AbbVie 2012 Annual Report Download - page 61

care cost trend rates. The discount rate is selected based on current market rates on high-quality, fixed-
income investments at December 31 each year. The expected long-term rate of return is based on the
asset allocation, historical performance and the current view of expected future returns. The health
care cost trend rate is selected by reviewing historical trends and current views on projected future
health care cost increases. The significant assumptions used in determining these calculations are
disclosed in Note 9 to the combined financial statements.
Income Taxes
In AbbVie’s combined financial statements, income tax expense and deferred tax balances have been
calculated on a separate tax return basis although AbbVie’s operations have historically been included
in the tax returns filed by the respective Abbott entities of which the AbbVie business was a part. In
the future, as a stand-alone company, AbbVie will file tax returns on its own behalf and its deferred
taxes and the effective tax rate may differ from those in the historical periods.
AbbVie and Abbott have entered into a tax sharing agreement effective on the date of separation,
January 1, 2013. For tax contingencies prior to the separation, Abbott will indemnify and hold AbbVie
harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will
not benefit if prior tax positions are resolved more favorably than recorded amounts.
Litigation
The company is subject to contingencies, such as legal proceedings and claims that arise in the normal
course of business. Refer to Note 12 for further information. Loss contingency provisions are recorded
for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a
minimum loss contingency amount is recorded. Accordingly, AbbVie is often initially unable to develop
a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded. As
information becomes known, either the minimum loss amount is increased, resulting in additional loss
provisions, or a best estimate can be made, also resulting in additional loss provisions. Occasionally, a
best estimate amount is changed to a lower amount when events result in an expectation of a more
favorable outcome than previously expected. There were no significant litigation reserves at
December 31, 2012.
Valuation of Intangible Assets and Goodwill
AbbVie has acquired and may continue to acquire significant intangible assets in connection with
business combinations that AbbVie records at fair value. Transactions involving the purchase or sale of
intangible assets occur with some frequency between companies in the pharmaceuticals industry and
valuations are usually based on a discounted cash flow analysis incorporating the stage of completion.
The discounted cash flow model requires assumptions about the timing and amount of future net cash
flows, risk, cost of capital, terminal values and market participants. Each of these factors can
significantly affect the value of the intangible asset. IPR&D acquired in a business combination is
capitalized as an indefinite-lived intangible asset until regulatory approval is obtained, at which time, it
is accounted for as a definite-lived asset and amortized over its estimated useful life. IPR&D acquired
in transactions that are not business combinations is expensed immediately, unless deemed to have an
alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized
and amortized over the remaining useful life.
AbbVie reviews the recoverability of definite-lived intangible assets whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. Goodwill and indefinite-
lived intangible assets, which relate to IPR&D, are reviewed for impairment annually or when an event
that could result in an impairment occurs. Refer to Note 2 to the combined financial statements for
further information.
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