Quest Diagnostics 2015 Annual Report Download - page 85

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
F- 10
Foreign Currency
The Company predominately uses the U.S. dollar as its functional currency. The functional currency of the Company's
foreign operating subsidiaries generally is the applicable local currency. Assets and liabilities denominated in non-U.S. dollars
are translated into U.S. dollars at exchange rates as of the end of the reporting period. Income and expense items are translated
at average exchange rates prevailing during the year. The translation adjustments are recorded as a component of accumulated
other comprehensive loss within stockholders' equity. Gains and losses from foreign currency transactions are included within
other operating expense (income), net in the consolidated statements of operations. Transaction gains and losses have
historically not been material. The Company may be exposed to market risk for changes in foreign exchange rates primarily
under certain intercompany receivables and payables. From time to time, the Company uses foreign exchange forward
contracts to mitigate the exposure of the eventual net cash inflows or outflows resulting from these intercompany transactions.
As a result of the HemoCue disposition, this foreign currency risk has largely been eliminated. The Company's remaining
foreign exchange exposure is not material to the Company's consolidated financial condition. The Company does not hedge its
net investment in non-U.S. subsidiaries because it views those investments as long-term in nature.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with original maturities, at the time acquired by the
Company, of three months or less.
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, 2015 and 2014, receivables due from government payers under the Medicare and
Medicaid programs represent approximately 16% and 14%, 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, 2015 and 2014, receivables due from patients represent approximately 17% 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. Changes to the allowances for doubtful accounts estimates
are recorded as an adjustment to bad debt expense within selling, general and administrative expenses in the consolidated
statements of operations. 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.
QUEST DIAGNOSTICS 2015 ANNUAL REPORT ON FORM 10-K