Walgreens 2012 Annual Report Download - page 25

advertising incurred, with the excess treated as a reduction of inventory costs.
We have not made any material changes to the method of estimating our vendor
allowances during the last three years. Based on current knowledge, we do not
believe there is a reasonable likelihood that there will be a material change in
the estimates or assumptions used to determine vendor allowances.
Asset impairments – The impairment of long-lived assets is assessed based upon
both qualitative and quantitative factors, including years of operation and expected
future cash flows, and tested for impairment annually or whenever events or
circumstances indicate that a certain asset may be impaired. If the future cash
flows reveal that the carrying value of the asset group may not be recoverable,
an impairment charge is immediately recorded. We have not made any material
changes to the method of estimating our asset impairments during the last three
years. Based on current knowledge, we do not believe there is a reasonable
likelihood that there will be a material change in the estimates or assumptions
used to determine asset impairments.
Liability for 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. We have not made any material changes to the method
of estimating our liability for closed locations during the last three years.
Based on current knowledge, we do not believe there is a reasonable likelihood
that there will be a material change in the estimates or assumptions used to
determine the liability.
Liability for insurance claims – The liability for insurance claims is recorded based
on estimates for claims incurred and is not discounted. The provisions are
estimated in part by considering historical claims experience, demographic
factors and other actuarial assumptions. We have not made any material changes
to the method of estimating our liability for insurance claims during the last three
years. Based on current knowledge, we do not believe there is a reasonable
likelihood that there will be a material change in the estimates or assumptions
used to determine the liability.
Cost of sales – Drugstore cost of sales is derived based on point-of-sale scanning
information with an estimate for shrinkage and adjusted based on periodic inventory
counts. Inventories are valued at the lower of cost or market determined by the
last-in, first-out (LIFO) method. We have not made any material changes to the
method of estimating cost of sales during the last three years. Based on current
knowledge, we do not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions used to determine cost of sales.
Equity method investments – We use the equity method to account for investments
in companies if the investment provides the ability to exercise significant influence,
but not control, over operating and financial policies of the investee. Our proportionate
share of the net income or loss of these companies is included in consolidated
net earnings. Judgment regarding the level of influence over each equity method
investment includes considering key factors such as our ownership interest,
representation on the board of directors, participation in policy-making decisions
and material intercompany transactions.
Income taxes – We are subject to routine income tax audits that occur periodically in
the normal course of business. U.S. federal, state, local and foreign tax authorities raise
questions regarding our 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 our various tax filing positions, we record 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 our liability for unrecognized tax benefits in
the period in which we determine 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. Our liability for unrecognized tax benefits,
including accrued penalties and interest, is included in other long-term liabilities on
our consolidated balance sheets and in income tax expense in our consolidated
statements of comprehensive income.
In determining our provision for income taxes, we use an annual effective income
tax rate based on full-year income, permanent differences between book and
tax income, and statutory income tax rates. The effective income tax rate also
reflects our 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. Based on current knowledge, we do not believe there is
a reasonable likelihood that there will be a material change in the estimates
or assumptions used to determine the amounts recorded for income taxes.
Contractual Obligations and Commitments
The following table lists our contractual obligations and commitments at August 31, 2012 (In millions):
Payments Due by Period
Total Less Than 1 Year 1– 3 Years 3 – 5 Years Over 5 Years
Operating leases (1) $ 35,356 $ 2,412 $ 4,758 $ 4,517 $ 23,669
Purchase obligations (2):
Open inventory purchase orders 1,679 1,679 — — —
Real estate development 227 146 24 57 —
Other corporate obligations 1,566 907 409 182 68
Long-term debt* (3) 5,388 1,315 10 7 4,056
Interest payment on long-term debt 407 116 105 105 81
Insurance* 635 240 178 88 129
Retiree health* 342 10 25 31 276
Closed location obligations* 116 25 31 20 40
Capital lease obligations* (1) 134 9 11 8 106
Other long-term liabilities reflected on the balance sheet* (4) 984 76 219 152 537
Total $ 46,834 $ 6,935 $ 5,770 $ 5,167 $ 28,962
* Recorded on balance sheet.
(1) Amounts for operating leases and capital leases do not include certain operating expenses under these leases such as common area maintenance, insurance and real estate taxes.
These expenses were $419 million for the fiscal year ended August 31, 2012.
(2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.
(3) Total long-term debt on the Consolidated Balance Sheet includes a $34 million fair market value adjustment and $4 million of unamortized discount.
(4) Includes $141 million ($86 million in 1–3 years, $43 million in 3–5 years and $12 million over 5 years) of unrecognized tax benefits recorded under Accounting Standards
Codification (ASC) Topic 740, Income Taxes.
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