Eli Lilly 2008 Annual Report Download - page 27

FINANCIALS
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arrangements often give us the discretion to unilater-
ally terminate development of the product, which would
allow us to avoid making the contingent payments; how-
ever, we are unlikely to cease development if the com-
pound successfully achieves clinical testing objectives.
We also note that, from a business perspective, we view
these payments as positive because they signify that the
product is successfully moving through development
and is now generating or is more likely to generate cash
fl ows from sales of products.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
In preparing our fi nancial statements in accordance
with generally accepted accounting principles (GAAP),
we must often make estimates and assumptions that
affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. Some
of those judgments can be subjective and complex,
and consequently actual results could differ from
those estimates. For any given individual estimate or
assumption we make, it is possible that other people
applying reasonable judgment to the same facts and
circumstances could develop different estimates. We
believe that, given current facts and circumstances,
it is unlikely that applying any such other reasonable
Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):
Payments Due by Period
Less Than 1–3 3–5 More Than
Total 1 Year Years Years 5 Years
Long-term debt, including interest
payments1 . . . . . . . . . . . . . . . . . . . . $ 8,205.5 $ 595.8 $ 387.0 $ 881.2 $6,341.5
Capital lease obligations. . . . . . . . . . . 41.3 13.1 17.0 5.2 6.0
Operating leases . . . . . . . . . . . . . . . . . 335.3 90.8 141.4 73.6 29.5
Purchase obligations2 . . . . . . . . . . . . . 7,923.0 5,976.3 723.5 388.5 834.7
Other long-term liabilities
refl ected on our balance sheet3 . . 1,088.8 — 316.7 185.0 587.1
Other4 . . . . . . . . . . . . . . . . . . . . . . . . . . 157.1 157.1 — — —
Total . . . . . . . . . . . . . . . . . . . . . . . . . $17,751.0 $6,833.1 $1,585.6 $1,533.5 $7,798.8
1Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the
interest rate forward curve at December 31, 2008 to compute the amount of the contractual obligation for interest on the variable rate
debt instruments and swaps.
2We have included the following:
• Purchase obligations, consisting primarily of all open purchase orders at our signifi cant operating locations as of December 31,
2008. Some of these purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished
between cancelable and noncancelable purchase obligations.
• Contractual payment obligations with each of our signifi cant vendors, which are noncancelable and are not contingent.
3We have included long-term liabilities consisting primarily of our nonqualifi ed supplemental pension funding requirements and
deferred compensation liabilities. We excluded liabilities for unrecognized tax benefi ts of $906.2 million, as we cannot reasonably
estimate the timing of future cash outfl ows associated with those liabilities.
4This category comprises primarily minimum pension funding requirements.
The contractual obligations table is current as of December 31, 2008. We expect the amount of these obligations
to change materially over time as new contracts are initiated and existing contracts are completed, terminated,
or modifi ed.
judgment would cause a material adverse effect on our
consolidated results of operations, fi nancial position,
or liquidity for the periods presented in this report. Our
most critical accounting policies have been discussed
with our audit committee and are described below.
Revenue Recognition and Sales Return, Rebate, and
Discount Accruals
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. For more than
90 percent of our sales, this is at the time products are
shipped to the customer, typically a wholesale distribu-
tor or a major retail chain. The remaining sales, which
are outside the U.S., are recorded at the point of delivery.
Provisions for returns, rebates, and discounts are estab-
lished in the same period the related sales are recorded.
We regularly review the supply levels of our sig-
nifi cant products sold to major wholesalers in the U.S.
and in major markets outside the U.S., primarily by
reviewing periodic inventory reports supplied by our
major wholesalers and available prescription volume
information for our products, or alternative approaches.
We attempt to maintain wholesaler inventory levels at
an average of approximately one month or less on a
consistent basis across our product portfolio. Causes