Pfizer 2008 Annual Report Download - page 56

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
for evaluating goodwill requires the calculation of the fair value of the corresponding business segment and determining the implied
fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the
business segment.
L. Acquisition-Related In-Process Research and Development Charges and Restructuring Charges and
Acquisition-Related Costs
When recording acquisitions, we have expensed amounts related to acquired IPR&D in Acquisition-related in-process research and
development charges.
We may incur restructuring charges in connection with our cost-reduction 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 have been recorded as additional goodwill,
if any, because they have been 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 have been expensed as incurred in
Restructuring charges and acquisition-related costs. Termination costs are a significant component of our restructuring charges and
are recorded when the actions are probable and estimable.
M. Cash Equivalents and Statement of Cash Flows
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.
Cash flows associated with financial instruments designated as fair value or cash flow hedges may be included in operating,
investing or financing activities, depending on the classification of the items being hedged. Cash flows associated with financial
instruments designated as net investment hedges are classified according to the nature of the hedge instrument. Cash flows
associated with financial instruments that do not qualify for hedge accounting treatment are classified according to their purpose and
accounting nature.
N. Investments, Loans and Derivative Financial Instruments
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 are based on 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.
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 a benefit recognition model. If we consider that a tax position is more likely than not
of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit
by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is
examined by the appropriate taxing authority that has full knowledge of all relevant information. Under the benefit 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: (i) 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 more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of
an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly reevaluate our tax positions
based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, and changes in tax
law that would either increase or decrease the technical merits of a position relative to the ‘more-likely-than-not’ standard. Liabilities
associated with uncertain tax positions are classified as current only when we expect to pay cash within the next 12 months. Interest
and penalties, if any, are recorded in Provision for taxes on income and are classified on our consolidated balance sheet with the
related tax liability.
We are subject to income tax in many jurisdictions and a certain degree of estimation is required in recording the assets and
liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction.
Tax audits can involve complex issues and the resolution of issues may span multiple years, particularly if subject to negotiation or
litigation.
P. Pension and Postretirement Benefit Plans
We provide defined benefit pension plans for the majority of employees worldwide. In the U.S., we have both qualified and
supplemental (non-qualified) defined benefit plans, as well as other postretirement benefit plans, consisting primarily of healthcare
and life insurance for retirees. We recognize the overfunded or underfunded status of each of our defined benefit plans as an asset
or liability on our consolidated balance sheet. The obligations are generally measured at the actuarial present value of all benefits
attributable to employee service rendered, as provided by the applicable benefit formula. Our pension and other postretirement
obligations may include assumptions such as long-term rate of return on plan assets, expected employee turnover and participant
mortality. For our pension plans, the obligation may also include assumptions as to future compensation levels. For our other
postretirement benefit plans, the obligation may include assumptions as to the expected cost of providing the healthcare and life
insurance benefits, as well as the extent to which those costs are shared with the employee or others (such as governmental
programs). Plan assets are measured at fair value. Net periodic benefit costs are recognized, as required, into Cost of sales, Selling,
informational and administrative and Research and development expenses, as appropriate.
54 2008 Financial Report