Cardinal Health 2008 Annual Report Download - page 98

The Company also uses interest rate swaps to hedge changes in the value of fixed rate debt due to variations
in interest rates. Both the derivative instruments and underlying debt are adjusted to market value through
interest expense and other at the end of each period. The Company uses foreign currency forward contracts to
protect the value of existing foreign currency assets and liabilities. The remeasurement adjustments for any
foreign currency denominated assets or liabilities are included in interest expense and other. The remeasurement
adjustment is offset by the foreign currency forward contract settlements which are also classified in interest
expense and other. The interest rate swaps are designated as fair value hedges.
The Company’s derivative contracts are adjusted to current market values each period and qualify for hedge
accounting under SFAS No. 133, as amended. Periodic gains and losses of contracts designated as cash flow
hedges are deferred in other comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in net earnings as an adjustment to the carrying amounts of
underlying transactions in the period in which these transactions are recognized. For those contracts designated
as fair value hedges, resulting gains or losses are recognized in net earnings offsetting the exposures of
underlying transactions. Carrying values of all contracts are included in other assets or liabilities.
The Company’s policy requires that contracts used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.
Hedging effectiveness is assessed periodically. Any contract not designated as a hedge, or so designated but
ineffective, is adjusted to market value and recognized in net earnings immediately. If a fair value or cash flow
hedge ceases to qualify for hedge accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the contract’s fair value would be recognized in
earnings immediately. If a forecasted transaction was no longer probable to occur, amounts previously deferred
in other comprehensive income would be recognized immediately in earnings. Additional disclosure related to
the Company’s hedging contracts is provided in Note 14.
Earnings per Common Share. Basic earnings per Common Share (“Basic EPS”) is computed by dividing net
earnings (the numerator) by the weighted average number of Common Shares outstanding during each period
(the denominator). Diluted earnings per Common Share (“Diluted EPS”) is similar to the computation for Basic
EPS, except that the denominator is increased by the dilutive effect of vested and unvested stock options,
restricted shares and restricted share units computed using the treasury stock method.
Recent Financial Accounting Standards. In February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments” an amendment of SFAS No. 133 and SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement permits fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that would
otherwise be required to be bifurcated from its host contract. The election to measure a hybrid financial
instrument at fair value, in its entirety, is irrevocable and all changes in fair value are to be recognized in
earnings. This Statement also clarifies and amends certain provisions of SFAS No. 133 and SFAS No. 140. This
Statement is effective for all of the Company’s financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15, 2006. The adoption of this
statement in fiscal 2008 did not have a material impact on the Company’s financial position or results of
operations.
In July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes.” This
Interpretation prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This
Interpretation is effective for fiscal years beginning after December 15, 2006. Refer to Note 11 for additional
information regarding the Company’s adoption of FIN No. 48 in fiscal 2008.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines
fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value
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