Cardinal Health 2011 Annual Report Download - page 59

T
he LIFO method presumes that the most recent inventory purchases are the first items sold, so LIFO helps
u
s
b
etter matc
h
current costs an
d
revenue. Us
i
ng LIFO,
if b
ran
d
e
d
p
h
armaceut
i
ca
li
nventory
l
eve
l
s
d
ec
li
ne, t
he
result
g
enerall
y
will be a decrease in future cost of products sold: prices for branded pharmaceuticals tend to rise
o
ver time, so our older inventory is held at a lower cost. Conversely, if generic pharmaceutical inventory levels
d
ec
li
ne,
f
uture cost o
f
pro
d
ucts so
ld
genera
ll
yw
ill i
ncrease: pr
i
ces
f
or gener
i
cp
h
armaceut
i
ca
l
s ten
d
to
d
ec
li
ne
o
ver time, so our older inventor
y
is held at a hi
g
her cost. We believe that the avera
g
e cost method of inventor
y
v
aluation reasonably approximates the current cost of replacing inventory within the Pharmaceutical distributio
n
f
ac
ili
t
i
es. Accor
di
ng
l
y, t
h
e LIFO reserve
i
st
h
e
diff
erence
b
etween (a)
i
nventory at t
h
e
l
ower o
f
LIFO cost or
market and (b) inventor
y
at replacement cost determined usin
g
the avera
g
e cost method of inventor
y
valuation.
I
n fiscal 2011 and 2010, we did not record any LIFO reserve reductions
.
T
he remaining inventory is stated at the lower of cost, using the FIFO (“first in, first out”) method, or
mar
k
et
.
If
we
h
a
d
use
d
t
h
e average cost met
h
o
d
o
fi
nventory va
l
uat
i
on
f
or a
ll i
nventory w
i
t
hi
nt
h
eP
h
armaceut
i
ca
l
d
istribution facilities, the value of inventories would not have chan
g
ed in fiscal 2011 or fiscal 2010. Primaril
y
because prices for our generic pharmaceutical inventories have continued to decline, inventories at LIFO were
$
8 million and
$
38 million higher than the average cost value as of June 30, 2011, and 2010, respectively. We d
o
not record inventories in excess of re
p
lacement cost.
I
nventories recorded on the consolidated balance sheets are net of reserves for excess and obsolete
inventory, which were
$
40 million at June 30, 2011, and
$
34 million at June 30, 2010. We determine reserves for
i
nventory o
b
so
l
escence
b
ase
d
on
hi
stor
i
ca
l
exper
i
ence, sa
l
es tren
d
s, spec
ifi
c categor
i
es o
fi
nventory an
d
age o
f
o
n-hand inventor
y
. If actual conditions are less favorable than our assumptions, additional inventor
y
reserves
may be required
.
Business Com
b
ination
s
T
he
p
urchase
p
rice of an ac
q
uired business is allocated to the assets ac
q
uired and liabilities assumed, base
d
o
nt
h
e
i
r est
i
mate
df
a
i
rva
l
ues as o
f
t
h
e
d
ate o
f
acqu
i
s
i
t
i
on,
i
nc
l
u
di
ng
id
ent
ifi
a
bl
e
i
ntang
ibl
e assets. W
h
en an
a
cquisition involves contin
g
ent consideration, we reco
g
nize a liabilit
y
equal to the fair value of the contin
g
ent
consideration obligation at the date of acquisition. The excess of the purchase price over the estimated fair value
of
t
h
e net tang
ibl
ean
did
ent
ifi
a
bl
e
i
ntang
ibl
e assets acqu
i
re
di
s recor
d
e
d
as goo
d
w
ill
.We
b
ase t
h
e
f
a
i
rva
l
ues o
f
identifiable intan
g
ible assets on detailed valuations that require mana
g
ement to make si
g
nificant
j
ud
g
ments
,
estimates and assum
p
tions. Critical estimates and assum
p
tions include: ex
p
ected future cash flows for trad
e
names, customer re
l
at
i
ons
hi
ps an
d
ot
h
er
id
ent
ifi
a
bl
e
i
ntang
ibl
e assets;
di
scount rates t
h
at re
fl
ect t
h
er
i
s
kf
actor
s
a
ssociated with future cash flows; and estimates of useful lives. See Note 2 of the “Notes to Consolidated
Financial Statements” for additional information regarding our acquisitions, including the contingen
t
cons
id
erat
i
on re
l
ate
d
to t
h
e P4 Hea
l
t
h
care acqu
i
s
i
t
i
on.
Goodwill and Other Intangibles
P
urc
h
ase
d
goo
d
w
ill
an
di
ntang
ibl
e assets w
i
t
hi
n
d
e
fi
n
i
te
li
ves are not amort
i
ze
d
,
b
ut
i
nstea
d
are teste
df
or
impairment annuall
y
or when indicators of impairment exist. Intan
g
ible assets with finite lives—primaril
y
customer relationshi
p
s and
p
atents and trademarks—continue to be amortized over their useful lives. Im
p
airment
test
i
ng
i
nvo
l
ves a compar
i
son o
f
est
i
mate
df
a
i
rva
l
ue to t
h
e respect
i
ve carry
i
ng amount. I
f
est
i
mate
df
a
i
rva
l
u
e
exceeds the carr
y
in
g
amount, then no impairment exists. If the carr
y
in
g
amount exceeds the estimated fair value
,
then a second ste
p
is
p
erformed to determine the amount of im
p
airment which would be recorded as an ex
p
ense
to our resu
l
ts o
f
operat
i
ons.
A
pp
li
cat
i
on o
f
goo
d
w
ill i
mpa
i
rment test
i
ng
i
nvo
l
ves
j
u
d
gment,
i
nc
l
u
di
ng
b
ut not
li
m
i
te
d
to, t
he
identification of reportin
g
units and estimatin
g
the fair value of each reportin
g
unit. A reportin
g
unit is defined a
s
a
n operating segment or one level below an operating segment. In fiscal 2011, we identified four reporting
33