CVS 2007 Annual Report Download - page 52

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48 I CVS Caremark
Vendor Allowances and Purchase Discounts
The Company accounts for vendor allowances and purchase
discounts under the guidance provided by EITF Issue No. 02-16,
“Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,” and EITF Issue No. 03-10,
“Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers.”
Retail Pharmacy Segment. Vendor allowances the RPS receives
reduce the carrying cost of inventory and are recognized in cost
of revenues when the related inventory is sold, unless they are
specifically identified as a reimbursement of incremental costs for
promotional programs and/or other services provided. Funds that
are directly linked to advertising commitments are recognized as a
reduction of advertising expense (included in operating expenses)
when the related advertising commitment is satisfied. Any such
allowances received in excess of the actual cost incurred also
reduce the carrying cost of inventory. The total value of any up-
front payments received from vendors that are linked to purchase
commitments is initially deferred. The deferred amounts are then
amortized to reduce cost of revenues over the life of the contract
based upon 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 revenues 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.
Pharmacy Services Segment. The PSS receives purchase
discounts on products purchased. The PSS’ contractual arrange-
ments with vendors, including manufacturers, wholesalers
and retail pharmacies, normally provide for the PSS to receive
purchase discounts from established list prices in one, or a
combination of, the following forms: (i) a direct discount at
the time of purchase, (ii) a discount for the prompt payment of
invoices or (iii) when products are purchased indirectly from
a manufacturer (e.g., through a wholesaler or retail pharmacy),
a discount (or rebate) paid subsequent to dispensing. These
rebates are recognized when prescriptions are dispensed and are
generally calculated and billed to manufacturers within 30 days
of the end of each completed quarter. Historically, the effect of
adjustments resulting from the reconciliation of rebates recog-
nized to the amounts billed and collected has not been material
to the PSS’ results of operations. The PSS accounts for the effect
of any such differences as a change in accounting estimate in
the period the reconciliation is completed. The PSS also receives
additional discounts under its wholesaler contract if it exceeds
contractually defined annual purchase volumes.
The PSS earns purchase discounts at various points in its business
cycle (e.g., when the product is purchased, when the vendor is
paid or when the product is dispensed) for products sold through
its mail service pharmacies and third party pharmacies included
its national retail pharmacy network. In addition, the PSS receives
fees from pharmaceutical manufacturers for administrative services.
Purchase discounts and administrative service fees are recorded as a
reduction of “Cost of revenues” as required by EITF 02-16.
Shares Held in Trust
As a result of the Caremark Merger, the Company maintains
grantor trusts, which held approximately 9.2 million shares of
its common stock at December 29, 2007. These shares are
designated for use under various employee compensation plans.
Since the Company holds these shares, they are excluded from
the computation of basic and diluted shares outstanding.
Insurance
The Company is self-insured for certain losses related to general
liability, workers’ compensation and auto liability. The Company
obtains third party insurance coverage to limit exposure from
these claims. The Company is also self-insured for certain losses
related to health and medical liabilities. 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.
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 equip-
ment, are charged to expense. The long-term portion of the
lease obligations associated with store closings was $370.0
million and $418.0 million in 2007 and 2006, respectively.