ADT 2007 Annual Report Download - page 199

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The effects of the change described above decreased net revenue by $21 million, decreased
depreciation expense by $37 million, and decreased loss from continuing operations and net loss by
$10 million each and increased basic and diluted earnings per share by $0.02 for 2007.
Long-Lived Assets—Tyco reviews long-lived assets, including property, plant and equipment and
amortizable intangible assets, 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. Impairment losses on
assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of
disposal.
Goodwill and Indefinite-Lived Intangible Assets—Goodwill and indefinite-lived intangible assets are
assessed for impairment annually and more frequently if triggering events occur (see Note 11). 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. The Company
performed its annual impairment tests for goodwill and indefinite-lived intangible assets on the first day
of the fourth quarter of 2007.
When testing for goodwill impairment, the Company first 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.
Dealer and Other Amortizable Intangible Assets, Net—Intangible assets primarily include contracts
and related customer relationships and intellectual property. Certain contracts and related customer
relationships result from purchasing residential security monitoring contracts from an external network
of independent dealers who operate under the ADT dealer program. Acquired contracts and related
customer relationships are recorded at their contractually determined purchase price.
During the first six months (twelve months in certain circumstances) after the purchase of the
customer contract, any cancellation of monitoring service, including those that result from customer
payment delinquencies, results in a chargeback by the Company to the dealer for the full amount of
the contract purchase price. The Company records the amount charged back to the dealer as a
reduction of the previously recorded intangible asset.
Intangible assets arising from the ADT dealer program described above are amortized in pools
determined by the month of contract acquisition on an accelerated basis over the period and pattern of
2007 Financials 107