Pfizer 2006 Annual Report Download - page 13

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A significant adverse change in legal factors or in the business
climate that could affect the value of the asset. For example,
a successful challenge of our patent rights resulting in generic
competition earlier than expected.
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A significant adverse change in the extent or manner in which
an asset is used. For example, restrictions imposed by the FDA
or other regulatory authorities that affect our ability to
manufacture or sell a product.
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A projection or forecast that demonstrates losses associated with
an asset. This could include, for example, a change in a
government reimbursement program that results in an inability
to sustain projected product revenues and profitability. This also
could include the introduction of a competitor’s product that
results in a significant loss of market share.
Our impairment review process is as follows:
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For finite-lived intangible assets, such as developed technology
rights, whenever impairment indicators are present, we perform
an in-depth review for impairment. We calculate the
undiscounted value of the projected cash flows associated with
the asset and compare this estimated amount to the carrying
amount of the asset. If the carrying amount is found to be
greater, we record an impairment loss for the excess of book
value over the asset’s fair value. Fair value is generally calculated
by applying an appropriate discount rate to the undiscounted
cash flow projections to arrive at net present value. In addition,
in all cases of an impairment review, we reevaluate the
remaining useful life of the asset and modify it, as appropriate.
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For indefinite-lived intangible assets, such as brands, each year and
whenever impairment indicators are present, we calculate the fair
value of the asset and record an impairment loss for the excess of
book value over fair value, if any. Fair value is generally measured
as the net present value of projected cash flows. In addition, in
all cases of an impairment review, we reevaluate the remaining
useful life of the asset and determine whether continuing to
characterize the asset as indefinite-lived is appropriate.
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For Goodwill, which includes amounts related to our
Pharmaceutical and Animal Health segments each year and
whenever impairment indicators are present, we calculate the
fair value of each business segment and calculate the implied
fair value of goodwill by subtracting the fair value of all the
identifiable net assets other than goodwill and record an
impairment loss for the excess of book value of goodwill over
the implied fair value, if any.
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For other long-lived assets, such as property, plant and
equipment, we apply procedures similar to those for finite-lived
intangible assets to determine if an asset is impaired. Long-term
investments and loans are subject to periodic impairment
reviews and whenever impairment indicators are present. For
these assets, fair value is typically determined by observable
market quotes or the expected present value of future cash
flows. When necessary, we record charges for impairments of
long-lived assets for the amount by which the fair value is less
than the carrying value of these assets.
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For non-current deferred tax assets, we provide a valuation
allowance when we believe that the assets are not probable of
recovery based on an assessment of estimated future taxable
income that incorporates ongoing, prudent, feasible tax-
planning strategies.
The value of intangible assets is determined primarily using
the “income method,” which starts with a forecast of all the
expected future net cash flows (see the “Our Strategic Initiatives—
Strategy and Recent Transactions: Acquisitions, Licensing and
Collaborations,” section of this Financial Review above).
Accordingly, the potential for impairment for these intangible
assets may exist if actual revenues are significantly less than those
initially forecasted or actual expenses are significantly more than
those initially forecasted. Some of the more significant estimates
and assumptions inherent in the intangible asset impairment
estimation process include: the amount and timing of projected
future cash flows; the discount rate selected to measure the risks
inherent in the future cash flows; and the assessment of the
asset’s life cycle and the competitive trends impacting the asset,
including consideration of any technical, legal, regulatory, or
economic barriers to entry as well as expected changes in
standards of practice for indications addressed by the asset.
The implied fair value of goodwill is determined by first estimating
the fair value of the associated business segment. To estimate the
fair value of each business segment, we generally use the “market
approach,” where we compare the segment to similar businesses
or “guideline” companies whose securities are actively traded in
public markets or which have recently been sold in a private
transaction. We may also use the “income approach,” where we
use a discounted cash flow model in which cash flows anticipated
over several periods, plus a terminal value at the end of that time
horizon, are discounted to their present value using an
appropriate rate of return. Some of the more significant estimates
and assumptions inherent in the goodwill impairment estimation
process using the “market approach” include: the selection of
appropriate guideline companies; the determination of market
value multiples for the guideline companies and the subsequent
selection of an appropriate market value multiple for the business
segment based on a comparison of the business segment to the
guideline companies; and the determination of applicable
premiums and discounts based on any differences in ownership
percentages, ownership rights, business ownership forms, or
marketability between the segment and the guideline companies;
and/or knowledge of the terms and conditions of comparable
transactions. When considering the “income approach,” we
include: the required rate of return used in the discounted cash
flow method, which reflects capital market conditions and the
specific risks associated with the business segment. Other estimates
inherent in the “income approach” include long-term growth rates
and cash flow forecasts for the business segment.
A single estimate of fair value results from a complex series of
judgments about future events and uncertainties and relies heavily
on estimates and assumptions (see “Estimates and Assumptions”
above). The judgments made in determining an estimate of fair value
can materially impact our results of operations. As such, for significant
items, we often obtain assistance from third-party valuation
specialists. The valuations are based on information available as of
the impairment review date and are based on expectations and
assumptions that have been deemed reasonable by management.
2006 Financial Report 11
Financial Review
Pfizer Inc and Subsidiary Companies