ADT 2013 Annual Report Download - page 115

FORM 10-K
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. In certain limited 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. For contracts that have multiple elements, including equipment, installation, monitoring services and
maintenance agreements, consideration is allocated to the units of accounting based on their relative selling price,
subject to the requirement that revenue recognized is limited to the amounts already received from the customer
that are not contingent upon the delivery of monitoring and maintenance services in the future.
Early termination of the contract by the customer results in a termination charge in accordance with the
customer contract, which is recognized when collectability is reasonably assured. Provisions for certain rebates,
refunds and discounts to customers are accounted for as reductions in revenue in the same period the related
revenue is recorded based on sales terms, historical experience and trend analysis. Refunds occur in limited
circumstances and only after all attempts to resolve customer concerns have been exhausted.
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 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.
Loss Contingencies
We record accruals for various contingencies including legal proceedings and other claims that arise in the
normal course of business. The accruals are based on judgment, the probability of losses and, where applicable,
the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. We
record an accrual when a loss is deemed probable to occur and is reasonably estimable. Additionally, we record
insurance recovery receivables from third-party insurers when recovery has been determined to be probable.
Acquisitions
We account for acquired businesses using the purchase method of accounting. Under the purchase method,
our Consolidated and Combined Financial Statements reflect the operations of an acquired business starting from
the completion of the acquisition. In addition, the assets acquired and liabilities assumed must be recorded at the
date of acquisition at their respective estimated fair values, with any excess of the purchase price over the
estimated fair values of the net assets acquired recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their
respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for
significant items. The fair value estimates are based on available historical information and on future
expectations and assumptions deemed reasonable by management, but are inherently uncertain.
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