Medtronic 2013 Annual Report Download - page 81

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Table of Contents
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
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, 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 benefit
costs include assumptions for the discount rate, retirement age, compensation rate increases, and the expected return on plan assets.
Post-retirement medical benefit costs include assumptions for the discount rate, retirement age, expected return on plan assets,
and health care cost trend rate assumptions.
The Company evaluates the discount rate, retirement age, compensation rate increases, expected return on plan assets, and health
care 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
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. 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 the product has been used or implanted. For multiple-element arrangements, the Company
allocates arrangement consideration to the deliverables by use of the relative selling price method. The selling price used for each
deliverable is based on vendor–specific objective evidence (VSOE) if available, third–party evidence (TPE) if VSOE is not
available, or best estimated selling price (BESP) if neither VSOE nor TPE is available. BESP is determined in a manner consistent
with that used to establish the price to sell the deliverable on a standalone basis. The Company records estimated sales returns,
discounts, and rebates as a reduction of net sales in the same period revenue is recognized.
Shipping and Handling Shipping and handling costs incurred were $153 million, $146 million, and $136 million in fiscal years
2013, 2012, and 2011, respectively, and are included in selling, general, and administrative expense in the consolidated statements
of earnings.
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.
Other Expense, Net Other expense, net includes royalty income and expense, realized equity security gains and losses, realized
foreign currency transaction and derivative gains and losses, impairment charges on equity securities, the Puerto Rico excise tax,
and the U.S. medical device excise tax.
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 statements of earnings, as appropriate. Refer to Note 12 for additional information.
Foreign Currency Translation Assets and liabilities of non-U.S. functional currency entities are translated to U.S. dollars at
period-end exchange rates, and the resulting gains and losses arising from the translation of those net assets are recorded as a
cumulative translation adjustment, a component of accumulated other comprehensive loss on the consolidated balance sheets.
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