| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
1
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations
Baxter
International Inc., through its subsidiaries, provides a broad
portfolio of essential renal and hospital products, including home,
acute and in-center dialysis; sterile IV solutions; infusion
systems and devices; parenteral nutrition; biosurgery products and
anesthetics; and pharmacy automation, software and services. The
company’s global footprint and the critical nature of its
products and services play a key role in expanding access to
healthcare in emerging and developed countries. These products are
used by hospitals, kidney dialysis centers, nursing homes,
rehabilitation centers, doctors’ offices and by patients at
home under physician supervision. The company operates in two
segments, Renal and Hospital Products, which are described in Note
17.
Use of
Estimates
The
preparation of the financial statements in conformity with
generally accepted accounting principles (GAAP) requires the
company to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from
those estimates.
Basis of
Presentation
The
consolidated financial statements include the accounts of Baxter
and its majority-owned subsidiaries that Baxter controls, after
elimination of intercompany transactions. Certain reclassifications
have been made to conform prior period consolidated financial
statements to the current period presentation.
On
July 1, 2015, Baxter completed the distribution of
approximately 80.5% of the outstanding common stock of its
biopharmaceuticals business, Baxalta Incorporated (Baxalta), to
Baxter stockholders (the Distribution). The Distribution was made
to Baxter’s stockholders of record as of the close of
business on June 17, 2015, who received one share of Baxalta
common stock for each Baxter common share held as of such date. As
a result of the Distribution, Baxalta is now an independent public
company whose shares trade on the New York Stock Exchange under the
symbol “BXLT.” Baxter is accounting for its investment
in Baxalta common stock as an available-for-sale equity security
with a fair value of approximately $5.1 billion as of
December 31, 2015 (prior to giving effect to the disposition
of 37,573,040 Baxalta shares of common stock on January 27,
2016 in a related debt for equity exchange).
As a result
of the separation, the consolidated statements of income,
consolidated balance sheets, consolidated statements of cash flow,
and related financial information reflect Baxalta’s
operations, assets and liabilities, and cash flows as discontinued
operations for all periods presented. Refer to Note 2 for
additional information regarding the separation of
Baxalta.
As a result
of the separation of Baxalta, Baxter realigned its organizational
structure under two reportable segments, Renal and Hospital
Products. Refer to Note 17 for additional information regarding the
company’s segments.
On
September 6, 2013, Baxter acquired Indap Holding AB, the
holding company for Gambro AB (Gambro), a privately held dialysis
product company based in Lund, Sweden, for cash consideration of
$3.7 billion. Beginning September 6, 2013, Baxter’s
financial statements include the assets, liabilities, and operating
results of Gambro. Refer to Note 5 for additional information about
the Gambro acquisition.
Revenue
Recognition
The company
recognizes revenues from product sales and services when earned.
Specifically, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred (or services have been
rendered), the price is fixed or determinable, and collectability
is reasonably assured. For product sales, revenue is not recognized
until title and risk of loss have transferred to the customer. The
shipping terms for the majority of the company’s revenue
arrangements are FOB destination. The recognition of revenue is
delayed if there are significant post-delivery obligations, such as
training, installation or other services. Provisions for discounts,
rebates to customers, chargebacks to wholesalers and returns are
provided for at the time the related sales are recorded, and are
reflected as a reduction to gross sales to arrive at net
sales.
The company
sometimes enters into arrangements in which it commits to
delivering multiple products or services to its customers. In these
cases, total arrangement consideration is allocated to the
deliverables based on their relative selling prices. Then the
allocated consideration is recognized as revenue in accordance with
the principles described above. Selling prices are determined by
applying a selling price hierarchy and by using vendor specific
objective evidence (VSOE), if it exists. Otherwise, selling prices
are determined using third party evidence (TPE). If neither VSOE
nor TPE is available, the company uses its best estimate of selling
prices.
Accounts
Receivable and Allowance for Doubtful Accounts
In the normal
course of business, the company provides credit to its customers,
performs credit evaluations of these customers and maintains
reserves for potential credit losses. In determining the amount of
the allowance for doubtful accounts, the company considers, among
other items, historical credit losses, the past-due status of
receivables, payment histories and other customer-specific
information. Receivables are written off when the company
determines they are uncollectible. The allowance for doubtful
accounts was $110 million at December 31, 2015 and $119
million at December 31, 2014.
Product
Warranties
The company
provides for the estimated costs relating to product warranties at
the time the related revenue is recognized. The cost is determined
based on actual company experience for the same or similar
products, as well as other relevant information. Product warranty
liabilities are adjusted based on changes in estimates.
Cash and
Equivalents
Cash and
equivalents include cash, certificates of deposit and money market
funds with an original maturity of three months or less.
Inventories
as of
December 31 (in millions)
2015
2014
Raw materials $ 374 $ 372
Work in
process 142 148
Finished goods
1,088
1,057
Inventories $ 1,604 $ 1,577
Inventories
are stated at the lower of cost (first-in, first-out method) or
market value. Market value for raw materials is based on
replacement costs, and market value for work in process and
finished goods is based on net realizable value. The company
reviews inventories on hand at least quarterly and records
provisions for estimated excess, slow-moving and obsolete
inventory, as well as inventory with a carrying value in excess of
net realizable value.
Property,
Plant and Equipment, Net
as of
December 31 (in millions)
2015
2014
Land $ 116 $ 119
Buildings and leasehold
improvements 1,389 1,378
Machinery and
equipment 5,414 5,377
Equipment with
customers 1,238 1,351
Construction in
progress 833 729
Total property, plant and
equipment, at cost 8,990 8,954
Accumulated
depreciation (4,604 ) (4,520 )
Property, plant and
equipment (PP&E), net $ 4,386 $ 4,434
Depreciation
expense is calculated using the straight-line method over the
estimated useful lives of the related assets, which range from 20
to 50 years for buildings and improvements and from three to 15
years for machinery and equipment. Leasehold improvements are
amortized over the life of the related facility lease (including
any renewal periods, if appropriate) or the asset, whichever is
shorter. Baxter capitalizes certain computer software and software
development costs incurred in connection with developing or
obtaining software for internal use as part of machinery and
equipment. Capitalized software costs are amortized on a
straight-line basis over the estimated useful lives of the
software, and are included in depreciation expense. Straight-line
and accelerated methods of depreciation are used for income tax
purposes. Depreciation expense was $597 million in 2015, $613
million in 2014 and $502 million in 2013.
Acquisitions
Results of
operations of acquired companies are included in the
company’s results of operations as of the respective
acquisition dates. The purchase price of each acquisition is
allocated to the net assets acquired based on estimates of their
fair values at the date of the acquisition. Any purchase price in
excess of these net assets is recorded as goodwill. The allocation
of purchase price in certain cases may be subject to revision based
on the final determination of fair values during the measurement
period, which may be up to one year from the acquisition
date.
Contingent
consideration is recognized at the estimated fair value on the
acquisition date. Subsequent changes to the fair value of
contingent payments are recognized in earnings as a component of
other income (expense), net. Contingent payments related to
acquisitions may consist of development, regulatory and commercial
milestone payments, in addition to sales-based payments, and are
valued using discounted cash flow techniques. The fair value of
development, regulatory and commercial milestone payments reflects
management’s expectations of probability of payment, and
increases or decreases as the probability of payment or expectation
of timing of payments changes. The fair value of sales-based
payments is based upon probability-weighted future revenue
estimates and increases or decreases as revenue estimates or
expectation of timing of payments changes.
Research
and Development
Research and
development (R&D) costs, including R&D acquired in
transactions that are not business combinations, are expensed as
incurred. Pre-regulatory approval contingent milestone obligations
to counterparties in collaborative arrangements are expensed when
the milestone is achieved. Payments made to counterparties on or
after regulatory approval are capitalized and amortized over the
remaining useful life of the related product. Amounts capitalized
for such payments are included in other intangible assets, net of
accumulated amortization.
Acquired
in-process R&D (IPR&D) is the value assigned to technology
or products under development acquired in a business combination
which have not received regulatory approval and have no alternative
future use. Acquired IPR&D is capitalized as an
indefinite-lived intangible asset. Development costs incurred after
the acquisition are expensed as incurred. Upon receipt of
regulatory approval of the related technology or product, the
indefinite-lived intangible asset is accounted for as a
finite-lived intangible asset and amortized on a straight-line
basis over the estimated economic life of the related technology or
product, subject to annual impairment reviews as discussed below.
If the R&D project is abandoned, the indefinite-lived asset is
charged to expense.
Collaborative Arrangements
The company
enters into collaborative arrangements in the normal course of
business. These collaborative arrangements take a number of forms
and structures, and are designed to enhance and expedite long-term
sales and profitability growth. These arrangements may provide that
Baxter obtain commercialization rights to a product under
development, and require Baxter to make upfront payments,
contingent milestone payments, profit-sharing, and/or royalty
payments. Baxter may be responsible for ongoing costs associated
with the arrangements, including R&D cost reimbursements to the
counterparty. See above regarding the accounting treatment of
payments during the development stage. Any royalty and
profit-sharing payments during the commercialization phase are
expensed as cost of sales when they become due and
payable.
Business
Optimization Charges
The company
records liabilities for costs associated with exit or disposal
activities in the period in which the liability is incurred.
Employee termination costs are primarily recorded when actions are
probable and estimable. Costs for one-time termination benefits in
which the employee is required to render service until termination
in order to receive the benefits are recognized ratably over the
future service period. Refer to the discussion below regarding the
accounting for asset impairment charges.
Goodwill
Goodwill is
not amortized, but is subject to an impairment review annually and
whenever indicators of impairment exist. Goodwill would be impaired
if the carrying amount of a reporting unit exceeded the fair value
of that reporting unit, calculated as the present value of
estimated cash flows discounted using a risk-free market rate
adjusted for a market participant’s view of similar companies
and perceived risks in the cash flows. The implied fair value of
goodwill is then determined by subtracting the fair value of all
identifiable net assets other than goodwill from the fair value of
the reporting unit, with an impairment charge recorded for the
excess, if any, of carrying amount of goodwill over the implied
fair value.
Intangible
Assets Not Subject to Amortization
Indefinite-lived intangible assets, such as IPR&D acquired
in business combinations and certain trademarks with indefinite
lives, are subject to an impairment review annually and whenever
indicators of impairment exist. Indefinite-lived intangible assets
are impaired if the carrying amount of the asset exceeded the fair
value of the asset.
Other
Long-Lived Assets
The company
reviews the carrying amounts of long-lived assets, other than
goodwill and intangible assets not subject to amortization, for
potential impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. In evaluating recoverability, the company groups
assets and liabilities at the lowest level such that the
identifiable cash flows relating to the group are largely
independent of the cash flows of other assets and liabilities. The
company then compares the carrying amounts of the assets or asset
groups with the related estimated undiscounted future cash flows.
In the event impairment exists, an impairment charge is recorded as
the amount by which the carrying amount of the asset or asset group
exceeds the fair value.
Shipping
and Handling Costs
Shipping
costs, which are costs incurred to physically move product from
Baxter’s premises to the customer’s premises, are
classified as marketing and administrative expenses. Handling
costs, which are costs incurred to store, move and prepare products
for shipment, are classified as cost of sales. Approximately $272
million in 2015, $319 million in 2014 and $273 million in 2013 of
shipping costs were classified in marketing and administrative
expenses.
Income
Taxes
Deferred
taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on
enacted tax laws and rates. The company maintains valuation
allowances unless it is more likely than not that the deferred tax
asset will be realized. With respect to uncertain tax positions,
the company determines whether the position is more likely than not
to be sustained upon examination, based on the technical merits of
the position. Any tax position that meets the more likely than not
recognition threshold is measured and recognized in the
consolidated financial statements at the largest amount of benefit
that is greater than 50% likely of being realized upon ultimate
settlement. The liability relating to uncertain tax positions is
classified as current in the consolidated balance sheets to the
extent the company anticipates making a payment within one year.
Interest and penalties associated with income taxes are classified
in the income tax expense line in the consolidated statements of
income.
Foreign
Currency Translation
Currency
translation adjustments (CTA) related to foreign operations are
included in other comprehensive income (OCI). For foreign
operations in highly inflationary economies, translation gains and
losses are included in other expense (income), net, and were not
material in 2015, 2014 and 2013.
Derivatives and Hedging Activities
All
derivative instruments are recognized as either assets or
liabilities at fair value in the consolidated balance sheets and
are classified as short-term or long-term based on the scheduled
maturity of the instrument. Based upon the exposure being hedged,
the company designates its hedging instruments as cash flow or fair
value hedges.
For each
derivative instrument that is designated and effective as a cash
flow hedge, the gain or loss on the derivative is accumulated in
accumulated other comprehensive income (AOCI) and then recognized
in earnings consistent with the underlying hedged item. Option
premiums or net premiums paid are initially recorded as assets and
reclassified to OCI over the life of the option, and then
recognized in earnings consistent with the underlying hedged item.
Cash flow hedges are classified in net sales, cost of sales, and
net interest expense, and primarily related to forecasted
third-party sales denominated in foreign currencies, forecasted
intercompany sales denominated in foreign currencies and
anticipated issuances of debt, respectively.
For each
derivative instrument that is designated and effective as a fair
value hedge, the gain or loss on the derivative is recognized into
earnings, offsetting the loss or gain on the underlying hedged
item. Fair value hedges are classified in net interest expense, as
they hedge the interest rate risk associated with certain of the
company’s fixed-rate debt.
For
derivative instruments that are not designated as hedges, the
change in fair value is recorded directly to other expense
(income), net.
If it is
determined that a derivative or nonderivative hedging instrument is
no longer highly effective as a hedge, the company discontinues
hedge accounting prospectively. If the company removes the cash
flow hedge designation because the hedged forecasted transactions
are no longer probable of occurring, any gains or losses are
immediately reclassified from AOCI to earnings. Gains or losses
relating to terminations of effective cash flow hedges in which the
forecasted transactions are still probable of occurring are
deferred and recognized consistent with the income or loss
recognition of the underlying hedged items. If the company
terminates a fair value hedge, an amount equal to the cumulative
fair value adjustment to the hedged items at the date of
termination is amortized to earnings over the remaining term of the
hedged item.
Derivatives,
including those that are not designated as a hedge, are principally
classified in the operating section of the consolidated statements
of cash flows in the same category as the related consolidated
balance sheet account.
Refer to Note
9 for further information regarding the company’s derivative
and hedging activities.
New
Accounting Standards
In November
2015, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2015-17, Income Taxes
(Topic 740), Balance Sheet Classification of Deferred Taxes, which
requires net deferred tax assets and liabilities to be classified
as non-current on the Consolidated Balance Sheets. Prior to
adoption of the new standard, net deferred tax assets and
liabilities were presented separately as current and non-current on
the Consolidated Balance Sheets. ASU No. 2015-17 is effective
for financial statements issued for annual periods beginning after
December 15, 2016 and early adoption is permitted. The company
elected to retrospectively adopt this accounting standard as of
December 31, 2015. As a result of the adoption,
$354 million and $531 million net deferred tax assets are
presented as non-current as of December 31, 2015 and 2014,
respectively, and $195 million and $168 million net deferred tax
liabilities are presented as non-current as of December 31,
2015 and 2014, respectively. There was no effect to Baxter
shareholders’ equity or to the consolidated statements of net
income as a result of this adoption.
In April
2015, the FASB issued ASU No. 2015-05,
Intangibles — Goodwill and
Other — Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement, which provides guidance to customers about how to
account for cloud computing arrangements when such arrangements
include software licenses. ASU No. 2015-05 will be effective
for the company beginning on January 1, 2016. The standard may
be applied retrospectively or prospectively. The company does not
expect a material impact from the adoption of this
standard.
In May 2014,
the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606), which amends the existing accounting
standards for revenue recognition. ASU No. 2014-09 is based on
principles that govern the recognition of revenue at an amount an
entity expects to be entitled when products are transferred to
customers. In August 2015, the FASB approved a one-year deferral of
the original effective date of January 1, 2017; therefore, ASU
No. 2014-09 will be effective for the company beginning on
January 1, 2018. Early adoption is permitted as of the
original effective date. The standard may be applied
retrospectively to each prior period presented or retrospectively
with the cumulative effect recognized as of the date of adoption.
The company is currently evaluating the impact of adopting the
standard on its consolidated financial statements. |
