ADT 2012 Annual Report Download - page 159

Property and Equipment, Net—Property and equipment, net is recorded at cost less accumulated
depreciation. Depreciation expense for 2012, 2011 and 2010 was $38 million, $35 million and $28 million,
respectively. Maintenance and repair expenditures are charged to expense when incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the related assets as follows:
Buildings and related improvements Up to 40 years
Leasehold improvements Lesser of remaining term of the lease or economic
useful life
Other machinery, equipment and furniture and fixtures 1 to 14 years
Subscriber System Assets and Related Deferred Costs and Deferred Revenue—Subscriber system assets, net
are recorded at cost less accumulated depreciation. Accumulated depreciation of subscriber system assets was
$2,080 million and $1,821 million as of September 28, 2012 and September 30, 2011, respectively. Depreciation
expense relating to subscriber system assets for 2012, 2011 and 2010 was $287 million, $272 million and $209
million, respectively. The Company considers security system assets related to its electronic security business in
two asset categories: internally generated subscriber systems (referred to as subscriber system assets) and
customer accounts generated through the ADT dealer program (referred to as dealer intangibles, as further
described in the Dealer and Other Amortizable Intangible Assets, Net section below). Subscriber system assets
include installed property and equipment for which the Company retains ownership and deferred costs directly
related to the customer acquisition and system installation. Subscriber system assets represent capitalized
equipment (e.g. security control panels, touchpad, motion detectors, window sensors, and other equipment) and
installation costs incurred to prepare the asset for its intended use. The Company pays property taxes on the
subscriber system assets and upon customer termination, may retrieve such assets. These assets embody a
probable future economic benefit as they generate future monitoring revenue for the Company.
Deferred subscriber acquisition costs, net associated with subscriber system assets represent direct and
incremental selling expenses (i.e. commissions) related to acquiring the customer. Commissions related to
up-front consideration paid by customers in connection with the establishment of the monitoring arrangement are
determined based on a percentage of the up-front fees and do not exceed deferred revenue. Amortization expense
relating to deferred subscriber acquisition costs for 2012, 2011 and 2010 was $111 million, $102 million and $98
million, respectively.
Subscriber system assets and any deferred costs and revenue resulting from the customer acquisition are
accounted for over the expected life of the customer relationship. The Company accounts for subscriber system
assets and related deferred costs and deferred revenue using pools, with separate pools for the components of
subscriber system assets and any related deferred costs and deferred revenue based on the same month and year
of acquisition. The Company depreciates its pooled subscriber system assets and related deferred costs and
deferred revenue using an accelerated method over 15 years. In order to align the depreciation of these assets to
the pattern in which their economic benefits are consumed, the accelerated method utilizes an average declining
balance rate of 240% and converts to a straight-line methodology when the resulting depreciation charge is
greater than that from the accelerated method, resulting in an average depreciation of 58% of the pool within the
first five years, 25% within the second five years and 17% within the final five years.
Dealer and Other Amortizable Intangible Assets, Net—Intangible assets primarily include contracts and
related customer relationships. Certain contracts and related customer relationships are generated from an
external network of independent dealers who operate under the ADT dealer program. These contracts and related
customer relationships are recorded at their contractually determined purchase price. During the initial period of
the customer contract, generally twelve to fifteen months, any cancellation of monitoring service, including those
that result from customer payment delinquencies, results in a chargeback by the Company to the dealer for the
full amount of the contract purchase price. The Company records the amount charged back to the dealer as a
reduction of the intangible assets.
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