Pfizer 2005 Annual Report Download - page 40

2005 Financial Report 39
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
1. Significant Accounting Policies
A. Consolidation and Basis of Presentation
The consolidated financial statements include our parent company
and all subsidiaries, including those operating outside the U.S. and
are prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). For subsidiaries
operating outside the U.S., the financial information is included
as of and for the year ended November 30 for each year presented.
Substantially all unremitted earnings of international subsidiaries
are free of legal and contractual restrictions. All significant
transactions among our businesses have been eliminated.
We made certain reclassifications to the 2004 and 2003
consolidated financial statements to conform to the 2005
presentation.
On April 16, 2003, we completed our acquisition of Pharmacia
Corporation (Pharmacia) in a stock-for-stock transaction accounted
for under the purchase method of accounting (see Note 2A,
Acquisitions: Pharmacia Corporation). Starting at the date of
acquisition, the assets acquired and liabilities assumed were
recorded at their respective fair values and our results of
operations included Pharmacia’s product sales and expenses from
the acquisition date. Therefore, approximately 71/2months of
results of operations of Pharmacia’s international operations and
about 81/2months of results of operations of Pharmacia’s U.S.
operations were included in our consolidated financial statements
for the year ended December 31, 2003.
B. Estimates and Assumptions
In preparing the consolidated financial statements, we use certain
estimates and assumptions that affect reported amounts and
disclosures. For example, estimates are used when accounting for
deductions from revenues (such as rebates, discounts, incentives
and product returns), depreciation, amortization, employee
benefits, contingencies and asset and liability valuations. Our
estimates are often based on complex judgments, probabilities and
assumptions that we believe to be reasonable but that are
inherently uncertain and unpredictable. Assumptions may be
incomplete or inaccurate and unanticipated events and
circumstances may occur. It is also possible that other professionals,
applying reasonable judgment to the same facts and
circumstances, could develop and support a range of alternative
estimated amounts. We are also subject to other risks and
uncertainties that may cause actual results to differ from estimated
amounts, such as changes in the healthcare environment,
competition, foreign exchange, litigation, legislation and
regulations. These and other risks and uncertainties are discussed
in the accompanying Financial Review, which is unaudited, under
the headings “Our Business Environment” and “Forward-Looking
Information and Factors That May Affect Future Results.”
C. Contingencies
We and certain of our subsidiaries are involved in various patent,
product liability, consumer, commercial, securities, environmental
and tax litigations and claims; government investigations; and
other legal proceedings that arise from time to time in the ordinary
course of our business. We record accruals for such contingencies
to the extent that we conclude their occurrence is probable and
the related damages are estimable. We consider many factors in
making these assessments. Because litigation and other
contingencies are inherently unpredictable and excessive verdicts
do occur, these assessments can involve a series of complex
judgments about future events and can rely heavily on estimates
and assumptions (see Note 1B, Significant Accounting Policies:
Estimates and Assumptions). We record anticipated recoveries
under existing insurance contracts when assured of recovery.
D. New Accounting Standards
As of December 31, 2005, we adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN
47). FIN 47 clarifies that conditional obligations meet the definition
of an asset retirement obligation in Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), and therefore should be
recognized if their fair value is reasonably estimable. As a result
of adopting FIN 47, we recorded a non-cash pre-tax charge of $40
million ($25 million, net of tax). This charge was reported in
Cumulative effect of a change in accounting principles—net of tax
in the fourth quarter of 2005. As of January 1, 2003, we adopted
the provisions of SFAS 143, which broadly addresses financial
accounting requirements for retirement obligations associated
with tangible long-lived assets. As a result of adopting SFAS 143,
we recorded a non-cash pre-tax charge of $47 million ($30 million,
net of tax) for the change in accounting for costs associated with
the eventual retirement of certain manufacturing and research
facilities. This charge was reported in Cumulative effect of a
change in accounting principles—net of tax in the first quarter of
2003. In accordance with these standards, we record accruals for
legal obligations associated with the retirement of tangible long-
lived assets, including obligations under the doctrine of promissory
estoppel and those that are conditioned upon the occurrence of
future events. We recognize these obligations using management’s
best estimate of fair value.
As of January 1, 2004, we adopted the provisions of FASB
Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest
Entities. FIN 46R provides additional guidance as to when certain
entities need to be consolidated for financial reporting purposes.
The adoption of FIN 46R did not have a material impact on our
consolidated financial statements.
E. Acquisitions
Our consolidated financial statements and results of operations
reflect an acquired business after the completion of the acquisition
and are not restated. We account for acquired businesses using
the purchase method of accounting which requires that the
assets acquired and liabilities assumed be recorded at the date of
acquisition at their respective fair values. Any excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Amounts allocated to acquired
in-process research and development (IPR&D) are expensed at the
date of acquisition. When we acquire net assets that do not
constitute a business under GAAP, no goodwill is recognized.
F. Foreign Currency Translation
For most international operations, local currencies have been
determined to be the functional currencies. The effects of
converting non-functional currency assets and liabilities into the
functional currency are recorded in Other (income)/deductions—