ADT 2005 Annual Report Download - page 135

Guarantees
Certain of the Company’s business segments have guaranteed the performance of third-parties and
provided financial guarantees for uncompleted work and financial commitments. The terms of these
guarantees vary with end dates ranging from 2006 through the completion of such transactions. The
guarantees would be triggered in the event of nonperformance and the potential exposure for
nonperformance under the guarantees would not have a material effect on the Company’s financial
position, results of operations or cash flows.
In disposing of assets or businesses, the Company often provides representations, warranties and/or
indemnities to cover various risks including, for example, unknown damage to the assets, environmental
risks involved in the sale of real estate, liability to investigate and remediate environmental
contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and
legal fees related to periods prior to disposition. The Company does not have the ability to estimate
the potential liability from such indemnities because they relate to unknown conditions. However, the
Company has no reason to believe that these uncertainties would have a material adverse effect on the
Company’s financial position, annual results of operations or cash flows.
The Company has recorded liabilities for known indemnifications included as part of
environmental liabilities. See Item I. Business—Environmental Matters for a discussion of these
liabilities.
The Company has guaranteed the fair value of certain vessels not to exceed $235 million, and as of
September 30, 2005 expects the obligation to be $54 million, which is recorded in the accompanying
Consolidated Balance Sheet, based on its estimate of the fair value of the vessels (see ‘‘Liquidity and
Capital Resources—Contractual Obligations’’ above).
In the normal course of business, the Company is liable for contract completion and product
performance. In the opinion of management, such obligations will not significantly affect the
Company’s financial position, results of operations or cash flows.
The Company generally records estimated product warranty costs at the time of sale. For further
information on estimated product warranty, see Notes 1 and 15 to the Consolidated Financial
Statements.
Accounting Pronouncements
In September 2004, the Emerging Issues Task Force (‘‘EITF’’) of the Financial Accounting
Standards Board (‘‘FASB’’) reached a consensus on EITF No. 04-8, ‘‘The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share.’’ This EITF requires that contingently convertible
debt securities with a market price trigger be included in diluted earnings per share, regardless of
whether the market price trigger has been met. EITF No. 04-8 became effective for Tyco on October 1,
2004 and required retroactive restatement of previously reported earnings per share. The adoption of
this EITF did not impact diluted earnings per share for any period presented.
In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs, an amendment of ARB
No. 43, Chapter 4.’’ SFAS No. 151 amends Accounting Research Bulletin (‘‘ARB’’) No. 43, Chapter 4,
to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on the normal capacity of the production
facilities. SFAS No. 151 will be effective in the first quarter of fiscal 2006 for Tyco. The adoption of
SFAS No. 151 is not expected to have a significant impact on the Company’s results of its operations,
financial position or cash flows.
2005 Financials 59