AbbVie 2013 Annual Report Download - page 72

Download and view the complete annual report

Please find page 72 of the 2013 AbbVie annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 176

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176

is recognized at the estimated fair value on the acquisition date, which is determined by utilizing a
probability weighted discounted cash flow model. Subsequent changes to the fair value of contingent
payments are recognized in other (income) expense, net in the consolidated statements of earnings.
The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision
based on the final determination of fair value. Legal costs, due diligence costs, business valuation costs
and all other business acquisition costs are expensed when incurred.
Goodwill and Intangible Assets
Intangible assets acquired in a business combination are recorded at fair value using a discounted cash
flow model. The discounted cash flow model requires assumptions about the timing and amount of
future net cash flows, risk, the cost of capital, and terminal values of market participants. Definite-lived
intangibles are amortized over their estimated useful lives. 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. AbbVie first compares the projected undiscounted cash flows to be
generated by the asset to its carrying value. If the undiscounted cash flows of an intangible asset are
less than the carrying value of an intangible asset, the intangible asset is written down to its fair value,
which is usually the discounted cash flow amount and a loss is recorded equal to the excess of the
asset’s net carrying value over its fair value. Where cash flows cannot be identified for an individual
asset, the review is applied at the lowest level for which cash flows are largely independent of the cash
flows of other assets and liabilities.
Goodwill and indefinite-lived assets are not amortized but are subject to an impairment review annually
and more frequently when indicators of impairment exist. An impairment of goodwill would occur if
the carrying amount of a reporting unit exceeded the fair value of that reporting unit, calculated using
a weighting of the income approach and the market approach. The fair value under the income
approach is calculated as the present value of estimated cash flows discounted using a risk-free market
rate adjusted for a market participant’s view of similar companies and perceived risks in cash flows.
The fair value under the market approach is calculated using market multiples for peer groups applied
to the operating results of the reporting unit to determine fair value. The implied fair value of goodwill
is then determined by subtracting the fair value of all identifiable net assets other than goodwill from
the fair value of the reporting unit, with an impairment charge recorded for the excess, if any, of the
carrying amount of goodwill over the implied fair value. Based on the company’s most recent annual
impairment test performed in the third quarter of 2013, the fair value of AbbVie’s single reporting unit
was substantially in excess of its carrying value.
Indefinite-lived intangible assets, which consist of capitalized IPR&D, are tested for impairment by
comparing the fair value of each intangible asset with its carrying value. The fair value of indefinite-
lived intangible assets is based on the present value of projected cash flows using an income approach.
If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to
fair value.
Acquired In-Process Research and Development
The initial costs of rights to IPR&D projects acquired in an asset acquisition are expensed as IPR&D
unless the project has an alternative future use. These costs include initial payments incurred prior to
regulatory approval in connection with research and development collaboration agreements that provide
rights to develop, manufacture, market and/or sell pharmaceutical products. The fair value of IPR&D
projects acquired in a business combination are capitalized and accounted for as indefinite-lived
intangible assets until the underlying project receives regulatory approval, at which point the intangible
asset will be accounted for as a definite-lived intangible asset, or discontinuation, at which point the
intangible asset will be written off. Development costs incurred after the acquisition are expensed as
incurred. Indefinite- and definite-lived assets are subject to impairment reviews as discussed previously.
68