Medtronic 2015 Annual Report Download - page 87

Medtronic plc
Notes to Consolidated Financial Statements (Continued)
cases where the Company utilizes distributors or ships product directly to the end user, it generally recognizes revenue upon
shipment provided all revenue recognition criteria have been met. A portion of the Company’s revenue is generated from
inventory maintained at hospitals or with field representatives. For these products, revenue is recognized at the time the product
has been used or implanted. The Company records estimated sales returns, discounts, and rebates as a reduction of net sales in
the same period revenue is recognized.
Provisions for rebates, as well as sales discounts and returns, are accounted for as a reduction of sales when revenue is
recognized. Rebates are estimated based on sales terms, historical experience, and trend analysis. In estimating rebates, the
Company considers the lag time between the point of sale and the payment of the rebate claim, contractual commitments,
including stated rebate rates, and other relevant information. The Company adjusts reserves to reflect differences between
estimated and actual experience, and records such adjustment as a reduction of sales in the period of adjustment.
In certain circumstances, the Company enters into arrangements in which it provides multiple deliverables to its customers.
Agreements with multiple deliverables are divided into separate units of accounting. Total revenue is first allocated among the
deliverables based upon their relative fair values. Revenue is then recognized for each deliverable in accordance with the
principles described above. Fair values are determined based on the prices at which the individual deliverables are regularly sold
to other third parties.
Shipping and Handling Shipping and handling costs incurred were $284 million, $194 million, and $182 million in fiscal
years 2015, 2014, and 2013, respectively, and are included in selling, general, and administrative expense in the consolidated
statements of income.
Research and Development Research and development costs are expensed when incurred. Research and development costs
include costs of all basic research activities as well as other research, engineering, and technical effort required to develop a new
product or service or make significant improvement to an existing product or manufacturing process. Research and development
costs also include pre-approval regulatory and clinical trial expenses.
Costs Associated with Exit Activities The Company accrues employee termination costs associated with ongoing benefit
arrangements, including benefits provided as part of the Company’s U.S. severance policy or provided in accordance with non-
U.S. statutory requirements, if the obligation is attributed to prior services rendered, the rights to the benefits have vested, the
payment is probable, and the amount can be reasonably estimated. Other costs associated with exit activities may include
distributor cancellation fees, costs related to leased facilities to be abandoned or subleased, and asset impairments.
Contingencies The Company records a liability in the 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 accordance with U.S. GAAP, income tax liabilities are not accounted for under the loss contingency rules, but
rather specific accounting guidance. Insurance recoveries related to potential claims are recognized up to the amount of the
recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. These recoveries are not
netted against the related liabilities for financial statement presentation.
Accrued Certain Litigation Charges The Company accrues for legal and environmental matters that are probable and
estimable and includes certain estimated costs of settlement and damages for legal matters and cleanup and remediation for
environmental matters. Legal costs of defending legal claims are generally expensed as incurred. As of April 24, 2015 and
April 25, 2014, accrued certain litigation charges involving product liability, intellectual property disputes, shareholder related
matters, environmental proceedings, and other matters were $879 million and $917 million, respectively. The Company
includes accrued certain litigation and environmental charges in other accrued expenses and other long-term liabilities on the
Company’s consolidated balance sheets.
Tax Guarantees As a result of the recent acquisition of Covidien, the Company has guarantee commitments and
indemnifications with Tyco International plc (Tyco International) and TE Connectivity Ltd. (TE Connectivity) which relate to
certain contingent tax liabilities as part of a tax sharing agreement. These commitments and indemnifications were recorded at
77