Cardinal Health 2010 Annual Report Download - page 61

estimate methodology by updating the reserve estimate percentages to reflect actual historical experience.
Changes to the estimate percentages affect the cost of products sold in the period in which the change was made
.
Vendor reserves were
$
26.8 million at June 30, 2010, and
$
53.6 million at June 30, 2009. Approximatel
y
5
7% of the vendor reserve at June 30, 2010, pertained to the Pharmaceutical segment, compared to 80% at the
end of fiscal 2009. The reserve balance will fluctuate due to variations of outstanding claims from period t
o
p
eriod, timing of settlements, and specific vendor issues, such as bankruptcies
.
The ultimate outcome of certain claims may be different than our original estimate and may require
adjustment. We believe, however, that reserves recorded for such disputes are adequate based upon current facts
and circumstances.
Provision
f
or Income Taxes
Our income tax expense, deferred tax assets and liabilities, and unrecognized tax benefits reflect
management’s assessment of estimated future taxes to be paid on items in the financial statements.
Deferred income taxes arise from temporary differences between financial reporting and tax reporting base
s
o
f assets and liabilities, as well as net operating loss and tax credit carryforwards for tax purposes. The following
table
p
resents information about our tax
p
osition:
Y
ear en
d
e
d
J
une 30,
N
et de
f
erred
i
ncome tax
a
ssets (in millions)
N
et de
f
erred
i
ncome tax
liabilities (in billions
)
Net loss and cred
i
t carr
yf
orwards
i
ncluded
i
n net de
f
erred
i
ncom
e
tax assets (in millions
)
N
et valuat
i
on allowanc
e
(
in millions
)
against
d
eferred tax assets (1
)
2
010
$
578
$
1.2
$
197
$
183
2
009
$
622
$
1.8
$
193
$
152
(1) This valuation allowance primarily relates to federal, state and international loss carryforwards for whic
h
the ultimate realization of future benefits is uncertain.
E
xpiring carryforwards and the required valuation allowances are adjusted annually. After applying th
e
valuation allowances, we do not anticipate any limitations on our use of any of the other net deferred income tax
assets described above
.
We believe that our estimates for the valuation allowances against deferred tax assets and unrecognized tax
benefits are appropriate based on current facts and circumstances. However, other companies applyin
g
r
easonable judgment to the same facts and circumstances could develop different estimates. The amount w
e
ultimately pay when matters are resolved may differ from the amounts accrued.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the positio
n
will be sustained upon examination, including resolutions of any related appeals or litigation processes, based o
n
the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater tha
n
5
0% likely of being realized upon settlement (see Note 1 of “Notes to Consolidated Financial Statements” for a
detailed disclosure of the unrecognized tax benefits).
I
f any of our assumptions or estimates were to change, an increase or decrease in our effective tax rate by
1% on earnings before income taxes and discontinued operations would have caused income tax expense to
increase or decrease by
$
12.1 million for fiscal 2010.
S
hare-based Com
p
ensation
A
ll share-based payments to employees, including grants of options, are recognized in the consolidate
d
statements of earnings based on the grant date fair value of the award. The fair value of stock options is
35