Pfizer 2008 Annual Report Download - page 54

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
We regularly evaluate our estimates and assumptions, using historical experience and other factors, including the economic
environment. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable
but that are inherently uncertain and unpredictable.
As future events and their effects cannot be determined with precision, our estimates and assumptions may prove to be incomplete
or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates and
assumptions. Market conditions, such as illiquid credit markets, volatile equity markets, dramatic fluctuations in foreign currency
rates and economic recession, can increase the uncertainty already inherent in our estimates and assumptions. We adjust our
estimates and assumptions when facts and circumstances indicate the need for change. Those changes will be reflected in our
financial statements on a prospective basis. It is 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, 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.”
D. 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
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
1B. Significant Accounting Policies: New Accounting Standards and Note 7E. 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 1C. Significant Accounting Policies: Estimates and Assumptions).
E. Acquisitions
Our consolidated financial statements reflect an acquired business after the completion of the acquisition and are not restated. We
account for acquired businesses using the purchase method of accounting, which requires that most assets acquired and liabilities
assumed be recorded at the date of acquisition at their fair values. Any excess of the purchase price over the assigned values of the
net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development (IPR&D) have
been expensed at the date of acquisition. When we have acquired net assets that do not constitute a business under U.S. GAAP, no
goodwill has been recognized.
F. Foreign Currency Translation
For most international operations, local currencies have been determined to be the functional currencies. 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/(expense). We translate functional currency
statement of income amounts at average rates for the period. The effects of converting non-functional currency assets and liabilities
into the functional currency are recorded in Other (income)/deductions—net.
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 revenues 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. When we cannot reasonably estimate the amount of future product returns, we record revenues when the risk of
product return has been substantially eliminated.
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 revenues are recognized and primarily represent rebates and discounts to government agencies,
wholesalers, distributors and managed care organizations with respect to our pharmaceutical products. These deductions represent
estimates of the related obligation and, as such, judgment and knowledge of market conditions and practices are required when
estimating the impact of these sales deductions on gross sales for a reporting period.
Specifically:
•In the U.S., we record provisions for pharmaceutical Medicaid, Medicare and contract rebates based upon our experience ratio of
rebates paid and actual prescriptions written 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.
•Outside the U.S., the majority of our pharmaceutical rebates, discounts and price reductions 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
52 2008 Financial Report