United states securities and exchange commission

Table of Contents
87
Determining the appropriate valuation model and 
related assumptions requires judgment, and includes 
estimating the expected market price of our stock on 
vesting date and stock price volatility as well as the 
term of the expected awards. Determining the 
appropriate amount to expense based on the 
anticipated achievement of performance targets 
requires judgment, including forecasting the 
achievement of future financial targets. The estimate 
of expense is revised periodically based on the 
probability of achieving the required performance 
targets and adjustments are made throughout the 
term as appropriate. The cumulative impact of any 
revision is reflected in the period of change.
We also estimate forfeitures over the requisite 
service period when recognizing share-based 
compensation expense based on historical rates and 
forward-looking factors. These estimates are adjusted 
to the extent that actual forfeitures differ, or are 
expected to materially differ, from our estimates.
Contingent Consideration
For acquisitions completed before January 1, 
2009, we record contingent consideration resulting 
from a business combination when the contingency is 
resolved. For acquisitions completed after January 1, 
2009, we record contingent consideration resulting 
from a business combination at its fair value on the 
acquisition date. Each reporting period thereafter, we 
revalue these obligations and record increases or 
decreases in their fair value as an adjustment to 
contingent consideration expense in our consolidated 
statements of income. Changes in the fair value of 
the contingent consideration obligations can result 
from changes to one or multiple inputs including 
adjustments to the discount rates and achievement 
and timing of any cumulative sales-based and 
development milestones, or changes in the probability 
of certain clinical events and changes in the assumed 
probability associated with regulatory approval. These 
fair value measurements represent Level 3 
measurements as they are based on significant 
inputs not observable in the market.
Significant judgment is employed in determining 
the appropriateness of these assumptions as of the 
acquisition date and for each subsequent period. 
Accordingly, changes in assumptions described above, 
could have a material impact on the amount of 
contingent consideration expense we record in any 
given period.
Restructuring Charges
We have made estimates and judgments 
regarding the amount and timing of our restructuring 
expense and liability, including current and future 
period termination benefits, pipeline program 
termination costs and other exit costs to be incurred 
when related actions take place. Severance and other 
related costs are reflected in our consolidated 
statements of income as a component of total 
restructuring charges incurred. Actual results may 
differ from these estimates.
Income Taxes
We prepare and file income tax returns based on 
our interpretation of each jurisdiction’s tax laws and 
regulations. In preparing our consolidated financial 
statements, we estimate our income tax liability in 
each of the jurisdictions in which we operate by 
estimating our actual current tax expense together 
with assessing temporary differences resulting from 
differing treatment of items for tax and financial 
reporting purposes. These differences result in 
deferred tax assets and liabilities, which are included 
in our consolidated balance sheets. Significant 
management judgment is required in assessing the 
realizability of our deferred tax assets. In performing 
this assessment, we consider whether it is more likely 
than not that some portion or all of the deferred tax 
assets will not be realized. The ultimate realization of 
deferred tax assets is dependent upon the generation 
of future taxable income during the periods in which 
those temporary differences become deductible. In 
making this determination, under the applicable 
financial accounting standards, we are allowed to 
consider the scheduled reversal of deferred tax 
liabilities, projected future taxable income and the 
effects of tax planning strategies. Our estimates of 
future taxable income include, among other items, our 
estimates of future income tax deductions related to 
the exercise of stock options. In the event that actual 
results differ from our estimates, we adjust our 
estimates in future periods and we may need to 
establish a valuation allowance, which could 
materially impact our consolidated financial position 
and results of operations.
All tax effects associated with intercompany 
transfers of assets within our consolidated group, 
both current and deferred, are recorded as a prepaid 
tax or deferred charge and recognized through our 
consolidated statements of income when the asset 
transferred is sold to a third-party or otherwise 
recovered through amortization of the asset's 
remaining economic life. If the asset transferred 
becomes impaired, for example through the 
obsolescence of inventory or the discontinuation of a 
research program, we will expense any remaining 
deferred charge or prepaid tax. As of December 31, 

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2017, total deferred charges and prepaid taxes were 
$617.7 million. For additional information on the new 
accounting standard related to tax effects associated 
with intercompany transfers of assets within our 
consolidated group, please read Note 1, Summary of 
Significant Accounting Policies: New Accounting 
Pronouncements, to our consolidated financial 
statements included in this report.
We account for uncertain tax positions using a 
“more-likely-than-not” threshold for recognizing and 
resolving uncertain tax positions. We evaluate 
uncertain tax positions on a quarterly basis and 
consider various factors that include, but are not 
limited to, changes in tax law, the measurement of tax 
positions taken or expected to be taken in tax returns, 
the effective settlement of matters subject to audit, 
information obtained during in process audit activities 
and changes in facts or circumstances related to a 
tax position. We adjust the level of the liability to 
reflect any subsequent changes in the relevant facts 
surrounding the uncertain positions. Our liabilities for 
uncertain tax positions can be relieved only if the 
contingency becomes legally extinguished, through 
either payment to the taxing authority or the expiration 
of the statute of limitations, the recognition of the 
benefits associated with the position meet the “more-
likely-than-not” threshold or the liability becomes 
effectively settled through the examination process. 
We consider matters to be effectively settled once the 
taxing authority has completed all of its required or 
expected examination procedures, including all 
appeals and administrative reviews, we have no plans 
to appeal or litigate any aspect of the tax position, 
and we believe that it is highly unlikely that the taxing 
authority would examine or re-examine the related tax 
position. We also accrue for potential interest and 
penalties related to unrecognized tax benefits in 
income tax expense.
We earn a significant amount of our operating 
income outside the U.S. As a result, a portion of our 
cash, cash equivalents and marketable securities are 
held by foreign subsidiaries. 
On December 22, 2017, the 2017 Tax Act was 
signed into law and has resulted in significant 
changes to the U.S. corporate income tax system.  
The 2017 Tax Act eliminates the deferral of U.S. 
income tax on the historical unrepatriated earnings by 
imposing the Transition Toll Tax, which is a one-time 
mandatory deemed repatriation tax on undistributed 
foreign earnings. The Transition Toll Tax is assessed 
on the U.S. shareholder's share of the foreign 
corporation's accumulated foreign earnings that have 
not previously been taxed. Earnings in the form of 
cash and cash equivalents will be taxed at a rate of 
15.5% and all other earnings will be taxed at a rate of 
8.0%. As of December 31, 2017, we have accrued 
income tax liabilities of $989.6 million under the 
Transition Toll Tax, of which $78.3 million is expected 
to be paid within one year. The Transition Toll Tax will 
be paid over an eight-year period, starting in 2018, 
and will not accrue interest. 
New Accounting Standards
For a discussion of new accounting standards 
and their expected impact on our consolidated 
financial statements or disclosures, please read 
Note 1, Summary of Significant Accounting Policies, to 
our consolidated financial statements included in this 
report.
Item 7A.      Quantitative and Qualitative 
Disclosures About Market Risk
Market Risk
We are subject to certain risks that may affect 
our results of operations, cash flows and fair values 
of assets and liabilities, including volatility in foreign 
currency exchange rates, interest rate movements, 
pricing pressures worldwide and weak economic 
conditions in the foreign markets in which we operate. 
We manage the impact of foreign currency exchange 
rates and interest rates through various financial 
instruments, including derivative instruments such as 
foreign currency forward contracts, interest rate lock 
contracts and interest rate swap contracts. We do not 
enter into financial instruments for trading or 
speculative purposes. The counterparties to these 
contracts are major financial institutions, and there is 
no significant concentration of exposure with any one 
counterparty.
Foreign Currency Exchange Risk
Our results of operations are subject to foreign 
currency exchange rate fluctuations due to the global 
nature of our operations. We have operations or 
maintain distribution relationships in the U.S., Europe, 
Canada, Asia, and Central and South America. In 
addition, we recognize our share of pre-tax co-
promotion profits on RITUXAN in Canada. As a result, 
our consolidated financial position, results of 
operations and cash flows can be affected by market 
fluctuations in foreign currency exchange rates, 
primarily with respect to the Euro, British pound 
sterling, Canadian dollar, Swiss franc, Danish krone 
and Japanese yen.

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