Pfizer 2009 Annual Report Download - page 54

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer
a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants,
considering the highest and best use of assets and, for liabilities, assuming the risk of non-performance will be the same before and
after the transfer. A single estimate of fair value results from a complex series of judgments about future events and uncertainties
and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset
or liability, we may use one or all of the following approaches:
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable
assets or liabilities.
•Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic
obsolescence.
•Income approach, which is based on the present value of a future stream of net cash flows.
These fair value methodologies depend on the following types of inputs:
•Quoted prices for identical assets or liabilities in active markets (called Level 1 inputs).
•Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that
are not active or are directly or indirectly observable (called Level 2 inputs).
•Unobservable inputs that reflect estimates and assumptions (called Level 3 inputs).
G. Foreign Currency Translation
For most of our 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 to their U.S. dollar equivalents 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 non-monetary items at historical rates.
H. 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. We record sales of certain of our vaccines to the U.S. government as part of the
Pediatric Vaccine Stockpile program; these rules require that for fixed commitments made by the U.S. government, we record
revenues when risk of ownership for the completed product has been passed to the U.S. government. There are no specific
performance obligations associated with products sold under this program.
Deductions from Revenues—As is typical in the biopharmaceutical industry, our gross product sales are subject to a variety of
deductions that generally are 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
we use an estimated allocation factor (based on historical payments) and total revenues by country 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.
•Provisions for pharmaceutical chargebacks (primarily reimbursements to wholesalers for honoring contracted prices to third parties)
closely approximate actual as we settle these deductions generally within two to five weeks of incurring the liability.
52 2009 Financial Report