Eli Lilly 2008 Annual Report Download - page 40

FINANCIALS
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carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted
cash fl ows to be generated by the asset to its carrying value. If an impairment 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.
At December 31, property and equipment consisted of the following:
2008 2007
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 219.0 $ 180.0
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,953.4 5,543.7
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,045.2 7,454.9
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,098.3 1,662.7
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,315.9 14,841.3
Less allowances for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,689.6) (6,266.2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,626.3 $ 8,575.1
Depreciation expense for 2008, 2007, and 2006 was $731.7 million, $682.3 million, and $627.4 million, respec-
tively. Approximately $48.2 million, $95.3 million, and $106.7 million of interest costs were capitalized as part of
property and equipment in 2008, 2007, and 2006, respectively. Total rental expense for all leases, including contin-
gent rentals (not material), amounted to approximately $327.4 million, $294.2 million, and $293.6 million for 2008,
2007, and 2006, respectively. Assets under capital leases included in property and equipment in the consolidated
balance sheets, capital lease obligations entered into, and future minimum rental commitments are not material.
Litigation and environmental liabilities: Litigation accruals and environmental liabilities and the related estimated
insurance recoverables are refl ected on a gross basis as liabilities and assets, respectively, on our consolidated
balance sheets. With respect to the product liability claims currently asserted against us, we have accrued for
our estimated exposures to the extent they are both probable and estimable based on the information available to
us. We accrue for certain product liability claims incurred but not fi led to the extent we can formulate a reason-
able estimate of their costs. We estimate these expenses based primarily on historical claims experience and
data regarding product usage. Legal defense costs expected to be incurred in connection with signifi cant product
liability loss contingencies are accrued when probable and reasonably estimable. A portion of the costs associated
with defending and disposing of these suits is covered by insurance. We record receivables for insurance-related
recoveries when it is probable they will be realized. These receivables are classifi ed as a reduction of the litigation
charges on the statement of income. We estimate insurance recoverables based on existing deductibles, cover-
age limits, our assessment of any defenses to coverage that might be raised by the carriers, and the existing and
projected future level of insolvencies among the insurance carriers. However, for substantially all of our currently
marketed products, we are completely self-insured for future product liability losses.
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. For more than 90 percent of our sales, this is at the
time products are shipped to the customer, typically a wholesale distributor or a major retail chain. The remain-
ing sales are recorded at the point of delivery. Provisions for returns, discounts, and rebates are established in the
same period the related sales are recorded.
We also generate income as a result of collaboration agreements. Revenue from co-promotion services is
based upon net sales reported by our co-promotion partners and, if applicable, the number of sales calls we
perform. 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 gener-
ally recognized as net sales over the term of the supply agreement. We immediately recognize the full amount of
milestone payments due to us upon the achievement of the milestone event if the event is substantive, objectively
determinable, and represents an important point in the development life cycle of the pharmaceutical product.
Milestone payments earned by us are generally recorded in other—net.
Royalty revenue from licensees, which are based on third-party sales of licensed products and technology, are
recorded as earned in accordance with the contract terms when third-party sales can be reasonably measured
and collection of the funds is reasonably assured. This royalty revenue is included in net sales.
Acquired 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