Medtronic 2015 Annual Report Download - page 52

predict the outcome for most of the matters discussed in Note 16 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.
Income Taxes 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. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations in a multitude of jurisdictions across our global operations. 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,
consolidated earnings, financial position or cash flows.
In the event there is a Non-GAAP Adjustment 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 income before income taxes, excluding Non-
GAAP 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 consider this non-GAAP measure in addition to, and not as a substitute for, financial performance measures prepared in
accordance with U.S. GAAP. In addition, this non-GAAP financial measure may not be the same or similar to measures
presented by other companies.
Tax regulations require certain items to be included in the tax return at different times than when those items are required to be
recorded in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial
statements is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are
not deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences
create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or
credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated statements of
income. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not
likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in our
consolidated financial statements for which payment has been deferred or expense has already been taken as a deduction on our
tax return but has not yet been recognized as an expense in our consolidated statements of income.
The Company’s overall tax rate from continuing operations including the tax impact of Non-GAAP Adjustments resulted in an
effective tax rate of 23.3 percent for fiscal year 2015. Excluding the impact of the Non-GAAP Adjustments, our operational and
tax strategies have resulted in a non-GAAP nominal tax rate of 18.2 percent versus the U.S. federal statutory rate of 35.0
percent. An increase in our non-GAAP nominal tax rate of 1 percent would result in an additional income tax provision for the
fiscal year ended April 24, 2015 of approximately $58 million. See discussion of our tax rate and the tax adjustments in the
“Income Taxes” section of this management’s discussion and analysis.
Valuation of Intangible Assets Intangible assets include patents, trademarks, tradenames, customer relationships, purchased
technology, and IPR&D. When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective
fair values as of the acquisition date. IPR&D represents the fair value of those R&D projects for which the related products have
not received regulatory approval and have no alternative future use. Determining the fair value of intangible assets acquired as
part of a business combination requires us to make significant estimates. These estimates include the amount and timing of
projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value,
the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic, and competitive risks.
The fair value assigned to IPR&D is determined by estimating the future cash flows of each project or technology and
discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in
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