Abbott Laboratories 2014 Annual Report Download - page 41

39
ABBOTT 2014 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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—On January1, 2013, Abbott completed
the separation of AbbVie Inc., which was formed to hold Abbott’s
research‑based proprietary pharmaceuticals 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.
In July 2014, Abbott announced that it will sell its developed
markets branded generics pharmaceuticals business to Mylan Inc.
(Mylan) for equity ownership of a newly formed entity that will
combine Mylan’s existing business and Abbott’s developed markets
pharmaceuticals business, and will be publicly traded. The sale
of this business closed on February27, 2015. In November 2014,
Abbott entered into an agreement to sell its animal health business
to Zoetis Inc. The sale of this business closed on February10, 2015.
The historical operating results of these businesses 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 and liabilities of
these businesses are being reported as held for sale in Abbott’s
Consolidated Balance Sheet at December31, 2014. The cash flows
of these businesses are included in its Consolidated Statements of
Cash Flows for all periods presented. See Note 3—Discontinued
Operations for additional information.
Basis of Consolidation—The consolidated financial statements
include the accounts of the parent company and subsidiaries, after
elimination of intercompany transactions.
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 dier from
those amounts. Significant estimates include amounts for sales
rebates; income taxes; pension and other post‑employment bene‑
fits, including certain asset values that are based on significant
unobservable inputs; valuation of intangible assets; litigation;
derivative financial instruments; 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 func‑
tional currencies are other than the U.S. dollar are translated into
U.S. dollars using exchange rates as of the balance sheet date. The
U.S. dollar eects 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 partici‑
pates in selling arrangements that include multiple deliverables
(e.g., instruments, reagents, procedures, 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.
In May 2014, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2014‑09, Revenue from Contracts
with Customers, which provides a single comprehensive model
for accounting for revenue from contracts with customers and
will supersede most existing revenue recognition guidance. Early
adoption is not permitted. The standard becomes eective for
Abbott in the first quarter of 2017. Abbott is currently evaluating
the eect, if any, that the standard will have on its consolidated
financial statements and related disclosures.
Income Taxes—Deferred income taxes are provided for the tax
eect of dierences between the tax bases of assets and liabilities
and their reported amounts in the financial statements at the
enacted statutory rate to be in eect when the taxes are paid.
U.S. income taxes are provided on those earnings of foreign subsid-
iaries 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‑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 participating securities. Earnings from Continuing Operations
allocated to common shares in 2014, 2013 and 2012 were $1.713bil‑
lion, $1.979billion and $236million, respectively. Net earnings
allocated to common shares in 2014, 2013 and 2012 were
$2.273billion, $2.558billion and $5.917billion, respectively.