AbbVie 2014 Annual Report Download - page 57

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Litigation
The company is subject to contingencies, such as legal proceedings and claims, that arise in the normal
course of business. Refer to Note 14 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 within a probable range 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, 2014.
Valuation of Goodwill and Intangible Assets
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 consolidated financial statements for further
information.
Annually, the company tests its goodwill for impairment by first assessing qualitative factors to
determine whether it is more likely than not that the fair value is less than its carrying amount. Some of
the factors considered in the assessment include general macro-economic conditions, conditions specific to
the industry and market, cost factors, which could have a significant effect on earnings or cash flows, the
overall financial performance, and whether there have been sustained declines in the company’s share
price. If the company concludes it is more likely than not that the fair value of reporting unit is less than
its carrying amount, a quantitative impairment test is performed. AbbVie tests indefinite-lived intangible
assets using a quantitative impairment test.
For its quantitative impairment tests, the company uses an estimated future cash flow approach that
requires significant judgment with respect to future volume, revenue and expense growth rates, changes in
working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset
groupings, and other assumptions and estimates. The estimates and assumptions used are consistent with
the company’s business plans and a market participant’s views of a company and similar companies. The
use of alternative estimates and assumptions could increase or decrease the estimated fair value of the
assets, and potentially result in different impacts to the company’s results of operations. Actual results may
differ from the company’s estimates.
At December 31, 2014 and 2013, goodwill and intangible assets, net of amortization totaled $7.4 billion
and $8.2 billion, respectively, and amortization expense for intangible assets was $403 million, $509 million, and
$625 million in 2014, 2013 and 2012, respectively. There were no impairments of goodwill in 2014, 2013 or
2014 Form 10-K 51