Medtronic 2013 Annual Report Download - page 80

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Table of Contents
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
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 fiscal year 2010, the
Company adopted authoritative guidance related to business combinations. Under this guidance, IPR&D is capitalized. Prior to
the adoption of this guidance, IPR&D was immediately expensed. The adoption of the authoritative guidance did not change the
requirement to expense IPR&D immediately with respect to asset acquisitions. These IPR&D charges are included within
acquisition-related items in the Company’s consolidated statements of earnings. IPR&D has an indefinite life and is not amortized
until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is
not completed in a timely manner or the project is terminated or abandoned, the Company may have an impairment related to the
IPR&D, calculated as the excess of the asset’s carrying value over its fair value.
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 measurement 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 that 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 trials, delay or failure to obtain required market clearances, or delays or
issues with patent issuance, or validity and litigation. If commercial viability were not achieved, the Company would likely look
to other alternatives to provide these therapies.
Contingent Consideration During fiscal year 2010, as mentioned above, the Company adopted authoritative guidance related
to business combinations. Under this guidance, the Company must recognize contingent purchase price consideration at fair value
at the acquisition date. Prior to the adoption of this guidance, contingent consideration was not included on the balance sheet and
was recorded as incurred. The acquisition date fair value is measured based on the consideration expected to be transferred
(probability-weighted), discounted back to present value. The discount rate used is determined at the time of measurement in
accordance with accepted valuation methods. The fair value of the contingent milestone consideration is remeasured at the estimated
fair value at each reporting period with the change in fair value recognized as income or expense within acquisition-related items
in the Company’s consolidated statements of earnings. Therefore, any changes in the fair value will impact the Company’s earnings
in such reporting period thereby resulting in potential variability in the Company’s earnings until contingencies are resolved.
Warranty Obligation The Company offers a warranty on various products. The Company estimates the costs that may be incurred
under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the
Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per
claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
The amount of the reserve recorded is equal to the net costs to repair or otherwise satisfy the claim. The Company includes the
warranty obligation in other accrued expenses and other long-term liabilities on the Company’s consolidated balance sheets. The
Company includes the covered costs associated with field actions, if any, in cost of products sold in the Company’s consolidated
statements of earnings.
Changes in the Company’s product warranty obligations during the years ended April 26, 2013 and April 27, 2012 consisted of
the following:
(in millions)
Balance as of April 29, 2011 $ 35
Warranty claims provision 23
Settlements made (27)
Balance as of April 27, 2012 $ 31
Warranty claims provision 25
Settlements made (21)
Balance as of April 26, 2013 $ 35
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