Abbott Laboratories 2012 Annual Report Download - page 33

31
Abbott 2012 Annual Report
Note 1 — Summary of Significant Accounting Policies
Nature of Business — Abbott’s principal business is the
discovery, development, manufacture and sale of a broad line
of health care products.
In October 2011, Abbott announced a plan to separate into two
publicly traded companies, one in diversified medical products
and the other in research-based pharmaceuticals. To accomplish
the separation, Abbott created a new company, AbbVie Inc. for its
research-based pharmaceuticals business which consists primarily
of Abbott’s Proprietary Pharmaceutical Products segment. On
January 1, 2013, Abbott distributed all of the outstanding shares of
AbbVie Inc. to Abbott’s shareholders. As a result of the distribution,
AbbVie is now an independent company trading under the symbol
“ABBV”. Beginning in the first quarter of 2013, the historical results
of the research-based pharmaceuticals business will be reflected in
Abbott’s consolidated financial statements as discontinued operations.
Concentration of Risk and Guarantees — Due to the nature of its
operations, Abbott is not subject to significant concentration risks relat-
ing to customers, products or geographic locations, except that three
U.S. wholesalers accounted for 23 percent of trade receivables as of
December 31, 2012 and 2010 and 22 percent of trade receivables as
of December 31, 2011. In addition, governmental accounts in Italy,
Spain, Greece and Portugal accounted for 16 percent, 23 percent, and
21 percent of total net trade receivables as of December 31, 2012,
2011, and 2010, respectively. Product warranties are not significant.
Abbott has no material exposures to off-balance sheet arrangements;
no special purpose entities; nor activities that include non-
exchange-traded contracts accounted for at fair value. Abbott has
periodically entered into agreements in the ordinary course of busi-
ness, such as assignment of product rights, with other companies
which has resulted in Abbott becoming secondarily liable for obliga-
tions that Abbott was previously primarily liable. Since Abbott no
longer maintains a business relationship with the other parties, Abbott
is unable to develop an estimate of the maximum potential amount of
future payments, if any, under these obligations. Based upon past
experience, the likelihood of payments under these agreements is
remote. Abbott periodically acquires a business or product rights in
which Abbott agrees to pay contingent consideration based on attain-
ing certain thresholds or based on the occurrence of certain events.
Basis of Consolidation and Change in Accounting Principle — Prior
to January 1, 2011, the accounts of foreign subsidiaries were consoli-
dated based on a fiscal year ended November 30 due to the time
needed to consolidate these subsidiaries. Effective January 1, 2011,
the one month lag in the consolidation of the accounts of foreign
subsidiaries was eliminated and the year-end of foreign subsidiaries
was changed to December 31. Abbott believes that the change in
accounting principle related to the elimination of the one month report-
ing lag is preferable because it results in more contemporaneous
reporting of the results of foreign subsidiaries. In accordance with
applicable accounting literature, a change in subsidiaries’ year-end is
treated as a change in accounting principle and requires retrospective
application. The cumulative effect of the change was an increase in
retained earnings of $289 million as of January 1, 2009 and a corre-
sponding decrease in other long-term liabilities. The impact of the
change was not material to the results of operations for the previously
reported annual and interim periods after January 1, 2009, and thus,
those results have not been revised. A charge of $137 million was
recorded to Other (income) expense, net in 2011 to recognize the
cumulative immaterial impacts to 2009 and 2010. Had the financial
statements been revised, net sales, operating earnings and net earn-
ings in 2010 would have decreased by $21 million, $195 million and
$175 million, respectively.
Use of Estimates — The financial statements have been prepared
in accordance with generally accepted accounting principles in the
United States and necessarily include amounts based on estimates
and assumptions by management. Actual results could differ from
those amounts. Significant estimates include amounts for sales
rebates, income taxes, pension and other post-employment benefits,
valuation of intangible assets, litigation, derivative financial instruments,
and inventory and accounts receivable exposures.
Revenue Recognition — Revenue from product sales is recognized
upon passage of title and risk of loss to customers. Provisions for
discounts, rebates and sales incentives to customers, and returns
and other adjustments are provided for in the period the related sales
are recorded. Sales incentives to customers are not material. Historical
data is readily available and reliable, and is used for estimating the
amount of the reduction in gross sales. Revenue from the launch
of a new product, from an improved version of an existing product,
or for shipments in excess of a customer’s normal requirements are
recorded when the conditions noted above are met. In those situa-
tions, management records a returns reserve for such revenue, if
necessary. In certain of Abbott’s businesses, primarily within diagnos-
tics and medical optics, Abbott participates in selling arrangements
that include multiple deliverables (e.g., instruments, reagents, proce-
dures, and service agreements). Under these arrangements, Abbott
recognizes revenue upon delivery of the product or performance of the
service and allocates the revenue based on the relative selling price of
each deliverable, which is based primarily on vendor specific objective
evidence. Sales of product rights for marketable products are
recorded as revenue upon disposition of the rights. Revenue from
license of product rights, or for performance of research or selling
activities, is recorded over the periods earned.
Income Taxes — Deferred income taxes are provided for the tax effect
of differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements at the enacted statutory
rate to be in effect when the taxes are paid. U.S. income taxes are
provided on those earnings of foreign subsidiaries which are intended
to be remitted to the parent company. Deferred income taxes are not
provided on undistributed earnings reinvested indefinitely in foreign
subsidiaries as working capital and plant and equipment. Interest and
penalties on income tax obligations are included in taxes on income.
Earnings Per Share — Unvested restricted stock that contain non-for-
feitable rights to dividends are treated as participating securities and are
included in the computation of earnings per share under the two-class
method. Under the two-class method, net earnings are allocated
between common shares and participating securities. Net earnings allo-
cated to common shares in 2012, 2011 and 2010 were $5.917 billion,
$4.714 billion and $4.613 billion, respectively.
Pension and Post-Employment Benefits — Abbott accrues for the
actuarially determined cost of pension and post-employment benefits
over the service attribution periods of the employees. Abbott must
develop long-term assumptions, the most significant of which are the
Notes to Consolidated Financial Statements