ADT 2005 Annual Report Download - page 166

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
During the first six months (twelve months in certain circumstances) after the purchase of the
customer contract, any cancellation of monitoring service, including those that result from customer
payment delinquencies, results in a chargeback by the Company to the dealer for the full amount of
the contract purchase price. The non-refundable charge to the dealer is retained by the Company even
in the event of customer cancellation. The Company records the amount charged back to the dealer as
a reduction of the previously recorded intangible asset.
Intangible assets arising from the ADT dealer program described above are amortized in pools
determined by the month of contract acquisition on an accelerated basis over the period and pattern of
economic benefit that is expected to be obtained from the customer relationship. Based upon analyses
of the period and pattern of economic benefit associated with the intangibles, which utilize information
contained in attrition studies of the ADT dealer program customer base, conducted by a third party
appraiser, the Company believes that the accelerated method that presently best achieves the matching
objective above is the double-declining balance method based on a ten-year life for the first eight years
of the estimated life of the customer relationship, converting to the straight-line method of
amortization for the remaining four years of the estimated relationship period. Actual attrition data is
regularly reviewed in order to assess the continued appropriateness of the accelerated method of
amortization described above.
Other contracts and related customer relationships, as well as intellectual property consisting
primarily of patents, trademarks and unpatented technology, are being amortized on a straight-line
basis over five to forty years. The Company evaluates the remaining useful life of intangible assets on a
periodic basis to determine whether events and circumstances warrant a revision to the remaining
useful life. In addition, intangible assets that are not subject to amortization are tested for impairment
annually, or more frequently if events or changes in circumstances indicate that the asset might be
impaired.
Investments—The Company invests in equity and debt securities. Long-term investments in
marketable equity securities that represent less than twenty percent ownership are marked to market at
the end of each accounting period. Unrealized gains and losses are credited or charged to other
comprehensive income within shareholders’ equity for available for sale securities unless an unrealized
loss is deemed to be other than temporary, in which case such loss is charged to earnings. Management
determines the proper classification of investments in debt obligations with fixed maturities and equity
securities for which there is a readily determinable market value at the time of purchase and
reevaluates such classifications as of each balance sheet date. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in the Consolidated
Statements of Income.
Other equity investments for which the Company does not have the ability to exercise significant
influence and for which there is not a readily determinable market value are accounted for under the
cost method of accounting. The Company periodically evaluates the carrying value of its investments
accounted for under the cost method of accounting, such that they are recorded at the lower of cost or
estimated net realizable value.
For equity investments in which the Company exerts significant influence over operating and
financial policies, the equity method of accounting is used. The Company’s share of net income or
losses of equity investments is included in the Consolidated Statements of Income and was not material
in any period presented.
90 2005 Financials