Eli Lilly 2003 Annual Report Download - page 31

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FINANCIALS
29
of the milestone event if the event is substantive, objectively determinable, and represents an important point in
the development life cycle of the pharmaceutical product. Milestone payments earned by us are generally recorded
in other income-net. Initial fees we receive from the partnering of our compounds under development are amor-
tized through the expected product approval date. Initial fees received from out-licensing agreements that include
both the sale of marketing rights to our commercialized products and a related commitment to supply the products
are generally recognized as net sales over the term of the supply agreement.
Research and development: We recognize as incurred the cost of directly acquiring assets to be used in the
research and development process that have not yet received regulatory approval for marketing and for which no
alternative future use has been identifi ed. If the product has obtained regulatory approval, we generally capitalize
the milestones paid and amortize them over the period benefi ted. Milestones paid prior to regulatory approval of
the product are generally expensed when the event requiring payment of the milestone occurs.
Income taxes: Deferred taxes are recognized for the future tax effects of temporary differences between
fi nancial and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the
portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable.
Earnings per share:
We calculate basic earnings per share based on the weighted-average number of outstand-
ing common shares and incremental shares. We calculate diluted earnings per share based on the weighted-average
number of outstanding common shares plus the effect of dilutive stock options and other incremental shares.
Stock-based compensation: As discussed further in Note 7, we have elected to follow Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for
our stock options and performance awards. Under APB 25, because the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant, no compensation expense is recog-
nized. However, SFAS 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, requires us to present pro forma information as if we had
accounted for our employee stock options and performance awards under the fair value method of that statement.
For purposes of pro forma disclosure, the estimated fair value of the options and performance awards at the date
of the grant is amortized to expense over the vesting period. The following table illustrates the effect on net income
and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
2003 2002 2001
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,560.8 $2,707.9 $2,780.0
Add: Compensation expense for stock-based
performance awards included in reported net income,
net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 5.5
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects . . . . . . . . . . . . . . . . . . . . . (220.8) (322.1) (215.9)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,340.0 $2,385.8 $2,569.6
Earnings per share:
Basic, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.38 $2.51 $2.58
Basic, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.17 $2.22 $2.38
Diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.37 $2.50 $2.55
Diluted, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.16 $2.20 $2.36
Note 2: Implementation of New Financial Accounting Pronouncements
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, Accounting for Asset Retirement Obli-
gations. SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred, which is adjusted to its present value each subsequent period. In addition, companies
must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which
is depreciated over the useful life of the related long-lived asset. The adoption of SFAS 143 on January 1, 2003, had
no impact on our consolidated fi nancial position or results of operations.
In 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB State-