LabCorp 2011 Annual Report Download - page 28

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LABORATORY CORPORATION OF AMERICA
Notes to Consolidated Financial Statements
(Dollars and shares in millions, except per share data)
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 2011 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 operations 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 54 primary laboratories and over 1,700 patient
service centers along with a network of branches and STAT
laboratories. With over 31,000 employees, the Company
processes tests on more than 450,000 patient specimens
daily and provides clinical laboratory testing services in all
50 states, the District of Columbia, Puerto Rico, Belgium,
Japan, the United Kingdom, China, Singapore and three
provinces in Canada. The Company operates within one
reportable segment based on the way the Company manages
its business.
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 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 investee’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 whose financial results are
not included in the consolidated financial statements.
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 adjustments are included in “Accumulated
other comprehensive income.”
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 contrac-
tual discounts and allowances for differences between the
amounts billed and estimated program payment amounts.
Adjustments to the estimated payment amounts based on
final settlement with the programs are recorded upon
settlement as an adjustment to revenue. In 2011, 2010 and
2009, approximately 19.0%, 19.4% and 19.1%, respectively,
of the Company’s revenues were derived directly from the
Medicare and Medicaid programs. The Company has capi-
tated 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 2011, 2010 and 2009, approximately 2.9%,
3.1% and 3.6%, respectively, of the Company’s revenues
were derived from such capitated agreements.
In connection with revenue arrangements with multiple
deliverables, revenue is deferred until the Company can
reasonably estimate when the performance obligation ceases
or becomes inconsequential.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Company 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 collections trends, the aging of accounts, current
economic conditions and regulatory changes. Actual results
could differ from those estimates.