Pfizer 2007 Annual Report Download - page 47

2007 Financial Report 45
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
invoiced sales to project the expected level of reimbursement. We
obtain third-party information that helps us to monitor the
adequacy of these accruals.
Our provisions for chargebacks (primarily reimbursements to
wholesalers for honoring contracted prices to third parties) closely
approximate actual, as we settle these deductions generally
within two to three weeks of incurring the liability.
We record sales allowances as a reduction of revenues at the time
the related revenues are recorded or when the allowance is
offered, whichever is later. We estimate the cost of our sales
incentives based on our historical experience with similar incentive
programs.
Our accruals for Medicaid rebates, Medicare rebates, performance-
based contract rebates and chargebacks were $1.2 billion as of
December 31, 2007, and $1.5 billion as of December 31, 2006.
Taxes collected from customers and remitted to governmental
authorities are presented on a net basis; that is, they are excluded
from revenues.
Alliances—We have agreements to co-promote pharmaceutical
products discovered by other companies. Revenues are earned
when our co-promotion partners ship the related product and title
passes to their customer. Alliance revenues are primarily based
upon a percentage of our co-promotion partners’ net sales.
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 $2.7 billion in 2007,
$2.6 billion in 2006 and $2.7 billion in 2005.
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. Before a compound receives regulatory
approval, we record milestone payments made by us to third
parties under contracted R&D arrangements as expense when the
specific milestone has been achieved. Once a compound receives
regulatory approval, we record any subsequent milestone
payments in Identifiable intangible assets, less accumulated
amortization and, unless the assets are determined to have an
indefinite life, we amortize them evenly over the remaining
agreement term or the expected product life cycle, whichever is
shorter.
K. Amortization of Intangible Assets, Depreciation and
Certain Long-Lived Assets
Long-lived assets include:
•Goodwill—Goodwill represents the excess of the purchase
price of an acquired business over the fair value of its net
assets. Goodwill is not amortized.
•Identifiable intangible assets, less accumulated amortization—
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, less accumulated depreciation—
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
intangible assets that are associated with a single function and
depreciation of property, plant and equipment are included in Cost
of sales, Selling, informational and administrative expenses and
Research and development expenses, as appropriate.
We review all of our long-lived assets, including goodwill and
other intangible assets, for impairment indicators at least annually
and we perform detailed impairment testing for goodwill and
indefinite-lived assets annually and for all other long-lived assets
whenever impairment indicators are present. When necessary, we
record charges for impairments of long-lived assets for the amount
by which the present value of future cash flows, or some other
fair value measure, is less than the carrying value of these assets.
L. Acquisition-Related In-Process Research and
Development Charges and Restructuring Charges and
Acquisition-Related Costs
When recording acquisitions (see Note 1E. Significant Accounting
Policies: Acquisitions), we immediately expense amounts related
to acquired IPR&D in Acquisition-related in-process research and
development charges.
We may incur restructuring charges in connection with our cost-
reduction initiatives, as well as in connection with acquisitions,
when we implement plans to restructure and integrate the
acquired operations. For restructuring charges associated with a
business acquisition that are identified in the first year after the
acquisition date, the related costs are recorded as additional
goodwill because they are considered to be liabilities assumed in
the acquisition. All other restructuring charges, all integration costs
and any charges related to our pre-existing businesses impacted
by an acquisition are included in Restructuring charges and
acquisition-related costs.