Eli Lilly 2007 Annual Report Download - page 26

FINANCIALS
24
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are,
by their nature, uncertain and are based upon complex
judgments and probabilities. The factors we consider
in developing our product litigation liability reserves
and other contingent liability amounts include the
merits and jurisdiction of the litigation, the nature and
the number of other similar current and past litigation
cases, the nature of the product and the current as-
sessment of the science subject to the litigation, and the
likelihood of settlement and current state of settlement
discussions, if any. In addition, we accrue for certain
product liability claims incurred, but not fi led, to the
extent we can formulate a reasonable estimate of their
costs. We estimate these expenses based primarily on
historical claims experience and data regarding product
usage. We accrue legal defense costs expected to be
incurred in connection with signifi cant product liability
contingencies when probable and reasonably estimable.
We also consider the insurance coverage we have
to diminish the exposure for periods covered by insur-
ance. In assessing our insurance coverage, we consider
the policy coverage limits and exclusions, the potential
for denial of coverage by the insurance company, the
fi nancial position of the insurers, and the possibility of
and the length of time for collection.
The litigation accruals and environmental liabilities
and the related estimated insurance recoverables have
been refl ected on a gross basis as liabilities and assets,
respectively, on our consolidated balance sheets.
We believe that the accruals and related insurance
recoveries we have established for product litigation li-
abilities and other contingencies are appropriate based
on current facts and circumstances.
Pension and Retiree Medical Plan Assumptions
Pension benefi t costs include assumptions for the dis-
count rate, retirement age, and expected return on plan
assets. Retiree medical plan costs include assumptions
for the discount rate, retirement age, expected return
on plan assets, and health-care-cost trend rates. These
assumptions have a signifi cant effect on the amounts
reported. In addition to the analysis below, see Note 12
to the consolidated fi nancial statements for additional
information regarding our retirement benefi ts.
Periodically, we evaluate the discount rate and the
expected return on plan assets in our defi ned benefi t
pension and retiree health benefi t plans. In evaluating
these assumptions, we consider many factors, includ-
ing an evaluation of the discount rates, expected return
on plan assets and the health-care-cost trend rates of
other companies; our historical assumptions compared
with actual results; an analysis of current market con-
ditions and asset allocations (approximately 85 percent
to 95 percent of which are growth investments); and the
views of leading fi nancial advisers and economists. We
use an actuarially determined, company-specifi c yield
curve to determine the discount rate. In evaluating our
expected retirement age assumption, we consider the
retirement ages of our past employees eligible for pen-
sion and medical benefi ts together with our expecta-
tions of future retirement ages.
We believe our pension and retiree medical plan as-
sumptions are appropriate based upon the above factors.
If the health-care-cost trend rates were to be increased
by one percentage point each future year, the aggregate
of the service cost and interest cost components of the
2007 annual expense would increase by approximately
$28 million. A one-percentage-point decrease would
lower the aggregate of the 2007 service cost and interest
cost by approximately $23 million. If the 2007 discount
rate for the U.S. defi ned benefi t pension and retiree
health benefi t plans (U.S. plans) were to be changed by
a quarter percentage point, income before income taxes
would change by approximately $32 million. If the 2007
expected return on plan assets for U.S. plans were to be
changed by a quarter percentage point, income before
income taxes would change by approximately $14 million.
If our assumption regarding the 2007 expected age of
future retirees for U.S. plans were adjusted by one year,
our income before income taxes would be affected by
approximately $31 million. The U.S. plans represent ap-
proximately 80 percent of the total accumulated postre-
tirement benefi t obligation and approximately 83 percent
of total plan assets at December 31, 2007.
Impairment of Long-lived Assets
We review the carrying value of long-lived assets for
potential impairment on a periodic basis and whenever
events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Impairment is
determined by comparing projected undiscounted cash
fl ows to be generated by the asset to its carrying value.
If an impairment is identifi ed, a loss is recorded equal to
the excess of the asset’s net book value over its fair value,
and the cost basis is adjusted. The estimated future cash
fl ows, based on reasonable and supportable assumptions
and projections, require management’s judgment. Actual
results could vary from these estimates.
Income Taxes
We prepare and fi le tax returns based on our interpreta-
tion of tax laws and regulations and record estimates
based on these judgments and interpretations. In the
normal course of business, our tax returns are subject
to examination by various taxing authorities, which may
result in future tax, interest, and penalty assessments
by these authorities. Inherent uncertainties exist in es-
timates of many tax positions due to changes in tax law
resulting from legislation, regulation and/or as conclud-
ed through the various jurisdictions’ tax court systems.
We recognize the tax benefi t from an uncertain tax posi-