Medtronic 2015 Annual Report Download - page 84

Medtronic plc
Notes to Consolidated Financial Statements (Continued)
At the time of acquisition, the Company expects that all acquired IPR&D will reach technological feasibility, but there can be
no assurance that the commercial viability of these products will actually be achieved. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of planning, designing, and conducting clinical
trials necessary to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not
limited to, delays or failure to obtain regulatory approvals to conduct clinical trials, delays or failure to obtain required market
clearances, or delays or issues with patent issuance, validity, and litigation. If commercial viability were not achieved, the
Company would likely look to other alternatives to provide these therapies. If the related R&D project is not completed in a
timely manner or the R&D project is terminated or abandoned, the Company may have an impairment related to the IPR&D,
calculated as the excess of the asset’s carrying value over its fair value.
Contingent Consideration The Company recognizes contingent consideration at fair value at the date of acquisition based on
the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present
value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies.
The fair value of the contingent consideration is remeasured each reporting period with the change in fair value, including
accretion for the passage of time, recognized as income or expense within acquisition-related items in the consolidated
statements of income. Changes in the fair value will impact the Company’s earnings in such reporting period thereby resulting
in potential variability in the Company’s earnings until contingencies are resolved.
Derivatives U.S. GAAP requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to
measure the instruments at fair value through earnings unless the derivative qualifies for hedge accounting. If the derivative
qualifies for hedge accounting, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the
derivative will either be recognized immediately in earnings or recorded in other comprehensive income (loss) until the hedged
item is recognized in earnings upon settlement/termination. The changes in the fair value of the derivative are intended to offset
the change in fair value of the hedged asset, liability, or probable commitment. The Company evaluates hedge effectiveness at
inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued.
Hedge ineffectiveness, if any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities
in the consolidated statements of cash flows.
The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate
derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In
order to minimize earnings and cash flow volatility resulting from currency exchange rate changes, the Company enters into
derivative instruments, principally forward currency exchange rate contracts. These contracts are designed to hedge anticipated
foreign currency transactions and changes in the value of specific assets and liabilities. At inception of the forward contract, the
derivative is designated as either a freestanding derivative or a cash flow hedge. The Company does not enter into currency
exchange rate derivative contracts for speculative purposes. All derivative instruments that qualify for hedge accounting are
recorded at fair value on the consolidated balance sheets, as a component of prepaid expenses and other current assets, other
assets, other accrued expenses, or other long-term liabilities depending upon the gain or loss position of the contract and
contract maturity date.
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted
transactions denominated in a foreign currency that will take place in the future. For derivative instruments that are designated
and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a
component of accumulated other comprehensive loss. The effective portion of the gain or loss on the derivative instrument is
reclassified into earnings and is included in other expense, net or cost of products sold in the consolidated statements of income,
depending on the underlying transaction that is being hedged, in the same period or periods during which the hedged transaction
affects earnings.
The Company uses freestanding derivative forward contracts to offset its exposure to the change in value of specific foreign
currency denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions
denominated in a foreign currency. These derivatives are not designated as hedges, and therefore, changes in the value of these
forward contracts are recognized in earnings, thereby offsetting the current earnings effect of the related change in value of
foreign currency denominated assets and liabilities.
The Company uses forward starting interest rate derivative instruments designated as cash flow hedges to manage the exposure
to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gains or losses on the
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