CVS 2011 Annual Report Download - page 39

CVS CAREMARK 37 2011 ANNUAL REPORT
Critical Accounting Policies
We prepare our consolidated financial statements in confor-
mity with generally accepted accounting principles, which
require management to make certain estimates and apply
judgment. We base our estimates and judgments on his-
torical experience, current trends and other factors that
management believes to be important at the time the consol-
idated financial statements are prepared. On a regular basis,
we review our accounting policies and how they are applied
and disclosed in our consolidated financial statements. While
we believe the historical experience, current trends and other
factors considered, support the preparation of our con-
solidated financial statements in conformity with generally
accepted accounting principles, actual results could differ
from our estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1
to our consolidated financial statements. We believe the fol-
lowing accounting policies include a higher degree of judg-
ment and/or complexity and, thus, are considered to be
critical accounting policies. We have discussed the devel-
opment and selection of our critical accounting policies with
the Audit Committee of our Board of Directors and the Audit
Committee has reviewed our disclosures relating to them.
REVENUE RECOGNITION
Pharmacy Services Segment
Our Pharmacy Services segment sells prescription drugs
directly through our mail service pharmacies and indirectly
through our retail pharmacy network. We recognize revenues
in our Pharmacy Services segment from prescription drugs
sold by our mail service pharmacies and under retail phar-
macy network contracts where we are the principal using
the gross method at the contract prices negotiated with our
clients. Net revenue from our Pharmacy Services segment
includes: (i) the portion of the price the client pays directly to
us, net of any volume-related or other discounts paid back to
the client, (ii) the price paid to us (“Mail Co-Payments”) or a
third party pharmacy in our retail pharmacy network (“Retail
Co-Payments”) by individuals included in our clients’ benefit
plans, and (iii) administrative fees for retail pharmacy network
contracts where we are not the principal.
We recognize revenue in the Pharmacy Services segment
when: (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 determinable, and
(iv) collectability is reasonably assured. We recognize revenues
generated from prescription drugs sold by mail service phar-
macies when the prescription is shipped. At the time of ship-
ment, we have performed substantially all of our obligations
under the client contract and do not experience a significant
level of reshipments. We recognize revenues generated from
prescription drugs sold by third party pharmacies in our retail
pharmacy network and associated administrative fees are
recognized at the point-of-sale, which is when we adjudicate
the claim in our online claims processing system.
We determine whether we are the principal or agent for our
retail pharmacy network transactions on a contract by con-
tract basis. In the majority of our contracts, we have deter-
mined we are the principal due to us: (i) being the primary
obligor in the arrangement, (ii) having latitude in establish-
ing the price, changing the product or performing part of the
service, (iii) having discretion in supplier selection, (iv) having
involvement in the determination of product or service speci-
fications, and (v) having credit risk. Our obligations under
our client contracts for which revenues are reported using
the gross method are separate and distinct from our obliga-
tions to the third party pharmacies included in our retail phar-
macy network contracts. Pursuant to these contracts, we are
contractually required to pay the third party pharmacies in
our retail pharmacy network for products sold, regardless of
whether we are paid by our clients. Our responsibilities under
these client contracts typically include validating eligibility and
coverage levels, communicating the prescription price and
the co-payments due to the third party retail pharmacy, iden-
tifying possible adverse drug interactions for the pharmacist
to address with the physician prior to dispensing, suggesting
clinically appropriate generic alternatives where appropriate
and approving the prescription for dispensing. Although we
do not have credit risk with respect to Retail Co-Payments,
we believe that all of the other indicators of gross revenue
reporting are present. For contracts under which we act as
an agent, we record revenues using the net method.
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