ADT 2002 Annual Report Download - page 50

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (continued)
inseparable from the change in estimated life, and therefore, the pre-tax cumulative effect of this
charge of $315.5 million was recorded as an increase in amortization expense effective January 1, 2003.
The restatement reverses this previously recorded charge and reflects the accelerated amortization
method for all historical periods.
Amounts Reimbursed from ADT Dealers
As described elsewhere in this Note 1 to the financial statements, the Company incurs costs
associated with maintaining and operating its ADT dealer program, including brand advertising costs
and due diligence costs relating to contracts offered for sale to the Company under the ADT dealer
program. Dealers pay the Company a non-refundable amount for each of the contracts sold to the
Company representing their reimbursement of such dealer program costs. Prior to fiscal 2002, the
Company recognized as an expense reduction the entire amount of such reimbursements from dealers.
Commencing October 1, 2001, to the extent that the amount of dealer reimbursement exceeded the
actual costs incurred by the Company, the excess was recorded as a deferred credit and amortized on a
straight-line basis over ten years. 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 these
reimbursements from dealers. Pursuant to a recently issued consensus of the FASB’s Emerging Issues
Task Force (EITF 02-16, ‘‘Accounting by a Customer (Including a Reseller) for Certain Consideration
received from a Vendor’’), the consideration received by the Company relating to the non-refundable
charge to each dealer for reimbursement of the costs to support the ADT dealer program was
presumed to be a reduction in the capitalized intangible asset cost to the Company of acquiring
customer contracts. As permitted under EITF 02-16, the Company changed its method of accounting
for the amounts received from dealers for reimbursement of the costs to support the ADT dealer
program through a cumulative change recorded retroactively to the beginning of the fiscal year. This
was reported as a $206.7 million after-tax ($265.5 million pre-tax) charge for the cumulative effect of
change in accounting principle in the Consolidated Statement of Operations for the six months ended
March 31, 2003, retroactive to October 1, 2002. The impact on the Consolidated Balance Sheets of the
cumulative adjustment was a decrease in net intangible assets of $566.8 million and a decrease in
liabilities for the previously deferred non-refundable charge to dealers of $301.4 million. The
restatement reverses the cumulative effect of the previously recorded change in accounting to report
non-refundable dealer reimbursements as a reduction in the capitalized intangible asset cost to the
Company of purchasing customer contracts in each prior accounting period to which such purchases
relate, and changes the classification of the portion of such previous charge that represents an
impairment of customer contracts and relationships. This impairment charge ($77.0 million pre-tax)
resulted from a further deterioration during the quarter ended March 31, 2003 of future estimated cash
flows anticipated from customers primarily in Mexico and certain Latin American countries following
the curtailment, and in some instances, the termination of the ADT dealer program in these countries
in 2002. This charge is now classified on the fiscal 2003 Consolidated Statement of Operations as an
Impairment of Long-Lived Assets.
Other Adjustments
In connection with the decision to reverse the effect of charges relating to prior years and quarters
described above, and to record those charges in the fiscal periods to which they relate, the restatement
also records the following adjustments, representing timing differences between fiscal periods:
(i) reduce the revenue ($90.0 million) and gross margin ($53.0 million) recognized on the sale of
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