Pfizer 2007 Annual Report Download - page 45

2007 Financial Report 43
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
1. Significant Accounting Policies
A. Consolidation and Basis of Presentation
The consolidated financial statements include our parent company
and all subsidiaries, including those operating outside the U.S., and
are prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). For
subsidiaries operating outside the U.S., the financial information
is included as of and for the year ended November 30 for each year
presented. Substantially all unremitted earnings of international
subsidiaries are free of legal and contractual restrictions. All
significant transactions among our businesses have been
eliminated.
We made certain reclassifications to the 2006 and 2005
consolidated financial statements to conform to the 2007
presentation, primarily related to presenting certain tax
receivables in current assets.
B. Estimates and Assumptions
In preparing the consolidated financial statements, we use certain
estimates and assumptions that affect reported amounts and
disclosures. For example, estimates are used when accounting for
deductions from revenues (such as rebates, chargebacks, sales
returns and sales allowances), depreciation, amortization,
employee benefits, contingencies and asset and liability valuations.
Our estimates are often based on complex judgments, probabilities
and assumptions that we believe to be reasonable but that are
inherently uncertain and unpredictable. Assumptions may later
prove to be incomplete or inaccurate, or unanticipated events and
circumstances may occur that might cause us to change those
estimates and assumptions. It is also possible that other
professionals, applying reasonable judgment to the same facts and
circumstances, could develop and support a range of alternative
estimated amounts. We are also subject to other risks and
uncertainties that may cause actual results to differ from estimated
amounts, such as changes in the healthcare environment,
competition, foreign exchange, litigation, legislation and
regulations. These and other risks and uncertainties are discussed
in the accompanying Financial Review, which is unaudited, under
the headings “Our Operating Environment and Response to Key
Opportunities and Challenges” and “Forward-Looking Information
and Factors That May Affect Future Results.”
C. 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. Except for income tax
contingencies, we record accruals for contingencies to the extent
that we conclude that their occurrence is probable and that the
related liabilities are estimable and we record anticipated
recoveries under existing insurance contracts when assured of
recovery. For tax matters, 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 Note 1D. Significant
Accounting Policies: New Accounting Standards and Note 8E.
Taxes on Income: Tax Contingencies.) We consider many factors
in making these assessments. Because litigation and other
contingencies are inherently unpredictable and excessive verdicts
do occur, these assessments can involve a series of complex
judgments about future events and can rely heavily on estimates
and assumptions (see Note 1B. Significant Accounting Policies:
Estimates and Assumptions).
D. New Accounting Standards
As of January 1, 2007, we adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an interpretation of
SFAS 109, Accounting for Income Taxes, and supplemented by
FASB Financial Staff Position FIN 48-1, Definition of Settlement in
FASB Interpretation No. 48, issued May 2, 2007, and changed
our policy related to the accounting for income tax contingencies.
To understand the cumulative effect of these accounting changes,
see Note 8A. Taxes on Income: Adoption of New Accounting
Standard. We continue to account for income tax contingencies
using a benefit recognition model. Beginning January 1, 2007, if
we consider that a tax position is ‘more likely than not’ of being
sustained upon audit, based solely on the technical merits of the
position, we recognize the benefit. We measure the benefit by
determining the amount that is greater than 50% likely of being
realized upon settlement, presuming that the tax position is
examined by the appropriate taxing authority that has full
knowledge of all relevant information. Under the benefit
recognition model, if our initial assessment fails to result in the
recognition of a tax benefit, we regularly monitor our position
and subsequently recognize the tax benefit: (i) if there are changes
in tax law or analogous case law that sufficiently raise the
likelihood of prevailing on the technical merits of the position to
more likely than not; (ii) if the statute of limitations expires; or
(iii) if there is a completion of an audit resulting in a favorable
settlement of that tax year with the appropriate agency. We
regularly reevaluate our tax positions based on the results of
audits of federal, state and foreign income tax filings, statute of
limitations expirations, and changes in tax law that would either
increase or decrease the technical merits of a position relative to
the more likely than not standard. Liabilities associated with
uncertain tax positions are now classified as current only when we
expect to pay cash within the next 12 months. Interest and
penalties, if any, continue to be recorded in Provision for taxes on
income and are classified on the balance sheet with the related
tax liability. Prior to 2007, our policy had been to account for
income tax contingencies based on whether we determined our
tax position to be ‘probable’ under current tax law of being
sustained, as well as an analysis of potential outcomes under a
given set of facts and circumstances. In addition, we previously
considered all tax liabilities as current once the associated tax year
was under audit.
On December 31, 2006, we adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans (an amendment of Financial Accounting Standards Board
(FASB) Statements No. 87, 88, 106 and 132R). SFAS 158 requires
us to recognize on our balance sheet the difference between our
benefit obligations and any plan assets of our benefit plans. In