Medtronic 2010 Annual Report Download - page 58

54Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
trials, delay or failure to obtain required market clearances, and
patent issuance, and validity and litigation, if any. 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 new authoritative guidance related
to business combinations. Under this new 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 expensed 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 the acquisition 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 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 covered costs associated with field actions, if any, in
warranty expense.
Changes in the Company’s product warranty obligations during
the years ended April 30, 2010 and April 24, 2009 consisted of
the following:
(in millions)
Balance April 25, 2008 $ 43
Warranty claims provision 23
Settlements made (31)
Balance April 24, 2009 $ 35
Warranty claims provision 50
Settlements made (40)
Balance April 30, 2010 $ 45
Self-Insurance It is the Company’s policy to self-insure the
vast majority of its insurable risks including medical and dental
costs, disability coverage, physical loss to property, business
interruptions, workers’ compensation, comprehensive general,
director and officer and product liability. Insurance coverage
is obtained for those risks required to be insured by law or
contract. A provision for losses under the self-insured program is
recorded and revised quarterly. The Company uses claims data
and historical experience, as applicable, to estimate liabilities
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 benefits
costs include assumptions for the discount rate, retirement age,
compensation rate increases and the expected return on plan
assets. Post-retirement medical benefits 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 benefits and post-
retirement benefits 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 expec ted 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
15 for additional information regarding the Company’s retirement
benefit plans.