Abbott Laboratories 2015 Annual Report Download - page 42

ABBOTT 2015 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 secu-
rities 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 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 informa-
tion. The liabilities are adjusted quarterly as additional information
becomes available. Receivables for insurance recoveries for product
liability claims are recorded as assets, on an undiscounted basis,
when it is probable that a recovery will be realized. Product liabil-
ity 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
shares and participating securities. Earnings from Continuing
Operations allocated to common shares in 2015, 2014 and 2013
were $2.595billion, $1.713billion and $1.979billion, respectively.
Net earnings allocated to common shares in 2015, 2014 and 2013
were $4.403billion, $2.273billion and $2.558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. 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 mea-
sured 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
liabilities 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 fair value of stock options and
restricted stock awards and units are amortized over their requi-
site service period, which could be shorter than the vesting period
if an employee is retirement eligible, with a charge to compensa-
tion 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 two publicly traded com-
panies, with a carrying value of approximately $104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