ADT 2006 Annual Report Download - page 163

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (Continued)
Revenue from the sale of services is recognized as services are rendered. Customer billings for
services not yet rendered are deferred and recognized as revenue as the services are rendered and the
associated deferred revenue is included in current liabilities or long-term liabilities, as appropriate.
Contract sales for the installation of fire protection systems, large security intruder systems,
undersea fiber optic cable systems and other construction related projects are recorded primarily on the
percentage-of-completion method. Profits recognized on contracts in process are based upon estimated
contract revenue and related cost to completion. Cost to completion is generally measured based on
the ratio of actual cost incurred to total estimated cost. Revisions in cost estimates as contracts
progress have the effect of increasing or decreasing profits in the current period. Provisions for
anticipated losses are made in the period in which they first become determinable.
Certain of the Company’s long-term contracts have warranty obligations. Estimated warranty costs
for each contract are determined based on the contract terms and technology specific issues. These
costs are included in total estimated contract costs accrued over the construction period of the
respective contracts under percentage-of-completion accounting.
At September 29, 2006 and September 30, 2005, accounts receivable and other long-term
receivables included retainage provisions of $91 million in both years of which $36 million and
$31 million are unbilled, respectively. These retainage provisions consist primarily of electronics
contracts, fire protection contracts as well as transportation, water and environmental-related contracts
and become due upon contract completion and acceptance. At September 29, 2006 the retainage
provision included $58 million, which is expected to be collected during 2007. In addition, at
September 29, 2006 and September 30, 2005, $56 million and $28 million, respectively, of accounts
receivable were unbilled related to long-term contracts.
Research and Development—Research and development expenditures are expensed when incurred
and are included in cost of product sales. Research and development expenses include salaries, direct
costs incurred and building and overhead expenses. Customer-funded research and development are
costs incurred by Tyco that are reimbursed by customers. There is no net impact on research and
development expense on the Consolidated Statements of Income for customer-funded research and
development. Research and development expense in our Consolidated Statements of Income reflects
company-sponsored research and development only. See Note 24.
Advertising—Advertising costs are expensed when incurred and are included in selling, general and
administrative expenses. See Note 24.
Translation of Foreign Currency—For the Company’s non-U.S. subsidiaries that account in a
functional currency other than U.S. Dollars and do not operate in highly inflationary environments,
assets and liabilities are translated into U.S. Dollars using year-end exchange rates. Revenue and
expenses are translated at the average exchange rates in effect during the year. Foreign currency
translation gains and losses are included as a component of accumulated other comprehensive income
(loss) within shareholders’ equity. For subsidiaries operating in highly inflationary environments,
inventories and property, plant and equipment, including related expenses, are translated at the rate of
exchange in effect on the date the assets were acquired, while other assets and liabilities are translated
at year-end exchange rates. Translation adjustments for the assets and liabilities of these subsidiaries
are included in net income.
Gains and losses resulting from foreign currency transactions included in net income were
$105 million, $52 million and $66 million in 2006, 2005 and 2004, respectively.
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2006 Financials