Cardinal Health 2015 Annual Report Download - page 53

Notes to Financial Statements
Cardinal Health | Fiscal 2015 Form 10-K 52
available-for-sale securities, net of applicable taxes, are included
within shareholders’ equity in accumulated other comprehensive
income ("AOCI"). We monitor these securities for other-than-
temporary impairment by considering factors such as the duration
that, and the extent to which, the fair value is below cost, the operating
performance and credit worthiness of the issuer of the securities and
current economic and market conditions. See Note 6 for additional
information regarding available-for-sale securities.
We previously held $72 million of investments in fixed income
corporate debt securities, which were classified as held-to-maturity
and matured during fiscal 2013.
Vendor Reserves
In the ordinary course of business, our vendors may dispute
deductions taken against payments otherwise due to them or assert
other billing disputes. These disputed transactions are researched
and resolved based upon our policy and findings of the research
performed. At any given time, there are outstanding items in various
stages of research and resolution. In determining appropriate
reserves for areas of exposure with our vendors, we assess historical
experience and current outstanding claims. We have established
various levels of reserves based on the type of claim and status of
review. Though the claim types are relatively consistent, we
periodically refine our methodology by updating the reserve estimate
percentages to reflect actual historical experience. The ultimate
outcome of certain claims may be different than our original estimate
and may require an adjustment. All adjustments to vendor reserves
are included in cost of products sold. In addition, the reserve balance
will fluctuate due to variations of outstanding claims from period-to-
period, timing of settlements and specific vendor issues, such as
bankruptcies. Vendor reserves were $88 million and $82 million at
June 30, 2015 and 2014, respectively, excluding third-party returns.
See separate section in Note 1 for a description of third-party returns.
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.
Loss Contingencies
We accrue for contingencies related to disputes, litigation and
regulatory matters if it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. Because
these matters are inherently unpredictable and unfavorable
developments or resolutions can occur, assessing contingencies is
highly subjective and requires judgments about future events. We
regularly review contingencies to determine whether our accruals
and related disclosures are adequate. The amount of ultimate loss
may differ from these estimates. See Note 9 for additional information
regarding loss contingencies.
Income Taxes
We account for income taxes using the asset and liability method.
The asset and liability method requires recognition of deferred tax
assets and liabilities for expected future tax consequences of
temporary differences that currently exist between the tax bases and
financial reporting bases of our assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates in the
respective jurisdictions in which we operate. Deferred taxes are not
provided on the unremitted earnings of subsidiaries outside of the
United States when it is expected that these earnings are
permanently reinvested.
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 8 for additional information regarding income taxes.
Other Accrued Liabilities
Other accrued liabilities represent various current obligations,
including certain accrued operating expenses and taxes payable.
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 on
the grant date using a lattice valuation model. The fair value of
restricted share units and performance share units is determined by
the grant date market price of our common shares. The compensation
expense associated with nonvested performance share units is
dependent on our periodic assessment of the probability of the targets
being achieved and our estimate, which may vary over time, of the
number of shares that ultimately will be issued. The compensation
expense recognized for 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 in
distribution, selling, general and administrative ("SG&A") expenses
to correspond with the same line item as the majority of the cash
compensation paid to employees. If awards are modified in
connection with a restructuring activity, the incremental share-based
compensation expense is classified in restructuring and employee
severance. See Note 16 for additional information regarding share-
based compensation.
Dividends
We paid cash dividends per common share of $1.37, $1.21 and
$1.025 in fiscal 2015, 2014 and 2013, respectively.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement
exists, product delivery has occurred or the services have been