Cardinal Health 2014 Annual Report Download - page 29

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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1. Basis of Presentation, Summary of
Significant Accounting Policies and Other
Cardinal Health, Inc. is a healthcare services company providing
pharmaceutical and medical products and services that help
pharmacies, hospitals and other healthcare providers focus on
patient care while reducing costs, enhancing efficiency and
improving quality. Cardinal Health, Inc. also provides medical
products to patients in the home. References to “we”, “our” and
similar pronouns in these consolidated financial statements are
to Cardinal Health, Inc. and its majority-owned or controlled
subsidiaries unless the context otherwise requires.
Our fiscal year ends on June 30. References to fiscal 2014, 2013
and 2012 in these consolidated financial statements are to the
fiscal years ended June 30, 2014, 2013 and 2012, respectively.
Basis of Presentation
Our consolidated financial statements include the accounts of
all majority-owned or controlled subsidiaries, and all significant
intercompany transactions and amounts have been eliminated.
To conform to the current year presentation, certain prior year
amounts have been reclassified. The results of businesses
acquired or disposed of are included in the consolidated financial
statements from the date of the acquisition or up to the date of
disposal, respectively.
Use of Estimates
Our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”). The preparation of financial statements
in accordance with GAAP requires us to make estimates,
judgments and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Estimates, judgments and assumptions are used in the
accounting and disclosure related to, among other items,
allowance for doubtful accounts, inventory valuation, business
combinations, goodwill and other intangible asset impairment,
vendor reserves, loss contingencies, income taxes and share-
based compensation. Actual amounts could ultimately differ
from these estimated amounts.
Joint Venture With CVS Caremark
In July 2014, we established Red Oak Sourcing, LLC ("Red Oak
Sourcing"), a U.S.-based generic pharmaceutical sourcing
entity with CVS Caremark Corporation (“CVS”) with an initial
term of 10 years. Both companies have contributed sourcing
and supply chain expertise to the 50/50 joint venture and have
committed to source generic pharmaceuticals through
arrangements negotiated by it. Red Oak Sourcing will negotiate
generic pharmaceutical supply contracts on behalf of both
companies, but will not own products or hold inventory on behalf
of either company. We are required to pay 39 quarterly payments
of $25.6 million to CVS commencing in October 2014 and, only
if certain milestones are achieved, to pay additional
predetermined amounts to CVS beginning in fiscal 2016. The
fixed payments of $25.6 million will be expensed evenly
commencing with the ramp-up of the venture, which we expect
to begin by the end of the first quarter of fiscal 2015. No physical
assets were contributed by either company to Red Oak
Sourcing, and minimal funding has been provided to capitalize
the entity.
Cash Equivalents
We consider liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value
of cash equivalents approximates fair value.
Receivables
Trade receivables are primarily comprised of amounts owed to
us through our distribution businesses and are presented net of
an allowance for doubtful accounts of $137 million and $134
million at June 30, 2014 and 2013, respectively. An account is
considered past due on the first day after its due date. In
accordance with contract terms, we generally have the ability
to charge customers service fees or higher prices if an account
is considered past due. We continuously monitor past due
accounts and establish appropriate reserves to cover potential
losses, which are based primarily on historical collection rates
and the credit worthiness of the customer. We write off any
amounts deemed uncollectible against the established
allowance for doubtful accounts.
We provide financing to various customers. Such financing
arrangements range from 270 days to 5 years, at interest rates
that are generally subject to fluctuation. Interest income on these
arrangements is recognized as it is earned. The financings may
be collateralized, guaranteed by third parties or unsecured.
Finance notes and related accrued interest were $158 million
(current portion $51 million) and $161 million (current portion
$29 million) at June 30, 2014 and 2013, respectively, and are
included in other assets (current portion is included in prepaid
expenses and other) in the consolidated balance sheets.
Finance notes receivable are reported net of an allowance for
doubtful accounts of $18 million and $17 million at June 30, 2014
and 2013, respectively. We estimate an allowance for these
financing receivables based on historical collection rates and
the credit worthiness of the customer. We write off any amounts
deemed uncollectible against the established allowance for
doubtful accounts.
Concentrations of Credit Risk
We maintain cash depository accounts with major banks, and
we invest in high quality, short-term liquid instruments and in
marketable securities. Our short-term liquid instruments mature
within three months and we have not historically incurred any
related losses. Investments in marketable securities consist of
a portfolio of high-grade instruments. Such investments are
made only in instruments issued by highly-rated institutions,
whose financial condition we monitor.