ADT 2014 Annual Report Download - page 119

FORM 10-K
deferred and amortized over the estimated life of the customer relationship. Transactions in which we transfer
ownership of the security system to the customer occur only in certain limited circumstances.
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.
Subscriber System Assets, Deferred Subscriber Customer Acquisition Costs and Dealer Intangibles
We record certain assets in connection with the acquisition of new customers depending on how the
accounts are generated: subscriber system assets and related deferred subscriber acquisition costs for customer
accounts generated internally, and dealer intangibles for customer accounts that are generated through the ADT
dealer program. Subscriber system assets represent capitalized equipment and installation costs incurred in
connection with transactions in which we retain ownership of the security system. Deferred subscriber
acquisition costs represent direct and incremental selling expenses (i.e. commissions) related to acquiring the
customer and do not exceed deferred subscriber acquisition revenue. Dealer intangibles represent contracts and
related customer relationships generated through the ADT dealer program which are recorded upon acquisition at
their contractually determined purchase price.
Dealer intangibles, subscriber system assets and related deferred subscriber acquisition costs and revenue
are accounted for using pools based on the month and year of customer acquisition. We amortize these pooled
assets using an accelerated method over the expected life of the customer relationship, which is 15 years. We
periodically perform lifing studies to estimate the expected life of the customer relationship and the attrition
pattern of our customers. The lifing studies are based on historical customer terminations and are used to
establish the amortization rates of our customer account pools in order to reflect the pattern of future benefit. The
results of the lifing studies indicate that we can expect attrition to be greatest in the initial years of asset life;
therefore, an accelerated method best matches the future amortization cost with the estimated revenue stream
from these customer pools.
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 are recorded at the date
of acquisition at their 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.
Goodwill
We assess goodwill for impairment annually and more frequently if events or changes in business
circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair
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