ADT 2007 Annual Report Download - page 212

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes (Continued)
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in a multitude of jurisdictions across our global operations. We recognize
potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.
These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves 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. Further, management has reviewed with tax counsel certain of the issues raised by these
taxing authorities and the adequacy of these recorded amounts. If the Company’s 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 may result in income tax benefits being recognized in the period when we determine the
liabilities are no longer necessary. Substantially all of these potential tax liabilities are recorded in other
liabilities on the Consolidated Balance Sheets as payment is not expected within one year.
Except for earnings that are currently distributed, no additional material provision has been made
for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized
deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings
are expected to be permanently reinvested, the investments are essentially permanent in duration, or
the Company has concluded that no additional tax liability will arise as a result of the distribution of
such earnings. A liability could arise if amounts are distributed by such subsidiaries or if such
subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related
to permanently reinvested earnings or the basis differences related to investments in subsidiaries.
See ‘‘Income Taxes’’ in Note 16 for information related to the Tax Sharing Agreement with
Covidien and Tyco Electronics.
7. Cumulative Effect of Accounting Change
During 2006, the Company adopted FIN No. 47, ‘‘Accounting for Conditional Asset Retirement
Obligations—an Interpretation of FASB Statement No. 143.’’ FIN No. 47 clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the timing and (or) method
of settling the obligation are conditional on a future event that may or may not be within the control of
the entity and clarifies when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN No. 47 requires that conditional asset retirement
obligations, along with the associated capitalized asset retirement costs, be initially reported at their fair
values. Upon adoption, the Company recognized a liability of $32 million for asset retirement
obligations and an increase of $10 million in the carrying amount of the related assets, of which
$19 million and $5 million are reflected in liabilities and assets of discontinued operations, respectively.
The initial recognition resulted in a cumulative effect of accounting change of $14 million after-tax loss
($22 million pre-tax), reflecting the accumulated depreciation and accretion that would have been
recognized in prior periods had the provisions of FIN No. 47 been in effect at the time.
During 2005, the Company changed the measurement date for its pension and postretirement
benefit plans, from September 30th to August 31st, effective October 1, 2004. The Company believes
that the one-month change of measurement date is a preferable change as it allows management
adequate time to evaluate and report the actuarial information in the Company’s Consolidated
120 2007 Financials