LabCorp 2007 Annual Report Download - page 38

Notes to Consolidated Financial Statements
(Dollars and shares in millions, except per share data)
36 Laboratory Corporation of America® Holdings 2007
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 2007 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 businesses
based on certain types of specialized testing capabilities and client
requirements, such as oncology testing, HIV genotyping and pheno-
typing, diagnostic genetics and clinical research trials.
Since its founding in 1971, the Company has grown into a network
of 37 primary laboratories and over 1,600 patient service centers along
with a network of branches and STAT laboratories. With over 26,000
employees, the Company processes tests on more than 420,000
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 fi nancial statements include the accounts of the
Company and its majority-owned subsidiaries for which it exercises
control. Long-term investments in affi liated companies in which the
Company owns greater than 20%, and therefore exercises signifi cant
infl uence, but which it does not control, are accounted for using the
equity method. Investments in which the Company does not exercise
signifi cant infl uence (generally, when the Company has an investment
of less than 20% and no representation on the investee’s board of
directors) are accounted for using the cost method. All signifi cant
inter-company transactions and accounts have been eliminated. The
Company does not have any variable interest entities or special purpose
entities whose fi nancial results are not included in the consolidated
fi nancial statements.
The Company has a cash management system under which
a cash overdraft exists for uncleared checks in the Company’s
primary disbursement accounts. The cash amount in the accom-
panying fi nancial statements represents book balances excluding
the effect of the uncleared checks. As of December 31, 2007 and
2006, accounts payable includes uncleared checks of $0.0 and
$34.9, respectively.
The fi nancial 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 adjustments 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 estimated payment amounts based on fi nal settlement with the
programs are recorded upon settlement as an adjustment to revenue.
In 2007, 2006 and 2005, approximately 18.3%, 19.9% and 20.3%,
respectively, of the Company’s revenues were derived directly from
the Medicare and Medicaid programs. The Company has capitated
agreements with certain managed care customers and recognizes
related revenue based on a predetermined monthly contractual rate for
each member of the managed care plan regardless of the number or
cost of services provided by the Company. In 2007, 2006 and 2005,
approximately 4% of the Company’s revenues were derived from such
capitated agreements.
Use of Estimates
The preparation of fi nancial 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 fi nancial statements and the reported amounts
of revenues and expenses during the reported periods. Signifi cant
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
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable.
The Company maintains cash and cash equivalents with various
major fi nancial institutions. The total cash balances on deposit that
Laboratory Corporation of America