This excerpt taken from the BEAV 8-K filed Jun 23, 2008.
15. Financial instruments
Credit and market riskFinancial instruments, including derivatives, expose the Business to counterparty credit risk for nonperformance and to market risk related to changes in interest or currency exchange rates. The exposure to counterparty credit risk is managed through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. The counterparty in derivative transactions is Honeywell. The impact of market risk on the fair value and cash flows of derivative and other financial instruments is monitored considering reasonably possible changes in interest and currency exchange rates and restrict the use of derivative financial instruments to hedging activities.
The Business continually monitors the creditworthiness of customers granted credit terms in the normal course of operations. While concentrations of credit risk associated with trade accounts and notes receivable are considered minimal due to the diverse customer base, most of the customers are in the commercial air transport industry (aircraft manufacturers and airlines). The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. Sales are not materially dependent on a single customer or a small group of customers.
Foreign currency risk managementThe Business conducts operations on a multinational basis in a variety of foreign currencies. Exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between operating units, foreign currency denominated monetary assets and liabilities and anticipated transactions arising from international trade. The Business' objective is to preserve the economic value of non-functional currency denominated cash flows. The Business attempts to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been
exhausted, through foreign currency forward and option agreements with Honeywell. The Business' principal currency exposures relate to the US dollar, Euro and British pound.
The Business hedges monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in Other/ (Income) Expense. Exposure to changes in foreign exchange rates is hedged principally with forward contracts. Forward contracts are marked-to-market with the resulting gains and losses similarly recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged.
The Business has partially hedge forecasted 2008 sales and purchases denominated in non-functional currencies with currency forward contracts. When a functional currency strengthens against nonfunctional currencies, the decline in value of forecasted non-functional currency cash inflows (sales) or outflows (purchases) is partially offset by the recognition of gains (sales) and losses (purchases), respectively, in the value of the forward contracts designated as hedges. Conversely, when a functional currency weakens against non-functional currencies, the increase in value of forecasted nonfunctional currency cash inflows (sales) or outflows (purchases) is partially offset by the recognition of losses (sales) and gains (purchases), respectively, in the value of the forward contracts designated as hedges. Market value gains and losses on these contracts are recognized in earnings when the hedged transaction is recognized. All open forward contracts mature by December 31, 2008.
At December 31, 2007 and 2006, there were contracts with notional amounts of $19,434 and $21,276, respectively, to exchange the US dollar, Euro and British pound.
Commodity price risk managementExposure to market risk for commodity prices can result in changes in the Business' cost of sales. The Business primarily mitigates exposure to commodity price risk through the use of long-term, fixed-price contracts with suppliers and customers.
Fair value of financial instrumentsThe carrying value of cash and cash equivalents, trade accounts and notes receivables, accounts payables and foreign currency exchange contracts contained on the Combined Balance Sheet approximates fair value.