Henry Schein 2003 Annual Report Download - page 41

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share and per share data)
Note 1–Significant Accounting Policies (Continued)
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Amortization of leasehold improvements is computed using the straight-line method over the
lesser of the useful life of the assets or the lease term. Depreciation is computed primarily under the straight-line method over the following
estimated useful lives:
Years
Buildings and improvements 40
Machinery and warehouse equipment 5-10
Furniture, fixtures and other 3-10
Computer equipment and software 3-8
Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage
for software bought and further customized by outside vendors for our use and software developed by a vendor for our proprietary use
have been capitalized. Costs incurred for our own personnel who are directly associated with software development are also capitalized.
Taxes on Income
We account for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future
tax consequences, we generally consider all expected future events other than enactments of changes in tax laws or rates. The effect on
deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the
enactment date. We file a consolidated United States Federal income tax return with our 80% or greater owned United States subsidiaries.
Foreign Currency Translation and Transactions
The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year end. Income statement accounts are
translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange
rates from period to period are included in the accumulated other comprehensive income (loss) account in stockholders’ equity. Gains
and losses resulting from foreign currency transactions are included in earnings.
Risk Management and Derivative Financial Instruments
We use derivative instruments to minimize our exposure to fluctuations in interest rates and foreign currency exchange rates. Our
objective is to manage the impact that interest rate and foreign currency exchange rate fluctuations could have on recognized asset and
liability fair values, earnings and cash flows. We do not enter into derivative instruments for speculative purposes. Our derivative
instruments include interest rate swap agreements related to our long-term fixed rate debt; foreign currency forward and swap contracts
related to intercompany loans and certain forecasted transactions with foreign vendors. We consider our net investments in foreign
subsidiaries to be both long-term and strategic and consequently do not hedge such investments. Our risk management policy requires
that derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated
as a hedge at the inception of the contract.
Our interest rate swap agreements are designated as fair value hedging instruments. The terms of the interest rate swap agreements are
identical to the Senior Notes and consequently qualify for an assumption of no ineffectiveness under the provisions of Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". Both the interest rate
swap agreements and the underlying Senior Notes are marked-to-market through earnings at the end of each period; however, since our
interest rate swap agreements are deemed fully effective, these mark-to-market adjustments have no net impact on earnings.
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