CVS 2007 Annual Report Download - page 50

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46 I CVS Caremark
Impairment of Long-Lived Assets
The Company accounts for the impairment of long-lived assets
in accordance with SFAS No. 144, “Accounting for Impairment
or Disposal of Long-Lived Assets.” As such, the Company groups
and evaluates fixed and finite-lived intangible assets, excluding
goodwill, for impairment at 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 group to the individual store’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 group, an impairment loss
calculation is prepared. The impairment loss calculation com-
pares the carrying amount of the asset group to the asset group’s
estimated future cash flows (discounted and with interest charges).
If required, an impairment loss is recorded for the portion of
the asset group’s carrying value that exceeds the asset group’s
estimated future cash flows (discounted and with interest charges).
Revenue Recognition
Retail Pharmacy Segment (the “RPS”). The RPS recognizes
revenue from the sale of merchandise (other than prescription
drugs) at the time the merchandise is purchased by the retail
customer. Revenue from the sale of prescription drugs is recog-
nized at the time the prescription is filled, which is or approximates
when the retail customer picks up the prescription. Customer
returns are not material. Revenue generated from the perfor-
mance of services in the RPS’ healthcare clinics is recognized at
the time the services are performed.
Pharmacy Services Segment (the “PSS”). The PSS sells
prescription drugs directly through its mail service pharmacies
and indirectly through its national retail pharmacy network.
The PSS recognizes revenues from prescription drugs sold by
its mail service pharmacies and under national retail pharmacy
network contracts where the PSS is the principal using the gross
method at the contract prices negotiated with its customers. Net
revenue from the PSS includes: (i) the portion of the price the
customer pays directly to the PSS, net of any volume-related or
other discounts paid back to the customer (see “Drug Discounts”
below), (ii) the portion of the price paid to the PSS (“Mail Co-
Payments”) or a third party pharmacy in the PSS’ national retail
pharmacy network (“Retail Co-Payments”) by individuals included
in its customers’ benefit plans and (iii) administrative fees for
national retail pharmacy network contracts where the PSS is not
the principal as discussed below.
SEC Staff Accounting Bulletins No. 101, “Revenue Recognition
in Financial Statements,” and 104, “Revenue Recognition, corrected
copy” (“SAB 101” and “SAB 104,” respectively) provide the
general criteria for the timing aspect of revenue recognition,
including consideration of whether: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been
rendered, (iii) the seller’s price to the buyer is fixed or determin-
able and (iv) collectability is reasonably assured. The Company has
established the following revenue recognition policies for the PSS
in accordance with SAB 101 and SAB 104:
• Revenues generated from prescription drugs sold by mail service
pharmacies are recognized when the prescription is shipped. At
the time of shipment, the Company has performed substantially
all of its obligations under its customer contracts and does not
experience a significant level of reshipments.
• Revenues generated from prescription drugs sold by third party
pharmacies in the PSS’ national retail pharmacy network and
associated administrative fees are recognized at the PSS’ point-
of-sale, which is when the claim is adjudicated by the PSS’
on-line claims processing system.
The PSS determines whether it is the principal or agent for
its national retail pharmacy network transactions using the
indicators set forth in Emerging Issues Task Force (“EITF”) Issue
No. 99-19, “Reporting Revenue Gross as a Principal versus Net
as an Agent” on a contract by contract basis. In the majority of
its contracts, the PSS has determined it is the principal due to
it: (i) being the primary obligor in the arrangement, (ii) having
latitude in establishing the price, changing the product or per-
forming part of the service, (iii) having discretion in supplier
selection, (iv) having involvement in the determination of product
or service specifications and (v) having credit risk. The PSS’
obligations under its customer contracts for which revenues are
reported using the gross method are separate and distinct from
its obligations to the third party pharmacies under its national
retail pharmacy network contracts. Pursuant to these contracts,
the PSS is contractually required to pay the third party pharmacies
in its national retail pharmacy network for products sold,
regardless of whether the PSS is paid by its customers. The PSS’