Walgreens 2014 Annual Report Download - page 73

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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.
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 2014, 2013 or 2012.
Loyalty Program
The Company’s rewards program, Balance ®Rewards, is accrued as a charge to cost of sales at the time a point
is earned. Points are funded internally and through vendor participation, and are credited to cost of sales at the
time a vendor-sponsored point is earned. Breakage is recorded as points expire as a result of a member’s
inactivity or if the points remain unredeemed after three years. Breakage income, which is reported in cost of
sales, was not significant in fiscal 2014 or 2013.
Cost of Sales
Cost of sales is derived based upon point-of-sale scanning information with an estimate for shrinkage and is
adjusted based on periodic inventories. In addition to product costs, cost of sales includes warehousing costs,
purchasing costs, freight costs, cash discounts and vendor allowances.
Vendor Allowances
Vendor allowances are principally received as a result of purchases, sales or promotion of vendors’
products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost
of sales when the related merchandise is sold. Those allowances received for promoting vendors’ products are
offset against advertising expense and result in a reduction of selling, general and administrative expenses to the
extent of advertising costs incurred, with the excess treated as a reduction of inventory costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses mainly consist of store salaries, occupancy costs, and expenses
directly related to stores. In addition, other costs included are headquarters’ expenses, advertising costs (net of
advertising revenue) and insurance.
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 $265 million in fiscal 2014,
$286 million in fiscal 2013 and $291 million in fiscal 2012. Included in net advertising expenses were vendor
advertising allowances of $256 million in fiscal 2014, $240 million in fiscal 2013 and $239 million in fiscal
2012.
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