Eli Lilly 2013 Annual Report Download - page 57

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obtained regulatory approval for marketing and amortize those amounts over the remaining estimated useful
life of the underlying asset.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when
impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets
is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived
IPR&D assets for impairment testing purposes, we utilize the "income method" discussed in the previous
paragraph. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is
present.
Property and equipment
Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment
are computed generally by the straight-line method at rates based on their estimated useful lives (12 to
50 years for buildings and 3 to 18 years for equipment). 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 flows to be generated by the asset to its carrying value. If an impairment is identified, 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.
Litigation and environmental liabilities
Litigation accruals, environmental liabilities, and the related estimated insurance recoverables are reflected on
a gross basis as liabilities and assets, respectively, on our consolidated balance sheets. With respect to the
product liability claims currently asserted against us, we have accrued for our estimated exposures to the
extent they are both probable and reasonably estimable based on the information available to us. 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. Legal defense costs expected to be incurred in connection with significant product
liability loss contingencies are accrued when both probable and reasonably estimable. For substantially all of
our currently marketed products, we are completely self-insured for product liability losses.
Revenue recognition
We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. Provisions for returns, discounts, and rebates are established in
the same period the related sales are recognized.
We also generate income as a result of collaboration agreements. Revenue from co-promotion arrangements
is based upon gross margins reported to us by our co-promotion partners. Initial fees we receive from the
partnering of our compounds under development where we have continuing involvement are generally
amortized through the expected product approval date. For out-licensing agreements that include both the
sale of marketing rights to our commercialized products and a related commitment to supply the products, the
initial fees received are generally recognized in net product sales over the term of the supply agreement when
we have determined that the marketing rights do not have value on a standalone basis. We immediately
recognize the full amount of developmental milestone payments due to us upon the achievement of the
milestone event if the event is objectively determinable and the milestone is substantive in its entirety. A
milestone is considered substantive if the consideration earned 1) relates solely to past performance, 2) is
commensurate with the enhancement in the pharmaceutical product's value associated with the achievement
of the important event in its development life cycle, and 3) is reasonable relative to all of the deliverables and
payment terms within the arrangement. Milestone payments earned by us are generally recorded in other–
net, (income) expense. If the payment to us is a commercialization payment that is part of a multiple-element
collaborative commercialization arrangement and is a result of the initiation of the commercialization period
(e.g., payments triggered by regulatory approval for marketing or launch of the product), we amortize the
payment to income as we perform under the terms of the arrangement. See Note 4 for specific agreement
details.
Royalty revenue from licensees, which is based on third-party sales of licensed products and technology, is
recorded as earned in accordance with the contract terms when third-party sales can be reasonably