Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Notes to Condensed Consolidated Financial Statements [Abstract]

Fair Value Disclosures

Fair Value Measurements

The Fair Value Measurements and Disclosure Topic of the FASB ASC establishes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:

• Level 1 - quoted prices in active markets for identical assets or liabilities;

• Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly; and

• Level 3 - unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013:

September 30, 2014 (Dollars in millions)	Total			Level 1		Level 2			Level 3
Recurring fair value measurements:
Available-for-sale securities	$	863		$	863	$	—		$	—
Derivative assets	100			—		100			—
Derivative liabilities	(217		)	—		(217		)	—
Nonrecurring fair value measurements:
Business dispositions	44			—		44			—

December 31, 2013 (Dollars in millions)	Total			Level 1		Level 2			Level 3
Recurring fair value measurements:
Available-for-sale securities	$	988		$	988	$	—		$	—
Derivative assets	90			—		90			—
Derivative liabilities	(157		)	—		(157		)	—
Nonrecurring fair value measurements:
Business dispositions	66			—		66			—

We have recorded gains of approximately $23 million, including a $48 million net gain during the nine months ended September 30, 2014, as a result of fair value adjustments related to the acquisition of the majority interest in a Pratt & Whitney joint venture. During the nine months ended September 30, 2014, we also recorded an approximately $30 million net gain from UTC Climate, Controls & Security's ongoing portfolio transformation, primarily due to a gain on the sale of an interest in a joint venture in North America, and a charge of approximately $28 million to adjust the fair value of a Sikorsky joint venture investment.

During the nine months ended September 30, 2013, we recorded an approximately $38 million net gain from UTC Climate, Controls & Security's ongoing portfolio transformation, primarily due to a gain on the sale of a business in Hong Kong. In addition, during that nine-month period we recorded a gain of approximately $193 million from the sale of the Pratt & Whitney Power Systems business, as well as an approximately $25 million charge to adjust the fair value of a Pratt & Whitney joint venture investment.

Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. As of September 30, 2014, there were no significant transfers in and out of Level 1 and Level 2.

As of September 30, 2014, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.

The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at September 30, 2014 and December 31, 2013:

	September 30, 2014						December 31, 2013
(Dollars in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Long-term receivables	$	1,016		$	954		$	655		$	586
Customer financing notes receivable	270			262			394			366
Short-term borrowings	(347		)	(347		)	(388		)	(388		)
Long-term debt (excluding capitalized leases)	(19,614		)	(21,992		)	(19,807		)	(21,525		)
Long-term liabilities	(294		)	(268		)	(283		)	(253		)

The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of September 30, 2014:

(Dollars in millions)	Total			Level 1		Level 2			Level 3
Long-term receivables	$	954		$	—	$	954		$	—
Customer financing notes receivable	262			—		262			—
Short-term borrowings	(347		)	—		(135		)	(212		)
Long-term debt (excluding capitalized leases)	(21,992		)	—		(21,644		)	(348		)
Long-term liabilities	(268		)	—		(268		)	—

We had commercial aerospace financing and other contractual commitments totaling approximately $10.9 billion and $11.3 billion as of September 30, 2014 and December 31, 2013, respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded. The fair value of these commitments is not readily determinable.