Cardinal Health 2009 Annual Report Download - page 80

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had net deferred income tax assets of $622 million and $656 million at June 30, 2009 and 2008, respectively. The
Company also had net deferred income tax liabilities of $1.8 billion and $1.7 billion at June 30, 2009 and 2008,
respectively. Net deferred income tax assets included net federal, state and local, and international loss and credit
carryforwards at June 30, 2009 and 2008 of $193 million and $200 million, respectively. The Company
established a net valuation allowance of $152 million and $178 million at June 30, 2009 and 2008, respectively,
against certain deferred tax assets, which primarily relates to federal and state loss carryforwards for which the
ultimate realization of future benefits is uncertain. Expiring carryforwards and the required valuation allowances
are adjusted annually. After application of the valuation allowances described above, the Company anticipates no
limitations will apply with respect to utilization of any of the other net deferred income tax assets described
above.
The Company believes that its estimates for the valuation allowances against deferred tax assets and
unrecognized tax benefits are appropriate based on current facts and circumstances. However, other people
applying reasonable judgment to the same facts and circumstances could develop a different estimate and the
amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.
In the first quarter of fiscal 2008, the Company adopted the provisions of FIN No. 48, “Accounting for
Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in
the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This standard also
provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit
that is greater than 50% likely of being realized upon settlement. This interpretation also provides guidance on
measurement, derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and
transition.
If any of the Company’s assumptions or estimates were to change, an increase/decrease in the Company’s
effective tax rate by 1% on earnings before income taxes and discontinued operations would have caused income
tax expense to increase/decrease by $16.7 million for the fiscal year ended June 30, 2009.
Loss Contingencies
The Company accrues for contingencies related to litigation in accordance with SFAS No. 5, which requires
the Company to assess contingencies to determine degree of probability and range of possible loss. An estimated
loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently
unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires
judgments about future events. The Company regularly reviews contingencies to determine the adequacy of the
accruals and related disclosures. The amount of ultimate loss may differ from these estimates.
Equity-Based Compensation
The Company accounts for equity-based compensation in accordance with SFAS No. 123(R), “Share-Based
Payment,” applying the modified prospective method. This Statement requires all equity-based payments to
employees, including grants of options, to be recognized in the consolidated statements of earnings based on the
grant date fair value of the award.
The fair values of options granted after the Company adopted this Statement were determined using a lattice
valuation model and all options granted prior to adoption of this Statement were valued using a Black-Scholes
model. The Company’s estimate of an option’s fair value is dependent on a complex estimation process that
requires the estimation of future uncertain events. These estimates which are entered within the option valuation
model include, but are not limited to, stock price volatility, the expected option life, expected dividend yield and
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