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 <strong>and</strong> 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) <strong>and</strong> so cannot be anticipated.Research <strong>and</strong> developmentOur business is underpinned by our marketed products <strong>and</strong>development 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 <strong>and</strong> 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 <strong>and</strong> are testedfor impairment both before <strong>and</strong> after launch. This policy is in line withpractice adopted by major pharmaceutical companies.Impairment testing of goodwill <strong>and</strong> intangible assetsWe have significant investments in goodwill <strong>and</strong> intangible assets asa result of acquisitions of businesses <strong>and</strong> purchases of assets, suchas product development <strong>and</strong> marketing rights.Details of the estimates <strong>and</strong> 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 (<strong>and</strong> not being amortised), all major intangibleassets acquired during the year <strong>and</strong> all intangible assets that have hadindications of impairment during the year. Sales forecasts <strong>and</strong> specificallocated costs (which have both been subject to appropriate seniormanagement sign-off) are discounted using appropriate rates basedon <strong>AstraZeneca</strong>’s risk-adjusted pre-tax weighted average cost ofcapital. In building to the range of rates used in our internal investmentappraisal of future projects <strong>and</strong> 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 <strong>20</strong>11 included$285 million following the termination of development of olaparibfor the maintenance treatment of serous ovarian cancer <strong>and</strong> 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 <strong>and</strong> tolerability studies. See pages 72 <strong>and</strong> 68respectively of the Therapy Area Review for more information.The majority of our investments in intangible assets <strong>and</strong> goodwillarose from the restructuring of the joint venture with Merck in 1998,the acquisition of MedImmune in <strong>20</strong>07 <strong>and</strong> the payments to partiallyretire Merck’s interests in our products in the US in <strong>20</strong>08 <strong>and</strong> <strong>20</strong>10.We are satisfied that the carrying values at 31 December <strong>20</strong>11 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 <strong>and</strong> 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 <strong>and</strong> 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 <strong>and</strong> penalties have been assessed <strong>and</strong> which are not subjectto appeal (or other similar forms of relief), or where a loss is probable(more than 50% assessed probability) <strong>and</strong> 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 <strong>and</strong>/orall or part of any loss incurred or for which a provision has beenestablished <strong>and</strong> 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 assets<strong>and</strong> of the amounts concerned usually involve a series of complexjudgements about future events <strong>and</strong> can rely heavily on estimates<strong>and</strong> assumptions. <strong>AstraZeneca</strong> believes that the provisions recordedare adequate based on currently available information <strong>and</strong> that theinsurance recoveries recorded will be received. However, given theinherent uncertainties involved in assessing the outcomes of thesecases <strong>and</strong> in estimating the amount of the potential losses <strong>and</strong> 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, <strong>and</strong> 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 <strong>and</strong>conditions, 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 US<strong>and</strong> Sweden, are defined benefit plans where benefits are based onemployees’ length of service <strong>and</strong> final salary (typically averaged overone, three or five years). The UK <strong>and</strong> US defined benefit schemeswere closed to new entrants in <strong>20</strong>00. 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 <strong>20</strong>10.96 Financial Review<strong>AstraZeneca</strong> <strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Form</strong> <strong>20</strong>-F <strong>Information</strong> <strong>20</strong>11
In applying IAS 19, we recognise all actuarial gains <strong>and</strong> lossesimmediately through reserves. This methodology results in a lessvolatile income statement charge than under the alternative approachof recognising actuarial gains <strong>and</strong> losses over time. Investmentdecisions in respect of defined benefit schemes are based onunderlying actuarial <strong>and</strong> economic circumstances with the intentionof ensuring that the schemes have sufficient assets to meet liabilitiesas they fall due, rather than meeting accounting requirements. Thetrustees follow a strategy of awarding m<strong>and</strong>ates to specialist, activeinvestment managers, which results in a broad diversification ofinvestment styles <strong>and</strong> asset classes. The investment approach isintended to produce less volatility in the plan asset returns.In assessing the discount rate applied to the obligations, we haveused rates on AA corporate bonds with durations corresponding tothe maturities of those obligations except in Sweden where we haveused rates on government bonds as the market in high quality bondsis insufficiently deep.In all cases, the pension costs recorded in the Financial Statementsare assessed in accordance with the advice of independent qualifiedactuaries but require the exercise of significant judgement in relation toassumptions for future salary <strong>and</strong> pension increases, long-term priceinflation <strong>and</strong> investment returns.Our approach to the assessment has been to select key transaction<strong>and</strong> financial reporting processes in our largest operating units <strong>and</strong>a number of specialist areas, such as financial consolidation <strong>and</strong>reporting, treasury operations <strong>and</strong> taxation, so that, in aggregate,we have covered a significant proportion of each of the key lineitems in our Financial Statements. Each of these operating units <strong>and</strong>specialist areas has ensured that its relevant processes <strong>and</strong> controlsare documented to appropriate st<strong>and</strong>ards, taking into account, inparticular, the guidance provided by the SEC. We have also reviewedthe structure <strong>and</strong> operation of our ‘entity level’ control environment.This refers to the overarching control environment, including structureof reviews, checks <strong>and</strong> balances that are essential to the managementof a well-controlled business.The Directors have concluded that our internal control over financialreporting is effective at 31 December <strong>20</strong>11 <strong>and</strong> the assessment isset out in the Directors’ Responsibilities for, <strong>and</strong> <strong>Report</strong> on, InternalControl over Financial <strong>Report</strong>ing on page 140. KPMG Audit Plchas audited the effectiveness of our internal control over financialreporting at 31 December <strong>20</strong>11 <strong>and</strong>, as noted in the Auditor’s <strong>Report</strong>son the Financial Statements <strong>and</strong> on Internal Control over Financial<strong>Report</strong>ing (Sarbanes-Oxley Act Section 404) on page 141, their reportis unqualified.TaxationAccruals for tax contingencies require management to makejudgements <strong>and</strong> estimates in relation to tax audit issues <strong>and</strong>exposures. Amounts accrued are based on management’sinterpretation of country-specific tax law <strong>and</strong> the likelihood ofsettlement. Tax benefits are not recognised unless the tax positionsare probable of being sustained. Once considered to be probable,management reviews each material tax benefit to assess whethera provision should be taken against full recognition of the benefit onthe basis of potential settlement through negotiation <strong>and</strong>/or litigation.All such provisions are included in current liabilities. Any recordedexposure to interest on tax liabilities is provided for in the tax charge.Business Review<strong>AstraZeneca</strong> faces a number of transfer pricing audits in jurisdictionsaround the world <strong>and</strong>, in some cases, is in dispute with the taxauthorities. These disputes usually result in taxable profits beingincreased in one territory <strong>and</strong> correspondingly decreased in another.Our balance sheet positions for these matters reflect appropriatecorresponding relief in the territories affected.Further details of the estimates <strong>and</strong> assumptions we make indetermining our recorded liability for transfer pricing audits <strong>and</strong> othertax contingencies are included in the tax section of Note 25 to theFinancial Statements on page 189.Sarbanes-Oxley Act Section 404As a consequence of our NYSE listing, <strong>AstraZeneca</strong> is requiredto comply with those provisions of the Sarbanes-Oxley Act applicableto foreign issuers. Section 404 of the Sarbanes-Oxley Act requirescompanies annually to assess <strong>and</strong> make public statements about thequality <strong>and</strong> effectiveness of their internal control over financial reporting.<strong>AstraZeneca</strong> <strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Form</strong> <strong>20</strong>-F <strong>Information</strong> <strong>20</strong>11Financial Review 97
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