Medtronic 2012 Annual Report Download - page 48

obligations, sales returns and discounts, stock-based compensation, valuation of equity and debt securities,
and income tax reserves are updated as appropriate, which in most cases is quarterly. We base our estimates
on historical experience, actuarial valuations, or various assumptions that are believed to be reasonable
under the circumstances.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate
requires assumptions about material matters that are uncertain at the time the accounting estimates are
made, and (2) material changes in the estimates are reasonably likely to occur from period to period. Our
critical accounting estimates include the following:
Legal Proceedings We are involved in a number of legal actions involving product liability, intellectual
property disputes, shareholder derivative actions, securities class actions, and other class actions. The
outcomes of these legal actions are not within our complete control and may not be known for prolonged
periods of time. In some actions, the claimants seek damages, as well as other relief (including injunctions
barring the sale of products that are the subject of the lawsuit), that could require significant expenditures
or result in lost revenues. In accordance with U.S. GAAP, we record a liability in our consolidated financial
statements for loss contingencies when a loss is known or considered probable and the amount can be
reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount
within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss
is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or
range of loss is disclosed in the notes to the consolidated financial statements. When determining the
estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss
to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings
involving the Company are inherently difficult to predict, particularly when the matters are in early
procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or
indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result
in a change in business practice. Our significant legal proceedings are discussed in Note 17 to the
consolidated financial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual
Report on Form 10-K. While it is not possible to predict the outcome for most of the matters discussed in
Note 17 to the consolidated financial statements, we believe it is possible that costs associated with them
could have a material adverse impact on our consolidated earnings, financial position, or cash flows.
Tax Strategies Our effective tax rate is based on income, statutory tax rates, and tax planning
opportunities available to us in the various jurisdictions in which we operate. We establish reserves when,
despite our belief that our tax return positions are fully supportable, we believe that certain positions are
likely to be challenged and that we may or may not prevail. These reserves are established and adjusted in
accordance with the principles of U.S. GAAP. Under U.S. GAAP, if we determine that a tax position is more
likely than not of being sustained upon audit, based solely on the technical merits of the position, we
recognize the benefit. We measure the benefit by determining the amount that is greater than 50 percent
likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing
authority with full knowledge of all relevant information. We regularly monitor our tax positions and
tax liabilities. We reevaluate the technical merits of our tax positions and recognize an uncertain tax
benefit, or derecognize a previously recorded tax benefit, when (i) there is a completion of a tax audit,
(ii) there is a change in applicable tax law including a tax case or legislative guidance, or (iii) there is an
expiration of the statute of limitations. Significant judgment is required in accounting for tax reserves.
Although we believe that we have adequately provided for liabilities resulting from tax assessments by
taxing authorities, positions taken by these tax authorities could have a material impact on our effective tax
rate in future periods.
In the event there is a special or restructuring charge, net, certain litigation charge, net, and/or
acquisition-related items recognized in our operating results, the tax cost or benefit attributable to that item
is separately calculated and recorded. Because the effective rate can be significantly impacted by these
discrete items that take place in the period, we often refer to our tax rate using both the effective rate and
the non-GAAP nominal tax rate. The non-GAAP nominal tax rate is defined as the income tax provision
as a percentage of earnings before income taxes, excluding special charges, restructuring charges, net, certain
litigation charges, net, acquisition-related items, and certain tax adjustments. We believe this resulting non-
GAAP financial measure provides useful information to investors because it excludes the effect of these
discrete items so that investors can compare our recurring results over multiple periods. Investors should
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