Medtronic 2009 Annual Report Download - page 59

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Medtronic, Inc.
associated with the exposures that the Company has self-insured.
Based on historical loss trends, the Company believes that its
self-insurance program accruals are adequate to cover future
losses. Historical trends, however, may not be indicative of future
losses. These losses could have a material adverse impact on the
Company’s consolidated financial statements.
Retirement Benefit Plan Assumptions The Company sponsors
various retirement benefit plans, including defined benefit
pension plans (pension benefits), post-retirement medical plans
(post-retirement benefits), defined contribution savings plans
and termination indemnity plans, covering substantially all U.S.
employees and many employees outside the U.S. Pension benefit
plan costs include assumptions for the discount rate, retirement
age, compensation rate increases and the expected return
on plan assets. Post-retirement medical plan costs include
assumptions for the discount rate, retirement age, expected return
on plan assets and healthcare cost trend rate assumptions.
The Company evaluates the discount rate, retirement age,
compensation rate increases, expected return on plan assets
and healthcare cost trend rates of its pension benefit and
post-retirement medical plans annually. In evaluating these
assumptions, many factors are considered, including an
evaluation of assumptions made by other companies, historical
assumptions compared to actual results, current market
conditions, asset allocations and the views of leading financial
advisors and economists. In evaluating the expected retirement
age assumption, the Company considers the retirement ages
of past employees eligible for pension and medical benefits
together with expectations of future retirement ages.
It is reasonably possible that changes in these assumptions will
occur in the near term and, due to the uncertainties inherent in
setting assumptions, the effect of such changes could be material
to the Company’s consolidated financial statements. Refer to Note
14 for additional information regarding the Company’s retirement
benefit plans.
Revenue Recognition The Company sells its products primarily
through a direct sales force in the U.S. and a combination of direct
sales representatives and independent distributors in international
markets. The Company recognizes revenue when title to the
goods and risk of loss transfers to customers, provided there are
no material remaining performance obligations required of the
Company or any matters requiring customer acceptance. In cases
where the Company utilizes distributors or ships product directly
to the end user, it recognizes revenue upon shipment provided all
revenue recognition criteria have been met. A portion of the
Company’s revenue is generated from inventory maintained
at hospitals or with field representatives. For these products,
revenue is recognized at the time that the product has been
used or implanted. The Company records estimated sales returns,
discounts and rebates as a reduction of net sales in the same
period revenue is recognized.
Research and Development Research and development costs
are expensed when incurred. Research and development costs
include costs of all basic research activities as well as other
research, engineering and technical effort required to develop
a new product or service or make significant improvement to
an existing product or manufacturing process. Research and
development costs also include pre-approval regulatory and
clinical trial expenses.
IPR&D When the Company acquires another entity, the purchase
price is allocated, as applicable, between IPR&D, other identifiable
intangible assets, net tangible assets and goodwill. 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.
Other Expense, Net Other expense, net includes intellectual
property amortization expense, royalty income and expense,
realized equity security gains and losses, realized foreign
currency transaction and derivative gains and losses and
impairment charges on equity securities.
Stock-Based Compensation The Company’s compensation
programs include share-based payments. All awards under share-
based payment programs are accounted for at fair value and
these fair values are generally amortized on a straight-line basis
over the vesting terms into cost of products sold, research and
development expense and selling, general and administrative expense
in the consolidated statement of earnings, as appropriate. Refer to
Note 12 for additional information.