Quest Diagnostics 2012 Annual Report Download - page 83

F- 10
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash
equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place
its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of
credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across
many different geographic regions, and is limited to certain payers who are large buyers of the Company's services. To reduce
risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts
receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal
and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related
healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting
appropriate documentation. At December 31, 2012 and 2011, receivables due from government payers under the Medicare and
Medicaid programs represent approximately 15% and 16%, respectively, of the Company's consolidated net accounts
receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. At
both December 31, 2012 and 2011, receivables due from patients represent approximately 18% of the Company's consolidated
net accounts receivable. The Company applies assumptions and judgments including historical collection experience for
assessing collectibility and determining allowances for doubtful accounts for accounts receivable from patients.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and
recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the
collectibility of its receivables based on a number of factors, including the period they have been outstanding. Historical
collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful
accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may
impact the collectibility of these receivables or reserve estimates. Revisions to the allowances for doubtful accounts estimates
are recorded as an adjustment to bad debt expense within selling, general and administrative expenses. Receivables deemed to
be uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off.
Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.
Inventories
Inventories, which consist principally of testing supplies and reagents, are valued at the lower of cost (first in, first out
method) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained for internal use
are capitalized for application development activities and expensed as incurred for preliminary project activities and post-
implementation activities. Capitalized costs include external direct costs of materials and services consumed in developing or
obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with the internal-
use software project, and interest costs incurred, when material, while developing internal-use software. Capitalization of such
costs ceases when the project is substantially complete and ready for its intended purpose. Costs for maintenance and training
are expensed as incurred. The Company capitalizes interest on borrowings during the active construction period of major capital
projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the expected useful lives of the
assets. Depreciation and amortization are provided on the straight-line method over expected useful asset lives as follows:
buildings and improvements, ranging from three to thirty-one and a half years; laboratory equipment and furniture and fixtures,
ranging from three to seven years; leasehold improvements, the lesser of the useful life of the improvement or the remaining
life of the building or lease, as applicable; and computer software developed or obtained for internal use, ranging from three to
seven years.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)