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62
CVS Caremark
Notes to Consolidated Financial Statements
The following is a reconciliation of the changes in the redeemable noncontrolling interest for the years ended
December 31, 2012 and 2011:
In millions
2012 2011
Beginning balance $ 30 $ 34
Net loss attributable to noncontrolling interest (2) (4)
Purchase of noncontrolling interest (26) —
Reclassification to capital surplus in connection with purchase of noncontrolling interest (2) —
Ending balance $ — $ 30
Revenue Recognition
Pharmacy Services Segment –
The PSS sells prescription drugs directly through its mail service dispensing
pharmacies and indirectly through its retail pharmacy network. The PSS recognizes revenue from prescription drugs
sold by its mail service dispensing pharmacies and under retail pharmacy network contracts where it is the principal
using the gross method at the contract prices negotiated with its clients. Net revenues include: (i) the portion of the
price the client pays directly to the PSS, net of any volume-related or other discounts paid back to the client (see
“Drug Discounts” later in this document), (ii) the price paid to the PSS by client plan members for mail order prescriptions
(“Mail Co-Payments”) and the price paid to retail network pharmacies by client plan members for retail prescriptions
(“Retail Co-Payments”), and (iii) administrative fees for retail pharmacy network contracts where the PSS is not the
principal as discussed below. Sales taxes are not included in revenue.
Revenue is recognized 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. The following revenue recognition policies have been established for the PSS:
• Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the
prescription is delivered. At the time of delivery, the PSS has performed substantially all of its obligations under its
client contracts and does not experience a significant level of returns or reshipments.
• Revenues generated from prescription drugs sold by third party pharmacies in the PSS’s retail pharmacy network
and associated administrative fees are recognized at the PSS’s point-of-sale, which is when the claim is adjudi-
cated by the PSS’s online claims processing system.
The PSS determines whether it is the principal or agent for its retail pharmacy network transactions on a contract by
contract basis. In the majority of its contracts, the PSS has determined it is the principal due to it: (i) being the primary
obligor in the arrangement, (ii) having latitude in establishing 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
specifications, and (v) having credit risk. The PSS’s obligations under its client contracts for which revenues are
reported using the gross method are separate and distinct from its obligations to the third party pharmacies included
in its retail pharmacy network contracts. Pursuant to these contracts, the PSS is contractually required to pay the
third party pharmacies in its retail pharmacy network for products sold, regardless of whether the PSS is paid by its
clients. The PSS’s responsibilities under its client contracts typically include validating eligibility and coverage levels,
communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible
adverse drug interactions for the pharmacist to address with the prescriber prior to dispensing, suggesting generic
alternatives where clinically appropriate and approving the prescription for dispensing. Although the PSS does not
have credit risk with respect to Retail Co-Payments, management believes that all of the other applicable indicators
of gross revenue reporting are present. For contracts under which the PSS acts as an agent, revenue is recognized
using the net method.