AstraZeneca Annual Report and Form 20-F Information 2011

Financial Reviewover the performance period. However, where the fair market value ofthe undelivered component is equal to or lower than the contractedprice for that component, we treat the whole of the upfront amountas being attributable to the delivered intangible assets and recognisethat part of the revenue upon delivery. No element of the contractedrevenue related to the undelivered component is allocated to the saleof the intangible asset. This is because the contracted revenue relatingto the undelivered component is contingent on future events (such assales) and so cannot be anticipated.Research and developmentOur business is underpinned by our marketed products anddevelopment portfolio. The R&D expenditure on internal activities togenerate these products is generally charged to profit in the year thatit is incurred. Purchases of IP and product rights to supplement ourR&D portfolio are capitalised as intangible assets. Further details ofthis policy are included in the Group Accounting Policies sectionof our Financial Statements from page 146. Such intangible assets areamortised from the launch of the underlying products and are testedfor impairment both before and after launch. This policy is in line withpractice adopted by major pharmaceutical companies.Impairment testing of goodwill and intangible assetsWe have significant investments in goodwill and intangible assets asa result of acquisitions of businesses and purchases of assets, suchas product development and marketing rights.Details of the estimates and assumptions we make in our annualimpairment testing of goodwill are included in Note 8 to the FinancialStatements on page 157. No impairment of goodwill was identified.Impairment reviews have been carried out on all intangible assetsthat are in development (and not being amortised), all major intangibleassets acquired during the year and all intangible assets that have hadindications of impairment during the year. Sales forecasts and specificallocated costs (which have both been subject to appropriate seniormanagement sign-off) are discounted using appropriate rates basedon AstraZeneca’s risk-adjusted pre-tax weighted average cost ofcapital. In building to the range of rates used in our internal investmentappraisal of future projects and capital investment decisions, weadjust our weighted average cost of capital for other factors, whichreflect, without limitation, local matters such as risk on a case bycase basis.Intangible asset impairment charges recorded in 2011 included$285 million following the termination of development of olaparibfor the maintenance treatment of serous ovarian cancer and animpairment of $150 million reflecting a lower probability of successassessment for TC-5214, based on the results of the first two of fourPhase III efficacy and tolerability studies. See pages 72 and 68respectively of the Therapy Area Review for more information.The majority of our investments in intangible assets and goodwillarose from the restructuring of the joint venture with Merck in 1998,the acquisition of MedImmune in 2007 and the payments to partiallyretire Merck’s interests in our products in the US in 2008 and 2010.We are satisfied that the carrying values at 31 December 2011 arefully justified by estimated future cash flows. The accounting for ourarrangements with Merck is fully explained in Note 25 to the FinancialStatements from page 181.Further details of the estimates and assumptions we make inimpairment testing of intangible assets are included in Note 9 tothe Financial Statements from page 158.LitigationIn the normal course of business, contingent liabilities may arise fromproduct-specific and general legal proceedings, from guarantees orfrom environmental liabilities connected with our current or formersites. Where we believe that potential liabilities have a less than 50%probability of crystallising or where we are unable to make areasonable estimate of the liability, we treat them as contingentliabilities. These are not provided for but are disclosed in Note 25to the Financial Statements from page 181.In cases that have been settled or adjudicated, or where quantifiablefines and penalties have been assessed and which are not subjectto appeal (or other similar forms of relief), or where a loss is probable(more than 50% assessed probability) and we are able to make areasonable estimate of the loss, we indicate the loss absorbed orthe amount of the provision accrued.Where it is considered that the Group is more likely than not to prevail,or in the rare circumstances where the amount of the legal liabilitycannot be estimated reliably, legal costs involved in defending theclaim are charged to profit as they are incurred. Where it is consideredthat the Group has a valid contract which provides the right toreimbursement (from insurance or otherwise) of legal costs and/orall or part of any loss incurred or for which a provision has beenestablished and we consider recovery to be virtually certain, thenthe best estimate of the amount expected to be received is recognisedas an asset.Assessments as to whether or not to recognise provisions or assetsand of the amounts concerned usually involve a series of complexjudgements about future events and can rely heavily on estimatesand assumptions. AstraZeneca believes that the provisions recordedare adequate based on currently available information and that theinsurance recoveries recorded will be received. However, given theinherent uncertainties involved in assessing the outcomes of thesecases and in estimating the amount of the potential losses and theassociated insurance recoveries, we could in future periods incurjudgments or insurance settlements that could have a materialadverse effect on our results in any particular period.The position could change over time, and there can, therefore, be noassurance that any losses that result from the outcome of any legalproceedings will not exceed the amount of the provisions that havebeen booked in the accounts.Although there can be no assurance regarding the outcome of legalproceedings, we do not currently expect them to have a materialadverse effect on our financial position, but they could significantlyaffect our financial results in any particular period.Post-retirement benefitsWe offer post-retirement benefit plans which cover many of ouremployees around the world. In keeping with local terms andconditions, most of these plans are ‘defined contribution’ in nature,where the resulting income statement charge is fixed at a set levelor is a set percentage of employees’ pay. However, several plans,mainly in the UK (which has by far the largest single scheme), the USand Sweden, are defined benefit plans where benefits are based onemployees’ length of service and final salary (typically averaged overone, three or five years). The UK and US defined benefit schemeswere closed to new entrants in 2000. All new employees in thesecountries are offered defined contribution schemes. As detailed inNote 18 to the Financial Statements from page 165, the benefitsprovided by the UK pension plan were also modified during 2010.96 Financial ReviewAstraZeneca Annual Report and Form 20-F Information 2011