Medtronic 2010 Annual Report Download - page 57

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Medtronic, Inc.
against the allowance when it is deemed that a customer account
is uncollectible.
Inventories Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis. Inventory balances
are as follows:
(in millions)
April 30,
2010
April 24,
2009
Finished goods $ 896 $ 854
Work in process 269 251
Raw materials 316 321
Total $1,481 $1,426
Property, Plant and Equipment Property, plant and equipment is
stated at cost. Additions and improvements that extend the lives
of the assets are capitalized while expenditures for repairs and
maintenance are expensed as incurred. Depreciation is provided
using the straight-line method over the estimated useful lives of
the various assets. Property, plant and equipment balances and
corresponding lives are as follows:
(in millions)
April 30,
2010
April 24,
2009
Lives
(in years)
Land and land improvements $ 137 $ 124 Up to 20
Buildings and leasehold improvements 1,427 1,296 Up to 40
Equipment 3,525 3,144 3–7
Construction in progress 269 323 —
Subtotal 5,358 4,887
Less: Accumulated depreciation (2,937) (2,608)
Property, plant and equipment, net $ 2,421 $ 2,279
Depreciation expense of $454 million, $418 million and $417
million was recognized in fiscal years 2010, 2009 and 2008,
respectively.
Goodwill Goodwill is the excess of purchase price of an acquired
entity over the amounts assigned to assets acquired and liabilities
assumed in a business combination. In accordance with U.S. GAAP,
goodwill is not amortized. Goodwill is tested for impairment
annually and when an event occurs or circumstances change that
would indicate the carrying amount may be impaired. Impairment
testing for goodwill is done at a reporting unit level. An impairment
loss is recognized when the carrying amount of the reporting
unit’s net assets exceeds the estimated fair value of the reporting
unit. The estimated fair value is determined using a discounted
future cash flows analysis. The Company completed its annual
goodwill impairment test in the third quarter of fiscal years 2010,
2009 and 2008 and determined that no goodwill was impaired.
Intangible Assets Intangible assets include patents, trademarks,
purchased technology and IPR&D (since April 25, 2009). Intangible
assets with a definite life are amortized on a straight-line or
accelerated basis, as appropriate, with estimated useful lives
ranging from 3 to 20 years. Intangible assets are tested for
impairment whenever events or circumstances indicate that a
carrying amount of an asset (asset group) may not be recoverable.
Impairment is calculated as the excess of the asset’s carrying
value over its fair value. Fair value is generally determined using a
discounted future cash flows analysis.
IPR&D When the Company acquires another entity, the purchase
price is allocated, as applicable, between IPR&D, other identifiable
intangible assets and net tangible assets, with the remainder
recognized as goodwill. During the fiscal year 2010, the Company
adopted new authoritative guidance related to business
combinations. Under this new guidance, IPR&D is capitalized. Prior
to the adoption of this guidance, IPR&D was immediately
expensed. The adoption of the new authoritative guidance did
not change the requirement to expense IPR&D immediately with
respect to asset acquisitions. IPR&D has an indefinite life and is
not amortized until completion and development of the project
which at that time the IPR&D becomes an amortizable asset. If the
related project is not completed in a timely manner, the Company
may have an impairment related to the IPR&D.
The Company’s policy defines IPR&D 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
requires the Company to make significant estimates. The amount
of the purchase price allocated to IPR&D 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 acquisition in
accordance with accepted valuation methods. These methodologies
include consideration of the risk of the project not achieving
commercial feasibility.
At the time of acquisition, the Company expects all acquired
IPR&D will reach technological feasibility, but there can be no
assurance that the commercial viability of these products will
actually be achieved. The nature of the efforts to develop the
acquired technologies into commercially viable products consists
principally of planning, designing and conducting clinical trials
necessary to obtain regulatory approvals. The risks associated
with achieving commercialization include, but are not limited to,
delay or failure to obtain regulatory approvals to conduct clinical