AbbVie 2014 Annual Report Download - page 74

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cash flows, risk, the cost of capital, and terminal values of 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. AbbVie first compares the 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 largely independent of the cash flows of other assets and liabilities.
Goodwill and indefinite-lived assets are not amortized but are subject to an impairment review
annually and more frequently when 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. Indefinite-lived
intangible assets, which consist of capitalized IPR&D, would occur if the fair value of the IPR&D intangible
asset is less than the carrying amount.
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. 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.
Based upon the company’s most recent annual impairment test performed in the third quarter of
2014, the company concluded goodwill was not impaired. In 2014, AbbVie recorded an impairment charge
of $37 million related to certain on-market product rights in Japan due to increased generic competition.
The charge was included in cost of products sold. In 2012, AbbVie recorded impairment charges of
$13 million for certain projects under development. These charges were included in R&D expense. There
were no impairment charges recorded in 2013.
Acquired In-Process Research and Development
The initial costs of rights to 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 period end exchange rates. The U.S. dollar effects
that arise from translating the net assets of these subsidiaries at changing rates are recognized in other
68 2014 Form 10-K