LabCorp 2006 Annual Report Download - page 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
34 Laboratory Corporation of America® Holdings 2006
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1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Financial Statement Presentation:
Laboratory Corporation of America Holdings with its subsidiaries (the
“Company”) is the second largest independent clinical laboratory
company in the United States based on 2006 net revenues. Through
a national network of laboratories, the Company offers a broad range
of testing services used by the medical profession in routine testing,
patient diagnosis, and in the monitoring and treatment of disease.
In addition, the Company has developed specialty and niche busi-
nesses based on certain types of specialized testing capabilities and
client requirements, such as oncology testing, HIV genotyping and
phenotyping, diagnostic genetics and clinical research trials.
Since its founding in 1971, the Company has grown into a network
of 36 primary laboratories and over 1,700 service sites consisting of
branches, patient service centers and STAT laboratories. With over
25,000 employees, the Company processes tests on more than
370,000 patient specimens daily and provides clinical laboratory
testing services in all 50 states, the District of Columbia, Puerto Rico,
Belgium and three provinces in Canada. The Company operates in
one business segment.
The consolidated financial statements include the accounts
of the Company and its majority-owned subsidiaries for which it
exercises control. Long-term investments in affiliated companies in
which the Company owns greater than 20%, and therefore exercises
significant influence, but which it does not control, are accounted for
using the equity method. Investments in which the Company does not
exercise significant influence (generally, when the Company has an
investment of less than 20% and no representation on the Company’s
Board of Directors) are accounted for using the cost method. All
significant inter-company transactions and accounts have been
eliminated. The Company does not have any variable interest entities
or special purpose entities.
The financial statements of the Company’s foreign subsidiaries
are measured using the local currency as the functional currency.
Assets and liabilities are translated at exchange rates as of the balance
sheet date. Revenues and expenses are translated at average monthly
exchange rates prevailing during the year. Resulting translation adjust-
ments are included in “Accumulated other comprehensive earnings.”
Revenue Recognition:
Sales are recognized on the accrual basis at the time test results are
reported, which approximates when services are provided. Services
are provided to certain patients covered by various third-party payer
programs including various managed care organizations, as well as the
Medicare and Medicaid programs. Billings for services under third party
payer programs are included in sales net of allowances for contractual
discounts and allowances for differences between the amounts billed
and estimated program payment amounts. Adjustments to the esti-
mated payment amounts based on final settlement with the programs
are recorded upon settlement as an adjustment to revenue. In 2006,
2005 and 2004, approximately 20% of the Company’s revenues were
derived from tests performed for the beneficiaries of the Medicare and
Medicaid programs. The Company has capitated agreements with cer-
tain managed care customers and recognizes related revenue based on
a predetermined monthly contractual rate for each member of the man-
aged care plan regardless of the number or cost of services provided
by the Company. In 2006, 2005 and 2004, approximately 4% of the
Company’s revenues were derived from these capitated agreements.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported periods. Significant
estimates include the allowances for doubtful accounts, deferred tax
assets, fair values and amortization lives for intangible assets and
accruals for self-insurance reserves and pensions. The allowance for
doubtful accounts is determined based on historical collection trends,
the aging of accounts, current economic conditions and regulatory
changes. Actual results could differ from those estimates.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concen-
trations of credit risk consist primarily of cash and cash equivalents
and accounts receivable.