Medtronic 2013 Annual Report Download - page 49

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Table of Contents
a change in business practice. Our significant legal proceedings are discussed in Note 17 to the consolidated financial statements
in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. While it is not possible to predict
the outcome for most of the matters discussed in Note 17 to the consolidated financial statements, we believe it is possible that
costs associated with them could have a material adverse impact on our consolidated earnings, financial position, or cash flows.
Tax Strategies Our effective tax rate is based on income, statutory tax rates, and tax planning opportunities available to us in
the various jurisdictions in which we operate. We establish reserves when, despite our belief that our tax return positions are fully
supportable, we believe that certain positions are likely to be 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 charge, restructuring charge, net, certain litigation charge, net, and/or acquisition-related items
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 charges, restructuring charges, net, certain litigation
charges, net, acquisition-related items, and certain tax adjustments. We believe this resulting non-GAAPfinancial 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 or similar to 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 from continuing operations including the tax impact of restructuring charges, net, certain litigation
charges, net, and acquisition-related items has resulted in an effective tax rate of 18.4 percent for fiscal year 2013. Excluding the
impact of the restructuring charges, net, certain litigation charges, net, and acquisition-related items, our operational and tax
strategies have resulted in a non-GAAP nominal tax rate of 17.9 percent versus the U.S. Federal statutory rate of 35.0 percent. An
increase in our nominal tax rate of 1 percent would result in an additional income tax provision for the fiscal year ended April 26,
2013 of approximately $46 million. See discussion of our tax rate and the tax adjustments in the “Income Taxes” section of this
management’s discussion and analysis.
Valuation of Other Intangible Assets, Including IPR&D, Goodwill and Contingent Consideration When we acquire a
business, the purchase price is allocated, as applicable, among identifiable intangible assets, including IPR&D, net tangible assets,
and goodwill as required by U.S. GAAP. Our 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 other intangible assets and IPR&D requires us to make significant estimates. These estimates include the amount and
timing of projected future cash flows, the discount rate used to discount those cash flows to present value, the assessment of the
asset’s life cycle and the consideration of legal, technical, regulatory, economic, and competitive risks. The amount of the purchase
price allocated to other intangible assets, including IPR&D, and net tangible 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 measurement in accordance with accepted valuation standards.
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