Honeywell 2015 Annual Report Download - page 42

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS —(Continued)
(Dollars in millions, except per share amounts)
with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are
deemed probable. For additional information, see Note 19 Commitments and Contingencies.
Aerospace Sales Incentives—We provide sales incentives to commercial aircraft manufacturers and airlines in
connection with their selection of our aircraft equipment, predominately wheel and braking system hardware, avionics, and
auxiliary power units, for installation on commercial aircraft. These incentives consist of free or deeply discounted products,
credits for future purchases of product and upfront cash payments. These costs are recognized in the period incurred as
cost of products sold or as a reduction to sales, as appropriate.
Research and Development—Research and development costs for company-sponsored research and development
projects are expensed as incurred. Such costs are principally included in cost of products sold and were $1,856 million,
$1,892 million and $1,804 million in 2015, 2014 and 2013.
Stock-Based Compensation Plans—The principal awards issued under our stock-based compensation plans, which
are described in Note 18 Stock-Based Compensation Plans, are non-qualified stock options and restricted stock units. The
cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting
period of the equity award) and is included in selling, general and administrative expenses. Forfeitures are estimated at the
time of grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture
rates.
Pension Benefits—We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan
assets or the plans
’ projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment),
and, if applicable, in any quarter in which an interim remeasurement is triggered. The remaining components of pension
(income) expense, primarily service and interest costs and assumed return on plan assets, are recognized on a quarterly
basis (Pension ongoing (income) expense).
Foreign Currency Translation—Assets and liabilities of subsidiaries operating outside the United States with a
functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Sales, costs and
expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and
losses are included as a component of accumulated other comprehensive income (loss). For subsidiaries operating in highly
inflationary environments, inventories and property, plant and equipment, including related expenses, are remeasured at
the exchange rate in effect on the date the assets were acquired, while monetary assets and liabilities are remeasured at
year-end exchange rates. Remeasurement adjustments for these subsidiaries are included in earnings.
Derivative Financial Instruments—We minimize our risks from interest and foreign currency exchange rate
fluctuations through our normal operating and financing activities and, when deemed appropriate through the use of
derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or
other speculative purposes and we do not use leveraged derivative financial instruments. Derivative financial instruments
that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the
inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes
in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives
designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the
hedged items are recorded in current earnings. For derivatives
38