ADT 2010 Annual Report Download - page 270

TYCO INTERNATIONAL LTD.
NOTES TO THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 2010
(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
inception of the hedge and are expected to remain highly effective over the life of the hedge
contract. All derivative financial instruments are reported on the balance sheets at fair value.
Derivatives used to economically hedge foreign currency denominated balance sheet items are
reported in foreign currency exchange results along with offsetting transaction gains and losses on
the items being hedged. Instruments that do not qualify for hedge accounting are marked to
market with changes recognized in current earnings.
e) Other liabilities
Other liabilities primarily represent the fair value of the guarantees and indemnifications under a
Tax Sharing Agreement. See Note 3.
3. GUARANTEES
Tyco International Ltd. fully and unconditionally guarantees public debt facilities of approximately
CHF 4.1 billion and CHF 4.3 billion as of September 24, 2010 and September 25, 2009, respectively,
issued by Tyco International Finance S.A. (TIFSA), a subsidiary of the Company. Additionally, Tyco
International Ltd. is a co-obligor under TIFSA’s indentures dated as of June 9, 1998 and November 12,
2003.
Effective June 29, 2007, Tyco completed the spin-offs of Covidien Plc. (Covidien) and Tyco
Electronics Ltd. (Tyco Electronics), formerly the Healthcare and Electronics businesses, respectively,
into separate, publicly traded companies (the ‘‘Separation’’) in the form of a distribution to Tyco
shareholders. There are certain guarantees or indemnifications extended among Tyco, Covidien and
Tyco Electronics in accordance with the terms of the Separation and Distribution Agreement and the
Tax Sharing Agreement. The guarantees primarily relate to certain contingent tax liabilities included in
the Tax Sharing Agreement. At the time of the separation, Tyco recorded a liability necessary to
recognize the fair value of such guarantees and indemnifications. In the absence of observable
transactions for identical or similar guarantees, the Company determined the fair value of these
guarantees and indemnifications utilizing expected present value measurement techniques. Significant
assumptions utilized to determine fair value included determining a range of potential outcomes,
assigning a probability weighting to each potential outcome and estimating the anticipated timing of
resolution. The probability weighted outcomes were discounted using the Company’s incremental
borrowing rate. The liability necessary to reflect the fair value of the guarantees and indemnifications
under the Tax Sharing Agreement is CHF 546,299,418 (of which CHF 153,523,360 is included in
accrued and other current liabilities and the remaining amount in other non-current liabilities) on the
Company’s balance sheet as of September 24, 2010. The liability was CHF 568,902,574 as of
September 25, 2009, which was recorded in other non-current liabilities on the balance sheet. During
2010, the Company reclassified CHF 153,523,360 from other non-current liabilities to accrued and
other current liabilities as it expects to make a payment within the next twelve months to Covidien and
Tyco Electronics related to resolution of certain IRS audit matters. The guarantees primarily relate to
certain contingent tax liabilities included in the Tax Sharing Agreement.
In addition, Tyco historically provided support in the form of financial and/or performance
guarantees to various Covidien and Tyco Electronics operating entities. In connection with the
separation, the Company worked with the guarantee counterparties to cancel or assign these guarantees
to Covidien or Tyco Electronics. To the extent these guarantees were not assigned prior to the
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