ADT 2006 Annual Report Download - page 158

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies
Basis of Presentation—The Consolidated Financial Statements include the consolidated accounts of
Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (Tyco
and all its subsidiaries, hereinafter collectively referred to as the ‘‘Company’’ or ‘‘Tyco’’) and have been
prepared in accordance with generally accepted accounting principles in the United States (‘‘GAAP’’).
Unless otherwise indicated, references in the Consolidated Financial Statements to 2006, 2005 and 2004
are to Tyco’s fiscal year ended September 29, 2006, September 30, 2005 and September 30, 2004,
respectively.
Restatement—Reviews of Prior Period Stock Option Grant Practices and Equity Plan Compliance
Review of Prior Period Stock Option Grant Practices
Following publicity in 2006 regarding the granting of stock options at a number of companies, the
Company initiated an internal review of its historical stock option grant practices to determine whether
the Company’s stock option award actions were appropriately governed and were accurately reflected in
the Company’s financial statements. The Company’s Internal Audit staff, which reports directly to the
Audit Committee of the Board of Directors, began a review of the Company’s equity incentive plan
practices and associated approvals over the period October 1999 through June 2006. In addition to its
review of plan administration, the Internal Audit staff performed detailed audit procedures on more
than 95% of share options granted through the regular and off-cycle grants during this period. The
audit procedures covered 100% of named executive officers and Section 16 officers and directors. The
Company’s review included an evaluation of grant authorizations, an assessment of the appropriate
measurement dates under Accounting Principles Board (‘‘APB’’) Opinion No. 25, ‘‘Accounting for Stock
Issued to Employees,’’ and the application of appropriate equity pricing methodology.
The Company has determined that between October 1999 and 2002, there were several grants for
which complete documentation was not available. As such, validation of the appropriate measurement
date under APB Opinion No. 25 was difficult to determine with precision. For such grants, the
Company determined an appropriate measurement date in reliance upon all available evidence and
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.
96 2006 Financials