CVS Health Corporation is an integrated pharmacy health care provider. The company’s offering include pharmacy benefit management services, mail order, retail and specialty pharmacy, disease management programs, and retail clinics. The Company operates drugstores throughout the U.S., the District of Columbia, and Puerto Rico. The company expands fast after acquiring Target’s pharmacy and clinical business in 2015 and purchasing Aetna, a health insurance provider, in 2018. Today, Jim Clark, a senior vice president, controller and chief accounting officer for CVS Health, is trying to prepare a memo to the board of directors to discuss the important investment activities in 2018. Required: Please access CVS’s 2018 Annual Report (10-K) at https://investors.cvshealth.com/ to complete this case assignment. The filing date of CVS’s 2018 annual report was February 28, 2019. You could also obtain CVS’s 10-K from www.sec.gov. Click Tab “Filings” from SEC website, select “EDGAR-Search and Access”, and search by company name. The filing type of annual report is 10-K. Answer the following two questions related to investments. Students need to use the FASB’s Codification Research System to obtain the relevant authoritative literature and explain the specific Codification citation that CVS would rely on. You can access the FASB Codification at http://aaahq.org/ascLogin.cfm. When you go to the FASB site, use this log-in information: Username: AAA51751 Password: K83kRmB When you answer the questions, please be specific and thorough in your referencing. There may be more than one relevant reference for any of the questions. You could use “advance search/refine search” to narrow down your results. The codification reference will generally be in the format of “FASB ASC tttttt-tttt-tttt-tt” and will be down to the specific paragraph. Students need to include all digits from above with the least number occasionally containing two digits instead of one. Please explain which FASB codification reference could help CVS determine its classification of debt investments. Please explain which FASB codification reference could help CVS determine what information of its debt investments must be disclosed in notes to financial statements. Please write a short business paper to communicate the company’s accounting treatment and financial condition of debt and equity investments to the CVS’s board of directors. The paper should be typed with double-spaced one or two pages. You may need to appropriately cite the codification references to support your arguments. Your final scores will be graded based on both contents and written communication. Your paper must address at least following (1) – (4) aspects of CVS’s debt and equity investments in 2018: First, please briefly discuss differences between debt investments and equity investments for board members who are not familiar with this topic. In its Note 3, CVS described its debt investments.How many debt investments in $ value were owned by CVS by 2018? How did CVS classify its debt investments? Current or/and noncurrent? Trading securities, held-to-maturity, or/and available-for-sale? Did CVS elect the fair value option to account for its debt investments? Did CVS use amortized cost or fair value to account for its debt investments? If fair value option was elected, which type of valuation information was used by CVS to determine its debt investments’ fair value, Level 1, Level 2, or/and Level 3 (Please find the related information from Note 4)? Which type of valuation information is the most (least) reliable? If fair value was different from amortized cost, what were CVS’s unrealized gains or losses from debt investments? Should the unrealized gains or losses be reported in net income or other comprehensive income for CVS, and why? In its Note 2, CVS described its acquisition transaction of Aetna health insurance provider.What’s the purchase price of this acquisition transaction? What’s the fair value of Aetna’s net assets at the acquisition date? What’s the total goodwill generated from this acquisition transaction? Should this acquisition be classified as debt or equity investment? What percentage of Aetna’s shares was purchased by CVS? Does CVS have insignificant influence, significant influence, or control over Aetna?Which accounting method (fair value method, equity method, or consolidation) should be implemented by CVS to recognize this acquisition of Aetna? After purchasing Aetna, did CVS’s revenues and income from continuing operations in 2018 increase or decrease compared to 2017? After purchasing Aetna, did CVS’s earnings per share in 2018 increase or decrease compared to 2017? If your answers to h and i above are different, please briefly explain to board members why CVS’s earnings per share did not move in the same direction with revenues and income from continuing operating. From CVS’s income statement in 2018, what is its net investment income? Did CVS’s investment income increase or decrease compared to its performance in 2016 and 2017? How do you want to conclude CVS’s overall performance in investment management? Final attention: Do not directly answer the questions (1)-(4) above! You must format your answers as a short business paper (memo) written by an accounting director to the company’s board of directors. You could use four paragraphs to discuss the questions (1)-(4) plus one short introduction and one conclusion paragraph.
