Financial Statements of - Shoppers Drug Mart

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SHOPPERS DRUG MART CORPORATION Notes to the Consolidated Financial Statements (unaudited) (in thousands of Canadian dollars, except per share data) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) The Company capitalizes borrowing costs at the weighted average interest rate on borrowings outstanding for the period. The Company commences capitalization of borrowing costs as part of the cost of a qualifying asset when activities are undertaken to prepare the asset for its intended use and when expenditures, including borrowing costs, are incurred for the asset. Capitalization of borrowing costs ceases when substantially all of the activities necessary to prepare the asset for its intended use are complete. (g) Income Taxes Income tax expense comprises taxes currently payable on earnings and changes in deferred tax balances. Income tax expense is recognized in net earnings except to the extent that it relates to items recognized either in other comprehensive income or directly in equity, in which case it is recognized in other comprehensive income or in equity, respectively. Current tax expense comprises the tax payable on the taxable income for the current financial year using tax rates enacted or substantively enacted at the reporting date, and any adjustment to income taxes payable in respect of previous years. Deferred tax is recognized using the balance sheet method in respect of taxable temporary differences arising from differences between the carrying amount of assets and liabilities for tax purposes and their carrying amounts in the financial statements. Deferred tax is calculated at the tax rates that are expected to apply to temporary differences in the year they are expected to reverse and are based on the tax legislation that has been enacted or substantively enacted by the reporting date. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill and the initial recognition of assets or liabilities in a transaction that is not a business acquisition and that affects neither accounting nor taxable earnings; and, differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset the recognized amounts and the Company intends to settle on a net basis or to realize the asset and settle the liability simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that all or part of the related tax benefit will be realized. (h) Earnings per Common Share The Company presents basic and diluted earnings per share (“EPS”) amounts for its common shares. Basic EPS is calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of common shares outstanding after adjusting for the effects of all potential dilutive common shares, which are comprised of share options granted to employees. Antidilutive options are not included in the calculation of diluted EPS. 29
SHOPPERS DRUG MART CORPORATION Notes to the Consolidated Financial Statements (unaudited) (in thousands of Canadian dollars, except per share data) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Financial Instruments (i) Classification of Financial Instruments Financial instruments are classified into one of the following five categories: held for trading, heldto-maturity investments, loans and receivables, available-for-sale financial assets or financial liabilities. The classification determines the accounting treatment of the instrument. The classification is determined by the Company when the financial instrument is initially recorded, based on the underlying purpose of the instrument. The Company’s financial instruments are classified and measured as follows: Financial Asset / Liability Category Measurement Cash Loans and receivables Amortized cost Accounts receivable Loans and receivables Amortized cost Deposits (1) Loans and receivables Amortized cost Long-term receivables (2) Loans and receivables Amortized cost Bank indebtedness Financial liabilities Amortized cost Commercial paper Financial liabilities Amortized cost Accounts payable and Financial liabilities Amortized cost accrued liabilities Dividends payable Financial liabilities Amortized cost Long-term debt Financial liabilities Amortized cost Other long-term liabilities Financial liabilities Amortized cost Associate interest Financial liabilities Amortized cost Derivatives Classification Measurement Interest rate derivatives (3) Effective cash flow hedge Fair value through other comprehensive income (loss) Equity forward derivatives (3)(4) Derivative financial instrument Fair value through earnings Equity forward derivatives (3)(4) Effective cash flow hedge Fair value through other comprehensive income (loss) (1) The carrying value of deposits is included in prepaid expenses and deposits in the consolidated balance sheets. (2) The carrying value of long-term receivables is included in other assets in the consolidated balance sheets. (3) The carrying values of the Company’s derivatives are included in other assets, accounts payable and accrued liabilities and long-term liabilities in the consolidated balance sheets. (4) The portion of the equity forward derivative agreements relating to the earned long-term incentive plan units is considered a derivative financial instrument. The portion of the equity forward derivative agreements relating to the unearned long-term incentive plan units and unearned restricted share unit plan units is considered an effective cash flow hedge. The unhedged portion of the equity forward derivates is measured at fair value and recorded in accounts payable and accrued liabilities on the consolidated balance sheets. See Note 15 to the Company’s 2010 annual financial statements reported under Canadian GAAP and Note 11 to these consolidated financial statements for further discussion of the long-term incentive plan and the restricted share unit plan. 30
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Financial Statements of - Shoppers Drug Mart

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