Henry Schein 2009 Annual Report Download - page 72

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(In thousands, except share and per share data)
60
Note 1 – Significant Accounting Policies – (Continued)
Capitalized software costs consist of costs to purchase and develop software. Costs incurred during
the application development stage for software bought and further customized by outside suppliers for our
use and software developed by a supplier for our proprietary use are capitalized. Costs incurred for our
own personnel who are directly associated with software development are capitalized.
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of
deferred income tax assets and liabilities for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. In estimating future tax consequences, we generally
consider all expected future events other than enactments of changes in tax laws or rates. The effect on
deferred income tax assets and liabilities of a change in tax rates will be recognized as income or expense
in the period that includes the enactment date. We file a consolidated U.S. federal income tax return with
our 80% or greater owned U.S. subsidiaries.
Foreign Currency Translation and Transactions
The financial position and results of operations of our foreign subsidiaries are determined using local
currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of
exchange prevailing during the year. Translation adjustments arising from the use of differing exchange
rates from period to period are included in Accumulated other comprehensive income in stockholders’
equity. Gains and losses resulting from foreign currency transactions are included in earnings.
Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in interest rates and foreign
currency exchange rates. Our objective is to manage the impact that interest rate and foreign currency
exchange rate fluctuations could have on recognized asset and liability fair values, earnings and cash
flows. Our risk management policy requires that derivative contracts used as hedges be effective at
reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception
of the contract. We do not enter into derivative instruments for speculative purposes. Our derivative
instruments primarily include interest rate swap agreements related to our long-term fixed rate debt and
foreign currency forward and swap agreements related to certain intercompany loans and certain
forecasted inventory purchase commitments with foreign suppliers.
Our interest rate swap agreements are designated as fair value hedges. The terms of our interest rate
swap agreements are identical to the senior notes and consequently qualify for an assumption of no
ineffectiveness under the provisions of ASC Topic 815, “Derivatives and Hedging.” Both the interest rate
swap agreements and the underlying senior notes are marked-to-market through earnings at the end of each
period; however, since our interest rate swap agreements are deemed fully effective, these mark-to-market
adjustments have no net impact on earnings.
Our foreign currency forward and swap agreements related to forecasted inventory purchase
commitments are designated as cash flow hedges. Our foreign currency forward and swap agreements
related to foreign currency balance sheet exposure provide economic hedges but are not designated as
hedges for accounting purposes.