Pfizer 2007 Annual Report Download - page 46

44 2007 Financial Report
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
addition, we are required to recognize as part of other
comprehensive income/(expense), net of taxes, gains and losses
due to differences between our actuarial assumptions and actual
experience (actuarial gains and losses) and any effects on prior
service due to plan amendments (prior service costs or credits) that
arise during the period and which are not yet recognized as net
periodic benefit costs. At adoption date, we recognized the
previously unrecognized actuarial gains and losses, prior service
costs or credits and net transition amounts within Accumulated
other comprehensive income/(expense), net of tax (see Note 14.
Pension and Postretirement Benefit Plans and Defined
Contribution Plans).
On January 1, 2006, we adopted the provisions of SFAS No. 123R,
Share-Based Payment, as supplemented by the interpretation
provided by SEC Staff Accounting Bulletin (SAB) No. 107, issued
in March 2005. (SFAS 123R replaced SFAS 123, Stock-Based
Compensation, issued in 1995.) We elected the modified
prospective application transition method of adoption and, as
such, prior-period financial statements were not restated for this
change. Under this method, the fair value of all stock options
granted or modified after adoption must be recognized in the
consolidated statement of income. Total compensation cost
related to nonvested awards not yet recognized, determined
under the original provisions of SFAS 123, must also be recognized
in the consolidated statement of income. The adoption of SFAS
123R primarily impacted our accounting for stock options (see
Note 16. Share-Based Payments). Prior to January 1, 2006, we
accounted for stock options under Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
an elective accounting policy permitted by SFAS 123. Under this
standard, since the exercise price of our stock options granted is
set equal to the market price of Pfizer common stock on the
date of the grant, we did not record any expense to the
consolidated statement of income related to stock options, unless
certain original grant date terms were subsequently modified.
However, as required, we disclosed, in the Notes to Consolidated
Financial Statements, the pro forma expense impact of the stock
option grants as if we had applied the fair-value-based recognition
provisions of SFAS 123.
As of December 31, 2005, we adopted the provisions of FASB
Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations (an interpretation of FASB Statement
No. 143). FIN 47 clarifies that conditional obligations meet the
definition of an asset retirement obligation in SFAS No. 143,
Accounting for Asset Retirement Obligations, 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 ($23 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. 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 conditional upon the occurrence of future
events. We recognize these obligations using management’s best
estimate of fair value.
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 the 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 U.S. 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—
net. We translate functional currency assets and liabilities to their
U.S. dollar equivalents at rates in effect at the balance sheet
date and record these translation adjustments in Shareholders’
equity—Accumulated other comprehensive income/(expense).
We translate functional currency statement of income amounts
at average rates for the period.
For operations in highly inflationary economies, we translate
monetary items at rates in effect at the balance sheet date, with
translation adjustments recorded in Other (income)/deductions—
net, and nonmonetary items at historical rates.
G. Revenues
Revenue Recognition—We record revenues from product sales
when the goods are shipped and title passes to the customer. At
the time of sale, we also record estimates for a variety of sales
deductions, such as sales rebates, discounts and incentives, and
product returns. When we cannot reasonably estimate the amount
of future product returns, we record revenues when the risk of
product return has been substantially eliminated.
Deductions from Revenues—Gross product sales are subject to a
variety of deductions that are generally estimated and recorded
in the same period that the revenues are recognized.
In the U.S., we record provisions for Medicaid, Medicare and
contract rebates based upon our actual experience ratio of rebates
paid and actual prescriptions during prior quarters. We apply
the experience ratio to the respective period’s sales to determine
the rebate accrual and related expense. This experience ratio is
evaluated regularly to ensure that the historical trends are as
current as practicable. As appropriate, we will adjust the ratio to
better match our current experience or our expected future
experience. In assessing this ratio, we consider current contract
terms, such as changes in formulary status and discount rates.
Outside the U.S., the majority of our rebates are contractual or
legislatively mandated and our estimates are based on actual
invoiced sales within each period; both of these elements help to
reduce the risk of variations in the estimation process. Some
European countries base their rebates on the government’s
unbudgeted pharmaceutical spending and we use an estimated
allocation factor based on historical payments against our actual