Eli Lilly 2013 Annual Report Download - page 58

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measured and collection of the funds is reasonably assured. This royalty revenue is included in collaboration
and other revenue.
Research and development expenses and acquired IPR&D
Research and development expenses include the following:
• Research and development costs, which are expensed as incurred.
• Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued
when the event requiring payment of the milestone occurs.
Acquired IPR&D expense includes the initial costs of IPR&D projects acquired directly in asset acquisitions,
unless they have an alternative future use.
Income taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and
income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion
of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. When foreign
earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is
provided.
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.
Earnings per share
We calculate basic earnings per share based on the weighted-average number of common shares
outstanding and incremental shares. We calculate diluted earnings per share based on the weighted-average
number of common shares outstanding, including incremental shares and dilutive stock options. See Note 13
for further discussion.
Stock-based compensation
We recognize the fair value of stock-based compensation as expense over the requisite service period of the
individual grantees, which generally equals the vesting period. Under our policy, all stock-based awards are
approved prior to the date of grant. The compensation committee of the board of directors approves the value
of the award and date of grant. Stock-based compensation that is awarded as part of our annual equity grant
is made on a specific grant date scheduled in advance.
Reclassifications
Certain reclassifications have been made to prior periods in the consolidated financial statements and
accompanying notes to conform with the current presentation.
Note 2: Implementation of New Financial Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board issued a clarification regarding the presentation of an
unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. Under this new standard, the liability related to an unrecognized tax benefit, or a portion thereof,
should be presented in the financial statements as a reduction to a deferred tax asset if available under the
tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial
statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax
asset that exist at the reporting date. The provisions of the new standard are effective on a prospective basis
beginning in 2014 for annual and interim reporting periods, with earlier adoption permitted. While we are still
finalizing our determination of the impact of this standard on both our deferred tax assets and income taxes
payable, we do not currently anticipate that the implementation of this standard will have a material impact on
our consolidated balance sheets, and it will have no impact on our consolidated statements of operations.