ADT 2002 Annual Report Download - page 98

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Discontinued Operations of Tyco Capital (CIT Group Inc.) (continued)
including historical and expected charge-off experience and levels of past due loans and non-performing
assets. Changes in economic conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the reserve for credit losses.
Charge-off of Finance Receivables—Finance receivables are reviewed periodically to determine the
probability of loss. Charge-offs are taken after considering such factors as the borrower’s financial
condition and the value of underlying collateral and guarantees (including recourse to dealers and
manufacturers). Such charge-offs are deducted from the carrying value of the related finance
receivables. To the extent that an unrecovered balance remains due, a final charge-off is taken at the
time collection efforts are no longer deemed useful. Charge-offs are recorded on consumer and certain
small ticket commercial finance receivables beginning at 180 days of contractual delinquency based
upon historical loss severity.
Impaired Loans—Impaired loans include primarily large loans that are placed on non-accrual status
or any troubled debt restructuring. Loan impairment is defined as any shortfall between the estimated
value and the recorded investment in the loan, with the estimated value determined using the fair value
of the collateral, if the loan is collateral dependent, or the present value of expected future cash flows
discounted at the loan’s effective interest rate.
Securitizations—Pools of assets are originated and sold to independent trusts which, in turn, issue
securities to investors backed by the asset pools. Tyco Capital retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected net cash flows that
exceeds the estimated cost of servicing is recorded at the time of sale as a ‘‘retained interest.’’ Tyco
Capital’s retained interests in securitized assets are included in other assets. Subsequent to the
recording of retained interests, Tyco Capital reviews such values on an asset by asset basis at least as
often as quarterly. Fair values of retained interests are calculated utilizing current and anticipated
credit losses, prepayment speeds and discount rates and are then compared to the respective carrying
values. Losses, representing the excess of carrying value over estimated current fair market value, are
recorded as impairments and are recognized as a charge to operations. Unrealized gains are not
credited to current earnings but are reflected in shareholders’ equity as part of other comprehensive
income.
Finance income—Includes interest on loans, the accretion of income on direct financing leases, and
rents on operating leases. Related origination and other nonrefundable fees and direct origination costs
are deferred and amortized as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is recognized on an accrual
basis commencing in the month of origination using methods that generally approximate the interest
method. Leveraged lease income is recognized on a basis calculated to achieve a constant after-tax rate
of return for periods in which Tyco Capital has a positive investment in the transaction, net of related
deferred tax liabilities. Rental income on operating leases is recognized on an accrual basis.
The accrual of finance income on commercial and consumer finance receivables is generally
suspended and an account is placed on non-accrual status when payment of principal or interest is
contractually delinquent for 90 days or more, or earlier when, in the opinion of management, full
collection of all principal and interest due is doubtful.
Financial Instruments—See the Company’s discussion of significant accounting policies included in
Note 1 for information related to financial instruments. Additionally, Tyco Capital has derivatives which
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