Eli Lilly 2009 Annual Report Download - page 56

transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative
contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss
recognized in current earnings during the period of change.
We may enter into foreign currency forward and option contracts to reduce the effect of fluctuating
currency exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency
derivatives used for hedging are put in place using the same or like currencies and duration as the
underlying exposures. Forward contracts are principally used to manage exposures arising from subsidiary
trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded
at fair value with the gain or loss recognized in other—net, expense (income). The purchased option
contracts are used to hedge anticipated foreign currency transactions, primarily intercompany inventory
activities expected to occur within the next year. These contracts are designated as cash flow hedges of
those future transactions and the impact on earnings is included in cost of sales. We may enter into
foreign currency forward contracts and currency swaps as fair value hedges of firm commitments.
Forward and option contracts generally have maturities not exceeding 12 months.
In the normal course of business, our operations are exposed to fluctuations in interest rates. These
fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks
through a controlled program of risk management that includes the use of derivative financial instru-
ments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on
earnings. Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest
rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between
fixed and floating rate debt and investment positions and may enter into interest rate swaps or collars to
help maintain that balance. Interest rate swaps or collars that convert our fixed-rate debt or investments
to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps
or collars that convert floating rate debt or investments to a fixed rate are designated as cash flow
hedges. Interest expense on the debt is adjusted to include the payments made or received under the
swap agreements.
Goodwill and other intangibles: Goodwill is not amortized. All other intangibles arising from acquisitions
and research alliances have finite lives and are amortized over their estimated useful lives, ranging from
5 to 20 years, using the straight-line method. The remaining weighted-average amortization period for
developed product technology is approximately 11 years. Amortization expense for 2009, 2008, and 2007
was $277.0 million, $193.4 million, and $172.8 million before tax, respectively. The estimated amortization
expense for each of the five succeeding years approximates $280.0 million before tax, per year.
Substantially all of the amortization expense is included in cost of sales. See Note 3 for further discussion
of goodwill and other intangibles acquired in 2009, 2008, and 2007.
Goodwill and other intangible assets at December 31 were as follows:
2009 2008
Goodwill . . . . . .................................................... $1,175.0 $1,167.5
Developed product technology—gross . . . . . . . . . .......................... 3,035.4 3,035.4
Less accumulated amortization . ....................................... (612.8) (346.6)
Developed product technology—net . . . . . . . . . . . .......................... 2,422.6 2,688.8
Other intangibles—gross . . . . . . ....................................... 158.4 118.2
Less accumulated amortization . ....................................... (56.2) (45.4)
Other intangibles—net . . . . . . . . ....................................... 102.2 72.8
Total intangibles—net . . . . . . . . ....................................... $3,699.8 $3,929.1
Goodwill and net other intangibles are reviewed to assess recoverability at least annually and when certain
impairment indicators are present. No significant impairments occurred with respect to the carrying value
of our goodwill or other intangible assets in 2009, 2008, or 2007.
Property and equipment: Property and equipment is stated on the basis of cost. Provisions for
depreciation of buildings and equipment are computed generally by the straight-line method at rates
based on their estimated useful lives (12 to 50 years for buildings and 3 to 18 years for equipment). We
review the carrying value of long-lived assets 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.
Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset
to its carrying value. If an impairment is identified, 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.
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FORM 10-K