ADT 2002 Annual Report Download - page 57

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (continued)
temporary. The results of companies acquired or disposed of during the fiscal year are included in the
Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal.
All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition—The Company adopted Staff Accounting Bulletin No. 101 (‘‘SAB 101’’),
‘‘Revenue Recognition in Financial Statements’’ in the fourth quarter of fiscal 2001 retroactive to the
beginning of the fiscal year and is now recognizing revenues from the installation of owned security
systems and deferring the associated direct incremental costs over the estimated customer lives.
Revenue from the sale of products is recognized according to the terms of the sales arrangement,
which is customarily when the products reach the free-on-board shipping point. Revenue from the sale
of services is recognized as services are rendered. Subscriber billings for services not yet rendered are
deferred and recognized as revenue as the services are rendered, and the associated deferred revenue is
included in current liabilities or long-term liabilities, as appropriate.
Contract sales for the installation of fire protection systems, undersea fiber optic cable systems and
other construction related projects are recorded on the percentage-of-completion method. Profits
recognized on contracts in process are based upon estimated contract revenue and related cost to
completion. Cost to completion for undersea cable systems is measured based on the ratio of costs
incurred to total estimated costs, while cost to completion for the installation of fire protection systems
and other construction related projects is measured using the efforts-expended method based on direct
labor hours expended and actual material used. Revisions in cost estimates as contracts progress have
the effect of increasing or decreasing profits in the current period. Provisions for anticipated losses are
made in the period in which they first become determinable.
Certain of the Company’s long-term contracts have warranty obligations. Estimated warranty costs
for each contract are determined based on the contract terms and technology specific issues. These
costs are included in total estimated contract costs accrued over the construction period of the
respective contracts under percentage-of-completion accounting. In addition, certain product sales also
have normal warranty provisions. The Company accrues estimated product warranty costs at the time of
sale and any additional amounts are recorded when such costs are probable and can be reasonably
estimated.
The Company’s global undersea fiber optic network, on which it sells bandwidth capacity, is known
as the Tyco Global Network (‘‘TGN’’). The Company’s sales of bandwidth capacity are generally
structured as either service arrangements or operating leases. The Company recognizes revenue
associated with the service arrangement ratably over the service period and recognizes revenue
associated with the operating leases over the lease term.
At September 30, 2002, accounts receivable and other long-term receivables included retainage
provisions of $164.8 million, of which $84.9 million remained unbilled. At September 30, 2001, accounts
receivable and other long-term receivables included retainage provisions of $100.7 million, of which
$73.7 million remained unbilled. These retention provisions relate primarily to fire protection and
electronics contracts and become due upon contract completion and acceptance. Of the balance of
$164.8 million at September 30, 2002, $128.3 million is included in accounts receivable and is expected
to be collected during fiscal 2003.
Research and Development—Research and development expenditures are expensed when incurred
and are included in cost of sales. Customer-funded research and development are costs incurred by
Tyco that are reimbursed by customers. There is no net impact on research and development expense
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