5. Equity Method Investments

Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method upon completion of the Second Step Transaction on December 31, 2014. Equity method investments as of May 31, 2015 and August 31, 2014 were as follows (in millions, except percentages):

	May 31, 2015					August 31, 2014
	Carrying Value		Ownership Percentage			Carrying Value		Ownership Percentage
Alliance Boots	$	N/A		100	%	$	7,336		45	%
Other		1,244		12% - 50	%		74		30% - 50	%
Total	$	1,244				$	7,410

N/A	Not applicable

Alliance Boots

On August 2, 2012, pursuant to the Purchase and Option Agreement the Company acquired 45% of the issued and outstanding share capital of Alliance Boots in exchange for $4.025 billion in cash and approximately 83.4 million shares of Walgreens common stock. The Purchase and Option Agreement provided, subject to the satisfaction or waiver of specified conditions, a call option that gave the Company the right, but not the obligation, to acquire the remaining 55% of Alliance Boots in exchange for an additional £3.1 billion in cash as well as an additional 144.3 million Company shares, subject to certain adjustments (the “call option”). On August 5, 2014, the Purchase and Option Agreement was amended to permit the exercise of the call option beginning on that date, and the Company, through an indirectly wholly-owned subsidiary to which the Company previously assigned its right to the call option, exercised the call option on August 5, 2014. The Company’s equity earnings, initial investment and the call option excluded the Alliance Boots minority interest in Galenica Ltd. (“Galenica”). The Alliance Boots investment in Galenica was distributed to the Alliance Boots shareholders other than Walgreens in May 2013, which had no impact on the Company’s financial results.

Prior to the closing of the Second Step Transaction on December 31, 2014, the Company accounted for its 45% investment in Alliance Boots using the equity method of accounting. Because the underlying net assets in Alliance Boots were denominated in a foreign currency, translation gains or losses had an impact on the recorded value of the Company’s investment. The Company utilized a three-month reporting lag in recording equity income in Alliance Boots, which was eliminated on December 31, 2014 (See Note 3, Change in Accounting Policy). The Company’s share of Alliance Boots earnings was recorded as Equity earnings in Alliance Boots in the Consolidated Condensed Statements of Earnings. The Company’s investment was recorded as Equity investment in Alliance Boots in the Consolidated Condensed Balance Sheets.

The Company’s initial investment in Alliance Boots exceeded its proportionate share of the net assets of Alliance Boots by $2.4 billion. This premium of $2.4 billion was recognized as part of the carrying value in the Company’s equity investment in Alliance Boots. The difference was primarily related to the fair value of Alliance Boots indefinite-lived intangible assets and goodwill. The Company’s equity method income from the investment in Alliance Boots was adjusted to reflect the amortization of fair value adjustments in certain definite lived assets of Alliance Boots. The Company’s incremental amortization expense associated with the Alliance Boots investment was zero and $14 million for the three and nine month periods ended May 31, 2015, respectively, and $11 million and $31 million for the three and nine month periods ended May 31, 2014, respectively. The incremental amortization expense was recorded as a reduction in equity earnings from Alliance Boots for all periods prior to closing of the Second Step Transaction on December 31, 2014.

The Second Step Transaction closed on December 31, 2014. (See Note 1, Organization, and Note 2, Basis of Presentation.) In connection with this transaction as required by ASC Topic 805, Business Combinations, the Company recorded a non-cash gain of $706 million resulting from the remeasurement of the previously held equity interest in Alliance Boots at its acquisition date fair value. The non-cash gain includes $80 million of foreign currency translation gains and losses reclassified from accumulated other comprehensive income. This gain is preliminary and may be subject to change as the Company finalizes purchase accounting.

Other Equity Method Investments

Other equity method investments primarily relate to equity method investments in Guangzhou Pharmaceuticals Corporation and Nanjing Pharmaceutical Corporation Limited, the Company’s pharmaceutical wholesale investments in China and the equity method investment retained through the sale of Walgreens Infusion Services in April 2015. Also included are additional investments in pharmaceutical wholesaling and distribution, retail pharmacy and our hearing care operator and the equity method investment retained through the sale of Take Care Employer in fiscal 2014. Equity investments of the Company are recorded within other noncurrent assets on the Consolidated Condensed Balance Sheets. The Company reported $7 million and $15 million of equity earnings in equity method investments for the three and nine month periods ended May 31, 2015, respectively. Equity earnings from the historical Walgreens equity method investments for the three and nine month periods ended May 31, 2014, respectively were immaterial. The Company’s share of equity income is reported as post tax earnings from equity method investments, in the Consolidated Condensed Statements of Earnings.

Summarized Financial Information

Summarized financial information for the Company’s equity method investees is as follows:

Balance Sheet (in millions)

	May 31, 2015⁽¹⁾		August 31, 2014⁽¹⁾
Current assets	$	4,985	$	9,074
Noncurrent assets		1,564		22,363
Current liabilities		3,944		9,372
Noncurrent liabilities		819		10,608
Shareholders’ equity ⁽²⁾		1,786		11,457

Income Statement (in millions)

	Three Months Ended May 31,				Nine Months Ended May 31,
	2015⁽³⁾		2014⁽³⁾		2015⁽³⁾		2014⁽³⁾

Net sales	$	2,884	$	9,385	$	17,862	$	28,485
Gross Profit		181		2,029		3,349		6,084
Net Income		28		320		771		1,091
Share of income from equity method investments⁽³⁾		7		137		330		467

⁽¹⁾Net assets in foreign equity method investments are translated at their respective May 31, 2015 and August 31, 2014 spot rates.

⁽²⁾Shareholders’ equity at May 31, 2015 and August 31, 2014 includes $163 million and $283 million respectively, related to noncontrolling interests.

⁽³⁾Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method upon completion of the Second Step Transaction on December 31, 2014. Earnings for the three and nine month periods ended May 31, 2015 reflect incremental acquisition-related amortization expense of zero and $14 million ($11 million net of tax), respectively. Incremental acquisition-related amortization expense for the three and nine month periods ended May 31, 2014 were $11 million ($9 million net of tax) and $31 million ($25 million net of tax), respectively. Earnings in foreign equity method investments are translated at their respective average exchange rates.