CVS 2009 Annual Report Download - page 58

Notes to Consolidated Financial Statements
3 to 5 years) using the straight-line method. Stock-based
compensation costs are included in selling, general and
administrative expenses.
Income taxes. The Company provides for federal and state
income taxes currently payable, as well as for those deferred
because of timing differences between reported income and
expenses for financial statement purposes versus tax purposes.
Federal and state tax credits are recorded as a reduction of
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recoverable or settled. The effect of a change
in tax rates is recognized as income or expense in the period
of the change.
Loss from discontinued operations. In connection with certain
business dispositions completed between 1991 and 1997, the
Company continues to guarantee store lease obligations for a
number of former subsidiaries, including Linens ’n Things. On
May 2, 2008, Linens Holding Co. and certain affiliates, which
operate Linens ’n Things, filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware.
The Company’s loss from discontinued operations includes
$12 million of lease-related costs ($19 million, net of a $7 million
income tax benefit) and $132 million of lease-related costs
($214 million, net of an $82 million income tax benefit) as
of December 31, 2009 and 2008, respectively, which the
Company believes is likely required to satisfy the lease
guarantees associated with Linens ’n Things.
Earnings per common share. Basic earnings per common share
is computed by dividing: (i) net earnings, after deducting the
after-tax Employee Stock Ownership Plan (“ESOP”) preference
dividends, by (ii) the weighted average number of common
shares outstanding during the year (the “Basic Shares”).
When computing diluted earnings per common share for
fiscal years 2008 and 2007, the Company assumed that the
ESOP preference stock was converted into common stock and
all dilutive stock awards were exercised. After the assumed
ESOP preference stock conversion, the ESOP Trust would hold
common stock rather than ESOP preference stock and would
receive common stock dividends ($0.25800 per share in 2008
and $0.22875 per share in 2007) rather than ESOP preference
stock dividends ($3.90 per share). Since the ESOP Trust used
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 $424 million
and $399 million in 2009 and 2008, respectively.
Advertising costs. Advertising costs are expensed when the
related advertising takes place. Advertising costs, net of vendor
funding (included in operating expenses), were $317 million
in 2009, $324 million in 2008 and $291 million in 2007.
Interest expense, net. Interest expense was $530 million,
$530 million and $468 million, and interest income was
$5 million, $21 million and $33 million in 2009, 2008 and
2007, respectively. Capitalized interest totaled $39 million
in 2009, $28 million in 2008 and $24 million in 2007.
Shares held in trust. As a result of the Caremark Merger
(see Note 2), the Company maintains grantor trusts, which
held approximately 2 million shares of its common stock at
December 31, 2009 and 2008. 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.
Accumulated other comprehensive loss. Accumulated other
comprehensive loss consists of changes in the net actuarial
gains and losses associated with pension and other postretire-
ment benefit plans, and unrealized losses on derivatives. The
amount included in accumulated other comprehensive income
related to the Company’s pension and postretirement plans
was $203 million pre-tax ($125 million after-tax) as of Decem-
ber 31, 2009 and $217 million pre-tax ($132 million after-tax)
as of December 31, 2008. The net impact on cash flow
hedges totaled $15 million pre-tax ($10 million after-tax) and
$17 million pre-tax ($11 million after-tax) as of December 31,
2009 and 2008, respectively.
Stock-based compensation. Stock-based compensation
expense is measured at the grant date based on the fair value
of the award and is recognized as expense over the appli-
cable requisite service period of the stock award (generally
CVS Caremark
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