AstraZeneca Annual Report and Form 20-F Information 2011

25 Commitments and contingent liabilities continued Environmental costs and liabilitiesThe Advance Payment has been accounted for as an intangible assetand is being amortised over 20 years. This approach reflects the factthat, under the Agreements, AstraZeneca has acquired rights relievingit of potential obligations and restrictions in respect of Astra productswith no existing or pending patents at the time of merger. Althoughthese rights apply in perpetuity, the period of amortisation of 20 yearshas been chosen to reflect the typical timescale of development andmarketing of a product.The net payment made in 2008, consisting of the Partial Retirementpayment of $4.271bn less the True-Up amount of $241m and loannote receivable of $1.38bn, in total $2.6bn, has been capitalised asintangible assets.Part of the net payment made in 2008 resulted in AstraZeneca acquiringMerck’s interests in certain AstraZeneca products, including Pulmicort,Rhinocort, Symbicort and Toprol-XL. Consequently AstraZeneca nolonger makes contingent payments on these products to Merck andhas obtained the ability to fully exploit these products and to fully exploitother opportunities in the Respiratory therapy area that AstraZenecawas previously prevented from doing by Merck’s interests in theseproducts. Intangible assets aggregating $994m have been recognisedin respect of these acquired product rights and these are beingamortised over various periods, giving rise to an annual expense ofapproximately $50m going forward.The balance of the net payment made in 2008 ($1,656m) represented‘non-refundable deposits’ for future product rights associated withthe First and Second Options. In 2010, $647m was recognised asan intangible asset as a result of payment of the Appraised Value forthe First Option (see page 182). Together with the $1,656m nonrefundabledeposits recognised in 2008, the total sum of $2,303mwas allocated as follows: $689m to contingent payment relief,$1,140m to intangible assets reflecting the ability to fully exploit theproducts in the Cardiovascular and Neuroscience therapy areas,and $474m as non-refundable deposits associated with the SecondOption. The intangible assets recognised on exercise of the FirstOption give rise to an additional amortisation expense in the rangeof $20m to $40m per annum charged to cost of sales in respect ofcontingent payment relief, the precise amount dependent upon thelaunch status of the covered pipeline compounds, and an additionalcharge to SG&A of around $60m per annum. Amortisation on theseintangible assets began when the $647m payment was made on30 April 2010. The remaining $474m relating to the non-refundabledeposits will not be subject to amortisation until the Second Optionis exercised and the related product rights are acquired. If theSecond Option is exercised then amortisation related to the abilityto exploit opportunities in the Gastrointestinal therapy area willcommence, in the amount of around $100m per annum (charged toSG&A), as well as an as yet indeterminable amount of amortisationrelated to relief from contingent payments.The intangible assets relating to purchased product rights and theintangible assets relating to non-refundable deposits are subjectto impairment testing and would be partially or wholly impaired if aproduct is withdrawn or if activity in any of the affected therapy areasis significantly curtailed. Consequently, following the discontinuationof the development of lesogaberan in the third quarter of 2010, animpairment of $128m was recognised. As noted earlier, AstraZenecahas the ability to exercise the Second Option in 2012, 2017 or ifcombined annual sales of Prilosec and Nexium fall below a minimumamount. If we do not exercise the Second Option in 2012, this willtrigger an impairment review of the non-refundable deposits of $474massociated with the Second Option. In addition, if it becomesprobable that the Second Option will not be exercised, the nonrefundabledeposits for the product rights available to be acquiredunder the Second Option will be expensed immediately.The Group’s expenditure on environmental protection, including bothcapital and revenue items, relates to costs which are necessary forimplementing internal systems and programmes, and meeting legaland regulatory requirements for processes and products.They are an integral part of normal ongoing expenditure for carryingout the Group’s research, manufacturing and commercial operationsand are not separated from overall operating and development costs.There are no known changes in legal, regulatory or other requirementsresulting in material changes to the levels of expenditure for 2009,2010 or 2011.In addition to expenditure for meeting current and foreseen environmentalprotection requirements, the Group incurs costs in investigating andcleaning up land and groundwater contamination. In particular,AstraZeneca has environmental liabilities at some currently or formerlyowned, leased and third party sites.In the US, Zeneca Inc., and/or its indemnitees, have been named aspotentially responsible parties (PRPs) or defendants at approximately19 sites where Zeneca Inc. is likely to incur future environmentalinvestigation, remediation, operation and maintenance costs underfederal, state, statutory or common law environmental liabilityallocation schemes (together, US Environmental Consequences).Similarly, Stauffer Management Company LLC (SMC), which wasestablished in 1987 to own and manage certain assets of StaufferChemical Company acquired that year, and/or its indemnitees, havebeen named as PRPs or defendants at 29 sites where SMC is likelyto incur US Environmental Consequences. AstraZeneca has alsogiven indemnities to third parties for a number of sites outside the US.These environmental liabilities arise from legacy operations that arenot currently part of the Group’s business and, at most of these sites,remediation, where required, is either completed or nearing completion.AstraZeneca has made provisions for the estimated costs of futureenvironmental investigation, remediation, operation and maintenanceactivity beyond normal ongoing expenditure for maintaining the Group’sR&D and manufacturing capacity and product ranges, where a presentobligation exists, it is probable that such costs will be incurred andthey can be estimated reliably. With respect to such estimated futurecosts, there were provisions at 31 December 2011 in the aggregateof $92m (2010: $119m; 2009: $112m), mainly relating to the US.Where we are jointly liable or otherwise have cost sharing agreementswith third parties, we reflect only our share of the obligation. Wherethe liability is insured in part or in whole by insurance or otherarrangements for reimbursement, an asset is recognised to theextent that this recovery is virtually certain.It is possible that AstraZeneca could incur future environmentalcosts beyond the extent of our current provisions. The extent of suchpossible additional costs is inherently difficult to estimate due to anumber of factors, including: (1) the nature and extent of claims thatmay be asserted in the future; (2) whether AstraZeneca has or will haveany legal obligation with respect to asserted or unasserted claims;(3) the type of remedial action, if any, that may be selected at siteswhere the remedy is presently not known; (4) the potential for recoveriesfrom or allocation of liability to third parties; and (5) the length of timethat the environmental investigation, remediation and liability allocationprocess can take. Notwithstanding and subject to the foregoing, weestimate the potential additional loss for future environmentalinvestigation, remediation, remedial operation and maintenance activityabove and beyond our provisions to be, in aggregate, between $50mto $90m (2010: $20m to $40m; 2009: $10m to $25m) which relatessolely to the US.Financial StatementsAstraZeneca Annual Report and Form 20-F Information 2011 Financial Statements 183