ADT 2002 Annual Report Download - page 97

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Discontinued Operations of Tyco Capital (CIT Group Inc.) (continued)
impairment. The estimated fair value was compared to the corresponding carrying value of CIT at
March 31, 2002. As a result, we recorded a $4,512.7 million impairment charge as of March 31, 2002,
which is included in discontinued operations.
SFAS 142 requires a second step analysis whenever a reporting unit’s book value exceeds estimated
fair value. This analysis requires the Company to estimate the fair value of the reporting unit’s
individual assets and liabilities to complete the analysis of goodwill as of March 31, 2002. The Company
completed this second step analysis for CIT during the quarter ended June 30, 2002 and, as a result,
recorded an additional goodwill impairment charge of $132.0 million. During the June 30, 2002 quarter,
CIT experienced further credit downgrades and the business environment and other factors continued
to negatively impact the likely proceeds of the IPO. As a result, we performed another first step and
second step analysis as of June 30, 2002 in a manner consistent with the March 2002 process described
above. Each of these analyses was based upon updated market data at June 30, 2002 and through the
period immediately following the IPO, including the IPO proceeds. These analyses resulted in a
goodwill impairment of $1,867.0 million which is also included in discontinued operations as of June 30,
2002. Tyco also recorded an additional impairment charge of $126.4 million in order to write-down its
investment in CIT to fair value for a total CIT goodwill impairment of $2,125.4 million for the quarter
ended June 30, 2002. This write-down was based upon net IPO proceeds of approximately $4.4 billion,
after deducting estimated out of pocket expenses, and is included in the $6,282.5 million loss from
discontinued operations. During the fourth quarter of fiscal 2002, Tyco recorded a loss on the sale of
Tyco Capital of $58.8 million.
Accounting Policies of Discontinued Operations
Financing and Leasing Assets—Tyco Capital provides funding for a variety of financing
arrangements, including term loans, lease financing and operating leases. The amounts outstanding on
loans and leases are referred to as finance receivables. Financing and leasing assets consist of finance
receivables, finance receivables held for sale, net book value of operating lease equipment and certain
investments.
At the time of designation for sale, securitization or syndication, assets are classified as finance
receivables held for sale, which are included in Net Assets of Discontinued Operations on the
Consolidated Balance Sheet. These assets are carried at the lower of aggregate cost or market value.
Lease Financing—Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating lease equipment is
carried at cost less accumulated depreciation and is depreciated to estimated residual value using the
straight-line method over the lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at the lower of carrying
value or estimated fair value when acquired. Lease receivables include leveraged leases, for which a
major portion of the funding is provided by third-party lenders on a nonrecourse basis, with Tyco
Capital providing the balance and acquiring title to the property. Leveraged leases are recorded at the
aggregate value of future minimum lease payments plus estimated residual value, less nonrecourse
third-party debt and unearned finance income. Management performs periodic reviews of the estimated
residual values with impairment, other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables—The reserve for credit losses is periodically
reviewed for adequacy considering economic conditions, collateral values and credit quality indicators,
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