CVS 2010 Annual Report Download - page 59

Retail Pharmacy Segment – The RPS’ cost of revenues includes: the cost of merchandise sold during the reporting period and
the related purchasing costs, warehousing and delivery costs (including depreciation and amortization) and actual and estimated
inventory losses. See Note 13 for additional information about the cost of revenues of the Company’s business segments.
VENDOR ALLOWANCES AND PURCHASE DISCOUNTS:
The Company accounts for vendor allowances and purchase discounts as follows:
Pharmacy Services Segment – The PSS receives purchase discounts on products purchased. The PSS’ contractual arrangements
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 recognized 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. In addition, the PSS receives fees from pharma-
ceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction
of “Cost of revenues”.
Retail Pharmacy Segment – Vendor allowances received by the RPS 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. Amounts 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 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 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.
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.
Facility opening and closing costs – New facility opening costs, other than capital expenditures, are charged directly to
expense when incurred. When the Company closes a facility, 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 facility closings was $368 million and
$424 million in 2010 and 2009, respectively.
Advertising costs – Advertising costs are expensed when the related advertising takes place. Advertising costs, net of vendor
funding (included in operating expenses), were $234 million, $317 million and $324 million in 2010, 2009 and 2008, respectively.
Interest expense, net – Interest expense, net of capitalized interest, was $539 million, $530 million and $530 million, and interest
income was $3 million, $5 million and $21 million in 2010, 2009 and 2008, respectively. Capitalized interest totaled $47 million,
$39 million and $28 million in 2010, 2009 and 2008, respectively.
Shares held in trust – The Company maintains grantor trusts, which held approximately 2 million shares of its common stock
at December 31, 2010 and 2009. 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.
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