This excerpt taken from the ELN 20-F filed Mar 30, 2006.
(e) Investments and marketable investment securities and impairment
Our investment portfolio consists primarily of marketable equity securities, convertible preferred stock and interest-bearing debt of other biotechnology companies.
Marketable equity and debt securities are classified into one of three categories in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, (SFAS 115): including trading, available-for-sale, or held-to-maturity.
Non-marketable equity and debt securities are carried at cost, less write-down-for-impairments, and are adjusted for impairment based on methodologies, including the Black-Scholes option-pricing model, the valuation achieved in the most recent private placement by an investee, an assessment of the impact of general private equity market conditions, and discounted projected future cash flows.
The factors affecting the assessment of impairments include both general financial market conditions for pharmaceutical and biotechnology companies and factors specific to a particular company. In the case of equity classified as available-for-sale, a significant and prolonged decline in the fair value of the security below its carrying value is considered in determining whether the securities are impaired. If any such evidence exists, an impairment loss is recognized.
Equity accounting applies where we hold equity in the investee and have the ability to exercise significant influence over the operating and financial policies of the investee. Significant influence is presumed to exist if we own 20% of the investees common stock and common stock equivalents, but may also exist in situations when we own less than 20% depending on the existence of influential factors such as representation on the board of directors, participation in policy making processes, material intercompany transactions, interchange of managerial personnel or technological dependency. Certain circumstances, such as majority ownership by another company, can offset the impact of such factors. The determination to use cost or equity accounting requires a significant degree of judgment of the facts and circumstances of a particular investment. Investments which are accounted for under the
Elan Corporation, plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equity method are stated at cost, adjusted for our share of the earnings or losses and distributions of the investee after the date of investment, less any provision for impairment in value. We have no investments accounted for under the equity method at December 31, 2005.