STRYKER

2013 Form 10-K

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26 Dollar amounts in millions except per share amounts or as otherwise specified classified as held for sale are recorded at the lower of carrying amount or fair value less costs to sell. Stock Options: At December 31, 2013, we had long-term incentive plans that are described more fully in Note 9 to the Consolidated Financial Statements, under which stock options are granted to key employees and non-employee directors. We measure the cost of employee stock options based on the grant-date fair value and recognize that cost using the straight-line method over the period during which a recipient is required to provide services in exchange for the options, typically the vesting period. The weighted-average fair value per share of options granted during 2013, 2012 and 2011, estimated on the date of grant using the Black-Scholes option pricing model, was $15.24, $13.36, and $17.14, respectively. The fair value of options granted was estimated using the following weighted-average assumptions: 2013 2012 2011 Risk-free interest rate 1.3% 1.3% 2.9% Expected dividend yield 1.9% 1.5% 1.4% Expected stock price volatility 27.9% 27.6% 26.9% Expected option life 7.1 years 7.1 years 6.9 years The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on the historical volatility of our stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. Income Taxes: Deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted income tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax benefits generally represent the change in net deferred income tax assets and liabilities during the year. Other amounts result from adjustments related to acquisitions as appropriate. We operate in multiple income tax jurisdictions both within the United States and internationally. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on current interpretations of complex income tax regulations. Income tax authorities in these jurisdictions regularly perform audits of our income tax filings. Income tax audits associated with the allocation of this income and other complex issues, including inventory transfer pricing and cost sharing, product royalty and foreign branch arrangements, may require an extended period of time to resolve and may result in significant income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates. Legal and Other Contingencies: We are involved in various proceedings, legal actions and claims arising in the normal course of business, including proceedings related to product, labor and intellectual property and other matters that are more fully described in Note 7 to the Consolidated Financial Statements. The outcomes of these matters will generally not be known for prolonged periods of time. In certain of the legal proceedings, the claimants seek damages, as well as other compensatory and equitable relief, that could result in the payment of significant claims and settlements and/or the imposition of injunctions or other equitable relief. For legal matters for which management has sufficient information to reasonably estimate our future obligations, a liability representing management's best estimate of the probable loss, or the minimum of the range of probable losses when a best estimate within the range is not known, for the resolution of these legal matters is recorded. The estimates are based on consultation with legal counsel, previous settlement experience and settlement strategies. NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) Changes in and reclassifications out of AOCI, net of tax, for the years ended December 31, 2013 and 2012 were: Marketable Securities Unrealized Gain (Loss) Defined Benefit Pension Plans Unrecognized Gain (Loss) on Hedge Foreign Currency Translation Total AOCI 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Beginning balance $ 4 $ — $ (101) $ (32) $ — $ — $ 226 $ 176 $ 129 $ 144 OCI before reclassifications 17 40 15 (70) 12 — 80 50 124 20 Amounts reclassified from AOCI (21) (36) 5 1 (5) — — — (21) (35) Net current-period OCI (4) 4 20 (69) 7 — 80 50 103 (15) Ending Balance $ — $ 4 $ (81) $ (101) $ 7 $ — $ 306 $ 226 $ 232 $ 129

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