AbbVie 2014 Annual Report Download - page 71

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Collaborations and Other Arrangements
The company enters into collaborative agreements with third parties to develop and commercialize
drug candidates. Collaborative activities may include joint research and development and commercialization
of new products. AbbVie generally receives certain licensing rights under these arrangements. These
collaborations often require upfront payments and may include additional milestone, research and
development cost sharing, royalty or profit share payments, contingent upon the occurrence of certain
future events linked to the success of the asset in development and commercialization. Upfront payments
associated with collaborative arrangements during the development stage are expensed to acquired
in-process research and development (IPR&D). Subsequent payments made to the partner for the
achievement of milestones during the development stage are expensed to R&D when the milestone is
achieved. Milestone payments made to the partner subsequent to regulatory approval are capitalized as
intangible assets and amortized to cost of products sold over the estimated useful life of the related asset.
Royalties are expensed as cost of products sold when incurred.
Advertising
Costs associated with advertising are expensed as incurred and are included in SG&A in AbbVie’s
consolidated statements of earnings. Advertising expenses were $665 million, $626 million, and $506 million
in 2014, 2013 and 2012, respectively.
Pension and Post-Employment Benefits
AbbVie records annual expenses relating to its defined benefit pension and other post-employment
plans based on calculations which include various actuarial assumptions, including discount rates, assumed
asset rates of return, compensation increases, turnover rates and health care cost trend rates. AbbVie
reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on
current rates and trends. Actuarial losses and gains are amortized over the remaining service attribution
periods of the employees under the corridor method, in accordance with the rules for accounting for
post-employment benefits. Differences between the expected long-term return on plan assets and the
actual annual return are amortized to net period benefit cost over a five-year period.
Prior to separation, AbbVie employees participated in certain defined benefit pension and other
post-employment plans sponsored by Abbott, which included participants of Abbott’s other businesses.
Such plans were accounted for as multiemployer plans in AbbVie’s historical combined financial statements
as of and for the year ended December 31, 2012. As a result, no asset or liability was recorded by AbbVie
in the historical combined balance sheets to recognize the funded status of these plans. In 2013,
subsequent to the separation from Abbott, AbbVie’s portion of the defined benefit pension plans was
separated from the Abbott defined benefit pension plans using a December 31, 2012 measurement date.
As a result, the funded status for each plan is reflected in AbbVie’s consolidated balance sheets as of
December 31, 2014 and 2013. AbbVie is the sole sponsor for certain defined benefit pension and other
post-employment plans. The funded status of these plans was recorded in AbbVie’s combined balance sheet
at December 31, 2012 and the consolidated balance sheets at December 31, 2014 and 2013.
Refer to Note 11 for information regarding AbbVie’s pension and post-employment plans.
Income Taxes
Income taxes are accounted for under the asset and liability method. Provisions for federal, state and
foreign income taxes are calculated on reported pretax earnings based on current tax laws. Deferred taxes
are provided using enacted tax rates on the future tax consequences of temporary differences, which are
the differences between the financial statement carrying amount of assets and liabilities and their
respective tax bases and the tax benefits of carryforwards. A valuation allowance is established or
2014 Form 10-K 65