LabCorp 2012 Annual Report Download - page 32

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LABORATORY CORPORATION OF AMERICA
Notes to Consolidated Financial Statements
Stock Compensation Plans
The Company measures stock compensation cost for all
equity awards at fair value on the date of grant and recognizes
compensation expense over the service period for awards
expected to vest. The fair value of restricted stock awards
and performance shares is determined based on the number
of shares granted and the quoted price of the Company’s
common stock on grant date. Such value is recognized as
expense over the service period, net of estimated forfeitures.
The estimation of equity awards that will ultimately vest
requires judgment and the Company considers many factors
when estimating expected forfeitures, including types of
awards, employee class, and historical experience. The
cumulative effect on current and prior periods of a change in
the estimated forfeiture rate is recognized as compensation
cost in earnings in the period of the revision. Actual results
and future estimates may differ substantially from the
Company’s current estimates.
See Note 14 for assumptions used in calculating
compensation expense for the Company’s stock
compensation plans.
Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments,
such as commercial paper, time deposits, and other money
market instruments, which have original maturities of three
months or less. At December 31, 2012, a balance sheet
reclassification adjustment was made to reduce cash and
accounts payable to net positive cash balances in certain
accounts at one of the Company’s financial institutions with
outstanding checks in specific accounts with that same
bank as there is a technical right of offset for cash accounts
within the same bank. This adjustment included an out of
period one time correction that reduced 2012 reported
operating cash flows by $34.0, which is not material to the
previously reported financial statements.
Inventories
Inventories, consisting primarily of purchased laboratory
and client supplies, are stated at the lower of cost (first-in,
first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The
cost of properties held under capital leases is equal to the
lower of the net present value of the minimum lease payments
or the fair value of the leased property at the inception of the
lease. Depreciation and amortization expense is computed
on all classes of assets based on their estimated useful
lives, as indicated below, using the straight-line method.
Years
Buildings and building improvements 10-35
Machinery and equipment 3-10
Furniture and fixtures 5-10
Software 3-10
Leasehold improvements and assets held under capital
leases are amortized over the shorter of their estimated
useful lives or the term of the related leases. Expenditures
for repairs and maintenance are charged to operations as
incurred. Retirements, sales and other disposals of assets are
recorded by removing the cost and accumulated depreciation
from the related accounts with any resulting gain or loss
reflected in the consolidated statements of operations.
Capitalized Software Costs
The Company capitalizes purchased software which is ready for
service and capitalizes software development costs incurred on
significant projects starting from the time that the preliminary
project stage is completed and the Company commits to fund-
ing a project until the project is substantially complete and the
software is ready for its intended use. Capitalized costs include
direct material and service costs and payroll and payroll-related
costs. Research and development costs and other computer
software maintenance costs related to software development
are expensed as incurred. Capitalized software costs are amor-
tized using the straight-line method over the estimated useful
life of the underlying system, generally five years.
Long-Lived Assets
Goodwill and indefinite-lived intangibles are evaluated for
impairment by applying a fair value based test on an annual
basis and more frequently if events or changes in circumstances
indicate that the asset might be impaired. The timing of the
Company’s annual impairment testing is the end of the fiscal
year. Step One of the impairment test includes the estimation
of the fair value of the reporting unit as compared to the book