ADT 2007 Annual Report Download - page 171

The Company records estimated product warranty costs at the time of sale. For further
information on estimated product warranty, see Notes 1 and 14 to the Consolidated Financial
Statements.
In 2001, a division of Safety Products initiated a Voluntary Replacement Program (‘‘VRP’’)
associated with the acquisition of Central Sprinkler. The VRP relates to the replacement of certain
O-ring seal sprinkler heads which were originally manufactured by Central Sprinkler prior to Tyco’s
acquisition. Under this program, the sprinkler heads are being replaced free of charge to property
owners. In the third quarter of 2006, the Company completed a comprehensive review of reported
claims, recent claim rates and cost trends and further assessed the future of the program. The
Company determined that an additional liability was necessary in order to satisfy the Company’s
obligation under the VRP. As a result, the Company recorded a $100 million charge which was
reflected in cost of sales. On May 1, 2007, the Consumer Products Safety Commission and the
Company announced an August 31, 2007 deadline for filing claims to participate in the VRP. The
Company will fulfill all valid claims for replacement of qualifying sprinklers received up to August 31,
2007. During the fourth quarter of 2007, the Company further assessed the expected cost to complete
the program in light of the most current claims data and determined that an additional accrual of
$10 million was necessary to satisfy the estimated remaining obligation. The ultimate cost to complete
the program will be impacted by a number of factors such as changes in material and labor costs, and
the actual number of sprinkler heads replaced. Actual results could differ from this estimate.
Settlements during 2007 include cash expenditures of $38 million related to the VRP.
Accounting Pronouncements
Recently Adopted Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 158,
‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of
FASB Statements No. 87, 88, 106 and 132(R).’’ SFAS No. 158 requires that employers recognize the
funded status of defined benefit pension and other postretirement benefit plans as a net asset or
liability on the balance sheet and recognize as a component of other comprehensive income, net of tax,
the gains or losses and prior service costs or credits that arise during the period but are not recognized
as a component of net periodic benefit cost. Under SFAS No. 158, companies are required to measure
plan assets and benefit obligations as of their fiscal year end. The Company presently uses a
measurement date of August 31st. SFAS No. 158 also requires additional disclosure in the notes to the
financial statements. The recognition provisions of SFAS No. 158 are effective for fiscal 2007, while the
measurement date provisions become effective in fiscal 2009. The Company adopted the recognition
and disclosure provisions of SFAS No. 158 as of September 28, 2007. The Company recognized a net
$111 million liability through a reduction in shareholders’ equity.
In September 2006, the SEC issued Staff Accounting Bulletin (‘‘SAB’’) No. 108, ‘‘Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.’’
SAB No. 108 requires that companies utilize a ‘‘dual approach’’ in assessing the quantitative effects of
financial statement misstatements. The dual approach includes both an income statement focused and
balance sheet focused assessment. SAB No. 108 is effective for Tyco in fiscal 2007. The implementation
of SAB No. 108 did not have a material impact on Tyco’s results of operations, financial position or
cash flows.
Recently Issued Accounting Pronouncements—In February 2007, the FASB issued Statement of
Financial Accounting Standards (‘‘SFAS’’) No. 159, ‘‘The Fair Value Option for Financial Assets and
Financial Liabilities.’’ SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an
irrevocable election to account for certain types of financial instruments and warranty and insurance
contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or
unrealized, recognized in earnings. SFAS No. 159 is effective for Tyco in the first quarter of fiscal 2009.
2007 Financials 79