2012 Annual Report  Finite-lived intangible assets are tested for impairment when facts or circumstances suggest that the carrying value of the asset may  not be recoverable. If the carrying value exceeds the projected undiscounted pre-tax cash flows of the intangible asset, an impairment  loss equal to the excess of the carrying value over the estimated fair value (discounted after-tax cash flows) is recognized.  Restructuring charges are recognized as a result of actions to streamline operations and rationalize manufacturing facilities. Judgment  is used when estimating the impact of restructuring plans, including future termination benefits and other exit costs to be incurred  when the actions take place. Actual results could vary from these estimates.  Loss contingencies from legal proceedings and claims may occur from a wide range of matters, including, government investigations,  shareholder lawsuits, product and environmental liability, contractual claims and tax matters. Accruals are recognized when it is  probable that a liability will be incurred and the amount of loss can be reasonably estimated. Gain contingencies are not recognized  until realized. Legal fees are expensed as incurred.  Derivatives are used principally in the management of interest rate and foreign currency exposures and are not held or used for trading  purposes.  Derivatives are recognized at fair value with changes in fair value recognized in earnings unless specific hedge criteria are met. If the  derivative is designated as a fair value hedge, changes in fair value of the derivative and of the hedged item attributable to the hedged  risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value  of the derivative are reported in accumulated other comprehensive income (OCI) and subsequently recognized in earnings when the  hedged item affects earnings. Cash flows are classified consistent with the underlying hedged item.  Derivatives are designated and assigned as hedges of forecasted transactions, specific assets or specific liabilities. When hedged  assets or liabilities are sold or extinguished or the forecasted transactions being hedged are no longer probable to occur, a gain or loss  is immediately recognized in earnings.  Non-derivative instruments, primarily euro denominated long-term debt, are also designated as hedges of net investments in foreign  affiliates. The effective portion of the designated non-derivative instrument is recognized in the foreign currency translation section of  OCI and the ineffective portion is recognized in earnings.  $^{ }$Shipping and handling costs are included in marketing, selling and administrative expenses and were $125 million in 2012, $139  million in 2011 and $135 million in 2010.  $^{ }$Advertising and product promotion costs are expensed as incurred.  $^{ }$Foreign subsidiary earnings are translated into U.S. dollars using average exchange rates. The net assets of foreign subsidiaries are  translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these  subsidiaries at changing rates are recognized in OCI.  $^{ }$Research and development costs are expensed as incurred. Clinical study costs are accrued over the service periods specified in the  contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. Strategic alliances  with third parties provide rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are owned by  the other party. Certain research and development payments to alliance partners are contingent upon the achievement of certain pre- determined criteria. Milestone payments achieved prior to regulatory approval of the product are expensed as research and  development. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of products  sold over the remaining useful life of the asset. Capitalized milestone payments are tested for recoverability periodically or whenever  events or changes in circumstances indicate that the carrying amounts may not be recoverable. Research and development is  recognized net of reimbursements in connection with collaboration agreements.  $^{ }$Research and Development  $^{ }$Foreign Currency Translation  $^{ }$Advertising and Product Promotion Costs  $^{ }$Shipping and Handling Costs  Derivative Financial Instruments  Contingencies  Restructuring  35 