Medtronic 2012 Annual Report Download - page 83

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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
66
Other Intangible Assets Other intangible assets include patents, trademarks, purchased technology,
and in-process research and development (IPR&D) (since April 25, 2009). Intangible assets with a definite
life are amortized on a straight-line or accelerated basis, as appropriate, with estimated useful lives ranging
from three to 20 years. Intangible assets are tested for impairment annually or whenever events or
circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.
Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally
determined using a discounted future cash flow analysis.
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 scal 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 Companys 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