GSK Annual Report 2002

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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 <strong>2002</strong> 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.
37 Reconciliation to US accounting principles continued Notes to the financial statements GlaxoSmithKline 131 Purchase accounting adjustments £m Total assumed purchase consideration for outstanding shares (a) 43,919 Costs and fees of transaction Less: 66 Book value of SmithKline Beecham net assets – US GAAP (less goodwill) 2,742 Excess fair value of inventory (b) 267 Excess fair value of tangible fixed assets (b) 15 Excess fair value of investments (c) 1,042 Excess fair value of pension asset (d) 81 Fair value attributed to other intangible assets (e) 24,382 Fair value attributed to workforce (now considered goodwill) (e) 483 Fair value attributed to in-process R&D projects (f) 6,324 Additional liabilities assumed (g) (110) Deferred tax liabilities related to purchase price adjustments (h) (7,669) Goodwill (i) 16,428
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Do more, feel better, live longer T
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The Annual Report was approved by t
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Joint statement by the Chairman and
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04 GlaxoSmithKline Joint statement
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Products - Pharmaceuticals Descript
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Additionally, GlaxoSmithKline marke
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Competition - Consumer Healthcare T
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Operating activities Marketing and
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Description of business GlaxoSmithK
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Description of business GlaxoSmithK
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Product approvals Country/Region Pr
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As part of GlaxoSmithKline’s majo
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Operating resources Intellectual pr
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Compensation philosophy and program
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Access to healthcare in the develop
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GlaxoSmithKline gave unrestricted g
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Corporate Executive Team (CET) JP G
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Research and development Safety of
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Remuneration report GlaxoSmithKline
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The majority of the competitor pane
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Performance graph 100 90 80 70 60 N
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Non-Executive Directors Non-Executi
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Non-Executive Directors’ share ar
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Incentive plans Remuneration report
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Operating and financial review and
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2002 Year World economy The world
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Pharmaceutical sales by therapeutic
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Consumer Healthcare sales 2002 2001
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Earnings 2001 2002 (restated) CER%
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Contractual obligations and commitm
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Funding, maturity and counterparty
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Stricter regulatory controls also h
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Operating and financial review and
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Latin America reported eight per ce
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Selected financial data UK/US GAAP
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Financial statements GlaxoSmithKlin
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Independent Auditors’ report to t
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Consolidated statement of profit an
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Page 95 and 96: 13 Earnings per share Notes to the
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Page 105 and 106: 30 Legal proceedings The Group is i
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Page 111 and 112: 31 Acquisitions and disposals conti
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Page 121 and 122: 34 Employee share schemes continued
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Page 125 and 126: 37 Reconciliation to US accounting
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Page 141 and 142: 38 Principal Group companies Notes
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Page 145 and 146: Financial record GlaxoSmithKline 14
Page 153 and 154: Investor information GlaxoSmithKlin
Page 155 and 156: Shareholder information Ordinary sh
Page 157 and 158: Share capital GlaxoSmithKline 155 A
Page 159 and 160: Cross reference to Form 20-F GlaxoS
Page 161 and 162: Index A Access to healthcare 27 Acc
Page 163: Contact details INTERNET Informatio
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GSK Annual Report 2002

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