FAIR VALUE MEASUREMENTS

The FASB ASC Topic “Fair Value Measurements and Disclosure” 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; • Level 3 – unobservable inputs based on our own assumptions used

to measure assets and liabilities at fair value.

The following table provides the assets and liabilities carried at fair value measured on a recurring and nonrecurring basis as of December 31, 2013 and 2012:

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 –

2012(DOLLARS IN MILLIONS) Total Level 1 Level 2 Level 3

Recurring fair value measurements: Available-for-sale securities $ 781 $ 781 $ – $ – Derivative assets 128 – 128 – Derivative liabilities (149) – (149) – Nonrecurring fair value measurements: Equity method investments 432 – 432 – Business dispositions 84 – 84 –

During 2013, we recorded an approximately $55 million net gain from UTC Climate, Controls & Security’s portfolio transformation, primarily due to a gain on the sale of businesses in Hong Kong and Australia. In addition, we recorded an approximately $193 million gain from the sale of Pratt & Whitney Power Systems business (see Note 2), as well as an approximately $25 million charge to adjust the fair value of a Pratt & Whitney joint venture investment.

During 2012, we recorded net gains on nonrecurring fair value measurements of approximately $157 million within Other income, net from UTC Climate, Controls & Security’s portfolio transformation efforts including the integration of the legacy UTC Fire & Security busi- nesses with the legacy Carrier businesses. These net gains include approximately $357 million from the sales of controlling interests in manufacturing and distribution joint ventures in Asia and Canada, of which approximately $272 million was non-cash. These gains were partially offset by $168 million of other-than-temporary impairment charges related to business dispositions and a $32 million loss on

the disposition of the U.S. UTC Fire & Security branch operations. In addition, we recorded a $34 million gain on the fair market measurement of the Company’s previously held interest in Goodrich.

Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domesti- cally 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 December 31, 2013, there were no significant transfers in and out of Level 1 and Level 2.

As of December 31, 2013, 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 at December 31, 2013 and 2012: December 31, 2013 December 31, 2012 (DOLLARS IN MILLIONS) Carrying Amount Fair Value Carrying Amount Fair Value Long-term receivables $ 655 $ 586 $ 499 $ 464

Customer financing notes

receivable 394 366 375 371

Short-term borrowings (388) (388) (503) (503)

Long-term debt (excluding

capitalized leases) (19,807) (21,525) (22,665) (25,606)

Long-term liabilities (283) (253) (182) (167)

The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Consoli- dated Balance Sheet as of December 31, 2013:

(DOLLARS IN MILLIONS) Total Level 1 Level 2 Level 3

Long-term receivables $ 586 $ – $ 586 $ – Customer financing notes receivable 366 – 366 – Short-term borrowings (388) – (200) (188) Long-term debt (excluding capitalized leases) (21,525) – (21,211) (314) Long-term liabilities (253) – (253) – NOTE 16: GUARANTEES

We extend a variety of financial guarantees to third parties. As of December 31, 2013 and 2012, the following financial guarantees were outstanding: December 31, 2013 December 31, 2012 (DOLLARS IN MILLIONS) Maximum Potential Payment Carrying Amount of Liability Maximum Potential Payment Carrying Amount of Liability

Commercial aerospace financing

arrangements (see Note 5) $ 615 $ 25 $ 346 $ 7

Credit facilities and debt obligations — unconsolidated

subsidiaries (expire 2014 to 2034) 231 6 240 2

Performance guarantees 150 – 33 –

As disclosed in Note 3, we completed the sale of substantially all operations of Rocketdyne to GenCorp Inc. on June 14, 2013. Follow- ing the sale, certain guarantees of Rocketdyne’s performance under existing contracts remain in place, which resulted in an increase in our performance guarantees of approximately $112 million, with no associ- ated significant carrying amount of a liability as of December 31, 2013. We also have obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The maximum potential payment related to these obligations is not a specified amount as a number of the obligations do not contain financial caps. The carrying amount of liabilities related to these obligations was $189 million and $144 million at December 31, 2013 and 2012, respectively. For additional information regarding the environmental indemnifications, see Note 17.

We accrue for costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with the FASB ASC Topic “Guarantees” we record these liabilities at fair value.

We provide service and warranty policies on our products and extend performance and operating cost guarantees beyond our normal service and warranty policies on some of our products, particularly commercial aircraft engines. In addition, we incur discretionary costs to service our products in connection with specific product performance issues. Liabilities for performance and operating cost guarantees are based upon future product performance and durability, and are largely Notes to Consolidated Financial Statements

estimated based upon historical experience. Adjustments are made to accruals as claim data and historical experience warrant. The changes in the carrying amount of service and product warranties and product performance guarantees for the years ended December 31, 2013 and 2012 are as follows:

Year ended December 31,

(DOLLARS IN MILLIONS) 2013 2012

Balance as of January 1 $ 1,332 $ 1,468

Warranties and performance guarantees issued 313 325

Settlements made (287) (277)

Other 2 (184)

Balance as of December 31 $ 1,360 $ 1,332

The decrease in the above table in “Other” during the year ended December 31, 2012 primarily reflects the impact of warranty reserves reclassified to Liabilities held for sale, as a part of the Clipper disposi- tion, partially offset by an increase in warranty reserves from the Goodrich acquisition. See Notes 2 and 3 for further discussion.