ADT 2005 Annual Report Download - page 164

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Gains and losses resulting from foreign currency transactions, the amounts of which are not
material in any period presented, are included in net income.
Cash and Cash Equivalents—All highly liquid investments purchased with maturity of three months
or less from the time of purchase are considered to be cash equivalents.
On occasion, the Company is required to post cash collateral to secure reimbursements or
indemnity obligations under letters of credit and performance guarantees in respect of various
construction projects. The amount of restricted cash in collateral was $86 million (of which $44 million
is included in current assets and $42 million is included in long-term assets) and $84 million (of which
$30 million is included in current assets and $54 million is included in long-term assets) at
September 30, 2005 and 2004, respectively.
Allowance for Doubtful Accounts—The allowance for doubtful accounts receivable reflects the best
estimate of probable losses inherent in Tyco’s receivable portfolio determined on the basis of historical
experience, specific allowances for known troubled accounts and other currently available evidence.
Inventories—Inventories are recorded at the lower of cost (primarily first-in, first-out) or market
value.
Property, Plant and Equipment, Net—Property, plant and equipment, net is recorded at cost less
accumulated depreciation. Depreciation expense for 2005, 2004 and 2003 was $1,447 million,
$1,428 million and $1,420 million, respectively. Maintenance and repair expenditures are charged to
expense when incurred. Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets as follows:
Buildings and related improvements ...... 5 to 50 years
Leasehold improvements .............. Lesser of remaining term of the lease
or economic useful life
Subscriber systems ................... 10 to 14 years
Other machinery, equipment and furniture
and fixtures ...................... 2 to 20 years
The Company generally considers its electronic security assets in three asset pools: internally
generated residential systems, internally generated commercial systems and customer accounts acquired
through the ADT dealer program. Subscriber systems represent internally generated residential systems
and internally generated commercial systems (customer accounts acquired through the ADT dealer
program are recorded as intangible assets). For internal purposes, the Company considers internally
generated commercial accounts in three smaller groups consisting of small business, core commercial
and national commercial accounts. The internally generated residential and commercial account pools
are generally amortized using the straight-line method over a ten-year period (a fourteen-year period is
used for national commercial accounts and a fourteen-year period with write-off of specific accounts
upon discontinuance is used for residential and commercial accounts in certain non-U.S. locations).
Long-Lived Assets—The Company periodically evaluates the net realizable value of long-lived
assets, including property, plant and equipment and amortizable intangible assets, relying on a number
of factors including operating results, business plans, economic projections and anticipated future cash
flows. When indicators of potential impairment are present, the carrying values of the assets are
evaluated in relation to the operating performance and estimated future undiscounted cash flows of the
88 2005 Financials