ADT 2010 Annual Report Download - page 173

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
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 same month and year of contract acquisition on an accelerated basis over the period
and pattern of economic benefit that is expected to be obtained from the customer relationship.
The estimated useful life of dealer intangibles in geographical areas comprising approximately 90%
of the net carrying value of dealer intangibles is 15 years. The Company amortizes dealer intangible
assets on an accelerated basis. Other contracts and related customer relationships, as well as intellectual
property consisting primarily of patents, trademarks, copyrights and unpatented technology, are
amortized on a straight-line basis over 4 to 40 years. The Company evaluates the amortization methods
and remaining useful lives of intangible assets on a periodic basis to determine whether events and
circumstances warrant a revision to the amortization method or remaining useful lives.
Investments—The Company invests in debt and equity securities. Long-term investments in
marketable equity securities that represent less than twenty percent ownership are marked to market at
the end of each accounting period. Unrealized gains and losses are credited or charged to accumulated
other comprehensive loss within shareholders’ equity for available for sale securities unless an
unrealized loss is deemed to be other than temporary, in which case such loss is charged to earnings.
Management determines the proper classification of investments in debt obligations with fixed
maturities and equity securities for which there is a readily determinable market value at the time of
purchase and reevaluates such classifications as of each balance sheet date. Realized gains and losses
on sales of investments are included in the Consolidated Statements of Operations.
Other equity investments for which the Company does not have the ability to exercise significant
influence and for which there is not a readily determinable market value are accounted for under the
cost method of accounting. Each reporting period, the Company evaluates the carrying value of its
investments accounted for under the cost method of accounting, such that they are recorded at the
lower of cost or estimated net realizable value. For equity investments in which the Company exerts
significant influence over operating and financial policies but does not control, the equity method of
accounting is used. The Company’s share of net income or losses of equity investments is included in
the Consolidated Statements of Operations and was not material in any period presented.
Product Warranty—The Company records estimated product warranty costs at the time of sale.
Products are warranted against defects in material and workmanship when properly used for their
intended purpose, installed correctly, and appropriately maintained. Generally, product warranties are
implicit in the sale; however, the customer may purchase an extended warranty. However, in most
instances the warranty is either negotiated in the contract or sold as a separate component. Warranty
period terms range from 90 days up to 15 years. The warranty liability is determined based on historical
information such as past experience, product failure rates or number of units repaired, estimated cost
of material and labor, and in certain instances estimated property damage.
2010 Financials 85