Financial Statements of - Shoppers Drug Mart

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SHOPPERS DRUG MART CORPORATION Notes to the Condensed Consolidated Financial Statements (unaudited) (in thousands of Canadian dollars, except per share data) 3. SIGNIFICANT ACCOUNTING POLICIES (a) Associate Interest Associate interest reflects the investment the Associates have in the net assets of their businesses. Under the terms of the Company’s agreements with Associates (the “Associate Agreements”), the Company agrees to purchase the assets that the Associates use in store operations, primarily at the carrying value to the Associate, when Associate Agreements are terminated by either party. In its first quarter interim condensed consolidated financial statements, the Company presented this balance as a long-term liability as that represented the expected pattern of the underlying cash flows based on historical experience. While the Company accordingly does not expect to pay the amount recognized as a current liability within the next 12 months to its Associates due to the Company’s long-term relationship with its Associates and the Company’s past experience, the contractual ability to terminate an Associate Agreement means that the Company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period, and accordingly the balance is presented as a current liability. As a result, the balance has been reclassified to current liabilities. (b) New Standards and Interpretations not yet Adopted A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending December 31, 2011, and accordingly, have not been applied in preparing these consolidated financial statements: (i) Financial Instruments – Disclosures The IASB has issued an amendment to IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7 amendment”), requiring incremental disclosures regarding transfers of financial assets. This amendment is effective for annual periods beginning on or after July 1, 2011. The Company will apply the amendment at the beginning of its 2012 financial year. The Company does not expect the implementation to have a significant impact on the Company’s disclosures. (ii) Deferred Taxes – Recovery of Underlying Assets The IASB has issued an amendment to IAS 12, “Income Taxes” (“IAS 12 amendment”), which introduces an exception to the general measurement requirements of IAS 12 in respect of investment properties measured at fair value. The IAS 12 amendment is effective for annual periods beginning on or after January 1, 2012. The Company will apply the amendment at the beginning of its 2012 financial year. The Company is assessing the impact of the IAS 12 amendment on its results of operations, financial position and disclosures. 30
SHOPPERS DRUG MART CORPORATION Notes to the Condensed Consolidated Financial Statements (unaudited) (in thousands of Canadian dollars, except per share data) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (iii) Financial Instruments The IASB has issued a new standard, IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 requires a single impairment method to be used, replacing multiple impairment methods in IAS 39. For financial liabilities measured at fair value, fair value changes due to changes in an entity’s credit risk are presented in other comprehensive income. IFRS 9 is effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. The Company is assessing the impact of the new standard on its results of operations, financial position and disclosures. 4. BUSINESS ACQUISITIONS In the normal course of business, the Company acquires the assets or shares of pharmacies. The total cost of these acquisitions during the 12 and 24 weeks ended June 18, 2011 of $200 and $6,465 (2010: $1,623 and $11,456), respectively, was allocated primarily to goodwill and other intangible assets based on their fair values. The goodwill acquired represents the benefits the Company expects to receive from the acquisitions. During the 12 and 24 weeks ended June 18, 2011, the Company expects that $nil and $38 (2010: $823 and $7,233), respectively, of acquired goodwill will be deductible for tax purposes. The values of assets acquired and liabilities assumed have been valued at the acquisition date using fair values. The intangible assets acquired are composed of prescription files. In determining the fair value of prescription files acquired during the 12 and 24 weeks ended June 18, 2011, the Company applied a pretax discount rate of 9 percent (2010: 8 percent) to the estimated expected future cash flows. The operations of the acquired pharmacies have been included in the Company’s results of operations from the date of acquisition. 5. COST OF GOODS SOLD During the 12 and 24 weeks ended June 18, 2011, the Company recorded $10,779 and $21,505 (2010: $7,822 and $17,478), respectively, as an expense for the write-down of inventory as a result of net realizable value being lower than cost in cost of goods sold in the condensed consolidated statements of earnings. During the 12 and 24 weeks ended June 18, 2011 and June 19, 2010, the Company did not reverse any significant inventory write-downs recognized in previous periods. 31
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Financial Statements of - Shoppers Drug Mart

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