Amgen 2013 Annual Report Download - page 84

Multiple-deliverable revenue arrangements
From time to time, we enter into arrangements for the R&D, manufacture and/or commercialization of products and product candidates. These
arrangements may require us to deliver various rights, services and/or goods across the entire life cycle of a product or product candidate, including
(i) intellectual property rights/licenses, (ii) R&D services, (iii) manufacturing services and/or (iv) commercialization services. The underlying terms of these
arrangements generally provide for consideration to Amgen in the form of non-refundable upfront license payments, R&D and commercial performance
milestone payments, cost sharing and/or royalty payments.
In arrangements involving the delivery of more than one element, each required deliverable is evaluated to determine whether it qualifies as a separate unit
of accounting. For Amgen, this determination is generally based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s
consideration that is fixed and determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The
estimated selling price of each deliverable is determined using the following hierarchy of values: (i) vendor-specific objective evidence of fair value, (ii) third-
party evidence of selling price and (iii) best estimate of selling price (BESP). The BESP reflects our best estimate of what the selling price would be if the
deliverable was regularly sold by us on a stand-alone basis. In general, the consideration allocated to each unit of accounting is recognized as the related goods
or services are delivered, limited to the consideration that is not contingent upon future deliverables. Consideration associated with at-risk substantive
performance milestones is recognized as revenue upon the achievement of the related milestone, as defined in the respective contracts.
Research and development costs
R&D costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and
related clinical manufacturing costs; contract services and other outside costs; information systems’ costs and amortization of acquired technology used in
R&D with alternative future uses. R&D expenses also include costs and cost recoveries associated with third-party R&D arrangements such as with K-A,
including upfront fees and milestones paid to third parties in connection with technologies which had not reached technological feasibility and did not have an
alternative future use. Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost
recovery. See Note 6, Collaborative arrangements, and Note 7, Related party transactions.
Selling, general and administrative costs
Selling, general and administrative (SG&A) expenses are comprised primarily of salaries, benefits and other staff-related costs associated with sales and
marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside marketing, advertising and legal expenses; amortization of
the U.S. healthcare reform federal excise fee; and other general and administrative costs. Advertising costs are expensed as incurred. SG&A expenses also
include costs and cost recoveries associated with marketing and promotion efforts under certain collaboration arrangements. Net payment or reimbursement of
SG&A costs is recognized when the obligations are incurred or we become entitled to the cost recovery. See Note 6, Collaborative arrangements.
Stock-based compensation
We have stock-based compensation plans under which various types of equity-based awards are granted, including restricted stock units (RSUs),
performance units and stock options. The estimated fair values of RSUs and stock option awards which are subject only to service conditions with graded
vesting are generally recognized as compensation expense on a straight-line basis over the service period. The estimated fair values of performance unit awards
are generally recognized as compensation expense as the awards vest ratably from the grant date to the end of the performance period. See Note 3, Stock-based
compensation.
Income taxes
We provide for income taxes based on pretax income, applicable tax rates and tax planning opportunities available in the various jurisdictions in which
we operate. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the basis of assets and liabilities for
financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount
of future tax benefit that is more likely than not to be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by
the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on
the largest benefit that is more likely than not to be realized. The
F-8