ADT 2007 Annual Report Download - page 198

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
See below for discussion of depreciation method and estimated useful lives related to subscriber
systems.
Subscriber System Assets and Related Deferred Revenue Accounts—The Company generally considers
assets related to the acquisition of new customers in its electronic security business in three asset
categories: internally generated residential subscriber systems, internally generated commercial
subscriber systems (collectively referred to as subscriber system assets) and customer accounts acquired
through the ADT dealer program (referred to as dealer intangibles). Subscriber system assets include
installed property, plant and equipment for which Tyco retains ownership and deferred costs directly
related to the customer acquisition and system installation. Subscriber system assets and any deferred
revenue resulting from the customer acquisition are accounted for over the expected life of the
subscriber. In certain geographical areas where the Company has a large number of customers that
behave in a similar manner over time, the Company accounts for subscriber system assets and related
deferred revenue using pools, with separate pools for the components of subscriber system assets and
any related deferred revenue based on the month and year of acquisition.
Effective as of the beginning of the third quarter of 2007, Tyco changed the depreciation method
and estimated useful life used to account for pooled subscriber system assets (primarily in North
America) and related deferred revenue from the straight-line method with lives ranging from 10 to
14 years to an accelerated method with lives up to 15 years. The accelerated method utilizes declining
balance rates based on geographical area ranging from 160% to 195% for residential subscriber pools
and 145% to 265% for commercial subscriber pools and converts to a straight line methodology when
the resulting depreciation charge is greater than that from the accelerated method. The Company will
continue to use a straight-line method with a 14-year life for non-pooled subscriber system assets
(primarily in Europe and Asia) and related deferred revenue, with remaining balances written off upon
customer termination.
The change in the method and estimated useful life used to account for pooled subscriber system
assets and related deferred revenue resulted from our ongoing analysis of all pertinent factors,
including actual customer attrition data specific to customer categories and geographical areas, demand,
competition, and the estimated technological life of the installed systems. The pertinent factors have
been influenced by management’s ongoing customer retention programs, as well as tactical and strategic
initiatives to improve service delivery, customer satisfaction, and the credit worthiness of the subscriber
customer base. In accordance with SFAS No. 154, ‘‘Accounting Changes and Error Correction,’’ the
change in method used to account for pooled subscriber system assets and related deferred revenue
accounts represents a change in accounting estimate effected by a change in accounting principle and is
accounted for prospectively. The change in method is based on information obtained by continued
observation of the expected benefits inherent in the pooled subscriber system assets by customer
category and is preferable, as it results in depreciation and amortization that are more reflective of the
pattern of expected benefits derived from these assets. All pertinent factors, including actual customer
attrition data specific to customer categories and geographical areas, demand, competition, and the
estimated technological life of the installed systems, will continue to be reviewed by the Company at
each balance sheet date to assess the continued appropriateness of methods and estimated useful lives.
106 2007 Financials