Cardinal Health 2014 Annual Report Download - page 34

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
32
policy to accrue for estimated sales returns and allowances
would not have materially changed our results of operations and
financial position in fiscal 2012. Sales returns and allowances
were $1.7 billion, $2.3 billion and $1.9 billion, for fiscal 2014,
2013 and 2012, 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. Since the benefit provided to a vendor is related to
the purchase and distribution of the vendor’s inventory, we
recognize the fees as a reduction in the carrying value of the
inventory that generated the fees, and as such, a reduction of
cost of products sold in our consolidated statements of earnings
when the inventory is sold.
Shipping and Handling
Shipping and handling costs are primarily 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 $430 million, $419 million and
$389 million, for fiscal 2014, 2013 and 2012, respectively.
Revenue received for shipping and handling was immaterial for
all periods presented.
Restructuring and Employee Severance
We consider restructuring activities to be programs by which we
fundamentally change our operations, such as closing and
consolidating facilities, moving manufacturing of a product to
another location, production or business process sourcing,
employee severance (including rationalizing headcount or other
significant changes in personnel) and realigning operations
(including realignment of the management structure of a
business unit in response to changing market conditions). See
Note 3 for additional information regarding our restructuring
activities.
Amortization and Other Acquisition-Related
Costs
We classify costs incurred in connection with acquisitions as
amortization and other acquisition-related costs in our
consolidated statements of earnings. These costs consist
primarily of amortization of acquisition-related intangible assets,
transaction costs, integration costs and changes in the fair value
of contingent consideration obligations. Transaction costs are
incurred during the initial evaluation of a potential acquisition
and primarily relate to costs to analyze, negotiate and
consummate the transaction as well as due diligence activities.
Integration costs relate to activities required to combine the
operations of an acquired enterprise into our operations. We
record changes in the fair value of contingent consideration
obligations relating to acquisitions as income or expense in
amortization and other acquisition-related costs. See Note 5 for
additional information regarding amortization of acquisition-
related intangible assets.
In fiscal 2011, we completed the acquisition of privately-held
Healthcare Solutions Holding, LLC ("P4 Healthcare") for cash
and certain contingent consideration. In connection with this
acquisition, the former owners of P4 Healthcare had the right to
receive certain contingent payments based on earnings before
interest, taxes, depreciation and amortization. As a result of
changes in our estimate of performance in future periods,
coupled with the progress of discussions with the former owners
regarding an early termination and settlement, we recorded a
$71 million decrease in fair value of the obligation during fiscal
2012; and settled and terminated the remaining contingent
consideration obligation for $4 million in fiscal 2013.
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 AOCI 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 AOCI
at June 30, 2014 and 2013 are presented in Note 13. Foreign
currency transaction gains and losses for the period are included
in the consolidated statements of earnings in other income, net,
and were immaterial for all periods presented.
Interest Rate, Currency and Commodity Risk
All derivative instruments are recognized at fair value on the
consolidated balance sheets and all changes in fair value are