Cardinal Health 2012 Annual Report Download - page 34

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
32
Other Accrued Liabilities
Other accrued liabilities represent various current obligations, including
certain accrued operating expenses and taxes payable.
Share-Based Compensation
All share-based compensation to employees, including grants of stock
options, is recognized in the consolidated statements of earnings based
on the grant date fair value of the awards. The fair value of stock options
is determined using a lattice valuation model. The compensation expense
recognized for all share-based awards is net of estimated forfeitures and
is recognized ratably over the service period of the awards. We classify
share-based compensation expense within SG&A expenses to
correspond with the same line item as the majority of the cash
compensation paid to employees. However, certain share-based
compensation incurred in connection with the Spin-Off is classified within
restructuring and employee severance. See Note 16 for additional
information regarding share-based compensation.
Dividends
We paid cash dividends per Common Share of $0.86, $0.78 and $0.70,
for fiscal 2012, 2011 and 2010, respectively.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement
exists, product delivery has occurred or the services have been rendered,
the price is fixed or determinable, and collectability is reasonably assured.
Pharmaceutical
This segment recognizes distribution revenue when title transfers to its
customers and the business has no further obligation to provide services
related to such merchandise.
Revenue for deliveries that are directly shipped to customer warehouses
from the manufacturer whereby we act as an intermediary in the ordering
and delivery of products is recorded gross in accordance with accounting
standards addressing reporting revenue on a gross basis as a principal
versus on a net basis as an agent. This revenue is recorded on a gross
basis since we incur credit risk from the customer, bear the risk of loss for
incomplete shipments and do not receive a separate fee or commission
for the transaction and, as such, are the primary obligor. Revenue from
these sales is recognized when title transfers to the customer and we have
no further obligation to provide services related to such merchandise.
Radiopharmaceutical revenue is recognized upon delivery of the product
to the customer and after the business has no further obligation to provide
services related to such merchandise.
Medicine Shoppe International, Inc. and Medicap Pharmacies
Incorporated earn franchise fees. Franchise fees represent monthly fees
that are either fixed or based upon franchisees’ sales and are recognized
as revenue when they are earned.
Medical
This segment recognizes distribution revenue when title transfers to its
customers and the business has no further obligation to provide services
related to such merchandise.
Sales Returns and Allowances
Revenue is recorded net of sales returns and allowances. We recognize
sales returns as a reduction of revenue and cost of products sold for the
sales price and cost, respectively, when products are returned. Our
customer return policies generally require that the product be physically
returned, subject to restocking fees, in a condition suitable to be added
back to inventory and resold at full value, or returned to vendors for credit
(“merchantable product”). 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
had we accrued for estimated sales returns and allowances at the time of
the sale transaction. Sales returns and allowances were $1.8 billion, $1.7
billion and $1.5 billion, for fiscal 2012, 2011 and 2010, respectively.
Third-Party Returns
Since we generally do not accept non-merchantable product returns from
our customers, many of our customers return non-merchantable
pharmaceutical products to our vendors through third parties. Since, our
customers generally do not have a direct relationship with our vendors,
our vendors pass the value of the returns to us (usually in the form of an
accounts payable deduction). We in turn pass the value received, less an
administrative fee, to our customer. In certain instances, we pass the
estimated value of the return to our customer prior to processing the
deduction with our vendors. Although we believe we have satisfactory
protections, we could be subject to claims from customers or vendors if
our administration of this overall process was deficient in some respect
or our contractual terms with vendors are in conflict with our contractual
terms with our customers. We have maintained reserves for some of these
situations based on their nature and our historical experience with their
resolution.
Distribution Service Agreement and Other Vendor Fees
Our Pharmaceutical segment recognizes fees received from its
distribution service agreements and other fees received from vendors
related to the purchase or distribution of the vendors’ inventory when those
fees have been earned and we are entitled to payment. We recognize 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 our statements of earnings when that inventory is sold.
Shipping and Handling
Shipping and handling costs are included in SG&A expenses in our
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 were $360
million, $326 million and $294 million, for fiscal 2012, 2011 and 2010,
respectively. Revenue received for shipping and handling was immaterial
for all periods presented.
Translation of Foreign Currencies
Financial statements of our subsidiaries outside the United States are
generally 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 accumulated other comprehensive income utilizing period-end
exchange rates. Revenues and expenses of these foreign subsidiaries
are translated using average exchange rates during the year.
The foreign currency translation gains/(losses) included in accumulated
other comprehensive income/(loss) were $37 million and $71 million at
June 30, 2012 and 2011, respectively. Foreign currency transaction gains
and losses for the period are included in the consolidated statements of