Pfizer 2006 Annual Report Download - page 45

2006 Financial Report 43
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
J. Research and Development Expenses
Research and development (R&D) costs are expensed as incurred.
These expenses include the costs of our proprietary R&D efforts,
as well as costs incurred in connection with our third-party
collaboration efforts. Before a compound receives regulatory
approval, we record milestone payments made by us to third
parties under contracted R&D arrangements as expense when the
specific milestone has been achieved. Once a compound receives
regulatory approval, we record any subsequent milestone
payments in Identifiable intangible assets, less accumulated
amortization and, unless the assets are determined to have an
indefinite life, we amortize them evenly over the remaining
agreement term or the expected product life cycle, whichever is
shorter. We have no third-party R&D arrangements that result in
the recognition of revenues.
K. Amortization of Intangible Assets, Depreciation and
Certain Long-Lived Assets
Long-lived assets include:
•
Goodwill—Goodwill represents the excess of the purchase
price of an acquired business over the fair value of its net
assets. Goodwill is not amortized.
•
Identifiable intangible assets, less accumulated amortization—
These acquired assets are recorded at our cost. Intangible
assets with finite lives are amortized evenly over their estimated
useful lives. Intangible assets with indefinite lives are not
amortized.
•
Property, plant and equipment, less accumulated depreciation—
These assets are recorded at original cost and increased by the
cost of any significant improvements after purchase. We
depreciate the cost evenly over the assets’ estimated useful
lives. For tax purposes, accelerated depreciation methods are used
as allowed by tax laws.
Amortization expense related to acquired intangible assets that
contribute to our ability to sell, manufacture, research, market and
distribute products, compounds and intellectual property are
included in Amortization of intangible assets as they benefit
multiple business functions. Amortization expense related to
intangible assets that are associated with a single function and
depreciation of property, plant and equipment are included in Cost
of sales, Selling, informational and administrative expenses and
Research and development expenses, as appropriate.
We review all of our long-lived assets, including goodwill and
other intangible assets, for impairment at least annually and
whenever events or circumstances present an indication of
impairment. When necessary, we record charges for impairments
of long-lived assets for the amount by which the present value of
future cash flows, or some other fair value measure, is less than
the carrying value of these assets.
L. Acquisition-Related In-Process Research and
Development Charges and Restructuring Charges and
Acquisition-Related Costs
When recording acquisitions (see Note 1E. Significant Accounting
Policies: Acquisitions), we immediately expense amounts related
to acquired IPR&D in Acquisition-related in-process research and
development charges.
We may incur restructuring charges in connection with productivity
initiatives, as well as in connection with acquisitions, when we
implement plans to restructure and integrate the acquired
operations. For restructuring charges associated with a business
acquisition that are identified in the first year after the acquisition
date, the related costs are recorded as additional goodwill because
they are considered to be liabilities assumed in the acquisition. All
other restructuring charges, all integration costs and any charges
related to our pre-existing businesses impacted by an acquisition
are included in Restructuring charges and acquisition-related costs.
M. Cash Equivalents
Cash equivalents include items almost as liquid as cash, such as
certificates of deposit and time deposits with maturity periods of
three months or less when purchased. If items meeting this
definition are part of a larger investment pool, we classify them
as Short-term investments.
N. Investments
Realized gains or losses on sales of investments are determined
by using the specific identification cost method.
O. Income Tax Contingencies
We account for income tax contingencies using an asset
recognition model. In our initial evaluation of tax positions taken
related to tax law, we assess the likelihood of prevailing on the
interpretation of that tax law. When we consider that a tax
position is probable of being sustained upon audit based solely
on the technical merits of the position, we record the benefit.
These assessments can be complex and we often obtain assistance
from external advisors.
Under the asset recognition model, if our initial assessment fails
to result in the recognition of a tax benefit, we regularly monitor
our position and subsequently recognize the tax benefit if there
are changes in tax law or analogous case law that sufficiently raise
the likelihood of prevailing on the technical merits of the position
to probable; if the statute of limitations expires; or if there is a
completion of an audit resulting in a settlement of that tax year
with the appropriate agency. Interest and penalties, if any, are
recorded in Provision for taxes on income.
P. Share-Based Payments
Our compensation programs can include share-based payments.
Beginning in 2006, all grants under share-based payment
programs are accounted for at fair value and these fair values are
generally amortized on an even basis over the vesting terms into
Cost of sales, Selling, informational and administrative expenses
and Research and development expenses, as appropriate. In 2005
and earlier years, grants under stock option and performance-
contingent share award programs were accounted for using the
intrinsic value method.
2. Acquisitions
We are committed to capitalizing on new growth opportunities,
a strategy that can include acquisitions of companies, products or
technologies. As of December 31, 2006, we executed the following
transactions:
•
In February 2006, we completed the acquisition of the sanofi-
aventis worldwide rights, including patent rights and