Medtronic 2010 Annual Report Download - page 24

20 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
challenged and that we may or may not prevail. These reserves
are established and adjusted in accordance with the principles of
U.S. GAAP. Under U.S. GAAP, if we determine that a tax position is
more likely than not of being sustained upon audit, based solely
on the technical merits of the position, we recognize the benefit.
We measure the benefit by determining the amount that is
greater than 50 percent likely of being realized upon settlement.
We presume that all tax positions will be examined by a taxing
authority with full knowledge of all relevant information. We
regularly monitor our tax positions and tax liabilities. We
reevaluate the technical merits of our tax positions and recognize
an uncertain tax benefit, or derecognize a previously recorded tax
benefit, when (i) there is a completion of a tax audit, (ii) there is a
change in applicable tax law including a tax case or legislative
guidance or (iii) there is an expiration of the statute of limitations.
Significant judgment is required in accounting for tax reserves.
Although we believe that we have adequately provided for
liabilities resulting from tax assessments by taxing authorities,
positions taken by these tax authorities could have a material
impact on our effective tax rate in future periods.
In the event there is a special or restructuring charge, certain
litigation charge, net and/or IPR&D and certain acquisition-related
costs recognized in our operating results, the tax cost or benefit
attributable to that item is separately calculated and recorded.
Because the effective rate can be significantly impacted by these
discrete items that take place in the period, we often refer to our
tax rate using both the effective rate and the non-GAAP nominal
tax rate. The non-GAAP nominal tax rate is defined as the income
tax provision as a percentage of earnings before income taxes,
excluding special and restructuring charges, certain litigation
charges, net, IPR&D and certain acquisition-related costs and
certain tax adjustments. We believe that this resulting non-GAAP
financial measure provides useful information to investors
because it excludes the effect of these discrete items so that
investors can compare our recurring results over multiple periods.
Investors should consider this non-GAAP measure in addition to,
and not as a substitute for, financial performance measures
prepared in accordance with U.S. GAAP. In addition, this non-
GAAP financial measure may not be the same as similar measures
presented by other companies.
Tax regulations require certain items to be included in the tax
return at different times than when those items are required to be
recorded in the consolidated financial statements. As a result, our
effective tax rate reflected in our consolidated financial statements
is different than that reported in our tax returns. Some of these
differences are permanent, such as expenses that are not
deductible on our tax return, and some are temporary differences,
such as depreciation expense. Temporary differences create
deferred tax assets and liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in
our tax return in future years for which we have already recorded
the tax benefit in our consolidated statements of earnings. We
establish valuation allowances for our deferred tax assets when
the amount of expected future taxable income is not likely to
support the use of the deduction or credit. Deferred tax liabilities
generally represent tax expense recognized in our consolidated
financial statements for which payment has been deferred or
expense has already been taken as a deduction on our tax return
but has not yet been recognized as an expense in our consolidated
statements of earnings.
The Company’s overall tax rate including the tax impact of
restructuring charges, certain litigation charges, net and IPR&D
and certain acquisition-related costs has resulted in an effective
tax rate of 21.9 percent for fiscal year 2010. Excluding the impact
of the restructuring charges, certain litigation charges, net, and
IPR&D and certain acquisition-related costs, our operational and
tax strategies have resulted in a non-GAAP nominal tax rate of
21.5 percent versus the U.S. Federal statutory rate of 35.0 percent.
An increase in our nominal tax rate of 1.0 percent would have
resulted in an additional income tax provision for the fiscal year
ended April 30, 2010 of approximately $44 million. See the
discussion of our tax rate and tax adjustments in the “Income
Taxes” section of this management’s discussion and analysis.
Valuation of IPR&D, Contingent Consideration, Goodwill and Other
Intangible Assets When we acquire a business, the purchase price
is allocated, as applicable, between IPR&D, other identifiable
intangible assets, net tangible assets and goodwill as required by
U.S. GAAP. IPR&D is defined as the value assigned to those
projects for which the related products have not received
regulatory approval and have no alternative future use. Determining
the portion of the purchase price allocated to IPR&D and other
intangible assets requires us to make significant estimates. The
amount of the purchase price allocated to IPR&D and other
intangible assets is determined by estimating the future cash
flows of each project or technology and discounting the net cash
flows back to their present values. The discount rate used is
determined at the time of the acquisition in accordance with
accepted valuation methods. For IPR&D, these valuation
methodologies include consideration of the risk of the project not
achieving commercial feasibility.