Pfizer 2007 Annual Report Download - page 37

time to time, depending on market conditions, we will fix interest
rates either through entering into fixed-rate investments and
borrowings or through the use of derivative financial instruments
such as interest rate swaps.
Our financial instrument holdings at year-end were analyzed to
determine their sensitivity to interest rate changes. The fair values
of these instruments were determined by net present values.
In this sensitivity analysis, we used a one hundred basis point
change (decreased 1% from the rate of the yield of the financial
instrument) in interest rates for all maturities. All other factors
were held constant. This represents a change in the key model
characteristic from last year. The change was made to better
reflect the potential impact of a significant change in interest
rates. Applying this new model characteristic to our financial
instruments last year had no material effect.
In 2007 and 2006, if there were an adverse change of one hundred
basis points in interest rates, the expected effect on net income
related to our financial instruments would be immaterial.
Legal Proceedings and Contingencies
We and certain of our subsidiaries are involved in various patent,
product liability, consumer, commercial, securities, environmental
and tax litigations and claims; government investigations; and
other legal proceedings that arise from time to time in the
ordinary course of our business. We do not believe any of them
will have a material adverse effect on our financial position.
Beginning in 2007 upon the adoption of a new accounting
standard, we record accruals for income tax contingencies to the
extent that we conclude that a tax position is not sustainable
under a ’more likely than not’ standard and we record our
estimate of the potential tax benefits in one tax jurisdiction that
could result from the payment of income taxes in another tax
jurisdiction when we conclude that the potential recovery is
more likely than not. (See Notes to Consolidated Financial
Statements—Note 1D. Significant Accounting Policies: New
Accounting Standards and Note 8E. Taxes on Income: Tax
Contingencies.) We record accruals for all other contingencies to
the extent that we conclude their occurrence is probable and the
related damages are estimable, and we record anticipated
recoveries under existing insurance contracts when assured of
recovery. If a range of liability is probable and estimable and some
amount within the range appears to be a better estimate than any
other amount within the range, we accrue that amount. If a
range of liability is probable and estimable and no amount within
the range appears to be a better estimate than any other amount
within the range, we accrue the minimum of such probable
range. Many claims involve highly complex issues relating to
causation, label warnings, scientific evidence, actual damages
and other matters. Often these issues are subject to substantial
uncertainties and, therefore, the probability of loss and an
estimation of damages are difficult to ascertain. Consequently, we
cannot reasonably estimate the maximum potential exposure or
the range of possible loss in excess of amounts accrued for these
contingencies. These assessments can involve a series of complex
judgments about future events and can rely heavily on estimates
and assumptions (see Notes to Consolidated Financial
Statements—Note 1B. Significant Accounting Policies: Estimates
and Assumptions). Our assessments are based on estimates and
assumptions that have been deemed reasonable by management.
Litigation is inherently unpredictable, and excessive verdicts do
occur. Although we believe we have substantial defenses in these
matters, we could in the future incur judgments or enter into
settlements of claims that could have a material adverse effect on
our results of operations in any particular period.
Patent claims include challenges to the coverage and/or validity
of our patents on various products or processes. Although we
believe we have substantial defenses to these challenges with
respect to all our material patents, there can be no assurance as
to the outcome of these matters, and a loss in any of these cases
could result in a loss of patent protection for the drug at issue,
which could lead to a significant loss of sales of that drug and
could materially affect future results of operations.
2007 Financial Report 35
Financial Review
Pfizer Inc and Subsidiary Companies