CVS Caremark Corporation (CVS)

NOTE 3 – NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in their consolidated earnings statements. SFAS No. 123(R) and related FASB Staff Positions became effective for Albertsons on February 3, 2006.

Prior to February 3, 2006, Albertsons applied the provisions of APB Opinion No. 25 and related interpretations in accounting for stock option and stock unit awards (“share-based awards”) made under its stock-based incentive plans. Stock options granted under these plans had an exercise price equal to or greater than the market value of the common stock on the date of the grant, and accordingly, no compensation expense was recognized. The fair value of stock units granted under these plans was determined based on the closing market price of the Albertsons’ common stock on the grant date and this amount was recognized as compensation expense over the respective vesting periods of the awards.

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Effective February 3, 2006, Albertsons adopted the provisions of SFAS No. 123(R) and related FASB Staff Positions using the modified-prospective transition method. Under this transition method, compensation expense is recognized for: 1) all share-based awards granted prior to, but not yet vested as of February 3, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, and 2) all share-based awards granted on or after February 3, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). For share-based awards granted prior to February 3, 2006, compensation expense was recognized using the accelerated amortization method. Upon the adoption of SFAS No. 123(R), Albertsons elected to begin recognizing compensation expense using the straight-line amortization method for share-based awards granted on or after February 3, 2006. In accordance with the modified-prospective transition method, results for prior periods have not been restated and all of Albertsons’ stock-based incentive plans are considered equity plans under SFAS No. 123(R). The adoption of SFAS No. 123(R) did not have a material effect on the Business’ Financial Statements.

Compensation expense recognized in the accompanying Statements of Revenues and Direct Expenses for the option holders that became employees of CVS was less than $1 for the 52 weeks ended February 2, 2006 and the 13-week periods ended May 4, 2006 and May 5, 2005. These expenses were primarily recorded in Selling, general and administrative expenses. With the exception of certain stock units granted in January 2006, all outstanding share-based awards fully vest on a “Change in Control” (as defined in the associated award agreement and plan) of Albertsons. Upon the Closing on June 2, 2006 (see Note 7 – Subsequent Events), the share-based awards fully vested and, in accordance with the APA Agreement, converted to liability (cash) awards for the option holders who became employees of CVS. The compensation cost for the accelerated vesting of all nonvested awards related to the option holders who became employees of CVS was recognized by Albertsons upon the Closing and are not included in the accompanying Statements of Revenues and Direct Expenses.

In May 2004 the FASB issued FASB Staff Position (“FSP”) No. FSP FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-2”). FSP FAS 106-2 supersedes FSP FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides guidance on the accounting and disclosure related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”), which was signed into law in December 2003. The Medicare Act and adoption of FSP FAS 106-2 in the Business’ third quarter of fiscal 2005 did not have a material effect on the Business’ Financial Statements.

In November 2004 the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage). SFAS No. 151 became effective for the Business on February 3, 2006 and did not have a material effect on the Business’ Financial Statements.

In May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable or unless a pronouncement includes alternative transition provisions. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” for the reporting of a correction of an error and a change in accounting estimate. SFAS No. 154 became effective for the Business on February 3, 2006 and did not have a material effect on the Business’ Financial Statements.

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In June 2005 the EITF reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date of acquisition. EITF 05-6 also requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. The Business’ historical accounting policies comply with these provisions and, accordingly, the adoption of EITF 05-6 in the third quarter of fiscal 2005 did not have a material effect on the Business’ Financial Statements.

In October 2005 the FASB issued FSP FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP FAS 13-1”). FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense. The Business historically capitalized rental costs incurred during a construction period. In accordance with the transition provisions of FSP FAS 13-1, the Business elected to early adopt and prospectively apply the requirement to expense rental costs incurred during a construction period in the Business’ fourth quarter of fiscal 2005. The adoption of FSP FAS 13-1 did not have a material effect on the Business’ Financial Statements.

NOTE 3 – NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in their consolidated earnings statements. SFAS No. 123(R) and related FASB Staff Positions became effective for Albertsons on February 3, 2006.

Prior to February 3, 2006, Albertsons applied the provisions of APB Opinion No. 25 and related interpretations in accounting for stock option and stock unit awards (“share-based awards”) made under its stock-based incentive plans. Stock options granted under these plans had an exercise price equal to or greater than the market value of the common stock on the date of the grant, and accordingly, no compensation expense was recognized. The fair value of stock units granted under these plans was determined based on the closing market price of the Albertsons’ common stock on the grant date and this amount was recognized as compensation expense over the respective vesting periods of the awards.

Effective February 3, 2006, Albertsons adopted the provisions of SFAS No. 123(R) and related FASB Staff Positions using the modified-prospective transition method. Under this transition method, compensation expense is recognized for: 1) all share-based awards granted prior to, but not yet vested as of February 3, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, and 2) all share-based awards granted on or after February 3, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). For share-based awards granted prior to February 3, 2006, compensation expense was recognized using the accelerated amortization method. Upon the adoption of SFAS No. 123(R), Albertsons elected to begin recognizing compensation expense using the straight-line amortization method for share-based awards granted on or after February 3, 2006. In accordance with the modified-prospective transition method, results for prior periods have not been restated and all of Albertsons’ stock-based incentive plans are considered equity plans under SFAS No. 123(R). The adoption of SFAS No. 123(R) did not have a material effect on the Business’ Financial Statements.

Compensation expense recognized in the accompanying Statements of Revenues and Direct Expenses for the option holders that became employees of CVS was less than $1 for the 52 weeks ended February 2, 2006 and the 13-week periods ended May 4, 2006 and May 5, 2005. These expenses were primarily recorded in Selling, general and administrative expenses. With the exception of certain stock units granted in January 2006, all outstanding share-based awards fully vest on a “Change in Control” (as defined in the associated award agreement and plan) of Albertsons. Upon the Closing on June 2, 2006 (see Note 7 – Subsequent Events), the share-based awards fully vested and, in accordance with the APA Agreement, converted to liability (cash) awards for the option holders who became employees of CVS. The compensation cost for the accelerated vesting of all nonvested awards related to the option holders who became employees of CVS was recognized by Albertsons upon the Closing and are not included in the accompanying Statements of Revenues and Direct Expenses.

In May 2004 the FASB issued FASB Staff Position (“FSP”) No. FSP FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-2”). FSP FAS 106-2 supersedes FSP FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides guidance on the accounting and disclosure related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”), which was signed into law in December 2003. The Medicare Act and adoption of FSP FAS 106-2 in the Business’ third quarter of fiscal 2005 did not have a material effect on the Business’ Financial Statements.

In November 2004 the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to include costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage). SFAS No. 151 became effective for the Business on February 3, 2006 and did not have a material effect on the Business’ Financial Statements.

In May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable or unless a pronouncement includes alternative transition provisions. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” for the reporting of a correction of an error and a change in accounting estimate. SFAS No. 154 became effective for the Business on February 3, 2006 and did not have a material effect on the Business’ Financial Statements.

In June 2005 the EITF reached a consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 requires that leasehold improvements acquired in a business combination be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date of acquisition. EITF 05-6 also requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewal periods that are deemed to be reasonably assured at the date the leasehold improvements are purchased. The Business’ historical accounting policies comply with these provisions and, accordingly, the adoption of EITF 05-6 in the third quarter of fiscal 2005 did not have a material effect on the Business’ Financial Statements.

In October 2005 the FASB issued FSP FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP FAS 13-1”). FSP FAS 13-1 requires rental costs associated with building or ground leases incurred during a construction period to be recognized as rental expense. The Business historically capitalized rental costs incurred during a construction period. In accordance with the transition provisions of FSP FAS 13-1, the Business elected to early adopt and prospectively apply the requirement to expense rental costs incurred during a construction period in the Business’ fourth quarter of fiscal 2005. The adoption of FSP FAS 13-1 did not have a material effect on the Business’ Financial Statements.