Quest Diagnostics 2010 Annual Report Download - page 73

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Revenue Recognition
The Company primarily recognizes revenue for services rendered upon completion of the testing process.
Billings for services reimbursed by third-party payers, including Medicare and Medicaid, are recorded as revenues
net of allowances for differences between amounts billed and the estimated receipts from such payers.
Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement.
Approximately 18% of the Company’s consolidated net revenues were generated by billings to the Medicare and
Medicaid programs in each of the years ending December 31, 2010, 2009 and 2008. Under capitated
arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined monthly
reimbursement rate for each member of an insurer’s health plan regardless of the number or cost of services
provided by the Company. In 2010, 2009 and 2008, approximately 4%, 4%, and 5%, respectively, of the
Company’s consolidated net revenues were generated under capitated arrangements.
Revenues from the Company’s risk assessment services, clinical trials testing and diagnostics products
businesses are recognized when persuasive evidence of a final agreement exists; delivery has occurred or services
have been rendered; the price of the product or service is fixed or determinable; and collectibility from the
customer is reasonably assured. The Company’s healthcare information technology business primarily uses the
percentage-of-completion method of contract accounting and recognizes revenue as performance takes place over
an extended period of time.
Taxes on Income
The Company uses the asset and liability approach to account for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the expected future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
Earnings Per Share
The Company’s unvested restricted common stock and unvested restricted stock units that contain non-
forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in
computing earnings per share using the two-class method for all periods presented. Basic earnings per common
share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the
weighted average number of common shares outstanding. Diluted earnings per common share is calculated by
dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of
common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and
performance share units granted under the Company’s Amended and Restated Employee Long-Term Incentive
Plan (“ELTIP”) and its Amended and Restated Non-Employee Director Long-Term Incentive Plan (“DLTIP”).
Stock-Based Compensation
The Company records stock-based compensation as a charge to earnings net of the estimated impact of
forfeited awards. As such, the Company recognizes stock-based compensation cost only for those stock-based
awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of
the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture
rate is recognized as compensation cost in earnings in the period of the revision. The terms of the Company’s
performance share unit grants allow the recipients of such awards to earn a variable number of shares based on
the achievement of the performance goals specified in the awards. For performance share unit awards, the actual
amount of any stock award earned is based on the compound annual growth rate of the Company’s earnings per
share from continuing operations over a three-year period as measured in accordance with the ELTIP. Stock-
based compensation expense associated with performance share units is recognized based on management’s best
estimates of the achievement of the performance goals specified in such awards and the resulting number of
shares that will be earned. The cumulative effect on current and prior periods of a change in the estimated
F-7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)