Pfizer 2005 Annual Report Download - page 41

40 2005 Financial Report
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
net. We translate functional currency assets and liabilities to their
U.S. dollar equivalents at rates in effect at the balance sheet
date and record these translation adjustments in Shareholders’
equity—Accumulated other comprehensive income. We translate
functional currency statement of income amounts at average
rates for the period.
For operations in highly inflationary economies, we translate
monetary items at rates in effect at the balance sheet date, with
translation adjustments recorded in Other (income)/deductions—
net, and nonmonetary items at historical rates.
G. Revenues
Revenue Recognition—We record revenue from product sales
when the goods are shipped and title passes to the customer. At
the time of sale, we also record estimates for a variety of sales
deductions, such as sales rebates, discounts and incentives, and
product returns.
Deductions From Revenues—Gross product sales are subject to a
variety of deductions that are generally estimated and recorded
in the same period that the revenue is recognized.
In the U.S., we record provisions for Medicaid and contract rebates
based upon our actual experience ratio of rebates paid and actual
prescriptions during prior quarters. We apply the experience
ratio to the respective period’s sales to determine the rebate
accrual and related expense. This experience ratio is evaluated
regularly to ensure that the historical trends are as current as
practicable. As appropriate, we will adjust the ratio to better
match our current experience or our expected future experience.
In assessing this ratio, we consider current contract terms, such as
changes in formulary status and discount rates.
Our provisions for chargebacks (primarily discounts to U.S. federal
government agencies) closely approximate actual as we settle
these deductions generally within 2-3 weeks of incurring the
liability.
Outside of the U.S., the majority of our rebates are contractual or
legislatively-mandated and our estimates are based on actual
invoiced sales within each period; both of these elements help to
reduce the risk of variations in the estimation process. Some
European countries base their rebates on the government’s
unbudgeted pharmaceutical spending and we use an estimated
allocation factor based on historical payments against our actual
invoiced sales to project the expected level of reimbursement. We
obtain third-party information that helps us to monitor the
adequacy of these accruals.
We record sales incentives as a reduction of revenues at the time
the related revenues are recorded or when the incentive is offered,
whichever is later. We estimate the cost of our sales incentives
based on our historical experience with similar incentive programs.
Other current liabilities include accruals for Medicaid rebates,
contract rebates and chargebacks of $1.8 billion at December 31,
2005 and $1.7 billion at December 31, 2004.
Alliances—We have agreements to co-promote pharmaceutical
products discovered by other companies. Revenue is earned when
our co-promotion partners ship the related product and title
passes to their customer. Alliance revenue is primarily based upon
a percentage of our co-promotion partners’ net sales. Generally,
expenses for selling and marketing these products are included
in Selling, informational and administrative expenses.
H. Cost of Sales and Inventories
We value inventories at cost or fair value, if lower. Cost is
determined as follows:
•finished goods and work in process at average actual cost;
and
•raw materials and supplies at average or latest actual cost.
I. Selling, Informational and Administrative Expenses
Selling, informational and administrative costs are expensed as
incurred. Among other things, these expenses include the costs
of marketing, advertising, shipping and handling, information
technology and non-plant employee compensation.
Advertising expenses relating to production costs are expensed
as incurred and the costs of radio time, television time and space
in publications are expensed when the related advertising occurs.
Advertising expenses totaled approximately $3.5 billion in 2005
and 2004, and $2.9 billion in 2003.
J. Research and Development Expenses
Research and development (R&D) costs are expensed as incurred.
These expenses include the costs of our proprietary R&D efforts,
as well as costs incurred in connection with our third-party
collaboration efforts. Pre-approval milestone payments made by
us to third parties under contracted R&D arrangements are
expensed when the specific milestone has been achieved. Once
the product receives regulatory approval, we record any
subsequent milestone payments in Identifiable intangible assets,
less accumulated amortization and amortize them evenly over the
remaining agreement term or the expected product life cycle,
whichever is shorter. We have no third-party R&D arrangements
that result in the recognition of revenue.
K. Amortization of Intangible Assets, Depreciation and
Certain Long-Lived Assets
Long-lived assets include:
•goodwill—Goodwill represents the difference between the
purchase price of a business acquisition and the fair value of
its net assets. Goodwill is not amortized.
•identifiable intangible assets—These acquired assets are
recorded at our cost. Intangible assets with finite lives are
amortized evenly over their estimated useful lives. Intangible
assets with indefinite lives are not amortized.
•property, plant and equipment—These assets are recorded at
original cost and increased by the cost of any significant
improvements after purchase. We depreciate the cost evenly
over the assets’ estimated useful lives. For tax purposes,
accelerated depreciation methods are used as allowed by tax
laws.
Amortization expense related to acquired intangible assets that
contribute to our ability to sell, manufacture, research, market and
distribute products, compounds and intellectual property are
included in Amortization of intangible assets as they benefit
multiple business functions. Amortization expense related to