Eli Lilly 2006 Annual Report Download - page 38

FINANCIALS
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Note 2: Implementation of New Financial Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition thresh-
old and measurement attribute for the fi nancial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The Interpretation is effective for fi scal years beginning after December
15, 2006; therefore, we are required to adopt this Interpretation in the fi rst quarter of 2007. While we have not yet
completed our analysis, we expect the adoption of FIN 48 will not have a material impact on retained earnings, and
that we will reclassify approximately $900 million to $960 million of income taxes payable from current to noncur-
rent liabilities.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defi ned Benefi t Pension
and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 re-
quires the recognition of the overfunded or underfunded status of a defi ned benefi t postretirement plan as an asset
or liability in its statement of fi nancial position, the measurement of a plan’s assets and its obligations that deter-
mine its funded status as of the end of the employer’s fi scal year, and the recognition of changes in that funded sta-
tus through comprehensive income in the year in which the changes occur. Additional footnote disclosures are also
required. SFAS 158 was effective December 31, 2006. See Note 12 for further discussion of the impact of adopting
this pronouncement.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides interpretive guid-
ance on how the effects of carryover or reversal of prior year misstatements should be considered in quantifying a
current year misstatement. SAB 108 is effective for fi scal years ending after November 15, 2006, and did not have
an impact on our consolidated fi nancial statements.
In 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143. FIN 47 requires us to record the fair value of a liability for conditional asset retirement
obligations in the period in which it is incurred, which is adjusted to its present value each subsequent period. In addi-
tion, we are required to 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 FIN 47 on December 31,
2005 resulted in a cumulative effect of a change in accounting principle of $22.0 million, net of income taxes of
$11.8 million.
Note 3: Acquisitions
ICOS Corporation Acquisition
On January 29, 2007, we acquired all of the outstanding common stock of ICOS Corporation (ICOS), our partner in
the Lilly ICOS LLC joint venture that manufactures, markets and sells Cialis for the treatment of erectile dysfunc-
tion. The acquisition brings the full value of Cialis to us and will enable us to realize operational effi ciencies in the
further development, marketing and selling of this product.
Under the terms of the agreement, each outstanding share of ICOS common stock was redeemed for $34 in
cash for an aggregate purchase price of approximately $2.3 billion, which was fi nanced through borrowings. While
the allocation of the purchase price has not been fi nalized, we anticipate that approximately $1.7 billion of the pur-
chase price will be allocated to the acquired intangible asset related to Cialis and approximately $300 million to ac-
quired in-process research and development (IPR&D). The intangible asset will be amortized over Cialis’ remaining
expected patent lives in each country, which range from 2015 to 2017. A deferred tax liability of approximately $700
million will be established related to the intangible asset. Approximately $800 million will be recorded as goodwill
and is not expected to be deductible for tax purposes. We will include the IPR&D as an expense in the fi rst quarter
of 2007 and will include ICOS’ results of operations subsequent to the acquisition in our 2007 consolidated fi nancial
statements. The IPR&D charge is not deductible for tax purposes.
Applied Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all of the outstanding common stock of Applied Molecular Evolution, Inc. (AME)
in a tax-free merger. Under the terms of the merger agreement, each outstanding share of AME common stock
was exchanged for our common stock or a combination of cash and our stock valued at $18. The aggregate pur-
chase price of approximately $442.8 million consisted of issuance of 4.2 million shares of our common stock val-
ued at $314.8 million, issuance of 0.7 million replacement options to purchase shares of our common stock in ex-
change for the remaining outstanding AME options valued at $37.6 million, cash of $85.4 million for AME common