Amgen 2001 Annual Report Download - page 40

AMGEN 2001 ANNUAL REPORT
Company’s sales to its customers, as adjusted for any
spillover sales. The Company is employing an arbitrated
audit methodology to measure each party’s spillover
sales based on estimates of and subsequent adjustments
thereto of third-party data on shipments to end users
and their usage. Sales of the Company’s other products
are recognized when shipped and title has passed.
Research and development costs
Research and development expenses are comprised of the
following types of costs incurred in performing research
and development activities: salaries and benefits, allo-
cated overhead and occupancy costs, clinical trial and
related clinical manufacturing costs, contract services
and other outside costs, and costs to acquire in-process
research and development projects and technologies
which have no alternative future use (see Note 11,
“Kinetix acquisition”). Research and development
expenses also include such costs related to activities per-
formed on behalf of corporate partners. Research and
development costs are expensed as incurred.
Derivative instruments
The Company adopted SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as
amended, on January 1, 2001 and its adoption has not
had a material effect on the Company’s financial state-
ments. SFAS No. 133 requires companies to recognize all
of its derivative instruments as either assets or liabilities
in the balance sheet at fair value. The accounting for
changes in the fair value (i.e., unrealized gains or losses)
of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging rela-
tionship and further, on the type of hedging relationship.
Derivatives that are not hedges must be adjusted to fair
value through current earnings.
To protect against possible changes in values of
certain anticipated foreign currency cash flows, primarily
resulting from sales outside the U.S., the Company enters
into foreign currency forward contracts which qualify
and are designated as cash flow hedges. These foreign
currency forward contracts cover anticipated foreign cur-
rency cash flows for up to the succeeding twelve months.
No portions of these foreign currency forward contracts
are excluded from the assessment of hedge effectiveness,
and there are no ineffective portions of these hedging
instruments. The gains and losses on these forward con-
tracts are reported as a component of other comprehen-
sive income and reclassified into interest and other income,
net in the same periods during which the hedged transac-
tions affect earnings. At December 31, 2001, amounts
in accumulated other comprehensive income related to
cash flow hedges were not material.
To protect against possible reductions in value of
certain of its available-for-sale marketable equity securities,
the Company has entered into equity forward contracts
during 2001 which qualify and are designated as fair
value hedges. The gains and losses on these forward con-
tracts as well as the offsetting losses and gains on the
hedged equity securities are recognized in interest and
other income, net in the current period. During the year
ended December 31, 2001, gains and losses on the por-
tions of these forwards excluded from the assessment of
hedge effectiveness and the ineffective portions of these
hedging instruments were not material. In addition, to
protect against possible reductions in value of certain
available-for-sale fixed income investments, the Company
entered into interest rate swap agreements during 2001
which qualify and are designated as fair value hedges.
The terms of the interest rate swap agreements corre-
spond to the related hedged investments. As a result,
there is no hedge ineffectiveness. During the year ended
December 31, 2001, gains and losses on these interest
rate swap agreements were fully offset by the losses and
gains on the hedged investments.
The Company has additional foreign currency
forward contracts to reduce exposures to foreign currency
fluctuations of certain assets and liabilities denominated
in foreign currencies. However, these contracts have
not been designated as hedges under SFAS No. 133.
Accordingly, gains and losses on these foreign currency
forward contracts are recognized in interest and other
income, net in the current period. During the year ended
December 31, 2001, gains and losses on these foreign
currency forward contracts were not material.
Prior to the adoption of SFAS No. 133, all of the
Company’s foreign exchange forward contracts were
adjusted to fair value through current earnings. Foreign
exchange option contracts that hedged anticipated for-
eign currency transactions were deferred and recognized
in the same period as the hedged transaction. In addition,
derivatives that hedged against possible reductions in the
fair values of available-for-sale equity securities were
included in the basis of the hedged securities and adjusted
to fair value through other comprehensive income.
Interest
Interest costs are expensed as incurred, except to the
extent such interest is related to construction in progress,
in which case interest is capitalized. Interest costs capi-
talized for the years ended December 31, 2001, 2000, and
1999, were $12.7 million, $12.3 million, and $11.6 mil-
lion, respectively.
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