United Technologies 2012 Annual Report Download - page 66

64 UNITED TECHNOLOGIES CORPORATION
mates 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 accord-
ance with the Revenue Recognition Topic of the FASB ASC. In 2012,
we recorded a $157 million charge on the CH-148 Canadian Mar-
itime Helicopter program resulting from ongoing program delays.
Service sales, representing aftermarket repair and main-
tenance 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 attribut-
able to our collaborators 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.
UTC Climate, Controls & Security customarily offers its
customers incentives to purchase products to ensure an adequate
supply of its products in the distribution channels. The principal
incentive program provides reimbursements to distributors for offer-
ing promotional pricing for our products. We account for incentive
payments made as a reduction in sales.
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. Repay-
ment, if any, is in the form of future royalties and is conditioned
upon the achievement of certain financial targets including specific
aircraft engine sales, total aircraft engine sales volume and total
year-over-year sales growth of the entity receiving the government
funding. Given the conditional and uncertain nature of any repay-
ment obligations, royalty expense is typically recorded only upon
engine shipment or is otherwise accrued monthly based upon the
forecasted impact for the current year. The cumulative funding
received under existing relationships has been approximately $2.0
billion of which approximately $450 million has been repaid to date
in the form of royalties.
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 con-
tracts is recognized. Research and development costs in excess of
contractual consideration is expensed as incurred.
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 move-
ments. The financial position and results of operations of sub-
stantially 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 balance sheets of these subsidiaries are deferred as a separate
component of shareowners’ equity.
We have used derivative instruments, including swaps,
forward contracts and options, to help manage certain foreign cur-
rency, interest rate and commodity price exposures. Derivative
instruments are viewed as risk management tools by us and are not
used for trading or speculative purposes. Derivatives used for hedg-
ing purposes may be designated and effective as a hedge of the
identified risk exposure at the inception of the contract.
All derivative instruments are recorded on the balance
sheet at fair value. Derivatives used to hedge foreign-currency-
denominated balance sheet items are reported directly in earnings
along with offsetting transaction gains and losses on the items
being hedged. Derivatives used to hedge forecasted cash flows
associated with foreign currency commitments or forecasted
commodity purchases may be accounted for as cash flow hedges,
as deemed appropriate. Gains and losses on derivatives designated
as cash flow hedges are recorded in other comprehensive income
and reclassified to earnings in a manner that matches the timing of
the earnings impact of the hedged transactions. The ineffective
portion of all hedges, if any, is recognized currently in earnings.
Additional information pertaining to foreign currency for-
ward contracts is included in Note 14.
Environmental. Environmental investigatory, remediation,
operating and maintenance costs are accrued when it is probable
that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on
an evaluation of currently available facts with respect to each
individual site, including existing technology, current laws and regu-
lations and prior remediation experience. Where no amount within a
range of estimates is more likely, the minimum is accrued. For sites
with multiple responsible parties, we consider our likely propor-
tionate share of the anticipated remediation costs and the ability of
the other parties to fulfill their obligations in establishing a provision
for those costs. Liabilities with fixed or reliably determinable future
cash payments are discounted. Accrued environmental liabilities are
not reduced by potential insurance reimbursements.