Pfizer 2010 Annual Report Download - page 63

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
N. 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.
O. 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 changes
in unrealized gains and losses, net of tax, reported in Other comprehensive income/(loss). Derivative financial instruments are
carried at fair value in various balance sheet categories (see Note 9A. Financial Instruments: Selected Financial Assets and
Liabilities), with changes in fair value reported in current earnings or deferred for qualifying hedging relationships. Virtually all of our
valuation measurements for investments, loans and derivative financial instruments 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.
Investments where we have significant influence over the financial and operating policies of the investee are accounted for under
the equity method. Under the equity method, we record our share of the investee’s income and expense in our income statements.
The excess of the cost of the investment over our share in the equity of the investee on acquisition date is allocated to the
identifiable assets of the investee, with any remainder allocated to goodwill. Such investments are initially recorded at cost, which
typically does not include amounts of contingent consideration.
We regularly evaluate all of our financial assets for impairment. For investments in debt and equity securities, when a decline in fair
value, if any, is determined to be other-than-temporary, an impairment charge is recorded, and a new cost basis in the investment is
established. For loans, an impairment charge is recorded if it is probable that we will not be able to collect all amounts due according
to the loan agreement.
P. Deferred Tax Assets and Income Tax Contingencies
We provide a valuation allowance when we believe that our deferred tax assets are not recoverable based on an assessment of
estimated future taxable income that incorporates ongoing, prudent and feasible tax-planning strategies.
We account for income tax contingencies using a benefit recognition model. If we consider that a tax position is more likely than not
to be 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, analogous case law or there is new information 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
re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations
expirations, changes in tax law or receipt of new information 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.
Q. 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 generally are 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 expenses and Research and development expenses, as appropriate.
R. Share-Based Payments
Our compensation programs can include share-based payments. All grants under share-based payment programs are accounted for
at fair value and these fair values generally are 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.
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