CVS 2015 Annual Report Download - page 67

65
2015 Annual Report
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 contracts 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/LTC Segment Vendor allowances received by the RLS reduce the carrying cost of inventory and are recog-
nized 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-insur-
ance 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 unrecover-
able 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 $217 million and $207 million in 2015 and 2014, 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, $212 million and $177 million in 2015, 2014
and 2013, respectively.
Interest expense, net Interest expense, net of capitalized interest, was $859 million, $615 million and $517 million,
and interest income was $21 million, $15 million and $8 million in 2015, 2014 and 2013, respectively. Capitalized
interest totaled $12 million, $19 million and $25 million in 2015, 2014 and 2013, respectively.