Eli Lilly 2012 Annual Report Download - page 49

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The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the
U.S. was 83 percent and 82 percent as of December 31, 2012 and 2011, respectively.
The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability
balances, including Medicaid (in millions):
2012 2011
Sales return, rebate, and discount liabilities, beginning of year. . . . . . . . . . . . . . . . . . $1,597.9 $ 1,155.3
Reduction of net sales due to sales returns, discounts, and rebates(1) . . . . . . . . . . 3,563.5 4,016.9
Cash payments of discounts and rebates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,576.9) (3,574.3)
Sales return, rebate, and discount liabilities, end of year. . . . . . . . . . . . . . . . . . . . . . . $1,584.5 $ 1,597.9
1 Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.0 percent of net sales for
each of the years presented.
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
assessment 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 filed,
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 significant product liability contingencies when probable and
reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance.
In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for
denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and
length of time for collection. Due to a very restrictive market for product liability insurance, we have been and
will continue to be largely self-insured for product liability losses for substantially all our currently marketed
products. In addition, there is no assurance that we will be able to fully collect from our insurance carriers on
past claims.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have
been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Pension and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount 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 significant effect on the amounts
reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional
information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension
and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality,
fixed income debt instruments to determine the discount rates. In evaluating the expected rate of return, we
consider many factors, with a primary analysis of current and projected market conditions, asset returns and
asset allocations (approximately 80 percent of which are growth investments); and the views of leading
financial advisers and economists. We may also review our historical assumptions compared with actual
results, as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of
other companies, where applicable. In evaluating our expected retirement age assumption, we consider the
retirement ages of our past employees eligible for pension and medical benefits together with our
expectations of future retirement ages.
If the health-care-cost trend rates were to be increased by one percentage point, the aggregate of the service
cost and interest cost components of the 2012 annual expense would increase by $15.6 million. A one-