Pfizer 2015 Annual Report Download - page 74

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
2015 Financial Report
73
for contingencies, rebates, chargebacks, sales allowances and sales returns, and restructuring reserves, all of which also impact the
consolidated statements of income.
Our estimates are often based on complex judgments and assumptions that we believe to be reasonable, but that can be inherently uncertain
and unpredictable. If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.
As future events and their effects cannot be determined with precision, our estimates and assumptions may prove to be incomplete or
inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. We are
subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in the healthcare
environment, competition, litigation, legislation and regulations. We regularly evaluate our estimates and assumptions using historical
experience and expectations about the future. We adjust our estimates and assumptions when facts and circumstances indicate the need for
change. Those changes generally will be reflected in our financial statements on a prospective basis, unless they are required to be treated
retrospectively under relevant accounting standards. It is possible that others, applying reasonable judgment to the same facts and
circumstances, could develop and support a range of alternative estimated amounts.
D. Acquisitions
Our consolidated financial statements include the operations of an acquired business after the completion of the acquisition. We account for
acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities
assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired IPR&D be recorded on the
balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net
assets acquired is recorded as goodwill. When we acquire net assets that do not constitute a business, as defined in U.S. GAAP, no goodwill is
recognized and acquired IPR&D is expensed.
Contingent consideration in a business combination is included as part of the acquisition cost and is recognized at fair value as of the
acquisition date. Fair value is generally estimated by using a probability-weighted discounted cash flow approach. Any liability resulting from
contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. These changes in fair value are
recognized in earnings in Other (income)/deductions––net.
Amounts recorded in connection with an acquisition can result from a complex series of judgments about future events and uncertainties and
can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 1C.
E. Fair Value
We are often required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or
reporting. For example, we use fair value extensively in the initial recognition of net assets acquired in a business combination, when measuring
certain impairment losses and when accounting for and reporting of certain financial instruments. We estimate fair value using an exit price
approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in
an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best
use of non-financial assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer.
When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following techniques:
• Income approach, which is based on the present value of a future stream of net cash flows.
• Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets
or liabilities.
• Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic
obsolescence.
Our fair value methodologies depend on the following types of inputs:
• Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
• Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that
are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or
corroborated by, observable market data by correlation or other means (Level 2 inputs).
• Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on
estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 1C.
F. Foreign Currency Translation
For most of our international operations, local currencies have been determined to be the functional currencies. We translate functional
currency assets and liabilities to their U.S. dollar equivalents at exchange rates in effect as of the balance sheet date and we translate
functional currency income and expense amounts to their U.S. dollar equivalents at average exchange rates for the period. The U.S. dollar
effects that arise from changing translation rates are recorded in Other comprehensive income/(loss). The effects of converting non-functional
currency monetary assets and liabilities into the functional currency are recorded in Other (income)/deductions––net. For operations in highly
inflationary economies, we translate monetary items at rates in effect as of the balance sheet date, with translation adjustments recorded in
Other (income)/deductions––net, and we translate non-monetary items at historical rates.