Medtronic 2008 Annual Report Download - page 60

market conditions, asset allocations and the views of leading financial
advisors and economists. In evaluating the expected retirement age
assumption, the Company considers the retirement ages of past
employees eligible for pension and medical benefits together with
expectations of future retirement ages.
It is reasonably possible that changes in these assumptions will occur
in the near term and, due to the uncertainties inherent in setting
assumptions, the effect of such changes could be material to the
Company’s consolidated financial statements. Refer to Note 13 for
additional information regarding the Company’s retirement benefit plans.
Revenue Recognition The Company sells its products primarily through
a direct sales force in the U.S. and a combination of direct sales
representatives and independent distributors in international markets.
The Company recognizes revenue when title to the goods and risk
of loss transfers to customers, provided there are no remaining
performance obligations required of the Company or any matters
requiring customer acceptance. In cases where the Company utilizes
distributors or ships product directly to the end user, it recognizes
revenue upon shipment provided all revenue recognition criteria have
been met. A portion of the Company’s revenue is generated from
inventory maintained at hospitals or with field representatives. For these
products, revenue is recognized at the time that the product has been
used or implanted. The Company records estimated sales returns,
discounts and rebates as a reduction of net sales in the same period
revenue is recognized.
Research and Development Research and development costs are
expensed when incurred. Research and development costs include
costs of all basic research activities as well as other research, engineering
and technical effort required to develop a new product or service or
make significant improvement to an existing product or manufacturing
process. Research and development costs also include pre-approval
regulatory expenses.
IPR&D When the Company acquires another entity, the purchase price
is allocated, as applicable, between IPR&D, other identifiable intangible
assets, net tangible assets and goodwill. The Company’s policy defines
IPR&D 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 requires the Company to make significant estimates. The amount
of the purchase price allocated to IPR&D 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. These methodologies include consideration of the
risk of the project not achieving commercial feasibility.
Other Expense, Net Other expense, net includes intellectual property
amortization expense, royalty income and expense, realized equity
security gains and losses, realized foreign currency transaction and
derivative gains and losses and impairment charges on equity securities.
Stock-Based Compensation The Company’s compensation programs
include share-based payments. Concurrent with the adoption of
SFAS No. 123 (revised 2004), “Share Based Payment” (SFAS No. 123(R)),
beginning in fiscal year 2007, all awards under share-based payment
programs are accounted for at fair value and these fair values are generally
amortized on a straight-line basis over the vesting terms into cost of
products sold, research and development expense, and selling, general and
administrative expense in the consolidated statement of earnings, as
appropriate. In fiscal year 2006 and earlier years, grants under
share-based payment programs were accounted for using the intrinsic
value method, which measured fair value based on the difference
between the quoted market price of the stock and the exercise price
on the date of grant. Refer to Note 11 for additional information.
Foreign Currency Translation Assets and liabilities are translated to
U.S. dollars at period-end exchange rates, and the resulting gains and
losses arising from the translation of net assets located outside the U.S.
are recorded as a cumulative translation adjustment, a component of
accumulated other comprehensive (loss)/income on the consolidated
balance sheets. Elements of the consolidated statements of earnings
are translated at average exchange rates in effect during the period and
foreign currency transaction gains and losses are included in other
expense, net in the consolidated statements of earnings.
Comprehensive Income and Accumulated Other Comprehensive (Loss)/
Income In addition to net earnings, comprehensive income includes
changes in foreign currency translation adjustments (including the
change in current exchange rates, or spot rates, of net investment
hedges), unrealized gains and losses on foreign exchange derivative
contracts qualifying and designated as cash flow hedges, defined
benefit pension adjustments and unrealized gains and losses on AFS
marketable securities. Comprehensive income in fiscal years 2008, 2007
and 2006 was $2,024, $2,794 and $2,552, respectively.
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
56 Medtronic, Inc.