Cardinal Health 2008 Annual Report Download - page 97

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arrangements involving a single segment or business unit and multiple deliverables are accounted for in
accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” If the deliverable
meets the criteria of a separate unit of accounting, the arrangement revenue is allocated to each element based
upon its relative fair value and recognized in accordance with the applicable revenue recognition criteria for each
element.
Sales Returns and Allowances. Revenue is recorded net of sales returns and allowances. The Company
recognizes sales returns as a reduction of revenue and cost of products sold for the sales price and cost,
respectively, when products are returned. The customer return policies generally require that the product be
physically returned, subject to restocking fees, and only allow customers to return products that can be added
back to inventory and resold at full value, or that can be returned to vendors for credit. Product returns are
generally consistent throughout the year, and typically are not specific to any particular product or customer.
Amounts recorded in revenue and cost of products sold under this accounting policy closely approximate what
would have been recorded under SFAS No. 48, “Revenue Recognition When Right of Return Exists.” Applying
the provisions of SFAS No. 48 would not materially change the Company’s financial position and results of
operations. Sales returns and allowances were approximately $1.8 billion, $1.8 billion and $1.5 billion in fiscal
2008, 2007 and 2006, respectively.
Distribution Service Agreement and Other Vendor Fees. The Company’s pharmaceutical supply chain
business within the Healthcare Supply Chain Services—Pharmaceutical segment recognizes fees received from
its distribution service agreements and other fees received from vendors related to the purchase or distribution of
the vendor’s inventory when those fees have been earned and the Company is entitled to payment. The Company
recognizes the fees as a reduction in the carrying value of the inventory that generated the fees and, as such, the
fees are recognized as a reduction of cost of products sold in its statements of earnings when that inventory is
sold.
Shipping and Handling. Shipping and handling costs are included in SG&A expenses in the consolidated
statements of earnings. Shipping and handling costs include all delivery expenses as well as all costs to prepare
the product for shipment to the end customer. Shipping and handling costs totaled $291.2 million, $305.8 million
and $274.3 million for fiscal 2008, 2007 and 2006, respectively. Shipping and handling revenue received was
immaterial for all periods presented.
Research and Development Costs. Costs incurred in connection with development of new products and
manufacturing methods are charged to expense as incurred. Research and development expenses were
$152.9 million, $102.8 million and $96.8 million for fiscal 2008, 2007 and 2006, respectively.
Translation of Foreign Currencies. Financial statements of the Company’s subsidiaries outside the
U.S. generally are measured using the local currency as the functional currency. Adjustments to translate the
assets and liabilities of these foreign subsidiaries into U.S. dollars are accumulated in shareholders’ equity
through other comprehensive income utilizing period-end exchange rates. Foreign currency transaction gains and
losses calculated by utilizing weighted average exchange rates for the period are included in the consolidated
statements of earnings in interest expense and other and were immaterial for the fiscal years ended June 30, 2008,
2007 and 2006.
Interest Rate and Currency Risk Management. The Company accounts for derivative instruments in
accordance with SFAS No. 133, as amended, “Accounting for Derivative Instruments and Hedging Activity.”
Under this standard, all derivative instruments are recorded at fair value on the balance sheet and all changes in
fair value are recorded to net earnings or shareholders’ equity through other comprehensive income, net of tax.
The Company uses forward currency exchange contracts and interest rate swaps to manage its exposures to
the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency
transaction costs and to the interest rate changes on borrowing costs. These contracts are designated as cash flow
hedges.
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