Abbott Laboratories 2012 Annual Report Download - page 34

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Abbott 2012 Annual Report
health care cost trend rates, discount rates and the expected return
on plan assets. Differences between the expected long-term return on
plan assets and the actual return are amortized over a five-year period.
Actuarial losses and gains are amortized over the remaining service
attribution periods of the employees under the corridor method.
Fair Value Measurements — For assets and liabilities that are
measured using quoted prices in active markets, total fair value is the
published market price per unit multiplied by the number of units held
without consideration of transaction costs. Assets and liabilities that
are measured using significant other observable inputs are valued by
reference to similar assets or liabilities, adjusted for contract restric-
tions and other terms specific to that asset or liability. For these items,
a significant portion of fair value is derived by reference to quoted
prices of similar assets or liabilities in active markets. For all remaining
assets and liabilities, fair value is derived using a fair value model, such
as a discounted cash flow model or Black-Scholes model. Purchased
intangible assets are recorded at fair value. The fair value of significant
purchased intangible assets is based on independent appraisals.
Abbott uses a discounted cash flow model to value intangible assets.
The discounted cash flow model requires assumptions about the
timing and amount of future net cash flows, risk, the cost of capital,
terminal values and market participants. Intangible assets, goodwill
and indefinite-lived intangible assets are reviewed for impairment at
least on a quarterly and annual basis, respectively.
Share-Based Compensation — The value of stock options and
restricted stock awards and units are amortized over their service
period, which could be shorter than the vesting period if an employee
is retirement eligible, with a charge to compensation expense.
Litigation — Abbott accounts for litigation losses in accordance with
FASB ASC No. 450, “Contingencies.” Under ASC No. 450, loss con-
tingency provisions are recorded for probable losses at management’s
best estimate of a loss, or when a best estimate cannot be made,
a minimum loss contingency amount is recorded. Legal fees are
recorded as incurred.
Cash, Cash Equivalents and Investments — Cash equivalents consist
of bank time deposits and U.S. treasury bills with original maturities of
three months or less. Investments in marketable equity securities and
certain investments in debt securities are classified as available-for-sale
and are recorded at fair value with any unrealized holding gains or
losses, net of tax, included in Accumulated other comprehensive
income (loss). Investments in equity securities that are not traded on
public stock exchanges are recorded at cost. Investments in other
debt securities are classified as held-to-maturity, as management
has both the intent and ability to hold these securities to maturity,
and are reported at cost, net of any unamortized premium or discount.
Income relating to these securities is reported as interest income.
Abbott reviews the carrying value of investments each quarter to
determine whether an other than temporary decline in market value
exists. Abbott considers factors affecting the investee, factors affecting
the industry the investee operates in and general equity market trends.
Abbott considers the length of time an investment’s market value has
been below carrying value and the near-term prospects for recovery to
carrying value. When Abbott determines that an other than temporary
decline has occurred, the investment is written down with a charge
to Other (income) expense, net.
Trade Receivable Valuations — Accounts receivable are stated at their
net realizable value. The allowance against gross trade receivables
reflects the best estimate of probable losses inherent in the receivables
portfolio determined on the basis of historical experience, specific
allowances for known troubled accounts and other currently available
information. Accounts receivable are charged off after all reasonable
means to collect the full amount (including litigation, where appropriate)
have been exhausted.
Inventories — Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Cost includes material and conversion costs.
Property and Equipment — Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the
assets. The following table shows estimated useful lives of property
and equipment:
Classification Estimated Useful Lives
Buildings 10 to 50 years (average 27 years)
Equipment 3 to 20 years (average 11 years)
Product Liability — Abbott accrues for product liability claims,
on an undiscounted basis, when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated
based on existing information. The liabilities are adjusted quarterly as
additional information becomes available. Receivables for insurance
recoveries for product liability claims are recorded as assets, on an
undiscounted basis, when it is probable that a recovery will be real-
ized. Product liability losses are self-insured.
Research and Development Costs — Internal research and develop-
ment costs are expensed as incurred. Clinical trial costs incurred by
third parties are expensed as the contracted work is performed. Where
contingent milestone payments are due to third parties under research
and development arrangements, the milestone payment obligations
are expensed when the milestone results are achieved.
Acquired In-Process and Collaborations Research and Development
(IPR&D) — The initial costs of rights to IPR&D projects obtained 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 develop-
ment 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.
Note 2 — Supplemental Financial Information
(dollars in millions)
Long-term Investments: 2012 2011 2010
Equity securities $213 $317 $240
Other 61 61 62
Total $274 $378 $302
The loss on the extinguishment of debt of $1.35 billion relates to the
early redemption of $7.7 billion of long-term notes. The loss consists
of the premium paid on the notes and the write off of deferred financ-
ing costs totaling $1.83 billion and was partially offset by a gain of
$479 million related to the unwinding of interest rate swaps related to
a portion of the debt. Other (income) expense, net, for 2012 includes
Notes to Consolidated Financial Statements