ADT 2007 Annual Report Download - page 153

believe that we will generate sufficient future taxable income to realize the tax benefits related to the
remaining net deferred tax assets on our Consolidated Balance Sheets. The valuation allowance was
calculated in accordance with the provisions of SFAS No. 109, ‘‘Accounting for Income Taxes,’’ which
requires a valuation allowance be established or maintained when it is ‘‘more likely than not’’ that all
or a portion of deferred tax assets will not be realized.
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in a multitude of jurisdictions across our global operations. We recognize
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 liabilities 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. 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.
Other Income Tax Matters
In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a
Tax Sharing Agreement that generally governs Covidien’s, Tyco Electronics’ and Tyco’s respective rights,
responsibilities, and obligations after the distribution with respect to taxes, including ordinary course of
business taxes and taxes, if any, incurred as a result of any failure of the distribution of all of the shares
of Covidien or Tyco Electronics to qualify as a tax-free distribution for U.S. federal income tax
purposes within the meaning of Section 355 of the Code or certain internal transactions undertaken in
anticipation of the spin-offs to qualify for tax-favored treatment under the Code.
Under the Tax Sharing Agreement, with certain exceptions, Tyco generally is responsible for the
payment of 27% of any additional U.S. income taxes that are required to be paid to a U.S. tax
authority as a result of a U.S. tax audit of Covidien’s, Tyco Electronics’ or Tyco’s subsidiaries’ income
tax returns for all periods prior to the spin-offs.
Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco’s,
Covidien’s and Tyco Electronics’ income tax liabilities based on a sharing formula for periods prior to
and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42%
and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities
to Tyco’s, Covidien’s and Tyco Electronics’ U.S. income tax returns. All costs and expenses associated
with the management of these shared tax liabilities are shared equally among the parties. At
September 28, 2007, Tyco has recorded a receivable from Covidien and Tyco Electronics of $103 million
reflected in other assets as our estimate of their portion of the Tax Sharing obligations with an offset to
shareholders’ equity. Other liabilities include $543 million for the fair value of Tyco’s obligations under
the Tax Sharing Agreement, determined in accordance with FIN 45 recognized with an offset to
shareholders’ equity.
Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities
are settled. Settlement is expected to occur as the IRS audit process is completed for the impacted
years. Given the nature of the shared liabilities, the maximum amount of potential future payments is
not determinable.
In the event the Separation is determined to be taxable and such determination was the result of
actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such
failure would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result
thereof. If such determination is not the result of actions taken after the Separation by Tyco, Covidien
2007 Financials 61