteria are not met, the
foreign currency forward contracts are utilized as economic
hedges and changes in the fair value of these contracts are
recorded currently in earnings in the period in which they
occur. These include hedges that are used to reduce
exchange rate risks arising from the change in fair value of
certain foreign currency denominated assets and liabilities
(e.g. payables, receivables) and other economic hedges
where the hedge accounting criteria were not met.
The four quarter rolling average of the notional amount of
foreign exchange contracts hedging foreign currency
transactions was $10.4 billion and $8.5 billion at December 31,
2011 and 2010, respectively.
Additional information pertaining to foreign exchange and
hedging activities is included in Note 1 to the Consolidated
Financial Statements.
Commodity Forward Contracts. We enter into commodity
forward contracts to reduce the risk of fluctuations in the
price we pay for certain commodities (for example, nickel)
which are used directly in the production of our products, or
are components of the products we procure to use in the
production of our products. These hedges are economic
hedges and the changes in fair value of these contracts are
recorded currently in earnings in the period in which they
occur. The fair value and outstanding notional amount of
contracts hedging commodity exposures were insignificant at
December 31, 2011 and 2010, respectively.
80 UNITED TECHNOLOGIES CORPORATION