Eli Lilly 2008 Annual Report Download - page 29

FINANCIALS
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other contingent liability amounts include the merits and
jurisdiction of the litigation, the nature and the number
of other similar current and past litigation cases, the
nature of the product and the current assessment of
the science subject to the litigation, and the likelihood
of settlement and current state of settlement discus-
sions, if any. In addition, we accrue for certain product
liability claims incurred, but not fi led, to the extent we
can formulate a reasonable estimate of their costs. We
estimate these expenses based primarily on historical
claims experience and data regarding product usage.
We accrue legal defense costs expected to be incurred
in connection with signifi cant product liability contingen-
cies when probable and reasonably estimable.
We also consider the insurance coverage we have
to diminish the exposure for periods covered by insur-
ance. In assessing our insurance coverage, we consider
the policy coverage limits and exclusions, the potential
for denial of coverage by the insurance company, the
fi nancial condition of the insurers, and the possibility of
and length of time for collection. In the past few years,
we have experienced diffi culties in obtaining product
liability insurance due to a very restrictive insurance
market. Therefore, for substantially all of our currently
marketed products, we have been and expect that we
will continue to be completely self-insured for future
product liability losses. In addition, there is no assur-
ance that we will be able to fully collect from our insur-
ance carriers in the future.
The litigation accruals and environmental liabilities
and the related estimated insurance recoverables have
been refl ected on a gross basis as liabilities and assets,
respectively, on our consolidated balance sheets.
We believe that the accruals and related insurance
recoveries we have established for product litigation
liabilities and other contingencies are appropriate
based on current facts and circumstances.
Pension and Retiree Medical Plan Assumptions
Pension benefi t costs include assumptions for the dis-
count rate, retirement age, and expected return on plan
assets. Retiree medical plan costs include assumptions
for the discount rate, retirement age, expected return
on plan assets, and health-care-cost trend rates. These
assumptions have a signifi cant effect on the amounts
reported. In addition to the analysis below, see Note 13
to the consolidated fi nancial statements for additional
information regarding our retirement benefi ts.
Periodically, we evaluate the discount rate and the
expected return on plan assets in our defi ned benefi t
pension and retiree health benefi t plans. In evaluating
these assumptions, we consider many factors, including
an evaluation of the discount rates, expected return on
plan assets, and health-care-cost trend rates of other
companies; our historical assumptions compared with
actual results; an analysis of current market condi-
tions and asset allocations (approximately 88 percent
to 92 percent of which are growth investments); and the
views of leading fi nancial advisers and economists. We
use an actuarially determined, company-specifi c yield
curve to determine the discount rate. In evaluating our
expected retirement age assumption, we consider the
retirement ages of our past employees eligible for pen-
sion and medical benefi ts together with our expecta-
tions of future retirement ages.
We believe our pension and retiree medical plan
assumptions are appropriate based upon the above
factors. If the health-care-cost trend rates were to be
increased by one percentage point each future year, the
aggregate of the service cost and interest cost com-
ponents of the 2008 annual expense would increase
by approximately $27 million. A one-percentage-point
decrease would lower the aggregate of the 2008 service
cost and interest cost by approximately $21 million. If
the 2008 discount rate for the U.S. defi ned benefi t pen-
sion and retiree health benefi t plans (U.S. plans) were
to be changed by a quarter percentage point, income
before income taxes would change by approximately
$26 million. If the 2008 expected return on plan assets
for U.S. plans were to be changed by a quarter percent-
age point, income before income taxes would change by
approximately $17 million. If our assumption regarding
the 2008 expected age of future retirees for U.S. plans
were adjusted by one year, our income before income
taxes would be affected by approximately $28 million.
The U.S. plans represent approximately 83 percent of
the total accumulated postretirement benefi t obligation
and approximately 84 percent of total plan assets at
December 31, 2008.
Impairment of Long-Lived Assets
We review the carrying value of long-lived assets (both
intangible and tangible) for potential impairment on
a periodic basis and whenever events or changes in
circumstances indicate the carrying value of an asset
may not be recoverable. We determine impairment by
comparing the projected undiscounted cash fl ows to be
generated by the asset to its carrying value. If an impair-
ment is identifi ed, a loss is recorded equal to the excess
of the asset’s net book value over its fair value, and the
cost basis is adjusted. The estimated future cash fl ows,
based on reasonable and supportable assumptions and
projections, require management’s judgment. Actual
results could vary from these estimates.
Income Taxes
We prepare and fi le tax returns based on our interpreta-
tion of tax laws and regulations and record estimates
based on these judgments and interpretations. In the
normal course of business, our tax returns are subject
to examination by various taxing authorities, which may
result in future tax, interest, and penalty assessments