RESTATEMENT

This Note 2 to the consolidated financial statements discloses the nature of the restatement matters and adjustments and shows the impact of the restatement matters on the consolidated financial statements as of and for the year ended December 31, 2014. The impact of the restatement on interim periods is described in Note 25 (unaudited).

Restatement Background

On October 26, 2015, in light of allegations regarding the Company’s relationship with the Philidor Rx Services, LLC (“Philidor”) pharmacy network, the Company’s Board of Directors (the “Board”) established an ad hoc committee of independent directors of the Board (the “Ad Hoc Committee”) to review these allegations and related matters (the “AHC Review”). The scope of the review conducted by the Ad Hoc Committee was subsequently broadened to encompass other areas of potential concern, unrelated to Philidor, raised during the course of the review. The Ad Hoc Committee was chaired by Robert Ingram, the Company’s current independent chairman of the board (and formerly the Company's lead independent director). Other members included Norma Provencio, chairperson of the Audit and Risk Committee (the “ARC”), Colleen Goggins and Mason Morfit. The Ad Hoc Committee engaged the law firm of Kirkland & Ellis LLP to assist and advise in carrying out the AHC Review. On February 22, 2016, the Company announced that, based on the work of the Ad Hoc Committee, as well as additional work and analysis performed by the Company, the Company had preliminarily identified certain revenue on sales transactions to Philidor during the second half of 2014, prior to the Company entering into a purchase option to acquire Philidor, that should have been recognized when product was dispensed to patients rather than on delivery to Philidor.

On March 21, 2016, management of the Company, the ARC and the Board concluded that the Company’s audited financial statements for the year ended, and unaudited financial information for the quarter ended, December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and the unaudited financial statements for the quarter ended March 31, 2015 included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 should no longer be relied upon due to the misstatements and other qualitative factors described below. In addition, due to the fact that the first quarter 2015 results are included within the financial statements for the six-month period ended June 30, 2015 included in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 and the financial statements for the nine-month period ended September 30, 2015 included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, management, the ARC and the Board also concluded that the financial statements for such six-month and nine-month periods reflected in those Quarterly Reports should no longer be relied upon. This determination was based on the AHC Review and additional work and analysis performed by the Company. Based on this work, the Company determined that the earnings impact of certain revenue transactions should have been recognized at a later date than when originally recognized.

On December 15, 2014, the Company entered into a purchase option agreement with Philidor and its members in which the Company received an exclusive option to acquire 100% of the equity interest in Philidor, and as of which time Philidor was consolidated with the Company for accounting purposes as a variable interest entity for which the Company was the primary beneficiary. Prior to consolidation, revenue on sales to Philidor was recognized by the Company on a sell-in basis (i.e., recorded when the Company delivered product to Philidor). In connection with the work of the Ad Hoc Committee, the Company determined that certain sales transactions for deliveries to Philidor in the second half of 2014 leading up to the execution of the purchase option agreement were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As a result of these actions, revenue for certain transactions completed prior to entry into the purchase option agreement should have been recognized on a sell-through basis (i.e., record revenue when Philidor dispensed the products to patients) rather than incorrectly recognized on the sell-in basis utilized by the Company. Additionally, related to these and certain earlier transactions, the Company has now concluded that collectability was not reasonably assured at the time the revenue was originally recognized, and, thus, these transactions should have been recognized at a later date (when collectability was reasonably assured which the Company determined coincides with when the inventory is sold through to the end customer) instead of on a sell-in basis. Following the consolidation of Philidor on the date of entry into the purchase option agreement, the Company began recognizing revenue as Philidor dispensed product to patients.

On April 5, 2016, the Company announced that the Ad Hoc Committee had determined that its review was complete, and that the Ad Hoc Committee had not identified any additional items that would require restatement beyond those required by matters previously disclosed. In addition, the Company announced that, given the completion of the AHC Review, the Board had determined to dissolve the Ad Hoc Committee and that the 12 independent directors on the Board, including the members of the ARC, would assume oversight responsibility for remaining work, including work associated with the completion of the Company's current and restated financial statements and disclosures, as well as its assessment of related internal controls and remediation matters.

Impact of Restatement

As a result of the foregoing, the Company has restated its financial statements for the year ended December 31, 2014. The restatement reduced revenue by approximately $58 million and reduced the Company's net income attributable to Valeant Pharmaceuticals International, Inc. and diluted earnings per share for the year ended December 31, 2014 by approximately $33 million and $0.09 per share, respectively.

The individual restatement matters that underlie the restatement adjustments are described below and are reflected and quantified, as applicable, in the footnotes to the below tables.

(a)

Philidor revenue recognition adjustments - The correction of the misstatement from recognizing revenue related to sales to Philidor from a sell-in to sell-through basis had the effect of eliminating certain revenue recorded in 2014 prior to the date that Philidor was consolidated as a variable interest entity. The revenue that is being eliminated from 2014 does not result in an increase to revenue in subsequent periods as a result of the Company having previously recognized that revenue, subsequent to the consolidation of Philidor, when Philidor dispensed the product to patients. Under the sell-in method previously utilized by the Company with respect to sales to Philidor prior to its consolidation in December 2014, revenue was recognized upon delivery of the products to Philidor. At the date of consolidation, certain of that previously sold inventory was still held by Philidor. Subsequent to the consolidation, Philidor recognized revenue on that inventory when it dispensed products to patients, and that revenue was consolidated into the Company’s results. As long as those pre-consolidation sales transactions were in the normal course of business under applicable accounting standards and not entered into in contemplation of the purchase option agreement, the Company’s historical accounting for this revenue was in accordance with generally accepted accounting principles. The Company has now determined that certain sales transactions for deliveries to Philidor, leading up to the purchase option agreement, were not executed in the normal course of business under applicable accounting standards and included actions taken by the Company (including fulfillment of unusually large orders with extended payment terms and increased pricing, an emphasis on delivering product prior to the execution of the purchase option agreement and seeking and filling a substitute order of equivalent value for an unavailable product) in contemplation of the purchase option agreement. As such, revenue, net of managed care rebates, of $58 million previously recorded in 2014 is now being corrected. However, because that revenue was also recorded by Philidor subsequent to consolidation, upon dispensing of products to patients, the elimination of this revenue in 2014, prior to consolidation, does not result in additional revenue being recorded in 2015. Additionally, provisions for managed care rebates of $21 million previously recorded in 2014 will now be recognized against that revenue in the first quarter of 2015.

The reduction in inventory relates to the Philidor revenue recognition adjustments described above. At the time of the consolidation of Philidor in December 2014, under the acquisition method of accounting, the Company recorded the fair value of the inventory on hand at Philidor at the net price the Company previously sold the inventory to Philidor, exclusive of the impact of managed care rebates. The restatement adjustments to eliminate the revenue for certain sales transactions between the Company and Philidor prior to consolidation, result in a reduction, for accounting purposes, to the amount of inventory that the Company acquired from Philidor. Eliminating the pre-consolidation sales described above had the effect of reducing pre-tax profit that was recognized in 2014 by $39 million. The majority of this profit is now recognized in 2015 as a reduction to previously recorded Cost of Goods Sold as the restated carrying amount of this inventory does not include the stepped up value resulting from the Company's consolidation of Philidor.

(b)

Philidor measurement period adjustments - Related to the consolidation of Philidor, the Company previously recorded certain measurement period adjustments during the second and third quarters of 2015 when known, which should be retroactively recorded as of the date Philidor was consolidated (December 2014). These measurement period adjustments primarily resulted in (1) an increase to acquisition-related contingent consideration as a result of further valuation analysis around the probability and timing of certain milestone payments; (2) increases in the fair value of certain intangible assets resulting from the higher sales forecast; and (3) a net increase in goodwill as a result of (1) and (2) above. The measurement period adjustments were previously determined to be immaterial to the Company’s consolidated financial statements, but are now being recorded in the fourth quarter of 2014 in connection with the other restatement adjustments related to Philidor.


(c)	Tax effect of restatement adjustments - The Company calculated the tax effect of the adjustments noted above.


(d)	Accumulated deficit - This adjustment reflects the cumulative net loss impact of the restatement adjustments as of the balance sheet date.

CONSOLIDATED BALANCE SHEET

(All dollar amounts expressed in millions of U.S. dollars)



	As of December 31,
	2014 (As Previously Reported)⁽¹⁾			Restatement Adjustments			2014 (Restated)			Restatement Ref
Assets
Current assets:
Cash and cash equivalents	$	322.6		$	—		$	322.6
Trade receivables, net	2,075.8			—			2,075.8
Inventories, net	950.6			(61.4		)	889.2			(a)
Prepaid expenses and other current assets	650.8			—			650.8
Deferred tax assets, net	193.3			—			193.3
Total current assets	4,193.1			(61.4		)	4,131.7
Property, plant and equipment, net	1,310.5			1.8			1,312.3			(b)
Intangible assets, net	11,255.9			22.0			11,277.9			(b)
Goodwill	9,346.4			15.0			9,361.4			(b)
Deferred tax assets, net	54.0			—			54.0
Other long-term assets, net	167.4			—			167.4
Total assets	$	26,327.3		$	(22.6	)	$	26,304.7
Liabilities
Current liabilities:
Accounts payable	$	398.0		$	—		$	398.0
Accrued and other current liabilities	2,179.4			(22.4		)	2,157.0			(a)
Acquisition-related contingent consideration	141.8			—			141.8
Current portion of long-term debt	0.9			—			0.9
Deferred tax liabilities, net	10.7			—			10.7
Total current liabilities	2,730.8			(22.4		)	2,708.4
Acquisition-related contingent consideration	167.0			38.8			205.8			(b)
Long-term debt	15,228.0			—			15,228.0
Pension and other benefit liabilities	239.8			—			239.8
Liabilities for uncertain tax positions	102.6			—			102.6
Deferred tax liabilities, net	2,227.5			(6.2		)	2,221.3			(c)
Other long-term liabilities	197.1			—			197.1
Total liabilities	20,892.8			10.2			20,903.0

Equity
Common shares, no par value, unlimited shares authorized, 334,402,964
issued and outstanding at December 31, 2014	8,349.2			—			8,349.2
Additional paid-in capital	243.9			—			243.9
Accumulated deficit	(2,365.0		)	(32.8		)	(2,397.8		)	(d)
Accumulated other comprehensive loss	(915.9		)	—			(915.9		)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity	5,312.2			(32.8		)	5,279.4
Noncontrolling interest	122.3			—			122.3
Total equity	5,434.5			(32.8		)	5,401.7
Total liabilities and equity	$	26,327.3		$	(22.6	)	$	26,304.7

____________________________________

(1)

As described in Note 3, the Company adopted guidance issued by the Financial Accounting Standards Board which requires certain debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The adoption of this guidance was applied retrospectively and impacted presentation only. The resulting reclassifications between assets and long-term debt did not have a material impact on the Company's financial statements.

CONSOLIDATED STATEMENT OF INCOME

(All dollar amounts expressed in millions of U.S. dollars, except per share data)



	Year Ended December 31,
	2014 (As Previously Reported)			Restatement Adjustments			2014 (Restated)			Restatement Ref
Revenues
Product sales	$	8,103.6		$	(57.5	)	$	8,046.1		(a)
Other revenues	159.9			—			159.9
	8,263.5			(57.5		)	8,206.0
Expenses
Cost of goods sold (Exclusive of amortization and impairments of
finite lived intangible assets shown separately below)	2,196.2			(18.5		)	2,177.7			(a)
Cost of other revenues	58.4			—			58.4
Selling, general and administrative	2,026.3			—			2,026.3
Research and development	246.0			—			246.0
Amortization and impairment of finite-lived intangible assets	1,550.7			—			1,550.7
Restructuring, integration and other costs	381.7			—			381.7
In-process research and development impairments and other changes	41.0			—			41.0
Acquisition-related costs	6.3			—			6.3
Acquisition-related contingent consideration	(14.1		)	—			(14.1		)
Other income	(268.7		)	—			(268.7		)
	6,223.8			(18.5		)	6,205.3
Operating income (loss)	2,039.7			(39.0		)	2,000.7
Interest income	5.0			—			5.0
Interest expense	(971.0		)	—			(971.0		)
Loss on extinguishment of debt	(129.6		)	—			(129.6		)
Foreign exchange and other	(144.1		)	—			(144.1		)
Gain on investments, net	292.6			—			292.6
Income (loss) before provision for (recovery of) income taxes	1,092.6			(39.0		)	1,053.6
Provision for (recovery of) income taxes	180.4			(6.2		)	174.2			(c)
Net income (loss)	912.2			(32.8		)	879.4
Less: Net income (loss) attributable to noncontrolling interest	(1.3		)	—			(1.3		)
Net income (loss) attributable to Valeant Pharmaceuticals International, Inc.	$	913.5		$	(32.8	)	$	880.7

Earnings (loss) per share attributable to Valeant Pharmaceuticals International, Inc.:
Basic	$	2.72		$	(0.09	)	$	2.63
Diluted	$	2.67		$	(0.09	)	$	2.58

Weighted-average common shares (in millions)
Basic	335.4						335.4
Diluted	341.5						341.5

There was no net impact of the 2014 restatement adjustments on net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities in the Consolidated Statement of Cash Flows. The adjustments only had an impact on certain captions within cash flows from operating activities.

CONSOLIDATED STATEMENT OF CASH FLOWS

(All dollar amounts expressed in millions of U.S. dollars)



	Year Ended December 31,
	2014 (As Previously Reported)			Restatement Adjustments			2014 (Restated)			Restatement Ref
Cash Flow From Operating Activities
Net income	$	912.2		$	(32.8	)	$	879.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including impairments of finite-lived intangible assets	1,737.6			—			1,737.6
Amortization and write-off of debt discounts and debt issuance costs	70.0			—			70.0
In-process research and development impairments	21.0			—			21.0
Acquisition accounting adjustment on inventory sold	27.3			—			27.3
Acquisition-related contingent consideration	(14.1		)	—			(14.1		)
Allowances for losses on accounts receivable and inventories	81.3			—			81.3
Deferred income taxes	81.8			(6.2		)	75.6			(c)
Gain on disposal of assets and liabilities	(253.5		)	—			(253.5		)
Reduction to accrued legal settlements	(44.7		)				(44.7		)
Payments of accrued legal settlements	(3.2		)	—			(3.2		)
Share-based compensation	78.2			—			78.2
Tax benefits from share-based compensation	(17.1		)	—			(17.1		)
Foreign exchange loss	135.1			—			135.1
Loss on extinguishment of debt	129.6			—			129.6
Payment of accreted interest on contingent consideration	(10.7		)	—			(10.7		)
Other	32.3			—			32.3
Changes in operating assets and liabilities:
Trade receivables	(572.4		)	—			(572.4		)
Inventories	(174.3		)	(18.5		)	(192.8		)	(a)
Prepaid expenses and other current assets	(110.3		)	—			(110.3		)
Accounts payable, accrued and other liabilities	188.6			57.5			246.1			(a)
Net cash provided by operating activities	2,294.7			—			2,294.7

Net cash used in investing activities	(99.7		)	—			(99.7		)

Net cash used in financing activities	(2,443.7		)	—			(2,443.7		)

Effect of exchange rate changes on cash and cash equivalents	(29.0		)	—			(29.0		)
Net decrease in cash and cash equivalents	(277.7		)	—			(277.7		)
Cash and cash equivalents, beginning of year	600.3			—			600.3
Cash and cash equivalents, end of year	$	322.6		$	—		$	322.6

Non- Cash Investing and Financing Activities
Acquisition of businesses, contingent consideration at fair value	$	(93.8	)	$	(38.8	)	$	(132.6	)	(b)
Acquisition of businesses, debt assumed	(11.2		)	—			(11.2		)