Medtronic 2008 Annual Report Download - page 25

or (iii) there is an expiration of the statute of limitations. Significant
judgment is required in accounting for tax reserves. Although we
believe that we have adequately provided for liabilities resulting from
tax assessments by taxing authorities, positions taken by these tax
authorities could have a material impact on our effective tax rate in
future periods.
In the event there is a special, restructuring, certain litigation and/or
IPR&D charge recognized in our operating results, the tax cost or benefit
attributable to that item is separately calculated and recorded. Because
the effective rate can be significantly impacted by these discrete items
that take place in the period, we often refer to our tax rate using both
the effective rate and the non-GAAP nominal tax rate. The non-GAAP
nominal tax rate is defined as the income tax provision as a percentage
of taxable income, excluding special, restructuring, certain litigation and
IPR&D charges. We believe that this resulting non-GAAP financial
measure provides useful information to investors because it excludes
the effect of these discrete items so that investors can compare our
recurring results over multiple periods.
Tax regulations require certain items to be included in the tax return
at different times than when those items are required to be recorded
in the consolidated financial statements. As a result, our effective tax
rate reflected in our consolidated financial statements is different than
that reported in our tax returns. Some of these differences are
permanent, such as expenses that are not deductible on our tax return,
and some are temporary differences, such as depreciation expense.
Temporary differences create deferred tax assets and liabilities. Deferred
tax assets generally represent items that can be used as a tax deduction
or credit in our tax return in future years for which we have already
recorded the tax benefit in our consolidated statements of earnings. We
establish valuation allowances for our deferred tax assets when the
amount of expected future taxable income is not likely to support the
use of the deduction or credit. Deferred tax liabilities generally represent
tax expense recognized in our consolidated financial statements for
which payment has been deferred or expense has already been taken
as a deduction on our tax return but has not yet been recognized as an
expense in our consolidated statements of earnings.
The Company’s overall tax rate including the tax impact on special,
restructuring, certain litigation and IPR&D charges has resulted in an
effective tax rate of 22.7 percent for fiscal year 2008. Excluding the
impact of these items, our operational and tax strategies have resulted
in a non-GAAP nominal tax rate of 21.0 percent versus the U.S. statutory
rate of 35.0 percent. An increase in our nominal tax rate of 1.0 percent
would result in an additional income tax provision for the fiscal year
ended April 25, 2008 of approximately $38 million. See discussion of the
tax rate in the “Income Taxes” section of the management’s discussion
and analysis.
Valuation of IPR&D, Goodwill and Other Intangible Assets When we
acquire a company, the purchase price is allocated, as applicable,
between IPR&D, other identifiable intangible assets, net tangible assets
and goodwill as required by U.S. GAAP. IPR&D is defined as the value
assigned to those projects for which the related products have not
received regulatory approval and have no alternative future use.
Determining the portion of the purchase price allocated to IPR&D and
other intangible assets requires us to make significant estimates. The
amount of the purchase price allocated to IPR&D and other intangible
assets is determined by estimating the future cash flows of each project
or technology and discounting the net cash flows back to their present
values. The discount rate used is determined at the time of acquisition
in accordance with accepted valuation methods. For IPR&D, these
methodologies include consideration of the risk of the project not
achieving commercial feasibility.
Goodwill represents the excess of the aggregate purchase price over
the fair value of net assets, including IPR&D, of the acquired businesses.
Goodwill is tested for impairment annually, or more frequently if
changes in circumstances or the occurrence of events suggest that the
carrying amount may be impaired.
The test for impairment requires us to make several estimates about
fair value, most of which are based on projected future cash flows.
Our estimates associated with the goodwill impairment tests are
considered critical due to the amount of goodwill recorded on
our consolidated balance sheets and the judgment required in
determining fair value amounts, including projected future cash flows.
Goodwill was $7.519 billion and $4.327 billion as of April 25, 2008 and
April 27, 2007, respectively.
Other intangible assets consist primarily of purchased technology,
patents and trademarks and are amortized using the straight-line or
accelerated method, as appropriate, over their estimated useful lives,
ranging from 3 to 20 years. As of April 25, 2008, all of our intangible
assets are definite lived and amortized on a straight-line basis. We
review these intangible assets for impairment annually or as changes
in circumstance or the occurrence of events suggest the remaining
value may not be recoverable. Other intangible assets, net of
accumulated amortization, were $2.193 billion and $1.433 billion as of
April 25, 2008 and April 27, 2007, respectively.
21Medtronic, Inc.