Abbott Laboratories 2015 Annual Report Download - page 41

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ABBOTT 2015 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 February 27, 2015, Abbott completed
the sale of its developed markets branded generics pharmaceuticals
business to Mylan Inc. (Mylan) for equity ownership of a newly
formed entity that combined Mylan’s existing business and Abbott’s
developed markets pharmaceuticals business. Mylan N.V. is pub-
licly traded. The sale was announced in July 2014. On February10,
2015, Abbott completed the sale of its animal health business to
Zoetis Inc. Abbott entered an agreement to sell this business in
November 2014. The historical operating results of these businesses
up to the date of sale 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 were reported as
heldfor disposition in Abbott’s Consolidated Balance Sheet at
December31, 2014. The cash flows of these businesses up to the
date of disposition are included in Abbott’s Consolidated Statements
of Cash Flows. See Note 3—Discontinued Operations for addi-
tional 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-employ-
ment benefits, 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 functional 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 compre-
hensive income (loss). Transaction gains and losses are recorded
on the Net foreign exchange (gain) loss line of the Consolidated
Statement of Earnings.
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.
In May 2014, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers, which provides a single compre-
hensive model for accounting for revenue from contracts with
customers and will supersede most existing revenue recognition
guidance. The standard becomes eective for Abbott in the first
quarter of 2018. Abbott is currently evaluating the eect, if any,
that the standard will have on its consolidated financial state-
ments 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 subsidiar-
ies 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.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet
Classification of Deferred Taxes, which requires entities to classify
all deferred tax assets and liabilities as non-current on the balance
sheet. The standard may be adopted on either a prospective or
retrospective basis. The standard is eective for fiscal years begin-
ning after December 15, 2016, and early adoption is permitted.
Eective December 31, 2015, Abbott adopted ASU 2015-17 and
applied the new standard retrospectively. As a result of applying
ASU 2015-17 to the previously reported Consolidated Balance
Sheet as of December 31, 2014, Deferred income taxes within the
Total Current Assets line decreased and the Deferred income taxes
and other assets line increased by approximately $1.7billion,
respectively; Other accrued liabilities within the Total Current
Liabilities line decreased by $65million and the Post-employment
obligations and other long-term liabilities line increased by
$12million. Reclassification of the deferred tax balances from
current to noncurrent aected the netting of these balances as a
deferred tax asset or liability in various jurisdictions.
Earnings Per Share—Unvested restricted stock units and awards
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