CVS 2008 Annual Report Download - page 52

48 CVS CAREMARK
Notes to Consolidated Financial Statements
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 fi nancial statements.
Shares held in trust. As a result of the Caremark Merger (see
Note 2 for additional information about the Caremark Merger),
the Company maintains grantor trusts, which held approximately
1.7 million and 9.2 million shares of its common stock at
December 31, 2008 and December 29, 2007, respectively.
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 equipment, are charged to expense.
The long-term portion of the lease obligations associated with
store closings was $398.6 million and $370.0 million in 2008
and 2007, respectively.
Advertising costs. Advertising costs are expensed when the
related advertising takes place. Advertising costs, net of vendor
funding, (included in operating expenses), were $323.8 million
in 2008, $290.6 million in 2007 and $265.3 million in 2006.
Interest expense, net. Interest expense was $529.8 million,
$468.3 million and $231.7 million, and interest income was
$20.3 million, $33.7 million and $15.9 million in 2008, 2007
and 2006, respectively. Capitalized interest totaled $27.8 million
in 2008, $23.7 million in 2007 and $20.7 million in 2006.
Accumulated other comprehensive loss. Accumulated other
comprehensive loss consists of changes in the net actuarial gains
and losses associated with pension and other post retirement
benefi t plans, unrealized losses on derivatives and an adjustment
to initially apply SFAS No. 158. In accordance with SFAS No. 158,
the amount included in accumulated other comprehensive income
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.”
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 defi ned 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 pharma-
cies included in 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.
Retail Pharmacy Segment. Vendor allowances received by
the RPS reduce the carrying cost of inventory and are recog-
nized in cost of revenues when the related inventory is sold,
unless they are specifi cally identifi ed 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 satisfi ed. Any such allowances
received in excess of the actual cost incurred also reduce
the carrying cost of inventory. 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 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