Walgreens 2014 Annual Report Download - page 74

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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, 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.
Available-for-Sale Investments
The Company, Alliance Boots and AmerisourceBergen Corporation (AmerisourceBergen) entered into a
Framework Agreement dated as of March 18, 2013, pursuant to which Walgreens and Alliance Boots together
were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but
not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen common stock (approximately 7
percent of the then fully diluted equity of AmerisourceBergen, assuming the exercise in full of the warrants
described below) in open market transactions. As of August 31, 2014, the Company held 11.5 million shares of
AmerisourceBergen common stock which are classified as available-for-sale. See Note 6 for additional
disclosure regarding the Company’s available-for-sale investments.
Warrants
The Company and Alliance Boots were each issued (a) a warrant to purchase shares of AmerisourceBergen
common stock exercisable during a six-month period beginning in March 2016, and (b) a warrant to purchase
shares of AmerisourceBergen common stock exercisable during a six-month period beginning in March
2017. The Company’s warrants are valued at the date of issuance and the end of the period using a Monte Carlo
simulation. Key assumptions used in the valuation include risk-free interest rates using constant maturity treasury
rates; the dividend yield for AmerisourceBergen’s common stock; AmerisourceBergen’s common stock price at
the valuation date; AmerisourceBergen’s equity volatility; the number of shares of AmerisourceBergen’s
common stock outstanding; the number of employee stock options and the exercise price; and the details specific
to the warrants. The fair value of the Company’s warrants on March 18, 2013, the date of issuance, was $77
million. The Company recorded the fair value of its warrants as a non-current asset with a corresponding deferred
credit in its Consolidated Balance Sheets. The deferred credit attributable to the warrants will be amortized over
the life of the warrants. The fair value of the Company’s warrants at August 31, 2014 and 2013 was $553 million
and $188 million, respectively, resulting in the Company recording other income of $366 million and $111
million within its Consolidated Statements of Earnings. The increase in the fair value of the warrants was
primarily attributable to the increase in the price of AmerisourceBergen’s common stock. In addition, the
Company recorded $19 million and $9 million in fiscal 2014 and 2013, respectively, of other income relating to
the amortization of the deferred credit. See Note 10 for additional disclosure regarding the Company’s warrants.
Pre-Opening Expenses
Non-capital expenditures incurred prior to the opening of a new or remodeled store are expensed as incurred.
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 2014, 2013 and 2012 was $114
million, $104 million and $99 million, respectively. The recognized tax benefit was $31 million, $30 million and
$9 million for fiscal 2014, 2013 and 2012, respectively. Unrecognized compensation cost related to non-vested
awards at August 31, 2014, was $188 million. This cost is expected to be recognized over a weighted average of
three years. See Note 14 for more information on the Company’s stock-based compensation plans.
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