ADT 2007 Annual Report Download - page 197

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
estimates as contracts progress have the effect of increasing or decreasing profits each period.
Provisions for anticipated losses are made in the period in which they become determinable. Estimated
warranty costs are included in total estimated contract costs and are accrued over the construction
period of the respective contracts under percentage-of-completion accounting.
At September 28, 2007 and September 29, 2006, accounts receivable and other long-term
receivables included retainage provisions of $63 million in both years of which $41 million and
$36 million are unbilled, respectively. These retainage provisions consist primarily of fire protection
contracts and become due upon contract completion and acceptance. At September 28, 2007 the
retainage provision included $62 million, that is expected to be collected during 2008.
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. See Note 22.
Advertising—Advertising costs are expensed when incurred and are included in selling, general and
administrative expenses. See Note 22.
Translation of Foreign Currency—For the Company’s non-U.S. subsidiaries that account in a
functional currency other than U.S. dollars, 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.
Gains and losses resulting from foreign currency transactions, including the impact of our foreign
currency derivatives, reflected in selling, general and administrative expenses were $60 million,
$77 million and $21 million in 2007, 2006 and 2005, respectively.
Cash and Cash Equivalents—All highly liquid investments purchased with maturities of three
months or less from the time of purchase are considered to be cash equivalents.
Allowance for Doubtful Accounts—The allowance for doubtful accounts receivable reflects the best
estimate of probable losses inherent in Tyco’s receivable portfolio determined on the basis of historical
experience, specific allowances for known troubled accounts and other currently available evidence.
Inventories—Inventories are recorded at the lower of cost (primarily first-in, first-out) or market
value.
Property, Plant and Equipment, Net—Property, plant and equipment, net is recorded at cost less
accumulated depreciation. Depreciation expense for 2007, 2006 and 2005 was $638 million, $665 million
and $676 million, respectively. Maintenance and repair expenditures are charged to expense when
incurred. Except for pooled subscriber systems, depreciation is calculated using the straight-line method
over the estimated useful lives of the related assets as follows:
Buildings and related improvements . . 5 to 50 years
Leasehold improvements .......... Lesser of remaining term of the lease or
economic useful life
Subscriber systems .............. Accelerated method up to 15 years
Other machinery, equipment and
furniture and fixtures ........... 2 to 20 years
2007 Financials 105