Medtronic 2012 Annual Report Download - page 49

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 17.6 percent for fiscal year 2012. 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 18.1 percent versus the U.S. Federal statutory rate of 35.0 percent. An increase in our
non-GAAP nominal tax rate of one percent would result in an additional income tax provision for the fiscal
year ended April 27, 2012 of approximately $43 million. See the 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.
IPR&D included in a business combination is capitalized as an indefinite-lived intangible asset.
Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory
approval, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset
and amortized on a straight-line basis over its estimated useful life. If the R&D project is abandoned,
the indefinite-lived asset is charged to expense. IPR&D acquired outside of a business combination is
expensed immediately.
Due to the uncertainty associated with R&D projects, there is risk that actual results will differ
materially from the original cash flow projections and that the R&D project will result in a successful
commercial product. 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.
Contingent consideration is recorded at the acquisition date at the estimated fair value of the contingent
consideration milestone payments for all acquisitions subsequent to April 24, 2009. 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
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