ADT 2006 Annual Report Download - page 167

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Restatement and Summary of Significant Accounting Policies (Continued)
Income Taxes—Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been reflected in the Consolidated Financial Statements. Deferred tax
liabilities and assets are determined based on the differences between the book and tax bases of
particular assets and liabilities and operating loss carryforwards, using tax rates in effect for the years in
which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax
assets if, based upon the available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Insurable Liabilities—The Company records liabilities for its workers’ compensation, product,
general and auto liabilities. The determination of these liabilities and related expenses is dependent on
claims experience. For most of these liabilities, claims incurred but not yet reported are estimated by
utilizing actuarial valuations based upon historical claims experience. Certain insurable liabilities are
discounted using a risk-free rate of return when the obligation is reliably determinable. The impact of
the discount on the Consolidated Balance Sheets at September 29, 2006 and September 30, 2005 was to
reduce the obligation by $47 million and $31 million, respectively. The Company maintains captive
insurance companies to manage certain of its insurable liabilities. Additionally, the Company records
receivables from third party insurers when recovery has been determined to be probable.
Financial Instruments—The Company uses interest rate swaps, currency swaps and forward and
option contracts to manage risks generally associated with foreign exchange rate and interest rate risk.
Derivatives used for hedging purposes are designated and effective as a hedge of the identified risk
exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract
are highly correlated with changes in the fair value of the underlying hedged item at inception of the
hedge and over the life of the hedge contract.
All derivative financial instruments are reported on the Consolidated Balance Sheets at fair value.
Derivatives used to economically hedge foreign currency denominated balance sheet items are reported
directly in earnings along with offsetting transaction gains and losses on the items being hedged. Gains
and losses on net investment hedges are included in the cumulative translation adjustment component
of other comprehensive income to the extent they are effective. Gains and losses on derivatives
designated as cash flow hedges are recorded in other comprehensive income and reclassified to
earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The
ineffective portion of all hedges, if any, is recognized currently in earnings. Instruments that do not
qualify for hedge accounting are marked to market with changes recognized in current earnings.
Share Premium and Contributed Surplus—In accordance with the Bermuda Companies Act 1981,
when Tyco issues shares for cash at a premium to their par value, the resulting premium is credited to
a share premium account, a non-distributable reserve. When Tyco issues shares in exchange for shares
of another company, the excess of the fair value of the shares acquired over the par value of the shares
issued by Tyco is credited, where applicable, to contributed surplus, which is, subject to certain
conditions, a distributable reserve.
Reclassifications—Certain prior year amounts have been reclassified to conform with current year
presentation.
Recently Adopted Accounting Pronouncements—Effective October 1, 2005, Tyco adopted Statement
of Financial Accounting Standards (‘‘SFAS’’) No. 123R, ‘‘Share-Based Payment,’’ which requires
compensation costs related to share-based transactions, including employee stock options, to be
recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as
2006 Financials 105