ADT 2011 Annual Report Download - page 156

over the past five years, and a projection which covers claims expected to be filed, including related
defense costs, over the next seven years on an undiscounted basis. Due to the high degree of
uncertainty regarding the pattern and length of time over which claims will be made and then settled or
litigated, we use multiple estimation methodologies based on varying scenarios of potential outcomes to
estimate the range of loss. We have concluded that estimating the liability beyond the seven year period
will not provide a reasonable estimate, as these uncertainties increase significantly as the projection
period lengthens.
In connection with the recognition of liabilities for asbestos-related matters, we record asbestos-
related insurance recoveries that are probable. The estimate of asbestos-related insurance recoveries
represents estimated amounts due to us for previously paid and settled claims and the probable
reimbursements relating to estimated liability for pending and future claims. In determining the amount
of insurance recoverable, we consider available insurance, allocation methodologies, solvency and
creditworthiness of the insurers.
Annually, we perform a detailed analysis with the assistance of outside legal counsel and other
experts to review and update as appropriate the underlying assumptions used in the estimated asbestos-
related assets and liabilities. On a quarterly basis, we re-evaluate the assumptions used to perform the
annual analysis and record an expense as necessary to reflect changes in the estimated liability and
related insurance asset. See Note 15 to the Consolidated Financial Statements for a discussion of
management’s judgments applied in the recognition and measurement of asbestos-related assets and
liabilities.
Income Taxes—In determining taxable income for financial statement purposes, we must make
certain estimates and judgments. These estimates and judgments affect the calculation of certain tax
liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise
from temporary differences between the tax and financial statement recognition of revenue and
expense.
In evaluating our ability to recover our deferred tax assets we consider all available positive and
negative evidence including our past operating results, the existence of cumulative losses in the most
recent years and our forecast of future taxable income. In estimating future taxable income, we develop
assumptions including the amount of future pre-tax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax planning strategies. These assumptions
require significant judgment about the forecasts of future taxable income and are consistent with the
plans and estimates we are using to manage the underlying businesses.
We currently have recorded valuation allowances that we will maintain until it is
more-likely-than-not the deferred tax assets will be realized. Our income tax expense recorded in the
future may be reduced to the extent of decreases in our valuation allowances. The realization of our
remaining deferred tax assets is primarily dependent on future taxable income in the appropriate
jurisdiction. Any reduction in future taxable income including but not limited to any future
restructuring activities may require that we record an additional valuation allowance against our
deferred tax assets. An increase in the valuation allowance could result in additional income tax
expense in such period and could have a significant impact on our future earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the
future. Management records the affect of a tax rate or law change on the Company’s deferred tax
assets and liabilities in the period of enactment. Future tax rate or law changes could have a material
effect on the Company’s financial condition, results of operations or cash flows.
In addition, 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
2011 Financials 53