AbbVie 2013 Annual Report Download - page 56

zero, is recorded. As information becomes known, either the minimum loss amount is increased,
resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss
provisions. Occasionally, a best estimate amount is changed to a lower amount when events result in an
expectation of a more favorable outcome than previously expected. There were no significant litigation
reserves at December 31, 2013.
Valuation of Goodwill and Intangible Assets
AbbVie has acquired and may continue to acquire significant intangible assets in connection with
business combinations that AbbVie records at fair value. Transactions involving the purchase or sale of
intangible assets occur with some frequency between companies in the pharmaceuticals industry and
valuations are usually based on a discounted cash flow analysis incorporating the stage of completion.
The discounted cash flow model requires assumptions about the timing and amount of future net cash
flows, risk, cost of capital, terminal values and market participants. Each of these factors can
significantly affect the value of the intangible asset. IPR&D acquired in a business combination is
capitalized as an indefinite-lived intangible asset until regulatory approval is obtained, at which time, it
is accounted for as a definite-lived asset and amortized over its estimated useful life. IPR&D acquired
in transactions that are not business combinations is expensed immediately, unless deemed to have an
alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized
and amortized over the remaining useful life.
AbbVie reviews the recoverability of definite-lived intangible assets whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. Goodwill and indefinite-
lived intangible assets, which relate to IPR&D, are reviewed for impairment annually or when an event
that could result in an impairment occurs. Refer to Note 2 to the consolidated financial statements for
further information.
For its impairment reviews, the company uses an estimated future cash flow approach that requires
significant judgment with respect to future volume, revenue and expense growth rates, changes in
working capital use, foreign currency exchange rates, the selection of an appropriate discount rate, asset
groupings and other assumptions and estimates. The estimates and assumptions used are consistent
with the company’s business plans and a market participant’s views of a company and similar
companies. The use of alternative estimates and assumptions could increase or decrease the estimated
fair value of the assets, and potentially result in different impacts to the company’s results of
operations. Actual results may differ from the company’s estimates.
At December 31, 2013 and 2012, goodwill and intangible assets, net of amortization totaled $8.2 billion
and $8.5 billion, respectively, and amortization expense for intangible assets was $509 million,
$625 million and $764 million in 2013, 2012 and 2011, respectively. There were no impairments of
goodwill in 2013, 2012 or 2011 and the results of the last impairment test indicated that the fair value
of AbbVie’s single reporting unit was substantially in excess of its carrying value. In 2012 and 2011,
AbbVie recorded impairment charges of $13 million and $46 million, respectively, for certain projects
under development. These charges are included in R&D expenses.
CERTAIN REGULATORY MATTERS
Legislative Issues
In the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act (collectively referred to herein as ‘‘health care reform legislation’’) were
signed into law in the United States. Health care reform legislation included an increase in the basic
Medicaid rebate rate from 15.1 percent to 23.1 percent and extended the rebate to drugs provided
through Medicaid managed care organizations. Starting in 2011, additional rebates were incurred
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