CONSOLIDATED FINANCIAL STATEMENTS - Boston Scientific

NOTES to the consolidated financial statements
Research and Development
Research and development costs, including new product development
programs, regulatory compliance and clinical research, are
expensed as incurred.
Pension Plans
The Company maintains pension plans covering certain international
employees, which the Company accounts for in accordance with
FASB Statement No. 87, Employers’ Accounting for Pensions. The
assets, liabilities and costs associated with these plans were not
material in 2004, 2003 and 2002.
Net Income Per Common Share
Net income per common share is based upon the weighted average
number of common shares and common share equivalents outstanding
each year.
New Accounting Standards
On December 16, 2004, the FASB issued Statement No.123(R),
Share-Based Payment, which is a revision of Statement No.123,
Accounting for Stock-Based Compensation. Statement No.123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees and amends Statement No. 95, Statement of Cash
Flows. In general, Statement No.123(R) contains similar accounting
concepts as those described in Statement No.123. However,
Statement No.123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is
no longer an alternative. The Company expects to adopt Statement
No.123(R) when it becomes effective on July 1, 2005.
Statement No.123(R) permits public companies to adopt the new
requirements using one of two methods:
1. A “modified prospective” method in that compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement No.123(R) for all share-based payments
granted after the effective date of Statement No. 123(R)
and (b) based on the requirements of Statement No. 123 for all
awards granted to employees before July 1, 2005 that remain
unvested as of July 1, 2005.
2. A “modified retrospective” method that includes the requirements
of the modified prospective method described above, but
also permits entities to restate based on the amounts previously
recognized under Statement No.123 for purposes of pro forma
disclosures either (a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
The Company is currently evaluating which method it will use to adopt
the requirements of Statement No.123(R).
BOSTON SCIENTIFIC AND SUBSIDIARIES
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As permitted by Statement No.123, the Company is currently
accounting for share-based payments to employees using Opinion
No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options, except as disclosed
in Note M. Accordingly, the adoption of Statement No.123(R)’s fair
value method will impact the Company’s statements of operations.
The impact of adoption of Statement No.123(R) cannot be quantified
at this time because it will depend on the level of share-based
payments granted in the future and the method used to value such
awards. However, had the Company adopted Statement No.123(R)
in prior periods, the impact of that standard would have approximated
the impact of Statement No.123 and net income and net income per
share would have been reported as the following pro forma amounts:
(in millions, except per share data) 2004 2003 2002
Net income, as reported
Add: Stock-based employee compensation
expense included in net income, net of
$ 1,062 $ 472 $ 373
related tax effects
Less: Total stock-based employee compensation
expense determined under fair value based
62 1 6
method for all awards, net of related tax effects (67) (62) (48)
Pro forma net income $ 1,057 $ 411 $ 331
Net income per common share
Basic
Reported $ 1.27 $ 0.57 $ 0.46
Pro forma $ 1.26 $ 0.50 $ 0.41
Assuming dilution
Reported $ 1.24 $ 0.56 $ 0.45
Pro forma $ 1.24 $ 0.49 $ 0.40
Statement No.123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under
currently effective accounting literature. This requirement will
reduce net operating cash flows and increase net financing cash
flows in periods after adoption of Statement No.123(R). While the
Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees
exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions was $185 million
in 2004, $154 million in 2003 and $28 million in 2002.
Reclassifications
The Company has reclassified certain prior years’ amounts to conform
to the current year’s presentation.