ADT 2002 Annual Report Download - page 161

over ten years. The Company concluded that for residential and commercial account pools the
straight-line method of amortization over a ten-year period continues to be appropriate given the
observed actual attrition data for these pools.
The determination of the depreciable lives of subscriber systems included in property, plant and
equipment, and the amortizable lives of customer contracts and related customer relationships included
in intangible assets, are primarily based on historical attrition rates, third party lifing studies and the
useful life of the underlying tangible asset. The realizable value and remaining useful lives of these
assets could be impacted by changes in customer attrition rates.
Goodwill—Effective October 1, 2001, the beginning of Tyco’s fiscal year 2002, we adopted SFAS
No. 142, ‘‘Goodwill and Other Intangible Assets,’’ for all of Tyco and its subsidiaries.
Since adoption of SFAS No. 142, goodwill is no longer amortized but instead is assessed for
impairment at least as often as annually and as triggering events occur. In making this assessment,
management relies on a number of factors including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place data. There are inherent
uncertainties related to these factors and management’s judgment in applying them to the analysis of
goodwill impairment. Since management’s judgment is involved in performing goodwill valuation
analyses, there is risk that the carrying value of our goodwill may be overstated or understated. We
have determined that there is no impact of adopting this new standard under the transition provisions
of SFAS No. 142. However, during the quarter ended March 31, 2002, circumstances developed that
indicated a potential impairment in the value of goodwill with respect to Tyco Telecommunications, a
reporting unit within the Electronics segment, and our Tyco Capital segment.
During the quarter ended March 31, 2002, the Electronics segment recorded a charge of
$2,218.4 million related to the impairment of the TGN, as a result of the fiberoptic capacity available
in the market place continuing to significantly exceed overall market demand, creating sharply declining
prices and reduced cash flows. For additional information on the TGN impairment charge, see Note 6
to the Consolidated Financial Statements. Since the TGN represented a significant asset group within
the Tyco Telecommunications reporting unit, an updated goodwill valuation was completed as of
March 31, 2002 for that reporting unit. The valuation was completed using an income approach based
upon the present value of future cash flows of the reporting unit as of March 31, 2002. However, this
first step analysis resulted in no impairment of the Tyco Telecommunications reporting unit’s goodwill
at that date.
During the quarter ended June 30, 2002, additional circumstances developed that indicated a
potential impairment of the value of goodwill with respect to our reporting units. We experienced
disruptions to our business surrounding the termination of our previously announced break-up plan, the
resignation of our chief executive officer, further downgrades in our credit ratings and an additional
decline in our market capitalization. Updated valuations were completed for all reporting units as of
June 30, 2002 using an income approach based on the present value of future cash flows of each
reporting unit. An additional discount factor was then applied to reflect a decrease in reporting unit
valuations for recent disruptions at our corporate offices and negative publicity, as evidenced by the
decline in our total market capitalization. This resulted in an estimated goodwill impairment on
continuing operations of $844.4 million, $607.7 million relating to Tyco Telecommunications and
$236.7 million relating to Tyco Infrastructure, a reporting unit within the Engineered Products and
Services segment.
During the quarter ended September 30, 2002, step two analyses, as prescribed by SFAS 142 where
the book value exceeds the estimated fair value of the individual assets and liabilities of a reporting
unit, were completed for the Tyco Telecommunications reporting unit and Tyco Infrastructure reporting
unit. This resulted in an incremental goodwill impairment on continuing operations of $162.0 million,
$79.5 million relating Tyco Telecommunications and $82.5 million relating to Tyco Infrastructure.
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