ADT 2011 Annual Report Download - page 188

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
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 (including legal,
environmental and asbestos reserves), insurance reserves, net realizable value of inventories, fair values
of financial instruments, estimated contract revenue and related costs, 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 a hierarchy of estimated selling price
for the deliverables. The selling price used for each deliverable will be based on Vendor Specific
Objective Evidence (‘‘VSOE’’) if available, Third Party Evidence (‘‘TPE’’) if VSOE is not available, or
estimated selling price if neither VSOE or TPE is available. Revenue recognized for equipment and
installation is limited to the lesser of their allocated amounts under the estimated selling price
hierarchy 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.
Non-refundable fees received in connection with the initiation of a monitoring contract, along with
associated direct and incremental selling costs, are deferred and amortized over the estimated life of
the customer relationship.
2011 Financials 85