CVS 2002 Annual Report Download - page 29

In accordance with Statement of Position No. 98-1,
“Accounting for the Costs of Computer Software Developed or
obtained for Internal Use,” the company capitalizes application
stage development costs for significant internally developed
software projects. These costs are amortized over a 5-year
period. Unamortized costs were $89.5 million as of December
28, 2002 and $87.8 million as of December 29, 2001.
Impairment of long-lived assets ~The Company groups and
evaluates fixed and intangible assets excluding goodwill, for
impairment at the individual store level, which is the lowest level
at which individual cash flows can be identified. When
evaluating assets for potential impairment, the Company first
compares the carrying amount of the asset to the asset’s
estimated future cash flows (undiscounted and without interest
charges). If the estimated future cash flows used in this analysis
are less than the carrying amount of the asset, an impairment
loss calculation is prepared. The impairment loss calculation
compares the carrying amount of the asset to the asset’s
estimated future cash flows (discounted and with interest
charges). If the carrying amount exceeds the asset’s estimated
future cash flows (discounted and with interest charges), then
the intangible assets are written down first, followed by the
other long-lived assets, to fair value.
Intangible assets ~Purchased customer lists are amortized on
a straight-line basis over their estimated useful lives of up to 10
years. Purchased leases are amortized on a straight-line basis
over the remaining life of the lease. See Note 4 for further
information on intangible assets.
Revenue recognition ~The Company recognizes revenue from
the sale of merchandise at the time the merchandise is sold.
Service revenue from the Company’s pharmacy benefit
management segment, which is recognized using the net
method under Emerging Issues Task Force (“EITF”) No. 99-19
“Reporting Revenue Gross as a Principal Versus Net as an
Agent,” is recognized at the time the service is provided.
Service revenue totaled $84.9 million in 2002 and $82.1
million in 2001. Customer returns are immaterial.
Vendor allowances ~The total value of any upfront payments
received from vendors that are linked to purchase commitments
is initially deferred. The deferred amounts are then amortized to
reduce cost of goods sold over the life of the contract based
upon periodic purchase volume. The total value of any upfront
payments received from vendors that are not linked to purchase
commitments is also initially deferred. The deferred amounts
are then amortized to reduce cost of goods sold on a straight-
line basis over the life of the related contract. The total
amortization of these upfront payments was not material to the
accompanying consolidated financial statements. Funds that are
directly linked to advertising commitments are recognized as a
reduction of advertising expense in the selling, general and
administrative expenses line when the related advertising
commitment is satisfied.
Store opening and closing costs ~New store opening costs,
other than capital expenditures, are charged directly to expense
when incurred. When the Company closes a store, the present
value of estimated unrecoverable costs, including the remaining
lease obligation less estimated sublease income and the book
value of abandoned property and equipment, are charged to
expense.
Insurance ~The Company is self-insured for certain losses
related to general liability, workers’ compensation and
automobile liability. The Company obtains third party insurance
coverage to limit exposure from these claims. The Company’s
self-insurance accruals, which include reported claims and claims
incurred but not reported, are calculated using standard
insurance industry actuarial assumptions and the Company’s
historical claims experience.
Stock-based compensation ~The Company accounts for its
stock-based compensation plans under the recognition and
measurement principles of APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations. As
such, no stock-based employee compensation cost is reflected
in net earnings for options granted under those plans since
they had an exercise price equal to the market value of the
underlying common stock on the date of grant. See Note 7 for
further information on stock-based compensation. The following
table summarizes the effect on net earnings and earnings per
common share if the company had applied the fair value
recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation,” to stock-based employee compensation for the
respective years:
27
2002 Annual Report
In millions, except per share amounts 2002 2001 2000
Net earnings, as reported $716.6 $ 413.2 $ 746.0
Add: Stock-based employee
compensation expense included
in reported net earnings, net of
related tax effects(1) 2.7 3.3 3.5
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects 56.8 59.4 31.8
Pro forma net earnings $662.5 $ 357.1 $ 717.7
Basic EPS: As reported $1.79$1.02 $1.87
Pro forma 1.65 0.87 1.80
Diluted EPS: As reported $1.75$1.00 $1.83
Pro forma 1.62 0.86 1.76
(1) Amounts represent the after-tax compensation costs for restricted stock grants.