Amgen 2013 Annual Report Download - page 61

carrying amount may not be recoverable. We determine impairment by comparing the fair value of the asset to its carrying value. If the asset's carrying value
exceeds its fair value, an impairment charge is recorded for the difference and its carrying value is reduced accordingly.
Estimating future cash flows of an IPR&D product candidate for purposes of an impairment analysis requires us to make significant estimates and
assumptions regarding the amount and timing of costs to complete the project and the amount, timing and probability of achieving revenues from the
completed product similar to how the acquisition date fair value of the project was determined, as described above. There are often major risks and
uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market these products. Such approvals
require completing clinical trials that demonstrate a product candidate is safe and effective. Consequently, the eventual realized value of the acquired IPR&D
project may vary from its estimated fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods which could have a
material adverse effect on our results of operations.
We believe our estimations of future cash flows used for assessing impairment of long-lived assets are based on reasonable assumptions given the facts
and circumstances as of the related dates of the assessments.
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We are exposed to market risks that may result from changes in interest rates, foreign currency exchange rates and prices of equity instruments as well
as changes in general economic conditions in the countries where we conduct business. To reduce certain of these risks, we enter into various types of foreign
currency and interest rate derivative hedging transactions as part of our risk management program. We do not use derivatives for speculative trading purposes.
In the capital and credit markets, we experienced an increase in interest rates during 2013. As a result, in the discussion that follows, we have assumed a
hypothetical change in interest rates of 100 basis points from those at December 31, 2013 and 2012. We have also assumed a hypothetical 20% change in
foreign currency exchange rates against the U.S. dollar based on its position relative to other currencies as of December 31, 2013 and 2012.
Interest rate sensitive financial instruments
Our portfolio of available-for-sale interest-bearing securities at December 31, 2013 and 2012, was comprised of: U.S. Treasury securities and other
government-related debt securities; corporate debt securities; residential mortgage-backed and other mortgage- and asset-backed securities; money market
mutual funds; and other short-term interest-bearing securities, composed principally of commercial paper. The fair values of our investment portfolio of
interest-bearing securities were $22.3 billion and $23.7 billion at December 31, 2013 and 2012, respectively. Duration is a sensitivity measure that can be used
to approximate the change in the value of a security that will result from a 100 basis point change in interest rates. Applying a duration model, a hypothetical
100 basis point increase in interest rates at December 31, 2013 and 2012, would not have resulted in a material effect on the fair values of these securities on
these dates. In addition, a hypothetical 100 basis point decrease in interest rates at December 31, 2013 and 2012, would not result in a material effect on
income or cash flows in the respective ensuing year.
As of December 31, 2013, we had outstanding debt with a carrying value of $32.1 billion and a fair value of $33.5 billion. As of December 31, 2012,
we had outstanding debt with a carrying value of $26.5 billion and a fair value of $29.9 billion. Our outstanding debt at December 31, 2013 and 2012, was
comprised of debt with fixed interest rates, except for $8.1 billion of debt issued in connection with the acquisition of Onyx outstanding at December 31, 2013.
Changes in interest rates do not affect interest expense or cash flows on fixed-rate debt. Changes in interest rates would, however, affect the fair values of fixed-
rate debt. A hypothetical 100 basis point decrease in interest rates relative to interest rates at December 31, 2013, would have resulted in an increase of
approximately $2.2 billion in the aggregate fair value of our outstanding debt on this date. A hypothetical 100 basis point decrease in interest rates relative to the
interest rates at December 31, 2012, would have resulted in an increase of approximately $2.6 billion in the aggregate fair value of our outstanding debt on this
date. The analysis for the debt does not consider the impact that hypothetical changes in interest rates would have on the related interest rate swap contracts
and cross-currency swap contracts.
To achieve a desired mix of fixed and floating interest rate debt, we entered into interest rate swap contracts during 2013, which qualified and were
designated for accounting purposes as fair value hedges, for certain of our fixed-rate debt. These derivative contracts effectively converted a fixed-rate interest
coupon to a floating-rate LIBOR-based coupon over the life of the respective note. Interest rate swap contracts with notional amounts totaling $4.4 billion were
outstanding at December 31, 2013. A hypothetical 100 basis point increase in interest rates relative to interest rates at December 31, 2013, would have resulted
in a reduction in fair value of approximately $300 million on our interest rate swap contracts on this date and would not result in a material effect on the related
income or cash flows in the respective ensuing year. The analysis for the interest rate swap contracts does not consider the impact that hypothetical changes in
interest rates would have on the related fair values of debt that these interest rate sensitive instruments were designed to offset.
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