Henry Schein 2012 Annual Report Download - page 63
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and
liabilities. We base our estimates on historical data, when available, experience, industry and market trends, and on
various other assumptions that are believed to be reasonable under the circumstances, the combined results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. However, by their nature, estimates are subject to various assumptions and
uncertainties. Reported results are therefore sensitive to any changes in our assumptions, judgments and estimates,
including the possibility of obtaining materially different results if different assumptions were to be applied.
We believe that the following critical accounting policies, which have been discussed with our audit committee,
affect the significant estimates and judgments used in the preparation of our financial statements:
Revenue Recognition
We generate revenue from the sale of dental, medical and animal health consumable products, as well as
equipment, software products and services and other sources. Provisions for discounts, rebates to customers,
customer returns and other contra-revenue adjustments are recorded based upon historical data and estimates and
are provided for in the period in which the related sales are recognized.
Revenue derived from the sale of consumable products is recognized when products are shipped to customers.
Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe
that the shipment date is the most appropriate point in time indicating the completion of the earnings process
because we have no post-shipment obligations, the product price is fixed and determinable, collection of the
resulting receivable is reasonably assured and product returns are reasonably estimable.
Revenue derived from the sale of equipment is recognized when products are delivered to customers. Such
sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some
equipment sales require minimal installation, which is typically completed at the time of delivery.
Revenue derived from the sale of software products is recognized when products are shipped to customers.
Such software is generally installed by customers and does not require extensive training due to the nature of its
design. Revenue derived from post-contract customer support for software, including annual support and/or
training, is recognized over the period in which the services are provided.
Revenue derived from multiple element arrangements, and the related deferral of such revenue (which is
insignificant to our financial statements), is recognized as follows. When we sell software products together with
related services (i.e., training and technical support) we allocate revenue to the delivered elements using the
residual method, based upon vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered
elements, or defer it until such time as vendor-specific evidence of fair value is obtained. Multiple element
arrangements that include elements that are not considered software consist primarily of equipment and the related
installation service. Effective December 26, 2010 we allocate revenue for such arrangements based on the relative
selling prices of the elements applying the following hierarchy: first VSOE, then third-party evidence (“TPE”) of
selling price if VSOE is not available, and finally our estimate of the selling price if neither VSOE nor TPE is
available. VSOE exists when we sell the deliverables separately and represents the actual price charged by us for
each deliverable. Estimated selling price reflects our best estimate of what the selling prices of each deliverable
would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business,
technical skill required, customer location and other market conditions. Each element that has standalone value is
accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the
service is provided or the product is delivered.
Revenue derived from other sources including freight charges, equipment repairs and financial services, is
recognized when the related product revenue is recognized or when the services are provided.