Eli Lilly 2012 Annual Report Download - page 63

51
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. These assets are treated as indefinite-lived
intangible assets until completion or abandonment of the projects, at which time the assets are amortized
over the remaining useful life or written off, as appropriate. We also capitalize milestone payments incurred at
or after the product has obtained regulatory approval for marketing and amortize those amounts over the
remaining estimated useful life of the underlying asset.
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. When determining the fair value of
indefinite-lived IPR&D assets for impairment testing purposes, we utilize the "income method" discussed in
the previous paragraph. Finite-lived intangible assets are reviewed for impairment when an indicator of
impairment is present.
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.
At December 31, property and equipment consisted of the following:
2012 2011
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201.4 $ 202.5
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,373.8 6,135.7
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,542.9 7,219.9
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799.9 1,036.0
14,918.0 14,594.1
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,157.8) (6,833.8)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,760.2 $ 7,760.3
Depreciation expense for the years ended December 31, 2012, 2011, and 2010 was $754.0 million,
$732.4 million, and $749.1 million, respectively. Interest costs of $21.0 million, $25.7 million, and
$26.0 million were capitalized as part of property and equipment for the years ended December 31, 2012,
2011, and 2010, respectively. Total rental expense for all leases, including contingent rentals (not material),
amounted to $285.8 million, $267.4 million, and $255.7 million for the years ended December 31, 2012, 2011,
and 2010, 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
reflected 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 reasonably estimable based on the information available to
us. We accrue for certain product liability claims incurred but not filed 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. Legal defense costs expected to be incurred in connection with
significant 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
classified as a reduction of the litigation charges on the statement of operations. We estimate insurance