Medtronic 2016 Annual Report Download - page 78

Table of Contents
Medtronic plc
Notes to Consolidated Financial Statements (Continued)
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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 $316 million, $284 million, and $194 million in fiscal years
2016, 2015, and 2014, 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.
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 their respective fair
values as of the Acquisition Date. Each reporting period, the Company evaluates the potential loss that it believes is probable. This
guarantee currently has not been amortized into income because there has been no predictable pattern of performance. As a result,
the liability generally will be reduced upon the Company’s release from its obligations or as payments are made. As of April 29,
2016, liabilities related to guarantee commitments associated with Tyco International's and TE Connectivity's tax obligations
totaled $284 million and are included in other accrued expenses and on the Company’s consolidated balance sheet.
The Company also has current and non-current receivables due from Tyco International and TE Connectivity as a result of the tax
sharing agreement. As of April 29, 2016, receivables from Tyco International and TE Connectivity totaled $261 million and are
included in prepaid expenses and other current assets on the Company’s consolidated balance sheet. See Notes 15 and 18 for
additional background on the tax sharing agreement.
Other Expense, Net Other expense, net includes royalty income and expense, realized equity security gains and losses, realized
currency transaction and derivative gains and losses, impairment charges on equity securities, Puerto Rico excise tax, and U.S.
medical device excise tax.
Currency Translation Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at period-
end exchange rates, and the resulting gains and losses arising from the translation of those net assets are recorded as a cumulative
translation adjustment, a component of accumulated other comprehensive (loss) income on the consolidated balance sheets.
Elements of the consolidated statements of income are translated at the average monthly currency exchange rates in effect during
the period and currency transaction gains and losses are included in other expense, net in the consolidated statements of income.
Earnings Per Share Earnings per share is calculated using the two-class method, as the Company's A Preferred Shares are
considered participating securities. Accordingly, earnings are allocated to both ordinary shares and participating securities in
determining earnings per ordinary share. Due to the limited number of A Preferred Shares outstanding, this allocation had no effect
on ordinary earnings per share; therefore, it is not presented below. Basic earnings per share is computed based on the weighted
average number of ordinary shares outstanding. Diluted earnings per share is computed based on the weighted average number of
ordinary shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially
dilutive ordinary shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds