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) 4. DETERMINATION OF FAIR VALUES A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining the fair values is disclosed in the notes specific to that asset or liability. (a) Non-derivative Financial Assets The fair values of cash, accounts receivable and deposits approximate their carrying values due to their short-term maturities. The fair values of long-term receivables approximate their carrying values due to their current market rates. Long-term receivables are included in other assets in the consolidated balance sheets. (b) Property and Equipment Acquired in a Business Combination The fair values of property and equipment recognized as a result of a business combination are based on the amount for which an item of property and equipment could be exchanged on the date of valuation between knowledgeable, willing parties in an arm’s length transaction. (c) Intangible Assets Acquired in a Business Combination The fair values of prescription files and customer relationships acquired in a business combination are based on the discounted cash flow that the prescription files and customer relationships, respectively, are expected to generate using an estimated rate of return. The fair values of other intangible assets acquired in a business combination are based on external valuations, discounted cash flows expected to be derived from the use and eventual sale of these assets, or other methods appropriate to the nature of the assets. (d) Derivatives The fair value of the interest rate derivative was valued using the one-month Reuters Canadian Dealer Offered Rate Index, as the Company’s interest rate derivative agreement had a reset term of one month. The primary valuation input for the determination of the fair values of the equity forward derivatives is the Company’s common share price. (e) Non-derivative Financial Liabilities The fair values of bank indebtedness, commercial paper, accounts payable and accrued liabilities and dividends payable approximate their carrying values due to their short-term maturities. The fair values of the revolving term facility and other long-term liabilities approximate their carrying values due to the current market rates associated with these instruments. The fair values of medium-term notes are determined by discounting the associated future cash flows using current market rates for items of similar risk. 41
SHOPPERS DRUG MART CORPORATION Notes to the Consolidated Financial Statements (unaudited) (in thousands of Canadian dollars, except per share data) 4. DETERMINATION OF FAIR VALUES (continued) (f) Share-based Payment Transactions The grant date fair values of stock options granted to employees are measured using the Black- Scholes option-pricing model (the “model”). Measurement inputs to the model include share price on measurement date, exercise price of the instruments, expected volatility, weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). The fair value of the amount payable to employees in respect of cash-settled share-based payments is measured based on the Company’s common share price. 5. 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 weeks ended March 26, 2011 of $6,265 (2010: $9,833) was allocated primarily to goodwill and other intangible assets based on their fair values. The goodwill acquired represents the benefits the Company expects from the acquisitions. The Company expects that $38 (2010: $6,410) of acquired goodwill will be deductible for tax purposes. The values of assets acquired and liabilities assumed have been valued at the acquisition date, generally using fair values. See Note 4 to these consolidated financial statements for the methods used in determining fair values. The intangible assets acquired are composed of prescription files. In determining the fair value of prescription files acquired, the Company applied a pre-tax discount rate of 9 percent (2010: 8 percent) to the estimated expected future cash flows. The Company incurred acquisition-related costs of $5 (2010: $nil), representing primarily legal fees. These acquisition-related costs have been included in net earnings, in operating and administrative expenses for the 12 weeks ended March 26, 2011 and March 27, 2010. The operations of the acquired pharmacies have been included in the Company’s results of operations from the date of acquisition. 6. COST OF GOODS SOLD During the 12 weeks ended March 26, 2011, the Company recognized $10,726 (2010: $9,656) of writedowns of inventory as a result of net realizable value being lower than cost in cost of goods sold in the consolidated statements of earnings. During the 12 weeks ended March 26, 2011 and March 27, 2010, the Company did not reverse any significant inventory write-downs recognized in previous periods. 42
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Financial Statements of - Shoppers Drug Mart

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