Pfizer 2008 Annual Report Download - page 53

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 (U.S. GAAP). The
consolidation decision requires consideration of majority voting interests, as well as effective economic or other control. Typically,
we do not seek control by means other than voting interests and we do not have significant interests in non-consolidated entities.
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.
B. New Accounting Standards
Financial Instruments—Fair Value—As of January 1, 2008, we adopted on a prospective basis certain required provisions of
SFAS No. 157, Fair Value Measurements. Those provisions relate to our financial assets and liabilities carried at fair value and our
fair value disclosures related to financial assets and liabilities. SFAS No. 157, as amended, defines fair value, expands related
disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair
value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements—
Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for
similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly
or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when
available.
Many, but not all, of our financial instruments are carried at fair value. For example, substantially all of our cash equivalents, short-
term investments and long-term investments are classified as available-for-sale securities and are carried at fair value, with
unrealized gains and losses, net of tax, reported in Other comprehensive income/(expense). Derivative financial instruments are
carried at fair value in various balance sheet categories (see Note 9D. Financial Instruments: Derivative Financial Instruments and
Hedging Activities), with changes in fair value reported in current earnings or deferred on qualifying hedging relationships. Virtually
all of our valuation measurements use Level 2 inputs. The adoption of SFAS No. 157, as amended, did not have a significant impact
on our consolidated financial statements. As of January 1, 2008, we did not elect to adopt SFAS No. 157, as amended, for acquired
nonfinancial assets and assumed nonfinancial liabilities.
Goodwill and Other Intangible Assets—Other Intangible Assets—As of January 1, 2008, we adopted the provisions of
Emerging Issues Task Force (EITF) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities, for new contracts entered into on or after that date. EITF Issue No. 07-3
requires that non-refundable advance payments for goods and services that will be used in future research and development (R&D)
activities be expensed when the R&D activity has been performed or when the R&D goods have been received rather than when the
payment is made. The adoption of EITF Issue No. 07-3 did not have a significant impact on our consolidated financial statements.
Taxes on Income—Income Tax Contingencies—As of January 1, 2007, we adopted the provisions of FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, as amended,
and changed our policy related to the accounting for income tax contingencies to a ‘more-likely-than-not’ standard from a ‘probable’
standard. To understand the cumulative effect of this accounting change, see Note 7A. Taxes on Income: Adoption of New
Accounting Standard.
Pension and Postretirement Benefit Plans and Defined Contribution Plans—As of December 31, 2006, we adopted the
provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of
Financial Accounting Standards Board (FASB) Statements No. 87, 88, 106 and 132R). SFAS 158 requires us to recognize on our
consolidated balance sheet the difference between our benefit obligations and any plan assets of our benefit plans. In 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 and credits and
net transition amounts within Accumulated other comprehensive income/(expense), net of tax. To understand the cumulative effect
of this accounting change, see Note 13A. Pension and Postretirement Benefit Plans and Defined Contribution Plans: Adoption of
New Accounting Standard.
C. Estimates and Assumptions
In preparing the consolidated financial statements, we use certain estimates and assumptions that affect reported amounts and
disclosures. These estimates and underlying assumptions can impact all elements of our financial statements. For example, in the
consolidated statement of income, estimates are used when accounting for deductions from revenues (such as rebates,
chargebacks, sales returns and sales allowances), determining cost of sales, allocating cost in the form of depreciation and
amortization, and estimating restructuring charges and the impact of contingencies. On the consolidated balance sheet, estimates
are used in determining the valuation and recoverability of assets, such as accounts receivables, investments, inventories, fixed
assets and intangible assets (including goodwill), and estimates are used in determining the reported amounts of liabilities, such as
taxes payable, benefit obligations, the impact of contingencies, rebates, chargebacks, sales returns and sales allowances and
restructuring reserves.
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