ADT 2005 Annual Report Download - page 162

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Sales of security monitoring systems include multiple elements including equipment installation,
monitoring services and maintenance agreements. Amounts assigned to each component are based on
that component’s objectively determined fair value. If fair value cannot be objectively determined for a
sale involving multiple elements, the Company recognizes the revenue from installation of services,
along with the associated direct incremental costs, over the contract life.
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 primarily 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 is measured based on the ratio of actual cost incurred to total
estimated cost. 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 providing services under certain contracts, Infrastructure Services (a business unit within
Engineered Products and Services) incurs sub-contract and other costs that are paid by Infrastructure
Services and re-billed to their customers. Prior to January 1, 2004, these costs were treated as ‘‘pass
through’’ and were therefore not included in reported revenue and cost of revenue of Infrastructure
Services. Effective January 1, 2004, retroactive to October 1, 2003, the Company began reflecting these
sub-contract costs in both revenue and cost of revenue for Infrastructure Services, resulting in
incremental revenue and cost of revenue of $649 million and $739 million for 2005 and 2004,
respectively. The Company has not adjusted revenue or cost of revenue for the year ended
September 30, 2003 as such change was not material. Further, such adjustment would have no impact
on previously reported operating income, net income or cash flow.
At September 30, 2005 and 2004, accounts receivable and other long-term receivables included
retainage provisions of $91 million and $86 million, respectively, of which $31 million and $34 million
are unbilled, respectively. These retainage provisions consist primarily of electronics contracts, fire
protection contracts as well as transportation, water and environmental-related contracts and become
due upon contract completion and acceptance. At September 30, 2005 the retainage provision included
$57 million, which is expected to be collected during 2006. In addition, at September 30, 2005 and
2004, $28 million and $48 million, respectively, of accounts receivable were unbilled related to
long-term contracts.
86 2005 Financials