Pfizer 2011 Annual Report Download - page 61

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
H. Cost of Sales and Inventories
We carry inventories at the lower of cost or market. The cost of finished goods, work in process and raw materials is determined
using average actual cost. We regularly review our inventories for impairment and reserves are established when necessary.
I. Selling, Informational and Administrative Expenses
Selling, informational and administrative costs are expensed as incurred. Among other things, these expenses include the internal
and external costs of marketing, advertising, shipping and handling, information technology and legal defense.
Advertising expenses relating to production costs are expensed as incurred, and the costs of radio time, television time and space in
publications are expensed when the related advertising occurs. Advertising expenses totaled approximately $3.9 billion in 2011,
$4.0 billion in 2010 and $2.9 billion in 2009.
J. Research and Development Expenses
Research and development (R&D) costs are expensed as incurred. These expenses include the costs of our proprietary R&D
efforts, as well as costs incurred in connection with certain licensing arrangements. Before a compound receives regulatory approval
in a major market, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense.
Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been
achieved. Once a compound receives regulatory approval in a major market, we record any milestone payments in Identifiable
intangible assets, less accumulated amortization and, unless the assets are determined to have an indefinite life, we amortize them
on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.
K. Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets
Long-lived assets include:
•Goodwill—Goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net
assets. Goodwill is not amortized.
•Identifiable intangible assets, less accumulated amortization—These acquired assets are recorded at our cost. Intangible assets with
finite lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets with indefinite lives that are
associated with marketed products are not amortized until a useful life can be determined. Intangible assets associated with IPR&D
projects are not amortized until approval is obtained in a major market, typically either the U.S. or the European Union (EU), or in a
series of other countries, subject to certain specified conditions and management judgment. The useful life of an amortizing asset
generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.
•Property, plant and equipment, less accumulated depreciation—These assets are recorded at our cost and are increased by the cost of
any significant improvements after purchase. Property, plant and equipment assets, other than land and construction in progress, are
depreciated on a straight-line basis over the estimated useful life of the individual assets. Depreciation begins when the asset is ready
for its intended use. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research,
market and distribute products, compounds and intellectual property are included in Amortization of intangible assets as they benefit
multiple business functions. Amortization expense related to intangible assets that are associated with a single function and
depreciation of property, plant and equipment are included in Cost of sales, Selling, informational and administrative expenses and
Research and development expenses, as appropriate.
We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever
impairment indicators are present. In addition, we perform detailed impairment testing for goodwill and indefinite-lived assets at least
annually. When necessary, we record charges for impairments. Specifically:
•For finite-lived intangible assets, such as Developed Technology Rights, and for other long-lived assets, such as property, plant and
equipment, whenever impairment indicators are present, we calculate the undiscounted value of the projected cash flows associated
with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater,
we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we
re-evaluate the remaining useful lives of the assets and modify them, as appropriate.
•For indefinite-lived intangible assets, such as Brands and IPR&D assets, annually and whenever impairment indicators are present, we
determine the fair value of the asset and record an impairment loss, if any, for the excess of book value over fair value. In addition, in all
cases of an impairment review other than for IPR&D assets, we re-evaluate whether continuing to characterize the asset as indefinite-
lived is appropriate.
•For goodwill, annually and whenever impairment indicators are present, we determine the fair value of each reporting unit and compare
the fair value to its book value. If the carrying amount is found to be greater, we then determine the implied fair value of goodwill by
subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the reporting unit and record an
impairment loss for the excess, if any, of the book value of goodwill over the implied fair value.
60 2011 Financial Report