Eli Lilly 2012 Annual Report Download - page 50

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percentage-point decrease would decrease the aggregate of the 2012 service cost and interest cost by
$12.6 million. If the 2012 discount rate for the U.S. defined benefit pension and retiree health benefit plans
(U.S. plans) were to be changed by a quarter percentage point, income before income taxes would change by
$35.2 million. If the 2012 expected return on plan assets for U.S. plans were to be changed by a quarter
percentage point, income before income taxes would change by $19.7 million. If our assumption regarding the
2012 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes
would be affected by $43.6 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent
of the total projected benefit obligation and approximately 81 percent of total plan assets at December 31,
2012.
Impairment of Indefinite-Lived and 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 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.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain
impairment indicators are present. When required, a comparison of fair value to the carrying amount of
assets is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of the IPR&D acquired in a business
combination, all of which require multiple assumptions. We utilize the “income method,” which applies a
probability weighting that considers the risk of development and commercialization, to the estimated future
net cash flows that are derived from projected sales revenues and estimated costs. These projections are
based on factors such as relevant market size, patent protection, historical pricing of similar products, and
expected industry trends. The estimated future net cash flows are then discounted to the present value using
an appropriate discount rate. This analysis is performed for each project independently.
For IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no
certainty that these assets ultimately will yield a successful product, as discussed previously in the “Late-
Stage Pipeline” section. The nature of the pharmaceutical business is high-risk and requires that we invest in
a large number of projects to build a successful portfolio of approved products. As such, it is likely that some
IPR&D assets will become impaired in the future.
The estimated future cash flows, based on what we believe to be reasonable and supportable assumptions
and projections, require management’s judgment. Actual results could vary from these estimates.
Income Taxes
We prepare and file tax returns based on our interpretation 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
by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law
resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ tax court
systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example,
adjustments could result from significant amendments to existing tax law, the issuance of regulations or
interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of
an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay
assessments that may result from examinations of our tax returns. We recognize both accrued interest and
penalties related to unrecognized tax benefits in income tax expense.
We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have
been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In
evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed