ADT 2002 Annual Report Download - page 60

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (continued)
time the contract is accepted for purchase. This non-refundable charge represents dealer
reimbursement to the Company for costs incurred by the Company associated with maintaining and
operating the ADT dealer program, including brand advertising, and for due diligence performed by
the Company with respect to contracts offered by the dealers for purchase. The Company has
determined that the identified benefits to the dealers are not sufficiently separable from the acquisition
of the customer contract such that the amounts received from the dealers should be characterized as a
reduction of the customer contract costs.
During the first six months (twelve months in certain circumstances) after the purchase of the
customer contract, any cancellation of monitoring service, including those that result from customer
payment delinquencies, results in a chargeback by the Company to the dealer of the full amount of the
contract purchase price. The non-refundable charge to the dealer is retained by the Company even in
the event of customer cancellation. The Company records the chargeback amount from the dealer as a
reduction of the previously recorded intangible asset.
Intangible assets arising from the ADT dealer program described above are amortized in pools
determined by the month of contract acquisition on an accelerated basis over the period and pattern of
economic benefit which is expected to be obtained from the customer relationship. Based upon an
attrition study of the ADT dealer program customer base, conducted by an independent appraiser, the
Company believes that the accelerated method that presently best achieves the matching objective
above is the double declining balance method based on a ten-year life for the first eight years of the
estimated life of the customer relationship, converting to the straight-line method of amortization for
the remaining four years of the estimated relationship period. Actual attrition data is regularly reviewed
in order to assess the continued applicability of the accelerated method of amortization described
above.
Other contracts and related customer relationships, as well as intellectual property consisting
primarily of patents, trademarks and unpatented technology, are being amortized on a straight-line
basis over five to forty years.
Investments—The Company invests in both debt and equity securities. The Company accounts for
its long-term investments in marketable equity securities that represent less than twenty percent
ownership by adjusting the securities to market value at the end of each accounting period. Unrealized
gains and losses are credited or charged to shareholders’ equity for available for sale securities unless
an unrealized loss is deemed to be other than temporary, in which case such loss is charged to
earnings. Debt and equity securities that are classified as trading securities are recorded at fair value,
and the unrealized gains and losses are credited or charged to earnings. Debt securities which the
Company has the ability and positive intent to hold to maturity are carried at amortized cost.
Management determines the proper classification of investments in debt obligations with fixed
maturities and equity securities for which there is a readily determinable market value at the time of
purchase and reevaluates such classifications as of each balance sheet date. Realized gains and losses
on sales of investments, as determined on a specific identification basis, are included in the
Consolidated Statements of Operations.
Other equity investments for which the Company does not have the ability to exercise significant
influence and for which there is not a readily determinable market value are accounted for under the
cost method of accounting. The Company periodically evaluates the carrying value of its investments
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