ADT 2002 Annual Report Download - page 49

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (continued)
program so that the amortization of such costs better matches the pattern of revenue related to such
contracts, (iii) a revision in the method of accounting for amounts reimbursed to us from ADT dealers
as part of the ADT dealer program to effectively treat such amounts as an integral part of the purchase
of the underlying contracts, and (iv) certain other adjustments regarding charges or credits so as to
record them in earlier accounting periods to which they relate. Each of these matters are described
further below:
Charges Relating to Prior Years Initially Recorded in Fiscal 2002
As disclosed in the Company’s previously filed Form 10-K for the fiscal year ended September 30,
2002, the Company identified various adjustments during the fourth quarter of fiscal 2002 relating to
prior period financial statements. These adjustments, which aggregated $261.6 million on a pre-tax basis
or $199.7 million on an after-tax basis, were recorded effective October 1, 2001. The adjustments
primarily were related to reimbursements from ADT dealers in years prior to fiscal 2002 in excess of
the costs incurred, a lower net gain on the issuance of TyCom shares previously reported for fiscal 2001
and adjustments identified both as a result of the Phase 2 review and the recording of previously
unrecorded audit adjustments (which were more appropriately recorded as expenses as opposed to part
of acquisition accounting). The restatement includes adjustments to reverse the charges recorded in the
first quarter of fiscal 2002 and present those charges in the historical periods to which they relate.
Charges Relating to Prior Years and Quarters Recorded in the Quarter Ended March 31, 2003
As disclosed in the Company’s previously filed Form 10-Q for the quarter ended March 31, 2003,
the Company conducted intensified internal audits and detailed controls and operating reviews that
resulted in the Company identifying and recording pre-tax charges of $434.5 million in that quarter for
charges related to prior periods. These charges resulted from capitalizing certain selling expenses to
property, plant and equipment and other non-current assets, mostly in the Fire and Security Services
segment, and reconciliation items relating to balance sheet accounts where certain account analysis or
periodic reconciliations were deficient, resulting in adjustments primarily related to the Engineered
Products and Services segment. Additionally, charges related to the correction of balances primarily
related to corporate pension and deferred compensation accruals, assets reserve adjustments and other
accounting adjustments (i.e., purchase price accounting accruals, deferred commissions, accounting
related to leases in the Fire and Security Services and Engineered Products and Services segments).
The restatement includes adjustments to reverse the charges recorded in the quarter ended March 31,
2003 and reflect those charges in the historic periods to which they relate.
Method of Amortizing Contracts and Related Customer Relationships
As described elsewhere in this Note 1 to the financial statements, the Company purchases
residential security monitoring contracts from an external network of independent dealers who operate
under the ADT dealer program. The purchase price of these customer contracts is recorded as an
intangible asset (i.e., contracts and related customer relationships), which is amortized over the period
of the economic benefit expected to be obtained from the customer relationship. Effective January 1,
2003, and as disclosed in the Company’s previously filed Form 10-Q for the quarter ended March 31,
2003, the Company changed its method of accounting for the amortization of the costs of these
purchased contracts from the straight-line method to an accelerated method. In addition, the Company
revised its estimate of the life of the customer account pool over which the costs of purchased contracts
would be amortized from ten years to twelve years. The change in method of accounting was viewed as
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