ADT 2011 Annual Report Download - page 157

other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will
be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves
in light of changing facts and circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from our
current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate
assessment, an additional charge to expense would result. If payment of these amounts ultimately
proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer necessary.
Goodwill and Indefinite-Lived Intangible Asset Impairments—Goodwill and indefinite-lived intangible
assets are assessed for impairment annually and more frequently if triggering events occur. In
performing these assessments, management relies on various factors, including operating results,
business plans, economic projections including expectations and assumptions regarding the timing and
degree of any economic recovery, anticipated future cash flows, comparable market transactions (to the
extent available) and other market data.
We elected to make the first day of the fourth quarter the annual impairment assessment date for
all goodwill and indefinite-lived intangible assets. In the first step of the goodwill impairment test, we
compare the fair value of a reporting unit with its carrying amount. Fair value for the goodwill
impairment test is determined utilizing a discounted cash flow analysis based on forecast cash flows
(including estimated underlying revenue and operating income growth rates) discounted using an
estimated weighted-average cost of capital for market participants. A market approach, utilizing
observable market data such as comparable companies in similar lines of business that are publicly
traded or which are part of a public or private transaction (to the extent available), is used to
corroborate the discounted cash flow analysis performed at each reporting unit. If the carrying amount
of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and further tests
are performed to measure the amount of impairment loss. In the second step of the goodwill
impairment test, we compare the implied fair value of a reporting unit’s goodwill with the carrying
amount of the reporting unit’s goodwill. If the carrying amount of a reporting unit’s goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the
excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill
is determined in the same manner that the amount of goodwill recognized in a business combination is
determined. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit,
including intangible assets, as if the reporting unit had been acquired in a business combination. Any
excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities
represents the implied fair value of goodwill.
We recorded no goodwill impairments in conjunction with our annual goodwill impairment
assessment performed during the fourth quarter of fiscal 2011. Additionally, we determined as part of
the assessment that our Water and Environmental Systems reporting unit within our Flow Control
segment had limited recoverability of goodwill. The fair value of the reporting unit exceeded its
carrying value by 6.9%. As of September 30, 2011, the Water and Environmental Systems goodwill
balance was $298 million. While historical performance and current expectations have resulted in fair
values of goodwill in excess of carrying values, if our assumptions are not realized, it is possible that in
the future an impairment charge may need to be recorded. However, it is not possible at this time to
determine if an impairment charge would result or if such a charge would be material. The Company
will continue to monitor the recoverability of its goodwill.
Fair value determinations require considerable judgment and are sensitive to changes in underlying
assumptions and factors. As a result, there can be no assurance that the estimates and assumptions
made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the
future. Examples of events or circumstances that could reasonably be expected to negatively affect the
54 2011 Financials