United Technologies 2011 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2011 and 2010:
(Dollars in millions)
Total
Carrying
Value at
December 31,
2011
Quoted
price in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
Available-for-sale securities $ 926 $926 $ — $—
Derivative assets 114 — 114 —
Derivative liabilities (165) — (165) —
(Dollars in millions)
Total
Carrying
Value at
December 31,
2010
Quoted
price in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
Available-for-sale securities $829 $829 $ — $—
Derivative assets 133 — 133 —
Derivative liabilities (53) — (53) —
Valuation Techniques. Our available-for-sale securities
include equity investments that are traded in active markets,
either domestically or internationally. 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
contracts and commodity derivatives that are measured at
fair value using internal models based on 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. As of December 31, 2011, there were no significant
transfers in and out of Level 1 and Level 2.
As of December 31, 2011, there has not been any significant
impact to the fair value of our derivative liabilities due to our
own credit risk. Similarly, there has not been any significant
adverse impact to our derivative assets based on our
evaluation of our counterparties’ credit risks.
The following table provides carrying amounts and fair values
of financial instruments that are not carried at fair value at
December 31, 2011 and 2010:
2011 2010
(Dollars in millions)
Carrying
Amount
Fair
Value
Carrying
Amount Fair Value
Long-term receivables $ 283 $ 276 $ 300 $ 276
Customer financing notes
receivable 309 297 376 346
Long-term debt (excluding
capitalized leases) (9,575) (11,639) (10,117) (11,500)
The above fair values were computed based on comparable
transactions, quoted market prices, discounted future cash
flows or an estimate of the amount to be received or paid to
terminate or settle the agreement, as applicable. Differences
from carrying amounts are attributable to interest and or
credit rate changes subsequent to when the transaction
occurred. The fair values of Cash and cash equivalents,
Accounts receivable, net, Short-term borrowings, and
Accounts payable approximate the carrying amounts due to
the short-term maturities of these instruments.
We had outstanding commercial aerospace financing and
other contractual commitments totaling approximately
$2,270 million and $2,032 million at December 31, 2011 and
2010, respectively. Risks associated with changes in interest
rates on these commitments are mitigated by the fact that
interest rates are variable during the commitment term, and
are set at the date of funding based on current market
conditions, the fair value of the underlying collateral and the
credit worthiness of the customers. As a result, the fair value
of these financings is expected to equal the amounts funded.
The fair value of the commitment itself is not readily
determinable and is not considered significant. Additional
information pertaining to these commitments is included in
Note 4 to the Consolidated Financial Statements.
NOTE 14: CREDIT QUALITY OF LONG-TERM RECEIVABLES
In July 2010, the FASB issued ASU No. 2010-20, “Disclosure
about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses.” This ASU is intended to
enhance a financial statement user’s ability to evaluate the
entity’s credit risk exposures and adequacy of its allowance
for credit losses by requiring additional disclosure about the
nature of credit risk inherent in the portfolio of receivables,
factors and methodologies used in estimating the allowance
for credit losses and activity that occurs during a period for
both financing receivables and allowance for credit losses.
The scope of this ASU is limited to financing receivables, as
defined by the ASU, and excludes short-term trade accounts
receivable and receivables measured at fair value or lower of
cost or fair value. We adopted the disclosures under this ASU
for the reporting period ended December 31, 2010, with the
exception of disclosures about activity that occurs during a
reporting period, which became effective for interim and
annual periods beginning on or after December 15, 2010. We
adopted the interim disclosures required under this ASU
during the quarter ended March 31, 2011.
82 UNITED TECHNOLOGIES CORPORATION