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) (ii) Associate-owned Stores Associate-owned stores comprise the majority of the Company’s store network. The Company does not have any direct or indirect shareholdings in Associates’ corporations. The Associates’ corporations are separate legal entities. The Company consolidates the Associate-owned stores under IAS 27, “Consolidated and Separate Financial Statements” (“IAS 27”). The consolidation of the stores under IAS 27 was determined based on the concept of control under IAS 27 and determined primarily through the agreements with Associates (the “Associate Agreements”) that govern the relationship between the Company and the Associates. (iii) Transactions Eliminated on Consolidation Intra-company balances and transactions and any unrealized earnings and expenses arising from intracompany transactions, including those with the Associate-owned stores, are eliminated in preparing the consolidated financial statements. (b) Basis of Measurement These interim consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments and deferred revenue related to the Shoppers Optimum ® loyalty card program and the liabilities for the Company’s long-term incentive plan and restricted share unit plan (see Note 15 in the Company’s 2010 annual financial statements prepared in accordance with Canadian GAAP and Note 11 to these interim consolidated financial statements for further information on the long-term incentive plan and the restricted share unit plan). Any recognized impairment losses will also impact the historical cost of certain balances. The methods used to measure fair values are discussed further in Note 4 to these consolidated financial statements. (c) Revenue (i) Sale of Goods and Services Revenue is comprised primarily of retail sales, including prescription sales. Retail sales are recognized as revenue when the goods are sold to the customer. Revenue is net of returns and amounts deferred related to the issuance of points under the Shoppers Optimum ® Loyalty Card Program (the “Program”) points. Where a sales transaction includes points awarded under the Program, revenue allocated to the Program points is deferred based on the fair value of the awards and recognized as revenue when the Program points are redeemed and the Company fulfills its obligations to supply the awards. Revenue is measured at the fair value of the consideration received or receivable from the customer for products sold or services supplied. 27
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) (ii) Shoppers Optimum ® Loyalty Card Program The Shoppers Optimum ® Loyalty Card Program allows members to earn points on their purchases in Shoppers Drug Mart ® , Pharmaprix ® , Shoppers Simply Pharmacy ® , Pharmaprix Simplement Santé ® , Shoppers Home Health Care ® and Murale TM stores at a rate of 10 points for each dollar spent on eligible products and services, plus any applicable bonus points. Members can then redeem points, in accordance with the Program rewards schedule or other offers, for qualifying merchandise at the time of a future purchase transaction. When points are earned by Program members, the Company defers revenue equal to the fair value of the awards. The Program’s deferred revenue is included in accounts payable and accrued liabilities on the Company’s consolidated balance sheets. When awards are redeemed by Program members, the redemption value of the awards is charged against the deferred revenue balance and recognized as revenue. The estimated fair value per point is determined based on the expected weighted average redemption levels for future redemptions based on the program reward schedule, including special redemption events. The trends in redemption rates (points redeemed as a percentage of points issued) are reviewed on an ongoing basis and the estimated fair value per point is adjusted based upon expected future activity. (d) Vendor Rebates The Company classifies rebates and other consideration received from vendors as a reduction to the cost of inventory. These amounts are recognized in the cost of goods sold when the associated inventory is sold. Certain exceptions apply where the consideration received from the vendor is a reimbursement of a selling cost or a payment for services delivered to the vendor, in which case the consideration is reflected in operating and administrative expenses. (e) Finance Expenses Finance expenses are comprised of interest expense on borrowings and the amortization of transaction costs incurred in conjunction with debt transactions. All borrowing costs are recognized in earnings on an accrual basis using the effective interest method, net of amounts capitalized as part of the cost of qualifying property and equipment. The Company’s finance income is not significant. (f) Borrowing Costs Borrowing costs that are directly attributable to the acquisition, construction or development of a qualifying asset are recognized as part of the cost of that asset. Qualifying assets are those that require a substantial period of time to prepare for their intended use. All other borrowing costs are recognized as finance expenses in the period in which they are incurred. 28
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Financial Statements of - Shoppers Drug Mart

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