Eli Lilly 2010 Annual Report Download - page 54

FORM 10-K
Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies
Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP). The accounts of all wholly-owned and
majority-owned subsidiaries are included in the consolidated financial statements. Where our ownership of
consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders’ interests are reflected in
shareholders’ equity. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at
the date of the financial statements and during the reporting period. Actual results could differ from those
estimates. We issued our financial statements by filing with the Securities and Exchange Commission and have
evaluated subsequent events up to the time of the filing.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on
the weighted-average number of outstanding common shares plus the effect of dilutive stock options and other
incremental shares.
Cash equivalents: We consider all highly liquid investments with a maturity of three months or less from the date
of purchase to be cash equivalents. The cost of these investments approximates fair value.
Inventories: We state all inventories at the lower of cost or market. We use the last-in, first-out (LIFO) method for
the majority of our inventories located in the continental United States, or approximately 45 percent of our total
inventories. Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of the following:
2010 2009
Finished products ................................................................... $ 800.8 $ 938.3
Work in process .................................................................... 1,714.2 1,830.1
Raw materials and supplies .......................................................... 220.8 227.8
2,735.8 2,996.2
Reduction to LIFO cost ............................................................... (218.1) (146.3)
Inventories ......................................................................... $2,517.7 $2,849.9
Investments: Substantially all of our investments in debt and marketable equity securities are classified as
available-for-sale. Investment securities with maturity dates of less than one year from the date of the balance sheet
are classified as short-term. Available-for-sale securities are carried at fair value with the unrealized gains and
losses, net of tax, reported in other comprehensive income (loss). The credit portion of unrealized losses on our debt
securities considered to be other-than-temporary are recognized in earnings. The remaining portion of the
other-than-temporary impairment on our debt securities is then recorded in other comprehensive income (loss). The
entire amount of other-than-temporary impairment on our equity securities is recognized in earnings. We do not
evaluate cost-method investments for impairment unless there is an indicator of impairment. We review these
investments for indicators of impairment on a regular basis. Realized gains and losses on sales of available-for-sale
securities are computed based upon specific identification of the initial cost adjusted for any other-than-temporary
declines in fair value that were recorded in earnings. Investments in companies over which we have significant
influence but not a controlling interest are accounted for using the equity method with our share of earnings or
losses reported in other—net, expense. We own no investments that are considered to be trading securities.
Risk-management instruments: Our derivative activities are initiated within the guidelines of documented
corporate risk-management policies and do not create additional risk because gains and losses on derivative
contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are
initiated, we designate the instruments individually as either a fair value hedge or a cash flow hedge. Management
reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is marked to
market with gains and losses recognized currently in income to offset the respective losses and gains recognized on
the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges, the effective
portion of gains and losses on these contracts is reported as a component of accumulated other comprehensive
income (loss) and reclassified into earnings in the same period the hedged transaction affects earnings. Hedge
ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging
instruments are recorded at fair value with the gain or loss recognized in current earnings during the period of
change.
We may enter into foreign currency forward contracts to reduce the effect of fluctuating currency exchange rates
(principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives used for hedging are put
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