Medtronic 2009 Annual Report Download - page 24

20 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
estimate of a known or probable loss is a range, and no amount
within the range is a better estimate than any other, the minimum
amount of the range is accrued. If a loss is possible, but not
known or probable, and can be reasonably estimated, the
estimated loss or range of loss is disclosed in the notes to the
consolidated financial statements. In most cases, significant
judgment is required to estimate the amount and timing of a loss
to be recorded. Our significant legal proceedings are discussed in
Note 16 to the consolidated financial statements. While it is not
possible to predict the outcome for most of the matters discussed
in Note 16 to the consolidated financial statements, we believe it
is possible that costs associated with them could have a material
adverse impact on our consolidated earnings, financial position
or cash flows.
Tax Strategies Our effective tax rate is based on income, statutory
tax rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. We establish reserves
when, despite our belief that our tax return positions are fully
supportable, we believe that certain positions are likely to be
challenged and that we may or may not prevail. These reserves
are established and adjusted in accordance with the principles of
FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN No. 48). Under FIN No. 48, if we determine that a tax
position is more likely than not of being sustained upon audit,
based solely on the technical merits of the position, we recognize
the benefit. We measure the benefit by determining the amount
that is greater than 50 percent likely of being realized upon
settlement. We presume that all tax positions will be examined by
a taxing authority with full knowledge of all relevant information.
We regularly monitor our tax positions and FIN No. 48 tax
liabilities. We reevaluate the technical merits of our tax positions
and recognize an uncertain tax benefit, or derecognize a previously
recorded tax benefit, when (i) there is a completion of a tax audit,
(ii) there is a change in applicable tax law including a tax case or
legislative guidance, 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 earnings
before income taxes, excluding special, restructuring, certain
litigation and IPR&D charges and certain tax adjustments. 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 of
special, restructuring, certain litigation and IPR&D charges and
certain tax adjustments has resulted in an effective tax rate of
16.4 percent for fiscal year 2009. Excluding the impact of the
special, restructuring, certain litigation and IPR&D charges and
certain tax adjustments, our operational and tax strategies have
resulted in a non-GAAP nominal tax rate of 20.9 percent versus
the U.S. Federal statutory rate of 35.0 percent. An increase in our
nominal tax rate of 1.0 percent would have resulted in an
additional income tax provision for the fiscal year ended April 24,
2009 of approximately $42 million. See the discussion of our tax
rate and tax adjustments in the “Income Taxes” section of this
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,