AbbVie 2012 Annual Report Download - page 75

Product Liability
AbbVie accrues for product liability claims, on an undiscounted basis, when it is probable that a
liability has been incurred and the amount of the liability can be reasonably estimated based on existing
information. The liabilities are adjusted quarterly as additional information becomes available.
Receivables for insurance recoveries for product liability claims are recorded as assets, on an
undiscounted basis, when it is probable that a recovery will be realized.
Business Combinations
Results of operations of acquired companies are included in AbbVie’s results of operations as of the
respective acquisition dates. Assets acquired and liabilities assumed are recognized at the date of
acquisition at their respective fair values. Any excess of the purchase price over the estimated fair
values of the net assets acquired is recognized as goodwill. Contingent consideration is recognized at
the estimated fair value on the acquisition date, which is determined by utilizing a probability weighted
discounted cash flow model. Subsequent changes to the fair value of contingent payments are
recognized in earnings. The allocation of purchase price in certain cases may be subject to revision
based on the final determination of fair value. Legal costs, audit fees, business valuation costs and all
other business acquisition costs are expensed when incurred.
Goodwill and Intangible Assets
Purchased intangible assets are recorded at fair value using a discounted cash flow model. The
discounted cash flow model requires assumptions about the timing and amount of future net cash
flows, risk, the cost of capital, terminal values and market participants. Definite-lived intangibles are
amortized over their estimated useful lives. 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. Impairment is reviewed by comparing projected undiscounted cash flows to be
generated by the asset to its carrying value. If the undiscounted cash flows of an intangible asset are
less than the carrying value of an intangible asset, the intangible asset is written down to its fair value,
which is usually the discounted cash flow amount and a loss is recorded equal to the excess of the
asset’s net carrying value over its fair value. Where cash flows cannot be identified for an individual
asset, the review is applied at the lowest level for which cash flows are identifiable.
Goodwill and indefinite-lived assets are not amortized but are subject to an impairment review annually
and whenever indicators of impairment exist. An impairment of goodwill would occur if the carrying
amount of a reporting unit exceeded the fair value of that reporting unit, calculated using a weighting
of the income approach and the market approach. The fair value under the income approach is
calculated as the present value of estimated cash flows discounted using a risk-free market rate
adjusted for a market participant’s view of similar companies and perceived risks in cash flows. The fair
value under the market approach is calculated using market multiples for peer groups applied to the
operating results of the reporting units to determine fair value. The implied fair value of goodwill is
then determined by subtracting the fair value of all identifiable net assets other than goodwill from the
fair value of the reporting units, with an impairment charge recorded for the excess, if any, of the
carrying amount of goodwill over the implied fair value. Based on the company’s most recent annual
impairment test performed in the third quarter, the fair value of the reporting units was substantially in
excess of their carrying value.
Indefinite-lived assets are tested for impairment by comparing the fair value of each intangible asset
with its carrying value. The value of indefinite-lived is based on the present value of projected cash
flows using an income approach. If the carrying value exceeds fair value, the intangible asset is
considered impaired and is reduced to fair value.
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