CVS 2012 Annual Report Download - page 64

CVS CAREMARK 2012 ANNUAL REPORT
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Notes to Consolidated Financial Statements
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 pharmaceutical 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 advertis-
ing 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 $288 million and $327 million in 2012 and 2011, respectively.
ADVERTISING COSTS – Advertising costs are expensed when the related advertising takes place. Advertising costs, net
of vendor funding (included in operating expenses), were $221 million, $211 million and $234 million in 2012, 2011 and
2010, respectively.
INTEREST EXPENSE, NET – Interest expense, net of capitalized interest, was $561 million, $588 million and $539 million,
and interest income was $4 million, $4 million and $3 million in 2012, 2011 and 2010, respectively. Capitalized interest
totaled $29 million, $37 million and $47 million in 2012, 2011 and 2010, respectively.