Abbott Laboratories 2014 Annual Report Download - page 42

ABBOTT 2014 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Abbott reviews the carrying value of investments each quarter to
determine whether an other than temporary decline in fair value
exists. Abbott considers factors aecting the investee, factors
aecting the industry the investee operates in and general equity
market trends. Abbott considers the length of time an investment’s
fair value has been below carrying value and the near-term pros-
pects 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 o 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 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 development 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 until completed and are then amortized over
the remaining useful life. Collaborations are not significant for
continuing operations.
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. Dierences 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 dis-
counted 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
requisite 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 matur‑
ities of three months or less. Investments in two publicly traded
companies, with a carrying value of approximately $95million, are
accounted for under the equity method of accounting. All other
investments in marketable equity securities are classified as avail‑
able‑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 pre‑
mium or discount. Income relating to these securities is reported
as interest income.