ADT 2006 Annual Report Download - page 101

consideration of alternatives, including the communication date to grantees for all grants, to establish a
reasonable date upon which equity recipients and share awards were known, fixed and ready to be
communicated to employees. To the extent the Company was able to conclude that grant date lists were
fixed and ready to be communicated to employees, the measurement date was considered to be the
grant date. However, in many instances, the measurement date the Company used was the date that
the equity award was communicated to the recipient.
The Company has concluded that errors relating to the Company’s stock option accounting
primarily resulted from: (a) incomplete documentation to enable application of accounting principles
under APB Opinion No. 25; (b) the unintentional misapplication of generally accepted accounting
principles; and (c) the absence of adequate control procedures in 1999 through early 2002 designed to
ensure equity recipients and share awards were fixed and certain prior to the legal grant date.
The amount of aggregate compensation expense related to this item, which the Company should
have recorded in prior periods, is $252 million pre-tax and $173 million after-tax, relating to grants
awarded prior to the end of 2002. None of this amount relates to 2006, $17 million pre-tax ($8 million
after-tax) relates to 2005 and $66 million pre-tax ($46 million after-tax) relates to 2004, as awards
vested over the relevant vesting periods. Had the Company used the communication date as the
measurement date in all instances, the difference in the amount recorded would not have been material
to any period or in the aggregate.
Review of Equity Plan Compliance
Separately, the Company identified an error related to the recognition of compensation expense
under the Company’s employee stock purchase program in the United Kingdom. The aggregate
compensation expense related to this item which the Company should have recorded in 2002-2005 is
$29 million pre-tax and $20 million after-tax. None of this amount relates to 2006, $7 million pre-tax
($5 million after-tax) relates to 2005 and $19 million pre-tax ($13 million after-tax) relates to 2004.
Effect of Restatement
Taken together, these prior period errors result in an aggregate understatement of compensation
expense of $281 million pre-tax and $193 million after-tax. Based on the findings of the items discussed
above, the Company has restated its reported results for prior periods to reflect the impact of
additional stock-based compensation expense in Corporate. The impact by year is as follows ($ in
millions):
2001
and
2006 2005 2004 2003 2002 Prior Total
Pre-tax impact ................................ — $24 $85 $84 $75 $13 $281
After-tax impact .............................. — $13 $59 $59 $53 $ 9 $193
The impact on the Consolidated Statements of Income for the years ended September 30, 2005
and 2004, and the Consolidated Balance Sheet as of September 30, 2005, as a result of the above
restatement, is summarized in the tables below. There was no impact on total cash flows from
operating, investing or financing activities within the Consolidated Statements of Cash Flows for the
years ended September 30, 2005 and 2004. The amounts previously reported are derived from the
2006 Financials 39