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OTHER
REVENUE: Novartis also generates revenue from out-licensing
and co-promotion arrangements. Royalty income and revenues from licensing and
co-promotion activity are recorded as other revenues in the consolidated income
statement. Royalty and copromotion income estimates are made in advance of amounts
collected using historical and forecasted trends. Royalties tend to be linked
to levels of sales by a third party. Initial payments and other similar non-refundable
payments received under licensing and co-promotion agreements are recorded as
deferred revenue and are recognized over the estimated performance periods established
in the agreements. Non-refundable milestone payments in such agreements are recognized
as revenue upon achievement of specified agreed criteria.
IMPAIRMENT
OF LONG-LIVED ASSETS Long-lived assets, including
identifiable intangibles and goodwill are regularly reviewed for impairment, whenever
events or changes in circumstance indicate that the balance sheet carrying amount
of the asset may not be recoverable. In order to assess if there is any impairment,
estimates are made of the future cash flows expected to result from the use of
the asset and its eventual disposal. Goodwill and in-process research and development
and acquired development projects not yet ready for use are subject to impairment
review at least annually. Other long-lived assets are reviewed when there is an
indication that an impairment may have occurred. If the balance sheet carrying
amount of the asset exceeds the higher of its value in use to Novartis or its
anticipated fair value less cost of sale, an impairment loss for the difference
is recognized. The impairment analysis is principally based upon estimated discounted
future cash flows. Actual outcomes could vary significantly from such estimates
of discounted future cash flows. Especially, the development of discounted future
cash flows for intangible assets under development involves highly sensitive | |
assumptions
specific to the nature of the Group’s activities such as:
| • | Outcome
of research & development activities (compound efficacy, results of clinical trials,
etc.) | | • | Probability
of obtaining regulatory approval | | • | Long-term
sales forecast period of up to 20 years | | • | Selling
price erosion rates after end of patent protection due to generic competition | | • | Behavior
of competitors (launch of competing products, marketing initiatives etc.) |
Factors
such as lower-than-anticipated sales for acquired products or for sales associated
with patents and trademarks or lower-thananticipated future sales resulting from
acquired research and development or the closing of facilities or changes in the
planned use of buildings, machinery or equipment could result in shortened useful
lives or impairment. Changes in the discount rates used for these calculations
also could lead to impairments. FAIR
VALUE OR IMPAIRMENT ADJUSTMENTS ON FINANCIAL INSTRUMENTS The
Novartis Group has extensive investments in marketable securities and has significant
derivative financial instrument positions. These are held mainly, but not exclusively,
for hedging underlying positions. Depending on the development of equity and derivative
markets, it may be necessary to recognize impairments on the marketable securities
or losses on the derivative positions in the Group’s consolidated income statement. | |
