CVS 2003 Annual Report Download - page 25

CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in
conformity with generally accepted accounting principles,
which requires management to make certain estimates
and apply judgment. We base our estimates and judgments
on historical experience, current trends and other factors
that management believes to be important at the time the
consolidated financial statements are prepared. On a
regular basis, we review our accounting policies and how
they are applied and disclosed in our consolidated financial
statements. While we believe that the historical experience,
current trends and other factors considered support the
preparation of our consolidated financial statements in
conformity with generally accepted accounting principles,
actual results could differ from our estimates, and such
differences could be material.
Our significant accounting policies are discussed in Note 1
to our consolidated financial statements. We believe the
following accounting policies include a higher degree of
judgment and/or complexity and, thus, are considered
to be critical accounting policies. The critical accounting
policies discussed below are applicable to both of our
business segments. We have discussed the development
and selection of our critical accounting policies with the
Audit Committee of our Board of Directors and the Audit
Committee has reviewed our disclosures relating to them.
Impairment of Long-Lived Assets
We evaluate the recoverability of long-lived assets, including
intangible assets with finite lives, but excluding goodwill,
which is tested for impairment using a separate test,
annually or whenever events or changes in circumstances
indicate that the carrying value of an asset may not be
recoverable. We group and evaluate long-lived assets for
impairment at the individual store level, which is the lowest
level at which individual cash flows can be identified.
When evaluating long-lived assets for potential impairment,
we first compare the carrying amount of the asset to the
individual store’s estimated future cash flows (undiscounted
and without interest charges). If the estimated future cash
flows 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 individual store’s estimated future cash flows
(discounted and with interest charges). If required, an
impairment loss is recorded for the portion of the asset’s
carrying value that exceeds the asset’s estimated future
cash flow (discounted and with interest charges).
Our impairment loss calculation contains uncertainty
since we must use judgment to estimate each store’s
future sales, profitability and cash flows. When preparing
these estimates, we consider each store’s historical results
and current operating trends and our consolidated sales,
profitability and cash flow results and forecasts. These
estimates can be affected by a number of factors including,
but not limited to, general economic conditions, the cost of
real estate, the continued efforts of third party organizations
to reduce their prescription drug costs, the continued
efforts of competitors to gain market share and consumer
spending patterns. Effective for fiscal 2002, we adopted
SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets.” The adoption did not have a material
impact on our impairment loss methodology and we have
not made any other material changes to our impairment
loss assessment methodology during the past three years.
Closed Store Lease Liability
We account for closed store lease termination costs in
accordance with SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” As such,
when a leased store is closed, we record a liability for the
estimated present value of the remaining obligation under
the noncancelable lease, which includes future real estate
taxes, common area maintenance and other charges, if
applicable. The liability is reduced by estimated future
sublease income.
The calculation of our closed store lease liability contains
uncertainty since we must use judgment to estimate the
timing and duration of future vacancy periods, the amount
and timing of future lump sum settlement payments and
the amount and timing of potential future sublease income.
When estimating these potential termination costs and
their related timing, we consider a number of factors,
which include, but are not limited to, historical settlement
experience, the owner of the property, the location and
condition of the property, the terms of the underlying lease,
the specific marketplace demand and general economic
conditions. We have not made any material changes in
the reserve methodology used to record closed store lease
reserves during the past three years.
Self-Insurance Liabilities
We are self insured for certain losses related to general
liability, worker’s compensation and auto liability although
we maintain stop loss coverage with third party insurers to
limit our total liability exposure.
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