April 30, 2012
Throughout the semester, our class has analyzed the financial statements of Gilead. Now, I have the opportunity to analyze two financial reporting topics based on Gilead Sciences and Celgene Corporation. This report is a comparative analysis of both long -lived assets and share- based compensation within the balance sheets of the 2010 10-K financial reports of Gilead and Celgene pharmaceutical companies. The following analysis is a response to the required questions regarding the Generally Accepted Accounting Principal (GAAP) filing requirements, disclosure differences, potential investment implications, and my opinion of the information provided. The final part of this report is devoted to the comparison of Celgene’s net income to that of Gilead's and what adjustments would be needed to make Celgene's financial statements more comparable to Gilead.
Long-lived assets are expected to provide economic benefits into future years and typically make up a large portion of a company’s total assets. They fall into the categories of tangible and intangible assets. Tangible assets include fixed assets, property, plant, and equipment. Intangible assets include trademarks, patents, and goodwill. Under GAAP, long-lived assets are predominantly based on historical cost because it has the highest degree of verifiability and allows little room for manipulation. When looking at the long-lived assets of both Gilead and Celgene, I will exclusively focus on the tangible assets of property, plant, and equipment as well as intangible assets and goodwill. Lastly, I will state how both companies address impairment, which occurs when the carrying value of the asset is greater than the future economic benefits.
Gilead regularly reviews the carrying value of long-lived assets for circumstances that may indicate impairment. If there is an indication of impairment, they test for recoverability by comparing the estimated undiscounted future cash flows and the carrying amount of the asset. The excess of the carrying value over the asset’s estimated fair value is classified as an impairment loss. Gilead discloses that property, plant, and equipment are stated as cost less accumulated depreciation and amortization. They use the straight-line method. In the 10-K, Gilead includes written paragraphs with broad statements about the purpose of the property they own. Gilead estimates the useful life of its buildings and improvements to be twenty to thirty-five years. Maintenance and repair costs are expensed as they are incurred. Leasehold improvements and capitalized leased equipment are amortized over the shorter of the asset’s useful life or the lease term. Gilead also has other intangible assets related to purchased in-process research and development (IPR&D) from the acquisitions of CGI Pharmaceuticals, Inc. in 2010 and CV Therapeutics, Inc. in 2009, both of which are measured at fair value. They do not amortize goodwill or intangible assets with indefinite useful lives, but they do test them for impairment annually. Intangible assets with finite useful lives are amortized over their estimated useful lives and are reviewed for impairment when circumstances suggest that the carrying value of the assets may not be recoverable. In the financial statements, Gilead lists their long-term marketable securities, noncurrent portion of their deferred tax assets, and prepaid royalties on their consolidated balance sheet.
I found that Gilead met the requirements for disclosure of their long-lived assets as they follow GAAP when classifying impairment and costs incurred. GAAP states that costs incurred after the acquisition are expensed unless they extend the life of the asset, increase the efficiency, or otherwise increase the economic benefits of the asset. Also, GAAP states that