Cardinal Health 2015 Annual Report Download - page 22

MD&A Critical Accounting Policies and Sensitive Accounting Estimates
21 Cardinal Health | Fiscal 2015 Form 10-K
division which was fully impaired in fiscal 2013, concluded that there
were no impairments of goodwill as the estimated fair value of each
reporting unit exceeded its carrying value. With the exception of our
Nuclear Pharmacy Services division in fiscal 2013, if we were to alter
our impairment testing by increasing the discount rate in the
discounted cash flow analysis by 1 percent, there still would not be
any impairment indicated for any of these reporting units for fiscal
2015, 2014 or 2013. As discussed further in Note 4 of the “Notes to
Consolidated Financial Statements”, during the fourth quarter of fiscal
2013 we recognized an $829 million ($799 million, net of tax) non-
cash goodwill impairment charge related to our Nuclear Pharmacy
Services division.
We review intangible assets with finite lives for impairment whenever
events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. Determining whether an
impairment loss occurred requires a comparison of the carrying
amount to the sum of the undiscounted cash flows expected to be
generated by the asset.
Vendor Reserves
In the ordinary course of business, our vendors may dispute
deductions taken against payments otherwise due to them or assert
other billing disputes. These disputed transactions are researched
and resolved based upon our policy and findings of the research
performed. At any given time, there are outstanding items in various
stages of research and resolution. In determining appropriate
reserves for areas of exposure with our vendors, we assess historical
experience and current outstanding claims. We have established
various levels of reserves based on the type of claim and status of
review. Though the transaction types are relatively consistent, we
periodically refine our methodology by updating the reserve estimate
percentages to reflect actual historical experience. Changes to the
estimate percentages affect the cost of products sold in the period
in which the change was made.
Vendor reserves were $88 million and $82 million at June 30, 2015
and 2014, respectively. Approximately 75 percent of the vendor
reserve at the end of fiscal 2015 pertained to the Pharmaceutical
segment compared to 68 percent at the end of fiscal 2014. The
reserve balance will fluctuate due to variations of outstanding claims
from period-to-period, timing of settlements, and specific vendor
issues, such as bankruptcies.
The ultimate outcome of specific claims may be different than our
original estimate and may require adjustment. We believe, however,
that reserves recorded for such disputes are adequate based upon
current facts and circumstances.
Loss Contingencies
We accrue for contingencies related to disputes, litigation and
regulatory matters if it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. Because
these matters are inherently unpredictable and unfavorable
developments or resolutions can occur, assessing contingencies is
highly subjective and requires judgments about future events.
We regularly review contingencies to determine whether our accruals
and related disclosures are adequate. The amount of ultimate loss
may differ from these estimates. See Note 9 of the “Notes to
Consolidated Financial Statements” for additional information
regarding loss contingencies.
Provision for Income Taxes
Our income tax expense, deferred income tax assets and liabilities,
and unrecognized tax benefits reflect management’s assessment of
estimated future taxes to be paid on items in the consolidated financial
statements.
Deferred income taxes arise from temporary differences between
financial reporting and tax reporting bases of assets and liabilities,
as well as net operating loss and tax credit carryforwards for tax
purposes. The following table presents information about our tax
position at June 30:
(in millions) 2015 2014
Net deferred income tax assets $ 498 $ 444
Net deferred income tax liabilities 1,853 1,653
Loss and credit carryforwards included in net deferred
income tax assets 197 191
Net valuation allowance against deferred income tax
assets (1) 87 94
(1) This valuation allowance primarily relates to federal, state and international loss
carryforwards for which the ultimate realization of future benefits is uncertain.
Expiring loss and credit carryforwards and the required valuation
allowances are adjusted annually. After applying the valuation