ADT 2007 Annual Report Download - page 160

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. If our estimate of tax liabilities proves to be less than the ultimate
assessment, an additional charge to expense would result. If payment of these amounts ultimately
proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer necessary. If the tax
liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment
of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are
assessed for impairment annually and more frequently if triggering events occur. In performing these
assessments, management relies on various factors, including operating results, business plans, economic
projections, anticipated future cash flows, comparable transactions and other market data. There are
inherent uncertainties related to these factors and judgment in applying them to the analysis of
goodwill and indefinite-lived intangible assets for impairment. Since judgment is involved in performing
fair value measurements used in goodwill and indefinite-lived intangible assets impairment analyses,
there is risk that the carrying values of our goodwill or indefinite-lived intangible assets may be
overstated.
We elected to make the first day of the fourth quarter the annual impairment assessment date for
all goodwill and indefinite-lived intangible assets. When testing for goodwill impairment, the Company
follows the guidance prescribed in SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ First, the
Company compares the fair value of a reporting unit with its carrying amount. If the carrying amount
of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and further tests
are performed to measure the amount of impairment loss. In the second step of the goodwill
impairment test, the Company compares the implied fair value of reporting unit goodwill with the
carrying amount of the reporting unit’s goodwill. If the carrying amount of reporting unit’s goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to
the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is
determined in the same manner that the amount of goodwill recognized in a business combination is
determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities
of that unit, including intangible assets, as if the reporting unit had been acquired in a business
combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets
and liabilities represents the implied fair value of goodwill.
Disruptions to our business such as end market conditions and protracted economic weakness,
unexpected significant declines in operating results of reporting units, the divestiture of a significant
component of a reporting unit and market capitalization declines may result in our having to perform a
goodwill impairment first step valuation analysis for some or all of our reporting units prior to the
required annual assessment. These types of events and the resulting analysis could result in goodwill
impairment charges in the future.
Goodwill impairments related to continuing operations were $46 million during 2007. There were
no goodwill impairments related to continuing operations during 2006 and 2005.
Long-Lived Assets—Assets held and used by the Company, including property, plant and
equipment and amortizable intangible assets, are reviewed for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the asset may not be fully recoverable.
Tyco performs undiscounted operating cash flow analyses to determine if impairment exists. For
purposes of recognition and measurement of an impairment for assets held for use, Tyco groups assets
and liabilities at the lowest level for which cash flows are separately identified. If an impairment is
determined to exist, any related impairment loss is calculated based on fair value. Impairments to long-
lived assets to be disposed of are recorded based upon the fair value of the applicable assets. The
calculation of the fair value of long-lived assets is based on assumptions concerning the amount and
68 2007 Financials