Cardinal Health 2008 Annual Report Download - page 78

Off-Balance Sheet Arrangements
See “Liquidity and Capital Resources—Capital Resources” above and Note 19 in “Notes to Consolidated
Financial Statements,” which is incorporated herein by reference, for a discussion of off-balance sheet
arrangements.
Recent Financial Accounting Standards
See Note 1 in “Notes to Consolidated Financial Statements” for a discussion of recent financial accounting
standards.
Critical Accounting Policies and Sensitive Accounting Estimates
Critical accounting policies are those accounting policies that can have a significant impact on the
presentation of the Company’s financial condition and results of operations, and require use of complex and
subjective estimates based upon past experience and management’s judgment. Other companies applying
reasonable judgment to the same facts and circumstances could develop different estimates. Because of the
uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies
applied in preparing the Company’s consolidated financial statements that management believes are the most
dependent on the application of estimates and assumptions. For additional accounting policies, see Note 1 of
“Notes to Consolidated Financial Statements.”
Allowance for doubtful accounts
Trade receivables are amounts owed to the Company through its operating activities and are presented net of
an allowance for doubtful accounts. The Company also provides financing to various customers. Such financing
arrangements range from 90 days to 10 years at interest rates that generally are subject to fluctuation. These
financings may be collateralized, guaranteed by third parties or unsecured. Finance notes and accrued interest
receivables are recorded net of an allowance for doubtful accounts and are included in other assets. Extending
credit terms and calculating the required allowance for doubtful accounts involve the use of judgment by the
Company’s management.
In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific
reserves, the Company reviews accounts receivable aging, industry trends, customer financial strength, credit
standing, historical write-off trends and payment history to assess the probability of collection. The Company
continuously monitors the collectibility of its receivable portfolio by analyzing the aging of its accounts
receivable, assessing credit worthiness of its customers and evaluating the impact of changes in economic
conditions that may impact credit risks. If the frequency or severity of customer defaults change due to changes
in customers’ financial condition or general economic conditions, the Company’s allowance for doubtful
accounts may require adjustment.
The allowance for doubtful accounts was $135.7 million and $128.9 million at June 30, 2008 and 2007,
respectively. This allowance represented 2.1% and 2.2% of customer receivables at June 30, 2008 and 2007,
respectively. The allowance for doubtful accounts as a percentage of revenue was 0.15%, 0.15% and 0.16% at
June 30, 2008, 2007 and 2006, respectively. The allowance for doubtful accounts was reduced by $25.3 million,
$28.4 million and $22.6 million in fiscal 2008, 2007, and 2006, respectively, for customer deductions and write-
offs and was increased by additional provisions of $26.1 million, $24.0 million and $24.6 million in fiscal 2008,
2007 and 2006, respectively. A hypothetical 0.1% increase or decrease in the reserve as a percentage of trade
receivables and sales-type leases to the reserve at June 30, 2008 would result in an increase or decrease in bad
debt expense of approximately $6.3 million.
Reserve methodologies are assessed annually based on historical losses and economic, business and market
trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present.
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