Amgen 2012 Annual Report Download - page 107

F-8
in the form of non-refundable upfront license payments, R&D and commercial performance milestone payments, cost sharing
and/or royalty payments.
Effective January 1, 2011, we adopted a new accounting standard that amends the guidance on the accounting for arrangements
involving the delivery of more than one element. Pursuant to the new standard, each required deliverable is evaluated to determine
whether it qualifies as a separate unit of accounting. For Amgen this determination is generally based on whether the deliverable
has “stand-alone value” to the customer. The arrangement’s consideration that is fixed and determinable is then allocated to each
separate units of accounting based on the relative selling price of each deliverable. The estimated selling price of each deliverable
is determined using the following hierarchy of values: (i) vendor-specific objective evidence of fair value, (ii) third-party evidence
of selling price (TPE) and (iii) best estimate of selling price (BESP). The BESP reflects our best estimate of what the selling price
would be if the deliverable was regularly sold by us on a stand-alone basis. In most cases we expect to use TPE or BESP for
allocating consideration to each deliverable. In general, the consideration allocated to each unit of accounting is recognized as
the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. The Company
adopted this new accounting standard on a prospective basis for all multiple-deliverable revenue arrangements (MDRAs) entered
into on or after January 1, 2011, and for any MDRAs that were entered into prior to January 1, 2011, but materially modified on
or after that date. Had the standard been adopted January 1, 2010, the impact on our consolidated financial statements would have
been immaterial.
For MDRAs entered into prior to January 1, 2011, and not materially modified thereafter, we continue to apply our prior
accounting policy with respect to such arrangements. Under this policy, in general, revenue from non-refundable, up-front fees
related to intellectual property rights/licenses where we have continuing involvement is recognized ratably over the estimated
period of ongoing involvement. In general, the consideration with respect to the other deliverables is recognized when the goods
or services are delivered.
Under all of our MDRAs, consideration associated with at-risk substantive performance milestones is recognized as revenue
upon the achievement of the related milestone, as defined in the respective contracts.
Research and development costs
R&D costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; facilities and
overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems’
costs and amortization of acquired technology used in R&D with alternative future uses. R&D expenses also include costs and
cost recoveries associated with third-party R&D arrangements such as with K-A, including upfront fees and milestones paid to
third parties in connection with technologies which had not reached technological feasibility and did not have an alternative future
use. Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the
cost recovery. See Note 6, Collaborative arrangements, and Note 7, Related party transactions.
Selling, general and administrative costs
Selling, general and administrative (SG&A) expenses are comprised primarily of salaries, benefits and other staff-related
costs associated with sales and marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside
marketing, advertising and legal expenses; and other general and administrative costs. Advertising costs are expensed as incurred.
SG&A expenses also include costs and cost recoveries associated with marketing and promotion efforts under certain collaboration
arrangements. Net payment or reimbursement of SG&A costs is recognized when the obligations are incurred or we become entitled
to the cost recovery. See Note 6, Collaborative arrangements.
Beginning January 1, 2011, SG&A expenses also include amortization of the annual fee mandated by the Patient Protection
and Affordable Care Act and the companion Health Care and Education Reconciliation Act (the U.S. healthcare reform federal
excise fee). The liability for the annual U.S. healthcare reform federal excise fee is estimated and recorded in full upon the first
qualifying sale of our covered products with a corresponding deferred cost established that is amortized on a straight-line basis
over the calendar year that it is payable.
Stock-based compensation
We have stock-based compensation plans under which various types of equity-based awards are granted, including restricted
stock units (RSUs), performance units and stock options. The estimated fair values of RSUs and stock option awards which are
subject only to service conditions with graded vesting are generally recognized as compensation expense on a straight-line basis
over the service period. The estimated fair values of performance unit awards are generally recognized as compensation expense
as the awards vest ratably from the grant date to the end of the performance period. See Note 3, Stock-based compensation.