Cardinal Health 2013 Annual Report Download - page 26

Cardinal Health, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The ultimate outcome of specific 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 for Income Taxes
Our income tax expense, deferred income tax assets and liabilities, and
unrecognized tax benefits reflect management’s assessment of estimated
future taxes to be paid on items in the consolidated financial statements.
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, as well as net
operating loss and tax credit carryforwards for tax purposes. The following
table presents information about our tax position at June 30:
(in millions) 2013 2012
Net deferred income tax assets $ 510 $ 480
Net deferred income tax liabilities 1,638 1,462
Net loss and credit carryforwards included in net deferred
income tax assets 158 120
Net valuation allowance against deferred income tax assets (1) 88 86
(1) This valuation allowance primarily relates to federal, state and international loss
carryforwards for which the ultimate realization of future benefits is uncertain.
Expiring loss and credit carryforwards and the required valuation
allowances are adjusted annually. After applying the 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, others applying reasonable
judgment to the same facts and circumstances could develop different
estimates. The amount we 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 position will be sustained upon examination of the
technical merits of the position, including resolutions of any related appeals
or litigation processes. The amount recognized is measured as the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon settlement. See Note 7 of the “Notes to Consolidated Financial
Statements” for additional information regarding unrecognized tax
benefits.
If any of our assumptions or estimates were to change, an increase or
decrease in our effective income tax rate by 1 percent would have caused
income tax expense to increase or decrease $9 million for fiscal 2013.
Share-Based Compensation
Share-based compensation to employees 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. We believe the lattice model provides reasonable
estimates because it has the ability to take into account employee exercise
patterns based on changes in our stock price and other variables and it
provides for a range of input assumptions.
We analyze historical data to estimate option exercise behaviors and
employee terminations to be used within the lattice model. The expected
life of the options granted is calculated from the option valuation model
and represents the length of time in years that the options granted are
expected to be outstanding. Expected volatilities are based on implied
volatility from traded options on our common shares and historical volatility
over a period of time commensurate with the contractual term of the option
grant (up to ten years). As required, the forfeiture estimates are adjusted
to reflect actual forfeitures when an award vests. The actual forfeitures in
future reporting periods could be higher or lower than our current
estimates. See Note 15 of the "Notes to Consolidated Financial
Statements" for additional information regarding share-based
compensation.