ADT 2008 Annual Report Download - page 207

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
of the monitoring arrangement are determined based on a percentage of the up-front fees and do not
exceed deferred revenue. Such deferred costs are recorded as non-current assets and are included in
the Other Assets line item within the Consolidated Balance Sheets.
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 same 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 was based on information obtained by continued
observation of the expected benefits inherent in the pooled subscriber system assets by customer
category and was preferable, as it resulted 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, are reviewed by the Company at each
balance sheet date to assess the continued appropriateness of methods and estimated useful lives.
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
104 2008 Financials