Notes to Consolidated Financial Statements 4

Note 4 — Post-Employment Benefits

(dollars in thousands)

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans. Information for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

	Defined Benefit Plans										Medical and Dental Plans
		2006			2005			2004				2006			2005			2004
Projected benefit obligations, January 1	$	5,041,086		$	4,753,225		$	4,646,321			$	1,292,301		$	1,112,124		$	1,241,845
Service cost — benefits earned during the year		218,662			205,286			187,146				55,618			43,554			34,628
Interest cost on projected benefit obligations		275,389			259,709			253,249				79,988			64,088			64,054
Losses (gains), primarily changes in discount and medical trend rates, plan design changes, law changes and differences between actual and estimated health care costs		64,003			142,453			174,669				133,766			138,442			(44,707	)
Benefits paid		(212,630	)		(195,964	)		(191,543	)			(67,511	)		(65,907	)		(67,232	)
Acquisitions in 2006 and spin-off of Hospira in 2004		86,024			—			(425,069	)			26,250			—			(116,464	)
Other, primarily foreign currency translation		(141,526	)		(123,623	)		108,452				—			—			—
Projected benefit obligations, December 31	$	5,614,060		$	5,041,086		$	4,753,225			$	1,520,412		$	1,292,301		$	1,112,124
Plans’ assets at fair value, January 1	$	4,348,779		$	3,465,666		$	3,017,732			$	149,080		$	—		$	—
Actual return on plans’ assets		507,223			384,912			285,794				22,955			9,080			—
Company contributions		266,269			755,982			565,909				107,511			205,907			67,232
Benefits paid		(212,630	)		(195,964	)		(191,543	)			(67,511	)		(65,907	)		(67,232	)
Acquisitions in 2006 and spin-off of Hospira in 2004		92,760			—			(262,109	)			—			—			—
Other, primarily foreign currency translation		83,225			(61,817	)		49,883				—			—			—
Plans’ assets at fair value, December 31	$	5,085,626		$	4,348,779		$	3,465,666			$	212,035		$	149,080		$	—
Projected benefit obligations greater than plans’ assets, December 31	$	(528,434	)	$	(692,307	)	$	(1,287,559	)		$	(1,308,377	)	$	(1,143,221	)	$	(1,112,124	)
Unrecognized actuarial losses, net					1,501,409			1,494,915							697,717			587,976
Unrecognized prior service cost					5,004			5,835							(264,499	)		(285,659	)
Net prepaid (accrued) benefit cost				$	814,106		$	201,521						$	(710,003	)	$	(809,807	)
Long-term assets	$	84,266									$	—
Short-term liabilities		(23,552	)									—
Long-term liabilities		(589,148	)									(1,308,377	)
Net liability	$	(528,434	)								$	(1,308,377	)
Accrued benefit cost				$	(463,789	)	$	(617,533	)					$	(710,003	)	$	(809,807	)
Prepaid benefit cost					1,262,892			241,622							—			—
Intangible assets					130			17,261							—			—
Accumulated other comprehensive income (loss)					14,873			560,171							—			—
Net prepaid (accrued) benefit cost				$	814,106		$	201,521						$	(710,003	)	$	(809,807	)
Amounts Recognized in Accumulated Other Comprehensive Income (loss): Actuarial losses, net	$	1,343,052									$	785,778
Prior service cost (credits)		42,659										(248,947
Total	$	1,385,711									$	536,831
Service cost — benefits earned during the year	$	218,662		$	205,286		$	187,146			$	55,618		$	43,554		$	34,628
Interest cost on projected benefit obligations		275,389			259,709			253,249				79,988			64,088			64,054
Expected return on plans’ assets		(382,220	)		(360,304	)		(295,294	)			(16,253	)		(11,948	)		—
Amortization of actuarial losses		78,288			65,744			29,776				44,612			31,569			27,453
Amortization of prior service cost (credits)		341			68			1,033				(21,160	)		(21,160	)		(21,803	)
Total cost		190,460			170,503			175,910				142,805			106,103			104,332
Discontinued operations		—			—			(9,781	)			—			—			(14,349	)
Net cost of continuing operations	$	190,460		$	170,503		$	166,129			$	142,805		$	106,103		$	89,983

The pretax amount of actuarial losses and prior service cost (credits) included in Accumulated other comprehensive income (loss) at December 31, 2006, that is expected to be recognized in the net periodic benefit cost in 2007 is $80,900 and $3,300, respectively, for defined benefit pension plans and $48,500 and $(21,500), respectively, for medical and dental plans.

On December 31, 2006, Abbott adopted the provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. The provisions of this standard require the immediate recognition of deferrals on the balance sheet with a corresponding charge to Accumulated other comprehensive income (loss). The following table summarizes significant changes in balance sheet line items before and after the adoption of the provisions of this standard.

Balance Sheet Caption		Balances Before Adoption of Standard			Adjustments			Balances After Adoption of Standard
Deferred Income Taxes and Other Assets	$	1,820,785		$	(953,704	)	$	867,081
Post-employment Obligations and Other Long-term Liabilities		2,450,643			712,484			3,163,127
Deferred income tax liabilities		366,655			(366,655	)		—
Accumulated Other Comprehensive Income (loss)		1,643,764			(1,253,998	)		389,766
Total Shareholders’ Investment		15,308,184			(1,253,998	)		14,054,186
Total Assets and Total Liabilities and Shareholders’ Investment		37,129,740			(951,568	)		36,178,172

The projected benefit obligations for non-U.S. defined benefit plans was $1,483,000, $1,148,000 and $1,132,000 at December 31, 2006, 2005 and 2004, respectively. The accumulated benefit obligations for all defined benefit plans was $4,738,000, $4,158,000 and $3,954,000 at December 31, 2006, 2005 and 2004, respectively. For plans where the accumulated benefit obligations exceeded plan assets at December 31, 2006, 2005 and 2004, the aggregate accumulated benefit obligations were $544,000, $465,000 and $3,053,000, respectively; the projected benefit obligations were $592,000, $508,000 and $3,738,000, respectively; and the aggregate plan assets were $22,000, $5,000 and $2,909,000, respectively.

The weighted average assumptions used to determine benefit obligations for defined benefit plans and medical and dental plans as of December 31, the measurement date of the plans, are as follows:

	2006	2005	2004
Discount rate	5.7%	5.5%	5.6%
Expected aggregate average long-term change in compensation	4.2%	4.2%	4.2%

The weighted average assumptions used to determine the net cost for defined benefit plans and medical and dental plans are as follows:

	2006	2005	2004
Discount rate	5.5%	5.6%	6.0%
Expected return on plan assets	8.5%	8.4%	8.4%
Expected aggregate average long-term change in compensation	4.2%	4.2%	4.2%

The assumed health care cost trend rates for medical and dental plans at December 31 were as follows:

	2006	2005	2004
Health care cost trend rate assumed for the next year	7%	7%	7%
Rate that the cost trend rate gradually declines to	5%	5%	5%
Year that rate reaches the assumed ultimate rate	2012	2012	2007

The discount rate used to measure liabilities as of December 31, 2006 and 2005 was determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. Prior to December 31, 2005, the discount rate was determined by reference to a composite corporate AA bond index. The health care cost trend rate represents Abbott’s expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date. A one-percentage point increase/(decrease) in the assumed health care cost trend rate would increase/(decrease) the accumulated post-employment benefit obligations as of December 31, 2006, by $245,400/$(196,800), and the total of the service and interest cost components of net post-employment health care cost for the year then ended by approximately $26,200/$(20,400).

In 2004, Abbott reflected the requirements of Financial Accounting Standards Board Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” As a result, the projected benefit obligations related to benefits attributed to past service were reduced by approximately $210,000 and the net cost recognized in 2004 was reduced by approximately $33,000.

The weighted average asset allocation for Abbott’s U.S. defined benefit plans by asset category is shown in the table below. Abbott’s international defined benefit plans have similar equity content.

Asset Category:	2006	2005	2004
Equity securities	75%	74%	73%
Fixed income securities	25	26	27
Total	100%	100%	100%

The investment mix between equity securities and fixed income securities is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities. Abbott’s domestic defined benefit plans are invested in diversified portfolios of public-market equity and fixed income securities. Investment allocations are made across a range of markets, industry sectors, capitalization sizes, and, in the case of fixed income securities, maturities and credit quality. The plans hold no securities of Abbott. Abbott’s international defined benefit plans are invested in a corresponding manner, with some variance in portfolio structure around local practices.

The plans’ expected return on assets, as shown above, is based on management’s expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions.

Abbott funds its domestic pension plans according to IRS funding limitations. In 2006, 2005 and 2004, $200,000, $641,000 and $482,000, respectively, was funded to the main domestic pension plan. International pension plans are funded according to similar regulations. Abbott expects pension funding for its main domestic pension plan of $200 million annually.

Total benefit payments expected to be paid to participants, which includes payments funded from company assets for medical and dental benefits as well as paid from the plans, are as follows:

	Defined Benefit Plans	Medical and Dental Plans
2007	$ 218,600	$ 69,000
2008	230,000	73,000
2009	233,300	78,600
2010	242,400	84,500
2011	253,300	90,800
2012 to 2016	1,513,500	527,500

The Abbott Stock Retirement Plan is the principal defined contribution plan. Abbott’s contributions to this plan were $102,000 in 2006, $100,000 in 2005 and $97,000 in 2004.

Abbott provides certain other post-employment benefits, primarily salary continuation plans, to qualifying domestic employees, and accrues for the related cost over the service lives of the employees.

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