ADT 2009 Annual Report Download - page 181

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Principles of Consolidation—Tyco is a holding company which conducts its business through its
operating subsidiaries. The Company consolidates companies in which it owns or controls more than
fifty percent of the voting shares or has the ability to control through similar rights. Also, the Company
consolidates variable interest entities in which the Company bears a majority of the risk of the entities’
expected losses or stands to gain from a majority of the entities’ expected returns. All intercompany
transactions have been eliminated. The results of companies acquired or disposed of during the year
are included in the Consolidated Financial Statements from the effective date of acquisition or up to
the date of disposal. References to the segment data are to the Company’s continuing operations.
Use of Estimates—The preparation of the Consolidated Financial Statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses. Significant estimates in these Consolidated Financial Statements include restructuring
charges, allowances for doubtful accounts receivable, estimates of future cash flows associated with
asset impairments, useful lives for depreciation and amortization, loss contingencies, net realizable
value of inventories, fair values of financial instruments, estimated contract revenue and related costs,
legal liabilities, income taxes and tax valuation allowances, and pension and postretirement employee
benefit expenses. Actual results could differ materially from these estimates.
Revenue Recognition—The Company recognizes revenue principally on four types of transactions—
sales of products, sales of security systems, billings for monitoring and maintenance services and
contract sales.
Revenue from the sales of products is recognized at the time title and risks and rewards of
ownership pass. This is generally when the products reach the free-on-board shipping point, the sales
price is fixed and determinable and collection is reasonably assured.
Provisions for certain rebates, sales incentives, trade promotions, product returns and discounts to
customers are accounted for as reductions in determining sales in the same period the related sales are
recorded. These provisions are based on terms of arrangements with direct, indirect and other market
participants. Rebates are estimated based on sales terms, historical experience and trend analysis.
Sales of security monitoring systems may have multiple elements, including equipment, installation,
monitoring services and maintenance agreements. The Company assesses its revenue arrangements to
determine the appropriate units of accounting. When ownership of the system is transferred to the
customer, each deliverable provided under the arrangement is considered a separate unit of accounting.
Revenues associated with sale of equipment and related installations are recognized once delivery,
installation and customer acceptance is completed, while the revenue for monitoring and maintenance
services are recognized as services are rendered. Amounts assigned to each unit of accounting are
based on an allocation of total arrangement consideration using each deliverable’s relative fair value.
Revenue recognized for equipment and installation is limited to the lesser of their allocated amounts
under the relative fair value method or the non-contingent up-front consideration received at the time
of installation, since collection of future amounts under the arrangement with the customer is
contingent upon the delivery of monitoring and maintenance services.
For transactions in which the Company retains ownership of the subscriber system asset fees for
monitoring and maintenance services are recognized on a straight-line basis over the contract term.
2009 Financials 89