Walgreens 2011 Annual Report Download - page 31

comprehensive general, pharmacist and vehicle liability. Liabilities for these losses
are recorded based upon the Company’s estimates for claims incurred and are not
discounted. The provisions are estimated in part by considering historical claims
experience, demographic factors and other actuarial assumptions.
Pre-Opening Expenses
Non-capital expenditures incurred prior to the opening of a new or remodeled store
are expensed as incurred.
Advertising Costs
Advertising costs, which are reduced by the portion funded by vendors, are expensed
as incurred. Net advertising expenses, which are included in selling, general and
administrative expenses, were $271 million in fiscal 2011, $271 million in fiscal 2010
and $334 million in fiscal 2009. Included in net advertising expenses were vendor
advertising allowances of $218 million in fiscal 2011, $197 million in fiscal 2010
and $174 million in fiscal 2009.
Stock-Based Compensation Plans
In accordance with ASC Topic 718, Compensation – Stock Compensation, the
Company recognizes compensation expense on a straight-line basis over the
employee’s vesting period or to the employee’s retirement eligible date, if earlier.
Total stock-based compensation expense for fiscal 2011, 2010 and 2009 was
$135 million, $84 million and $84 million, respectively. The recognized tax benefit
was $49 million, $29 million and $29 million for fiscal 2011, 2010 and 2009,
respectively.
Unrecognized compensation cost related to non-vested awards at August 31, 2011,
was $122 million. This cost is expected to be recognized over a weighted average
of three years.
Income Taxes
The Company accounts for income taxes according to the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based upon the
estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured pursuant to tax laws using
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts more likely than not to be realized.
In determining the Company’s provision for income taxes, an annual effective
income tax rate based on full-year income, permanent differences between book
and tax income, and statutory income tax rates is used. The effective income tax
rate also reflects the Company’s assessment of the ultimate outcome of tax audits.
Discrete events such as audit settlements or changes in tax laws are recognized
in the period in which they occur.
The Company is subject to routine income tax audits that occur periodically in the
normal course of business. U.S. federal, state and local and foreign tax authorities
raise questions regarding the Company’s tax filing positions, including the timing and
amount of deductions and the allocation of income among various tax jurisdictions.
In evaluating the tax benefits associated with its various tax filing positions, the
Company records a tax benefit for uncertain tax positions using the highest cumulative
tax benefit that is more likely than not to be realized. Adjustments are made to the
liability for unrecognized tax benefits in the period in which the Company determines
the issue is effectively settled with the tax authorities, the statute of limitations
expires for the return containing the tax position or when more information becomes
available. The Company’s liability for unrecognized tax benefits, including accrued
penalties and interest, is included in other long-term liabilities on the
Consolidated Balance Sheets and in income tax expense in the Consolidated
Statements of Earnings.
Depreciation expense for property and equipment was $809 million in fiscal 2011,
$804 million in fiscal 2010 and $787 million in fiscal 2009.
The Company capitalizes application stage development costs for significant
internally developed software projects, such as upgrades to the store point of
sale system. These costs are amortized over a five-year period. Amortization
was $58 million in fiscal 2011, $44 million in fiscal 2010 and $40 million
in fiscal 2009. Unamortized costs at August 31, 2011 and 2010, were
$230 million and $244 million, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets
acquired and liabilities assumed. The Company accounts for goodwill and intangibles
under ASC Topic 350, Intangibles – Goodwill and Other, which does not permit
amortization, but requires the Company to test goodwill and other indefinite-lived
assets for impairment annually or whenever events or circumstances indicate
impairment may exist.
Revenue Recognition
The Company recognizes revenue at the time the customer takes possession of
the merchandise. Customer returns are immaterial. Sales taxes are not included
in revenue.
The services the Company provided to its pharmacy benefit management (PBM) clients
included: plan set-up, claims adjudication with network pharmacies, formulary
management, and reimbursement services. Through its PBM, the Company acted
as an agent in administering pharmacy reimbursement contracts and did not
assume credit risk. Therefore, revenue was recognized as only the differential
between the amount receivable from the client and the amount owed to the network
pharmacy. The Company acted as an agent to its clients with respect to administrative
fees for claims adjudication. Those service fees were recognized as revenue.
Gift Cards
The Company sells Walgreens gift cards to retail store customers and through its
website. The Company does not charge administrative fees on unused gift cards
and most gift cards do not have an expiration date. Income from gift cards is
recognized when (1) the gift card is redeemed by the customer; or (2) the likelihood
of the gift card being redeemed by the customer is remote (“gift card breakage”)
and there is no legal obligation to remit the value of unredeemed gift cards to the
relevant jurisdictions. The Company’s gift card breakage rate is determined based
upon historical redemption patterns. Gift card breakage income, which is included
in selling, general and administrative expenses, was not significant in fiscal 2011,
2010 or 2009.
Impaired Assets and Liabilities for Store Closings
The Company tests long-lived assets for impairment whenever events or circum-
stances indicate that a certain asset may be impaired. Store locations that have
been open at least five years are reviewed for impairment indicators at least annually.
Once identified, the amount of the impairment is computed by comparing the
carrying value of the assets to the fair value, which is based on the discounted
estimated future cash flows. Impairment charges included in selling, general and
administrative expenses were $44 million in fiscal 2011, $17 million in fiscal
2010 and $10 million in fiscal 2009.
The Company also provides for future costs related to closed locations. The liability
is based on the present value of future rent obligations and other related costs
(net of estimated sublease rent) to the first lease option date. The reserve for store
closings was $145 million, $151 million and $99 million in fiscal 2011, 2010 and
2009, respectively. See Note 3 for additional disclosure regarding the Company’s
reserve for future costs related to closed locations.
Insurance
The Company obtains insurance coverage for catastrophic exposures as well as
those risks required by law to be insured. It is the Company’s policy to retain a
significant portion of certain losses related to workers’ compensation, property,
2011 Walgreens Annual Report Page 29