Summary
Honeywell International Inc. (HON) filed an 8-K report on May 31, 2006, to disclose a change in its accounting policy for Aerospace sales incentives, effective from the first quarter of 2006. This change involves recognizing these incentive costs when they are provided, rather than capitalizing and amortizing them over time. This new policy is applied retrospectively to previously reported financial periods, including the fiscal year 2005.
Key Highlights
- 1Change in accounting policy for Aerospace sales incentives, recognizing costs upon provision.
- 2New policy impacts incentives like free/discounted products, future purchase credits, and upfront cash payments.
- 3The change is effective for the first quarter of 2006 and applied retrospectively to prior periods.
- 4Retrospective application reduced reported income from continuing operations and net income.
- 5Impact of the policy change on prior years: $17 million reduction in 2005, $35 million in 2004, and $35 million in 2003.
- 6Per-share impact: $0.02 reduction in 2005, $0.04 in 2004, and $0.04 in 2003.
- 7A significant reduction of $405 million to opening shareholders' equity at January 1, 2003, was noted.
Frequently Asked Questions
The primary purpose of this 8-K filing is to announce and detail Honeywell's change in its accounting policy for Aerospace sales incentives and to report the retrospective financial impact of this change on previously filed financial statements.
The old policy involved capitalizing sales incentive costs and amortizing them over their useful economic life. The new policy recognizes these costs immediately when they are provided to customers, either upon delivery of products to aircraft manufacturers or delivery of aircraft to airlines.
The retrospective application of the new policy reduced net income by $17 million ($0.02 per share) in 2005, $35 million ($0.04 per share) in 2004, and $35 million ($0.04 per share) in 2003. It also reduced opening shareholders' equity by $405 million as of January 1, 2003.
Honeywell believes the new policy is preferable because it will improve decision-making and internal controls related to Aerospace sales incentives by recognizing costs as they are provided.