United Technologies 2012 Annual Report Download - page 64

62 UNITED TECHNOLOGIES CORPORATION
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 the prior year amounts to conform to the current year
presentation. On September 28, 2011, we announced a new
organizational structure that allows us to better serve customers
through greater integration across product lines. Effective Jan-
uary 1, 2012, we formed the UTC Climate, Controls & Security
segment which combines the former Carrier and UTC Fire & Secu-
rity segments. On July 26, 2012 we acquired Goodrich Corporation
(Goodrich). As a result of the acquisition, Goodrich became a
wholly-owned subsidiary of UTC. The acquired Goodrich business
and legacy Hamilton Sundstrand business have been combined to
form a new segment named UTC Aerospace Systems. This seg-
ment and our Pratt & Whitney segment are separately reportable
segments, although they are both included within the newly formed
UTC Propulsion & Aerospace Systems organizational structure. In
2012, UTC’s Board of Directors approved plans for the divestiture
of a number of non-core businesses to help fund the Goodrich
acquisition. The results of operations, including any realized gains
and realized or expected losses on disposition and the related cash
flows, which result from these non-core businesses have been
reclassified to Discontinued Operations in our Consolidated State-
ment of Operations and Consolidated Statement of Cash Flows for
all periods presented. See Note 3 for further discussion.
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 matur-
ities 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, 2012 and 2011, the amount of such restricted cash
was approximately $35 million and $37 million, respectively and is
included in Other assets, current.
Accounts Receivable. Current and long-term accounts
receivable include retainage of $172 million and $154 million and
unbilled receivables of $1,363 million and $1,060 million as of
December 31, 2012 and 2011, respectively.
Retainage represents amounts that, pursuant to the appli-
cable contract, are not due until project completion and accept-
ance 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. Unreal-
ized holding gains and losses are recorded as a separate compo-
nent 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 UTC Aerospace Systems
and UTC Climate, Controls & Security 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 $139 million and $144 million at December 31,
2012 and 2011, 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 appro-
priate. Manufacturing costs are allocated to current production and
firm contracts.
Fixed Assets. Fixed assets are stated at cost. Deprecia-
tion 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 FASB ASC Topic
“Intangibles—Goodwill and Other.” This testing compares carrying
values to fair values and, when appropriate, the carrying value of
these assets is reduced to fair value. During 2012 we
early-adopted the FASB Accounting Standards Update (ASU)
No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impair-
ment” in connection with the performance of our annual goodwill
and indefinite-lived intangible assets impairment test. This ASU
intends to align impairment testing guidance among indefinite-lived
asset categories. This ASU allows an assessment based on qual-
itative factors to determine whether it is more likely than not that an
indefinite-lived intangible asset is impaired prior to determining
whether it is necessary to perform the quantitative impairment test
in accordance with FASB ASC Subtopic 350-30, “Intangibles—
Goodwill and Other—General Intangibles Other than Goodwill.”
During 2012, we recorded pre-tax goodwill impairment charges of
approximately $360 million and $590 million related to Pratt &
Whitney Rocketdyne (Rocketdyne) and Clipper Windpower
(Clipper), respectively. The goodwill impairment charges result from
the decision to dispose of both Rocketdyne and Clipper within a
relatively short period after acquiring the businesses.