AbbVie 2012 Annual Report Download - page 76

Acquired In-Process Research and Development
The initial costs of rights to acquired in-process research and development (IPR&D) projects acquired
in an asset acquisition are expensed as IPR&D unless the project has an alternative future use. These
costs include initial payments incurred prior to regulatory approval in connection with research and
development collaboration agreements that provide rights to develop, manufacture, market and/or sell
pharmaceutical products. The fair value of IPR&D projects acquired in a business combination are
capitalized and accounted for as indefinite-lived intangible assets until the underlying project receives
regulatory approval, at which point the intangible asset will be accounted for as a definite-lived
intangible asset, or discontinuation, at which point the intangible asset will be written off. Development
costs incurred after the acquisition are expensed as incurred. Indefinite- and definite-lived assets are
subject to impairment reviews as discussed previously.
Foreign Currency Translation
Foreign subsidiary earnings are translated into U.S. dollars using average exchange rates. The net assets
of foreign subsidiaries are translated into U.S. dollars using current exchange rates. The U.S. dollar
effects that arise from translating the net assets of these subsidiaries at changing rates are recognized in
other comprehensive income (OCI). The net assets of subsidiaries in highly inflationary economies are
remeasured as if the functional currency were the reporting currency. The remeasurement is recognized
in earnings and is immaterial for all years presented.
Derivatives
All derivative instruments are recognized as either assets or liabilities at fair value in the combined
balance sheets and are classified as current or long-term based on the scheduled maturity of the
instrument. The accounting for changes in the fair value of a derivative instrument depends on whether
it has been formally designated and qualifies as part of a hedging relationship under the applicable
accounting standards and, further, on the type of hedging relationship.
For derivatives formally designated as hedges, the company assesses at inception and quarterly
thereafter, whether the hedging derivatives are highly effective in offsetting changes in the fair value or
cash flows of the hedged item. The changes in fair value of a derivative designated as a fair value
hedge and of the hedged item attributable to the hedge risk are recognized in earnings immediately.
Fair value hedges are used to hedge the interest rate risk associated with certain of the company’s
fixed-rate debt. The effective portions of changes in the fair value of a derivative designated as a cash
flow hedge are reported in AOCI and are subsequently recognized in earnings consistent with the
underlying hedged item. Cash flow hedges are used to manage exposures from changes in foreign
currency exchange rates.
The derivatives that are not designated and do not qualify as hedges are adjusted to fair value through
current earnings. If it is determined that a derivative is no longer highly effective as a hedge, the
company discontinues hedge accounting prospectively. Gains or losses are immediately reclassified from
AOCI to earnings relating to hedged forecasted transactions that are no longer probable of occurring.
Gains or losses relating to terminations of effective cash flow hedges in which the forecasted
transactions are still probable of occurring are deferred and recognized consistent with the income or
loss recognition of the underlying hedged items. Terminations of a fair value hedge result in a
cumulative fair value adjustment to the hedged items at the date of termination which is amortized to
earnings over the remaining term of the hedged item.
Derivatives, including those that are not designated as a hedge, are principally classified in the
operating section of the combined statements of cash flows, consistent with the underlying hedged item.
Refer to Note 8 for information regarding AbbVie’s derivative and hedging activities.
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