GSK Annual Report 2002

130 GlaxoSmithKline Notes to the financial statements
37 Reconciliation to US accounting principles continued
Acquisition of SmithKline Beecham
Under US GAAP, the Financial statements of GlaxoSmithKline prior to
the merger are those of Glaxo Wellcome, the US GAAP accounting
acquirer. The acquisition of SmithKline Beecham is accounted for
under the purchase method as of the date of the merger,
27th December 2000.
Purchase accounting adjustments
In order to determine the proper allocation of purchase price
related to the acquired assets of SmithKline Beecham under US
GAAP purchase accounting, the cost of acquisition is calculated
using the market value of the shares issued, the fair value of vested
options exchanged and direct external acquisition costs and then
allocated to the fair value of net assets acquired. As a result of the
fair value exercise, increases in the values of SmithKline Beecham’s
inventory, tangible fixed assets, investments and pension obligations
were recognised and fair market values attributed to its other
intangible assets, mainly product rights (inclusive of patents and
trade marks), assembled workforce and in-process research and
development, together with appropriate deferred taxation effects.
The difference between the cost of acquisition and the fair value
of the assets and liabilities of SmithKline Beecham has been
recorded as goodwill. The amount allocated to in-process research
and development is required under US GAAP to be expensed
immediately in the first reporting period after the business
combination, which for GlaxoSmithKline was the period ended
31st December 2000. Fair value adjustments to the recorded
amount of inventory were expensed in 2001 and additional
amortisation and depreciation will be recorded in respect of the
fair value adjustments to tangible and intangible assets and the
resulting goodwill over the periods of their respective economic
useful lives.
The adjustments to the assets and liabilities of SmithKline Beecham
to reflect the fair values and allocation of the excess purchase
consideration over the fair value of net assets acquired, based
on management best estimates of fair value, are summarised in
the table opposite and discussed below:
(a) The total assumed purchase consideration was calculated
by multiplying the number of GlaxoSmithKline shares issued
to SmithKline Beecham’s shareholders for all outstanding
SmithKline Beecham shares by the average fair value of Glaxo
Wellcome securities. The average fair value of Glaxo Wellcome
securities was calculated over a period of four days prior
to and subsequent to the announcement of the merger on
17th January 2000. The total assumed purchase consideration
also included the fair value of SmithKline Beecham vested
options exchanged for vested options in GlaxoSmithKline.
The total number of SmithKline Beecham vested options was
multiplied by the respective fair value of each of the ordinary
shares and ADR plans determined at 17th January 2000.
(b) The increase in fair value of inventory and fixed assets was
determined based on the difference between the carrying
value and the market value of these assets. The increase to
inventory was expensed in 2001, as all inventory was sold. The
increase in fixed assets was allocated to its respective category
and is being depreciated over the remaining useful lives of
these assets.
(c) The market value of investments was included in the book value
of SmithKline Beecham’s net assets under US GAAP. The increase
in investments related to increases in the fair market value of
non-marketable securities at 31st December 2000. Included
in this amount are increases to equity investments. These equity
investments were measured at fair value and any excess of the
fair value over the underlying tangible assets and liabilities was
recognised as goodwill within investments. This goodwill is no
longer amortised, but reviewed annually for impairment.
(d) The fair value attributed to pension obligations reflected the
recognition of previously unrecognised actuarial gains/losses,
prior service costs and transition amounts. The amounts recognised
were based on actuarial assessments at the acquisition date.
(e) The fair value attributed to other intangible assets related
primarily to management’s estimate of the value of product
rights (inclusive of their respective patents and trade marks)
on existing products and of the assembled workforce. The fair
value of the product rights was determined based on a
discounted net future cash flow analysis of SmithKline Beecham’s
approved product portfolio which included all existing approved
products within the pharmaceutical therapeutic areas and
consumer healthcare product portfolios. Any supplemental
products in the development process which built upon existing
chemical entities within existing areas and which were not
subject to separate US Food and Drug Administration approval
were also included. Management based the estimates of the
weighted average useful life of the product rights on the future
period over which the substantial majority of the estimated net
future cash flow value was expected to be realised. The fair value
of the assembled workforce was reclassified to goodwill under
SFAS 142 in 2002 and will be reviewed annually for impairment.
(f) The amount of total consideration allocated to SmithKline
Beecham’s in-process research and development projects (IPR&D)
was estimated using current estimates of the status and
prospects of its R&D portfolio. The IPR&D included only those
identified projects that had advanced to a stage of development
where management believed reasonable estimates of projected
cash flows could be prepared. This did not include basic
discovery and the portfolio of gene patents. The reported IPR&D
value was not intended to reflect the present value of all
development activities under way. The value allocated to the
IPR&D was determined utilising a risk adjusted income approach
that included earnings discounted by the appropriate cost of
capital for the investment. Estimates of future cash flows related
to individual IPR&D projects were based on existing estimates of
revenues and contribution margin for the project.
(g) Additional liabilities related to restructuring costs directly linked
to plans that were in place at the date of the acquisition. These
liabilities reflected the costs to close certain SmithKline Beecham
manufacturing sites and redundancy costs. The other liabilities
related to additional deferred tax liabilities previously not
recognised.
(h) Deferred taxes were computed on the excess of fair value over
book value, other than for goodwill and in-process research and
development, using the applicable weighted average statutory
tax rates.
(i) Goodwill represents the remainder of unallocated purchase
consideration and now includes the value originally allocated to
workforce. Goodwill is no longer amortised under SFAS 142,
but rather reviewed annually for impairment.