Abbott Laboratories 2013 Annual Report Download - page 41

ABBOTT 2013 ANNUAL REPORT
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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.
Changes in Presentation Due to Abbvie Separation — On January 1,
2013, Abbott completed the separation of AbbVie Inc., which was
formed to hold Abbott’s research-based proprietary pharmaceuti-
cals business. The historical operating results of the research-based
proprietary pharmaceuticals business prior to separation are
excluded from Earnings from Continuing Operations and are
presented on the Earnings from Discontinued Operations line in
Abbott’s Consolidated Statement of Earnings. The assets, liabilities,
and cash flows of the research-based proprietary pharmaceuticals
business are included in Abbott’s Consolidated Balance Sheet and
its Consolidated Statements of Cash Flows for periods prior to
January 1, 2013. See Note 2 for additional information.
Basis of Consolidation and Change in Accounting Principle —
The consolidated financial statements include the accounts of the
parent company and subsidiaries, after elimination of intercompany
transactions. Prior to January 1, 2011, the accounts of foreign subsid-
iaries were consolidated 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 reporting 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 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 in 2011 to recognize the cumulative immaterial impacts to
2009 and 2010 of which $37 million is recognized in the results of
discontinued operations.
The Consolidated Statements of Cash Flows for 2012 and 2011 have
been appropriately revised to reflect acquisition and contingent
consideration payments related to certain business acquisitions
as cash flow used in financing activities. The amounts had been
previously reflected as cash flow used in investing activities.
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 instru-
ments, and inventory and accounts receivable exposures.
Foreign Currency Translation — The statements of earnings of
foreign subsidiaries whose functional currencies are other than
the U.S. dollar are translated into U.S. dollars using average
exchange rates for the period. The net assets of foreign subsidiaries
whose functional currencies are other than the U.S. dollar are trans-
lated into U.S. dollars using exchange rates as of the balance sheet
date. The U.S. dollar effects that arise from translating the net assets
of these subsidiaries at changing rates are recorded in the foreign
currency translation adjustment account, which is included in
equity as a component of accumulated other comprehensive income
(loss). Transaction gains and losses are recorded in earnings and
were not significant for any of the periods presented.
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 situations, management records a returns
reserve for such revenue, if necessary. In certain of Abbott’s
businesses, primarily within diagnostics and medical optics,
Abbott participates in selling arrangements that include multiple
deliverables (e.g., instruments, reagents, procedures, and service
agreements). Under these arrangements, Abbott recognizes reve-
nue 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 undistrib-
uted 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS