ADT 2005 Annual Report Download - page 165

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
underlying business. An impairment in the carrying value of an asset is recognized whenever anticipated
future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The net
book value of an asset is adjusted to fair value if its expected future undiscounted cash flows are less
than book value. The amount of the impairment recognized is the difference between the carrying
value of the asset and its fair value. Fair values are based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
Goodwill—Goodwill is assessed for impairment at least annually and as triggering events occur. In
making this assessment, management relies on a number of factors including operating results, business
plans, economic projections, anticipated future cash flows, and transactions and market place data.
There are inherent uncertainties related to these factors and management’s judgment in applying them
to the analysis of goodwill impairment.
The Company has elected to make the first day of the fourth quarter the annual impairment
assessment date for all reporting units. Statement of Financial Accounting Standards No. 142 defines a
reporting unit as an operating segment or one level below an operating segment. Our reporting units as
of September 30, 2005 were as follows: Electronic Security Services, Fire Protection Contracting and
Services, Electronic Components, Wireless, Power Systems, Printed Circuit Group, Submarine
Telecommunications, Medical Devices & Supplies, Retail, Pharmaceuticals, Flow Control and Fire &
Building Products, Electrical and Metal Products, and Infrastructure Services. When changes occur in
the composition of one or more segments or reporting units, the goodwill is reassigned to the segments
or reporting units affected based on their relative fair value.
Goodwill valuations have been calculated using an income approach based on the present value of
future cash flows of each reporting unit. This approach incorporates many assumptions including future
growth rates, discount factors and income tax rates. Changes in economic and operating conditions
impacting these assumptions could result in a goodwill impairment in future periods.
Disruptions to the business such as end market conditions and protracted economic weakness,
unexpected significant declines in operating results of reporting units, the divestiture of a significant
component of a reporting unit, and market capitalization declines may result in our having to perform
a goodwill impairment first step valuation analysis for some or all of Tyco’s reporting units prior to the
required annual assessment. These types of events and the resulting analysis could result in additional
charges for goodwill and other asset impairments in the future.
Intangible Assets, Net—Intangible assets primarily include contracts and related customer
relationships, and intellectual property. Certain contracts and related customer relationships result from
purchasing residential security monitoring contracts from an external network of independent dealers
who operate under the ADT dealer program. Acquired contracts and related customer relationships are
recorded at their contractually determined purchase price. The Company incurs costs associated with
maintaining and operating its ADT dealer program, including brand advertising and due diligence,
which are expensed as incurred. In certain programs, dealers pay the Company a non-refundable
amount for each of the contracts sold to the Company. This non-refundable charge represents dealer
reimbursement to the Company for costs incurred by the Company associated with maintaining and
operating the ADT dealer program. Accordingly, each acquired contract and related customer
relationship was recorded at its contractually determined purchase price, net of a non-refundable
amount charged to dealers at the time the contract was accepted for purchase.
2005 Financials 89