

2.	Summary of Significant Accounting Policies

a. Principles of Consolidation

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), and include the accounts of our parent company, all majority-owned subsidiaries where we have control, certain fifty-percent owned subsidiaries where we possess the power to direct or cause the direction of management and policies and certain veterinary medical groups to which we provide services as discussed below. We have eliminated all intercompany transactions and balances in consolidation.

We provide management and other administrative services to certain veterinary practices in states and Canadian provinces with laws, rules and regulations which require that veterinary medical practices be owned by licensed veterinarians and that corporations which are not owned by licensed veterinarians refrain from providing, or holding themselves out as providers of, veterinary medical care. In these states and Canadian provinces, we provide management and other administrative services to the veterinary medical practices. At December 31, 2015, we operated 198 animal hospitals in 15 of these states and 76 animal hospitals in four Canadian provinces, under management agreements with these veterinary practices. Pursuant to the management agreements, the veterinary medical practices are each solely responsible for all aspects of the practice of veterinary medicine, as defined by their respective state or province.

We have determined that the veterinary medical practices are variable interest entities as defined by the Financial Accounting Standards Board (“FASB”), and that we have a variable interest in those entities through our management agreements. We also determined that our variable interests in these veterinary medical practices, in aggregate with the variable interests held by our related parties, provide us with the power to direct the activities of these practices that most significantly impact their economic performance and obligate us to absorb losses that could potentially be significant or the right to receive



2.	Summary of Significant Accounting Policies, continued

benefits from the veterinary medical practices that could potentially be significant. Based on these determinations, we consolidated the veterinary medical practices in our consolidated financial statements.

b. Foreign Currency Translation

The functional currency of our Canadian subsidiaries is their local currency. Assets and liabilities are translated into U.S. dollars at the exchange rate at the balance sheet date, whereas revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period.

Translation adjustments are included in accumulated other comprehensive income (loss) and realized transaction gains and losses are recorded in the results of operations.

c. Use of Estimates in Preparation of Financial Statements

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of our consolidated financial statements and our reported amounts of revenue and expense during the reporting period. Actual results could differ from our estimates. Amounts subject to significant judgment and estimates include, but are not limited to, collectability of receivables, cash flows used in the evaluation of impairment of goodwill, cash flows used in the evaluation of impairment of long-lived assets, valuation allowance on deferred tax assets, estimated redemption value of mandatorily redeemable partnership interests and inputs used for computing stock-based compensation.

d. Revenue and Related Cost Recognition

General

We recognize revenue, barring other facts, when the following revenue recognition criteria are met:


•	persuasive evidence of a sales arrangement exists;


•	delivery of goods has occurred or services have been rendered;


•	the sales price or fee is fixed or determinable; and


•	collectability is reasonably assured.

Revenue is reported net of sales discounts and excludes sales taxes.

We generally recognize revenue and costs as follows:


•	For non-contractual services provided by our business units, at the time services are rendered.


•	For the sale of merchandise, when delivery of the goods has occurred.


•	For services under defined support and maintenance contracts, on a straight-line basis over the contractual period, recognizing costs as incurred; these services include, but are not limited to, technical support, when-and-if available product updates for software and extended warranty coverage.


•	For the sale of our digital radiography imaging equipment and ultrasound imaging equipment sold on a standalone basis, at the time title and risk of loss transfers to the customer, which is generally upon delivery or upon installation and customer acceptance if required per the sale arrangement.


•	For the sale of reminder cards, when shipment has occurred.



2.	Summary of Significant Accounting Policies, continued


•	For revenue related to bundled products and services, sales arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method, whereby any discount in the arrangement is allocated proportionally to each deliverable on the basis of each deliverable’s selling price.

Deferred Revenue

We defer revenue for certain transactions as follows:


•	We defer revenue for pre-paid services such as our veterinarian wellness, consulting, marketing and education services and recognize that revenue on a straight-line basis over the contract period or as the services are provided depending on the nature of the service.


•	We defer revenue for services provided as part of the purchase of equipment and software and recognize that revenue on a straight-line basis over the service period.

As a result of these policies, we have deferred revenue and costs at December 31, 2015 and 2014 consisting of the following (in thousands):



	2015			2014
Deferred equipment revenue⁽¹⁾	$	753		$	883
Deferred fixed-priced support or maintenance contract revenue	3,811			4,265
Other deferred revenue⁽²⁾	10,083			9,190
Total deferred revenue	14,647			14,338
Less current portion included in other accrued liabilities	14,647			14,304
Long-term portion of deferred revenue included in other liabilities	$	—		$	34
Current portion of deferred costs included in prepaid expenses and other	$	1,172		$	866
Long-term portion of deferred costs included in other assets	(72		)	1,126
Total deferred costs⁽³⁾	$	1,100		$	1,992

____________________________


⁽¹⁾	Represents amounts received for sales arrangements that include equipment, hardware, software and services.


⁽²⁾	Represents amounts received in advance for services.


⁽³⁾	Represents costs related to warranties, equipment and hardware included in deferred equipment revenue.

Customer Loyalty Programs

We record reductions to revenue related to customer incentive programs, which include various forms of cash consideration. Incentives may be provided in the form of credits, coupons or loans and are earned by clients upon entering into an agreement to purchase products or services in future periods while maintaining defined volume purchase or utilization levels. These incentives are capitalized and recognized as a reduction to revenue over the term of the customer agreement. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs. For the years ended December 31, 2015, 2014 and 2013, we did not have any impaired customer acquisition costs.

e. Direct Costs

Direct costs are comprised of all service and product costs, including but not limited to, salaries of veterinarians, technicians and other hospital-based, laboratory-based personnel, and content-development personnel, transportation and delivery costs, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expenses and costs of goods sold.



2.	Summary of Significant Accounting Policies, continued

f. Cash and Cash Equivalents

We consider only highly liquid investments with original maturities of less than 90 days to be cash equivalents. We maintain balances in our bank accounts that are in excess of FDIC insured levels.

g. Inventory

Our inventory consists primarily of finished goods and includes imaging equipment, pet food and products and medical supplies. It is valued at the lower of cost or market using the first-in, first-out method and is adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions.

h. Property and Equipment

Property and equipment is recorded at cost. Equipment held under capital leases is recorded at the lower of the present value of the minimum lease payments or the fair value of the equipment at the beginning of the lease term.

We develop and implement new software to be used internally, or enhance our existing internal software. We develop the software using our own employees and/or outside consultants. We capitalize software development costs when application development begins, it is probable that the project will be completed, and the software will be used as intended. We expense costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities as we incur these costs. The capitalized costs are amortized over the expected useful lives of the software. Costs related to upgrades or enhancements of existing systems are capitalized if the modifications result in additional functionality.

Depreciation and amortization are recognized on the straight-line method over the following estimated useful lives:



Buildings and improvements	5 to 40 years
Leasehold improvements	Lesser of lease term or 15 years
Furniture and equipment	3 to 10 years
Software	3 to 10 years
Equipment held under capital leases	5 to 10 years

Depreciation and amortization expense, including the amortization of property under capital leases, in 2015, 2014 and 2013 was $58.3 million, $58.4 million and $56.5 million, respectively.

Property and equipment at December 31, 2015 and 2014 consisted of (in thousands):



	2015			2014
Land	$	72,651		$	64,495
Building and improvements	156,417			152,812
Leasehold improvements	213,272			193,274
Furniture and equipment	325,244			296,789
Software	46,366			39,987
Buildings held under capital leases	58,984			59,555
Equipment held under capital leases	55			875
Construction in progress	22,230			12,466
Total property and equipment	895,219			820,253
Less — accumulated depreciation and amortization	(387,466		)	(352,212		)
Total property and equipment, net	$	507,753		$	468,041

Accumulated amortization on buildings and equipment held under capital leases amounted to $19.1 million and $17.0 million at December 31, 2015 and 2014, respectively.



2.	Summary of Significant Accounting Policies, continued

i. Operating Leases

Most of our facilities are under operating leases. The minimum lease payments, including predetermined fixed escalations of the minimum rent, are recognized as rent expense on a straight-line basis over the lease term as defined in the FASB’s accounting guidance pertaining to leases. The lease term includes contractual renewal options that are reasonably assured based on significant leasehold improvements acquired. Any leasehold improvement incentives paid to us by a landlord are recorded as a reduction of rent expense over the lease term.

j. Goodwill

Goodwill represents the excess of the consideration transferred over the net of the fair value of identifiable assets acquired and liabilities assumed in a business combination.

Impairment testing for goodwill is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). In accordance with the FASB’s accounting guidance pertaining to goodwill and other intangibles, we have determined that we have five reporting units: Animal Hospital, Laboratory, Medical Technology, Vetstreet and Camp Bow Wow. Annually, or sooner if circumstances indicate an impairment may exist, we estimate the fair value of each of our reporting units and compare their estimated fair value against the net book value of those reporting units to determine if our goodwill is impaired.

The recognition and measurement of a goodwill impairment loss involves either a qualitative assessment of the fair value of each reporting unit or a more detailed quantitative two-step process. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. If we elect to not use this option, or we determine, using the qualitative method, that it is more likely than not that the fair value of a reporting unit is less than its net book value, we then perform the more detailed two-step impairment test. Step one of the two-step test compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment.

Our estimated reporting unit fair values are calculated using valuation methods consisting primarily of discounted cash flow techniques, and market comparables, where applicable. These valuation methods involve the use of significant assumptions and estimates such as forecasted growth rates, valuation multiples, the weighted-average cost of capital, and risk premiums, which are based upon the best available market information and are consistent with our long-term strategic plans. Negative changes in our projected cash flows related to variables such as revenue growth rates, margins, or the discount rate could result in a decrease in the estimated fair value of our reporting units and could ultimately result in a substantial goodwill impairment charge. The performance of our reporting units, and in turn the risk of goodwill impairment, is subject to a number of risks and uncertainties, some of which are outside of our control.

Consumer spending habits for our business are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. We believe these factors have and may continue to impact consumer spending for our products and services. Deterioration in consumer spending habits for our business would negatively impact the value of our reporting units and could result in additional goodwill impairment. Any potential impairment charge could be material and would be reflected as expense in our consolidated statements of income. We provide no assurance that forecasted growth rates, valuation multiples, and discount

rates will not deteriorate in the near term. We will continue to analyze changes to these assumptions in future periods.

We adopted the end of October as our annual impairment testing date although, as mentioned above, we test our reporting units sooner if an event or circumstances change that would more than likely than not reduce the fair value of a reporting unit below its carrying value.



2.	Summary of Significant Accounting Policies, continued

As of October 31, 2015, we evaluated our goodwill for impairment. Based on this analysis, we concluded that goodwill was not impaired for any of our reporting units. As of December 31, 2015, no events or changes in circumstances occurred that would have triggered the need for an additional impairment review of goodwill.

k. Other Intangible Assets

In addition to goodwill, we have amortizable intangible assets at December 31, 2015 and 2014, as follows (in thousands):



	2015							2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Non-contractual customer relationships	$	116,082	$	(48,821	)	$	67,261	$	101,056	$	(45,295	)	$	55,761
Covenants not-to-compete	12,435		(4,779		)	7,656		10,093		(4,422		)	5,671
Favorable lease asset	9,441		(5,440		)	4,001		9,576		(4,962		)	4,614
Technology	1,377		(589		)	788		1,627		(414		)	1,213
Trademarks	11,591		(4,086		)	7,505		13,503		(4,015		)	9,488
Contracts	—		—			—		100		(11		)	89
Franchise rights	11,730		(1,564		)	10,166		11,730		(391		)	11,339
Total	$	162,656	$	(65,279	)	$	97,377	$	147,685	$	(59,510	)	$	88,175

The recoverability of the carrying values of all intangible assets with finite lives are re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. We perform a quarterly review of identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

In 2014, we recorded a $13.1 million intangible asset impairment charge related to non-contractual customer relationships, technology, trademarks and contracts related to Vetstreet. Our determination that the fair value of the intangible assets was less than carrying value was based upon changes in our estimate of forecasted cash flows. These forecasted cash flow changes were related to the less than anticipated positive impact of new product offerings outlined in an operational and financial plan established in 2013 and the negative impact of the overall competitive environment, discussed in further detail below in Note 5, Goodwill. The fair values of the impaired intangibles were calculated utilizing valuation methods consisting primarily of discounted cash flow techniques, and market comparables, where applicable. The impairment is included under the caption "Impairment of goodwill and other long-lived assets" in our consolidated income statement.



2.	Summary of Significant Accounting Policies, continued

Amortization is recognized on the straight-line method over the following estimated useful lives:



Non-contractual hospital customer relationships		5 years
Non-contractual laboratory customer relationships		5 to 25 years
All other non-contractual customer relationships		5 to 7 years
Covenants not-to-compete		3 to 25 years
Favorable lease asset		4 to 27 years
Technology		4 to 10 years
Trademarks		2 to 10 years

The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):



	For the Years Ended December 31,
	2015		2014		2013
Aggregate amortization expense	$	23,395	$	21,039	$	20,934

The estimated amortization expense related to intangible assets for each of the five succeeding years and thereafter at December 31, 2015 is as follows (in thousands):



Definite-lived intangible assets:
2016	$	22,841
2017	17,302
2018	14,006
2019	11,127
2020	6,390
Thereafter	24,671
Total	$	96,337
Indefinite-lived intangible assets:
Trademarks	1,040
Total intangible assets	$	97,377

l. Income Taxes

We account for income taxes under the FASB’s accounting guidance on income taxes. In accordance with the guidance, we record deferred tax liabilities and deferred tax assets, which represent taxes to be recovered or settled in the future. We adjust our deferred tax assets and deferred tax liabilities to reflect changes in tax rates or other statutory tax provisions. We make judgments in assessing our ability to realize future benefits from our deferred tax assets, which include operating and capital loss carryforwards. As such, we have a valuation allowance to reduce our deferred tax assets for the portion we believe will not be realized. Changes in tax rates or other statutory provisions are recognized in the period the change occurs. We also assess differences between our probable tax bases and the as-filed tax bases of certain assets and liabilities.

We account for unrecognized tax benefits also in accordance with the FASB’s accounting guidance on income taxes which prescribe a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation, based solely on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We did not have any unrecognized tax benefits at December 31, 2015 and 2014.



2.	Summary of Significant Accounting Policies, continued

m. Notes Receivable

Notes receivable are financial instruments issued in the normal course of business and are not market traded. The amounts recorded approximate fair value and are shown net of valuation allowances. There were no valuation allowances recorded as of December 31, 2015 and December 31, 2014. The notes bear interest at rates varying from 2.6% to 7.5% per annum.

n. Deferred Financing Costs

Deferred financing costs are amortized using the effective interest method over the life of the related debt. Amortization of deferred financing costs was $1.7 million and $1.4 million for the periods ending December 31, 2015 and 2014, respectively.

o. Fair Value of Financial Instruments and Concentration of Risk

The carrying amount reported in our consolidated balance sheets for cash, cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximates fair value because of the immediate or short-term maturity of these financial instruments. Our policy is to place our cash and cash equivalents in highly-rated financial instruments and institutions,which we believe mitigates our credit risk. Concentration of credit risk with respect to accounts receivable is limited due to the diversity of our customer base. We routinely review the collection of our accounts receivable and maintain an allowance for potential credit losses, but historically have not experienced any significant losses related to an individual customer or groups of customers in a geographic area.

Our operations depend, in some cases, on the ability of single source suppliers or a limited number of suppliers, to deliver products and supplies on a timely basis. We have in the past experienced, and may in the future experience, shortages of or difficulties in acquiring products and supplies in the quantities and of the quality needed. Shortages in the availability of products and supplies for an extended period of time could have a negative impact on our operating results.

p. Marketing and Advertising

Marketing and advertising costs are expensed as incurred. Total marketing and advertising expense included in direct costs amounted to $25.5 million, $23.9 million and $25.4 million for 2015, 2014 and 2013, respectively. Total marketing and advertising expense included in selling, general and administrative expense amounted to $7.5 million, $6.8 million and $5.9 million for 2015, 2014 and 2013, respectively.

q. Insurance and Self-Insurance

We use a combination of insurance and self-insurance with high-retention or high-deductible provisions for a number of risks, including workers’ compensation, general liability, property insurance and our group health insurance benefits.

Liabilities associated with these risks are estimated based on an undiscounted basis by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.

r. Product Warranties

We accrue the cost of basic product warranties included with the sale of our digital radiography imaging equipment and our ultrasound imaging equipment at the time we sell these units to our customers. Our warranty costs are primarily for our assistance in helping our customers resolve issues with the warranties they have with the original equipment manufacturers. We estimate our warranty costs based on historical warranty claim experience. Accrued warranty costs at December 31, 2015 were$0.05 million. There were no accrued warranty costs at December 31, 2014.



2.	Summary of Significant Accounting Policies, continued

s. Calculation of Earnings per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):



	For Years Ended December 31,
	2015		2014		2013
Net income attributable to VCA Inc.	$	211,049	$	135,438	$	137,511
Weighted average common shares outstanding:
Basic	81,443		86,656		88,621
Effect of dilutive potential common stock:
Stock options	330		302		305
Non-vested shares and units	641		867		737
Diluted	82,414		87,825		89,663
Basic earnings per common share	$	2.59	$	1.56	$	1.55
Diluted earnings per common share	$	2.56	$	1.54	$	1.53

For the years ended December 31, 2015, 2014 and 2013, potential common shares of 55,351, 31,668 and 43,300, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

t. Share-Based Compensation

We account for share-based compensation in accordance with FASB’s accounting guidance for stock compensation. Accordingly, we measure the cost of share-based payments based on the grant-date fair value of the equity instruments and recognize the cost over the requisite service period, which is typically the vesting period. Our company’s share-based employee compensation plans are described further in Note 10, Share-Based Compensation.

u. Acquisitions

We account for acquisitions based upon the provisions of the FASB’s accounting guidance on business combinations. Accordingly, acquisitions are accounted for at fair value under the acquisition method of accounting. Acquisition costs are expensed as incurred; noncontrolling interests are valued at fair value at the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.

v. Litigation

We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position or results of operations and accrue and/or disclose loss contingencies as appropriate.

w. Recent Accounting Pronouncements

In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”, that now requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This Update amends current GAAP that requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position, simplifying the presentation and aligning it with the International Financial Reporting Standards (IFRS). This ASU is effective for fiscal



2.	Summary of Significant Accounting Policies, continued

years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.

We elected to retrospectively adopt the accounting standard in the fourth quarter of 2015.

In September 2015, the FASB issued Accounting Standards Update (ASU) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” , which amends the requirement for the acquirer in a business combination to retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill and revise comparative information for prior year periods presented. This update simplifies the accounting for the adjustments to provisional amounts by eliminating the requirement to retrospectively account for those adjustments. The adjustments to provisional amounts identified during the measurement period shall now be recognized in the reporting period in which the adjustment amounts are determined. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. We do not expect this adoption to have a significant impact on our consolidated financial statements.

In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements”, given that the authoritative guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We do not expect this adoption to have a significant impact on our consolidated financial statements.

In July 2015, the FASB approved the deferral of the effective date of the new revenue recognition standard ASU 2014-09 by one year. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, “Inventory (Topic 330): “Simplifying the Measurement of Inventory,” which amends the guidelines for the measurement of inventory. The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method, but do apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. Under the amendments, an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and

transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively with earlier application permitted. We will further study the implications of this statement in order to evaluate the expected impact on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 - “Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is to be implemented retrospectively. Early adoption is permitted for financial statements that have not been previously issued. Adoption of the new guidance will only affect the presentation of our consolidated balance sheets and will not have a significant impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including



2.	Summary of Significant Accounting Policies, continued

adoption in an interim period. We do not expect this adoption to have a significant impact on our consolidated financial statements.

x. Corrections

During 2013, we recorded a $2.8 million immaterial out-of-period non-cash physical inventory adjustment in our Animal Hospital business segment which resulted in a debit to inventory and a credit to direct costs.

We have analyzed the impact of this item and concluded that the adjustment would not be material to any individual period, taking into account the requirements of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in the Current Year Financial Statements (“SAB 108”). In accordance with the relevant guidance, we evaluated the materiality of errors from a quantitative and qualitative perspective. Based on such evaluation, we concluded that correcting the errors would not have had a material impact on any individual prior period presented in the 2015 Form 10-K nor would it have affected the trend of financial results. As provided by SAB 108, the error correction did not require the restatement of the consolidated financial statements for prior periods.

y. Reclassifications

Certain reclassifications have been made herein to prior year balances to conform to the 2015 financial statement presentation.