Abbott Laboratories 2013 Annual Report Download - page 42

ABBOTT 2013 ANNUAL REPORT
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Earnings Per Share — Unvested restricted stock that contain
non-forfeitable 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 participat-
ing securities. Earnings from Continuing Operations allocated
to common shares in 2013, 2012 and 2011 were $2.366 billion,
$575 million and $1.123 billion, respectively. Net earnings
allocated to common shares in 2013, 2012 and 2011 were
$2.558 billion, $5.917 billion and $4.714 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 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 restrictions 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 liabili-
ties 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 contingency 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 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 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
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 insur-
ance recoveries for product liability claims are recorded as assets,
on an undiscounted basis, when it is probable that a recovery
will be realized. Product liability losses are self-insured.
Research and Development Costs — Internal research and
development 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS