contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows: The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriate- ness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments. Accruals for product liability claims are recorded, on an undis- counted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. Based on the availability of prior coverage, receivables for insurance recover- ies related to product liability claims are recorded on an undis- counted basis, when it is probable that a recovery will be realized. Research and development expenses are expensed as incurred. Upfront and milestone payments made to third-parties in connec- tion with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization. The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of Basic earnings per share is computed by dividing net earnings avail- able to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; there- fore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation. At January 2, 2011 and January 3, 2010, the cumulative amount of undistributed international earnings was approximately $37.0 billion and $32.2 billion, respectively. Costs associated with advertising are expensed in the year incurred and are included in the selling, marketing and administrative expenses. Advertising expenses worldwide, which are comprised of television, radio, print media and Internet advertising, were $2.5 bil- lion, $2.4 billion and $2.9 billion in 2010, 2009 and 2008, respectively. * Milestones are capitalized as intangible assets and amortized to cost of goods sold over the useful life. Nature/Type of Collaboration Statement of Earnings Presentation Third-party sale of product Sales to customers Royalties/milestones paid to collaborative partner (post-regulatory approval)* Cost of goods sold Royalties received from collaborative partner Other income (expense), net Upfront payments & milestones paid to collaborative partner (pre-regulatory approval) Research and development expense Research and development payments to collaborative partner Research and development expense Research and development payments received from collaborative partner Reduction of research and development expense PRODUCT LIABILITY RESEARCH AND DEVELOPMENT ADVERTISING INCOME TAXES NET EARNINGS PER SHARE 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS