ADT 2012 Annual Report Download - page 140

Revenue from the sale of services is recognized as services are rendered. Contractual fees for monitoring
and maintenance services are recognized on a straight-line basis over the contract term. Customer billings for
services not yet rendered are deferred and recognized as revenue as the services are rendered. The balance of
deferred revenue is included in current liabilities or long-term liabilities, as appropriate.
For transactions in which we retain ownership of the security system asset, referred to as subscriber system
assets, non-refundable fees (referred to as deferred subscriber acquisition revenue) received in connection with
the initiation of a monitoring contract, along with associated direct and incremental selling costs (referred to as
deferred subscriber acquisition costs), are deferred and amortized over the estimated life of the customer
relationship.
Sales of security monitoring systems may have multiple elements, including equipment, installation,
monitoring services and maintenance agreements. We assess our revenue arrangements to determine the
appropriate units of accounting. In certain circumstances, ownership of the system is contractually transferred to
the customer, in which case each deliverable provided under the arrangement is considered a separate unit of
accounting. Revenue associated with the sale of equipment and related installations is recognized once delivery,
installation and customer acceptance is completed, while the revenue for monitoring and maintenance services is
recognized on a straight-line basis over the contract term as services are rendered. Early termination of the
contract by the customer results in a termination charge in accordance with the customer contract, which is due
immediately following the termination date. We may refund up-front consideration and monitoring fees paid
during the six months following installation of a system in limited circumstances after all attempts to resolve
customer concerns have been exhausted. 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 is 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 nor 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.
Provisions for certain rebates and discounts to customers are accounted for as reductions in revenue in the
same period the related revenue is 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.
Depreciation and Amortization Methods for Security Monitoring-Related Assets
We classify assets related to the generation of new customers in two asset categories for purposes of
depreciation and amortization methods: internally generated residential subscriber systems (referred to as
subscriber system assets) and customer accounts generated through the ADT dealer program (referred to as
dealer intangibles). Subscriber system assets include installed property and equipment for which ADT retains
ownership and deferred costs directly related to the customer acquisition and system installation. We account for
subscriber system assets and any deferred costs and revenue resulting from the customer acquisition over the
expected life of the customer relationship. We account for subscriber system assets and related deferred costs and
revenue using pools, with separate pools for the components of subscriber system assets and any related deferred
costs and revenue based on the month and year of acquisition. We depreciate our pooled subscriber system assets
and related deferred costs and revenue using an accelerated method over 15 years.
We amortize intangible assets arising from the ADT dealer program in pools determined by the same month
and year of contract commencement on an accelerated basis over the expected life of the customer relationship of
15 years.
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