Honeywell 2014 Annual Report Download - page 40

•Annual operating plans or five-year strategic plans that indicate an unfavorable trend in
operating performance of a business or product line;
•Significant negative industry or economic trends; or
•Significant changes or planned changes in our use of the assets.
Once it is determined that an impairment review is necessary, recoverability of assets is measured
by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash
flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping
is considered to be impaired. The impairment is then measured as the difference between the carrying
amount of the asset grouping and its fair value. We endeavor to utilize the best information available to
measure fair value, which is usually either market prices (if available), level 1 or level 2 of the fair value
hierarchy, or an estimate of the future discounted cash flow, level 3 of the fair value hierarchy. The key
estimates in our discounted cash flow analysis include expected industry growth rates, our
assumptions as to volume, selling prices and costs, and the discount rate selected.
Goodwill and Indefinite-Lived Intangible Assets Impairment Testing—In testing goodwill and
indefinite-lived intangible assets, the fair value is estimated utilizing a discounted cash flow approach
utilizing cash flow forecasts in our five year strategic and annual operating plans adjusted for terminal
value assumptions. These impairment tests involve the use of accounting estimates and assumptions,
changes in which could materially impact our financial condition or operating performance if actual
results differ from such estimates and assumptions. To address this uncertainty we perform sensitivity
analysis on key estimates and assumptions.
Income Taxes—On a recurring basis, we assess the need for a valuation allowance against our
deferred tax assets by considering all available positive and negative evidence, such as past operating
results, projections of future taxable income, enacted tax law changes and the feasibility and impact of
tax planning initiatives. Our projections of future taxable income include a number of estimates and
assumptions regarding our volume, pricing and costs, as well as the timing and amount of reversals of
taxable temporary differences.
Sales Recognition on Long-Term Contracts—In 2014, we recognized approximately 15% of
our total net sales using the percentage-of-completion method for long-term contracts in our
Aerospace, ACS and PMT segments. These long-term contracts are measured on the cost-to-cost
basis for engineering-type contracts and the units-of-delivery basis for production-type contracts.
Accounting for these contracts involves management judgment in estimating total contract revenue and
cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified
by our assumptions regarding contract options, change orders, incentive and award provisions
associated with technical performance and price adjustment clauses (such as inflation or index-based
clauses). Contract costs are incurred over a period of time, which can be several years, and the
estimation of these costs requires management judgment. Cost estimates are largely based on
negotiated or estimated purchase contract terms, historical performance trends and other economic
projections. Significant factors that influence these estimates include inflationary trends, technical and
schedule risk, internal and subcontractor performance trends, business volume assumptions, asset
utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and
revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized
when such losses become evident. We maintain financial controls over the customer qualification,
contract pricing and estimation processes to reduce the risk of contract losses.
OTHER MATTERS
Litigation
See Note 19 Commitments and Contingencies of Notes to Financial Statements for a discussion
of environmental, asbestos and other litigation matters.
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