ADT 2005 Annual Report Download - page 182

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes (Continued)
potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.
These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light
of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the
ultimate resolution may result in a payment that is materially different from our current estimate of the
tax liabilities. Further, management has reviewed with tax counsel the issues raised by these taxing
authorities and the adequacy of these recorded amounts. If the Company’s estimate of tax liabilities
proves to be less than the ultimate assessment, an additional charge to expense would result. If
payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the
liabilities may result in income tax benefits being recognized in the period when we determine the
liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in other
liabilities on the Consolidated Balance Sheets as payment is not expected within one year.
Except for earnings that are currently distributed, no additional provision has been made for U.S.
or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax
liabilities for temporary differences related to basis differences in investments in subsidiaries, as such
earnings are expected to be permanently reinvested, the investments are essentially permanent in
duration, or the Company has concluded that no additional tax liability will arise as a result of the
distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if
such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes
related to permanently reinvested earnings or the basis differences related to investments in
subsidiaries.
The American Jobs Creation Act of 2004 (the ‘‘AJCA’’), signed into law in October 2004, replaces
an export incentive with a deduction from domestic manufacturing income. It is not expected that the
AJCA will have a material impact on the Company’s income tax provision. The AJCA also allows the
Company to repatriate up to $500 million of permanently reinvested foreign earnings in 2006 at an
effective tax rate of 5.25%. The Company continues to review whether to take advantage of this
provision of the AJCA.
8. Cumulative Effect of Accounting Change
During 2005, the Company changed the measurement date for its pension and postretirement
benefit plans, from September 30th to August 31st. The Company believes that the one-month change of
measurement date is a preferable change as it allows management adequate time to evaluate and
report the actuarial information in the Company’s Consolidated Financial Statements under the
accelerated reporting deadlines. As a result of this change, the Company recorded a $21 million
after-tax gain ($28 million pre-tax) cumulative effect adjustment. Refer to Note 18 for additional
information on retirement plans.
During 2003, the Company adopted Financial Accounting Standards Board Interpretation (‘‘FIN’’)
No. 46, ‘‘Consolidation of Variable Interest Entities,’’ which requires identification of the Company’s
participation in Variable Interest Entities (‘‘VIE’s’’), which are entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a controlling financial interest. For entities
identified as VIE’s, FIN No. 46 sets forth a model to evaluate potential consolidation based on an
106 2005 Financials