Cardinal Health 2015 Annual Report Download - page 54

Notes to Financial Statements
53 Cardinal Health | Fiscal 2015 Form 10-K
rendered, the price is fixed or determinable, and collectability is
reasonably assured.
Pharmaceutical Segment
The Pharmaceutical segment recognizes distribution revenue when
title transfers to its customers and we have no further obligation to
provide services related to such merchandise.
Revenue for deliveries that are directly shipped to customer
warehouses from the manufacturer when we act as an intermediary
in the ordering and delivery of products is recorded gross. This is 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 we have no further obligation to provide
services related to such merchandise.
Medical Segment
The Medical segment recognizes revenue when title transfers to its
customers and we have no further obligation to provide services
related to such merchandise.
Sales Returns and Allowances
Revenue is recorded net of sales returns and allowances. 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.
We accrue for estimated sales returns and allowances at the time of
sale based upon historical customer return trends, margin rates and
processing costs. Our accrual for sales returns is reflected as a
reduction of revenue and cost of products sold for the sales price and
cost, respectively. At June 30, 2015 and 2014, the accrual for
estimated sales returns and allowances was $305 million and $273
million, respectively, the impact of which is reflected in trade
receivables, net and inventories, net in the consolidated balance
sheets. Sales returns and allowances were $2.0 billion, $1.7 billion
and $2.3 billion, for fiscal 2015, 2014 and 2013, 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 the manufacturer through third parties.
Since our customers generally do not have a direct relationship with
manufacturers, our vendors pass the value of such returns to us
(usually in the form of an accounts payable deduction) for distribution
to customers. 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 our receipt of
the value from the vendor. 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.
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 $454 million, $430 million and $419 million, for
fiscal 2015, 2014 and 2013, 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 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
and, in the case of Cordis (a business of Ethicon, Inc., a wholly-owned
subsidiary of Johnson & Johnson, as further described in Note 2) to
stand-up the systems and processes needed to support its global
footprint. 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 and Note 11 for additional
information regarding contingent consideration.
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 AOCI utilizing period-end exchange rates.