Eli Lilly 2004 Annual Report Download - page 34

FINANCIALS
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Revenue recognition: We recognize revenue from sales of products at the time title of goods passes to the buyer
and the buyer assumes the risks and rewards of ownership. This is generally at the time products are shipped to the
customer. Provisions for discounts and rebates to customers are established in the same period the related sales are
recorded. Revenue from copromotion services (primarily Actos) is based upon net sales reported by our copromotion
partner and, if applicable, the number of sales calls we perform. We immediately recognize the full amount of mile-
stone payments due us upon the achievement of the milestone event if the event is substantive, objectively deter-
minable, and represents an important point in the development life cycle of the pharmaceutical product. Milestone
payments earned by us are generally recorded in other income-net. Initial fees we receive from the partnering of our
compounds under development are amortized through the expected product approval date. Initial fees received from
out-licensing agreements that include both the sale of marketing rights to our commercialized products and a related
commitment to supply the products are generally recognized as net sales over the term of the supply agreement.
Research and development: We recognize as incurred the cost of directly acquiring assets to be used in the
research and development process that have not yet received regulatory approval for marketing and for which no
alternative future use has been identifi ed. If the product has obtained regulatory approval, we generally capitalize
the milestones paid and amortize them over the period benefi ted. Milestones paid prior to regulatory approval of
the product are generally expensed when the event requiring payment of the milestone occurs.
Income taxes: Deferred taxes are recognized for the future tax effects of temporary differences between fi nancial
and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of
the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. See Note 11
regarding the 2004 tax expense associated with the expected repatriation of earnings reinvested outside the U.S.
pursuant to the American Job Creations Act.
Earnings per share: We calculate basic earnings per share based on the weighted-average number of outstanding
common shares and incremental shares. We calculate diluted earnings per share based on the weighted-average
number of outstanding common shares plus the effect of dilutive stock options and other incremental shares.
Stock-based compensation:
As discussed further in Note 7, we elected to follow Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock op-
tions and performance awards. Under APB 25, because the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no compensation expense is recognized. However, SFAS
123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensa-
tion-Transition and Disclosure, requires us to present pro forma information as if we had accounted for our employ-
ee stock options and performance awards under the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the options and performance awards at the date of the grant is amortized to
expense over the vesting period. The following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
2004 2003 2002
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,810.1 $2,560.8 $2,707.9
Add: Compensation expense for stock-based
performance awards included in reported net income,
net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.5 — —
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects . . . . . . . . . . . . . . . . . . . . . (294.2) (210.8) (307.2)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,550.4 $2,350.0 $2,400.7
Earnings per share:
Basic, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 $2.38 $2.51
Basic, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.43 $2.18 $2.23
Diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.66 $2.37 $2.50
Diluted, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.42 $2.17 $2.21
As discussed more fully in Note 2, we plan to adopt SFAS 123(R) effective January 1, 2005.