Medtronic 2011 Annual Report Download - page 24

20 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Critical Accounting Estimates
We have adopted various accounting policies to prepare the
consolidated financial statements in accordance with accounting
principles generally accepted in the U.S. (U.S. GAAP). Our most
significant accounting policies are disclosed in Note 1 to the
consolidated financial statements.
The preparation of the consolidated financial statements, in
conformity with U.S. GAAP, requires us to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying Notes. Our estimates and
assumptions, including those related to bad debts, inventories,
intangible assets, asset impairment, legal proceedings, in-process
research and development (IPR&D), contingent consideration,
warranty obligations, product liability, self-insurance, pension and
post-retirement obligations, sales returns and discounts, stock-
based compensation, valuation of equity and debt securities, and
income tax reserves are updated as appropriate, which in most
cases is quarterly. We base our estimates on historical experience,
actuarial valuations, or various assumptions that are believed to
be reasonable under the circumstances.
Estimates are considered to be critical if they meet both of the
following criteria: (1) the estimate requires assumptions about
material matters that are uncertain at the time the accounting
estimates are made, and (2) material changes in the estimates are
reasonably likely to occur from period to period. Our critical
accounting estimates include the following:
Legal Proceedings We are involved in a number of legal actions
involving both product liability and intellectual property disputes.
The outcomes of these legal actions are not within our complete
control and may not be known for prolonged periods of time.
In some actions, the claimants seek damages as well as other
relief, including injunctions barring the sale of products that are
the subject of the lawsuit, that could require significant
expenditures or result in lost revenues. In accordance with U.S.
GAAP, we record a liability in our consolidated financial statements
for these actions when a loss is known or considered probable
and the amount can be reasonably estimated. If the reasonable
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
U.S. GAAP. Under U.S. GAAP, 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 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 or restructuring charge, certain
litigation charge, net, and/or acquisition-related items 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 and restructuring charges, certain litigation
charges, net, acquisition-related items, and certain tax
adjustments. We believe this resulting non-GAAP financial
measure provides useful information to investors because it
excludes the effect of these discrete items so that investors can