Pfizer 2011 Annual Report Download - page 59

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Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
prospective basis unless they are required to be treated retrospectively under relevant accounting standards. 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.
D. Acquisitions
Our consolidated financial statements include the operations of an acquired business after the completion of the acquisition. We
account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets
acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of
acquired IPR&D be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration
transferred over the assigned values of the net assets acquired is recorded as goodwill. When we acquire net assets that do not
constitute a business as defined in U.S. GAAP, no goodwill is recognized.
Contingent consideration, if any, is included as part of the acquisition cost and is recognized at fair value as of the acquisition date.
Any liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is
resolved. These changes in fair value are recognized in earnings.
Amounts recorded for acquisitions can result from a complex series of judgments about future events and uncertainties and can rely
heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 1C.
Significant Accounting Policies: Estimates and Assumptions.
E. Fair Value
We are often required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent
accounting or reporting. For example, we use fair value extensively in the initial measurement of net assets acquired in a business
combination and when accounting for and reporting on certain financial instruments. We estimate fair value using an exit price
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 that the risk of non-performance will be the same before
and after the transfer.
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:
•Income approach, which is based on the present value of a future stream of net cash flows.
•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.
These fair value methodologies depend on the following types of inputs:
•Quoted prices for identical assets or liabilities in active markets (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 (Level 2 inputs).
•Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely
heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 1C.
Significant Accounting Policies: Estimates and Assumptions.
F. 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 Other comprehensive income/(loss). 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 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 deductions—net, and non-monetary items at historical rates.
58 2011 Financial Report