6. 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 August 31, 2015 and 2014 were as follows (in millions, except percentages):

	2015				2014
	Carrying Value		Ownership Percentage		Carrying Value		Ownership Percentage
Alliance Boots	$	NA		100%	$	7,336		45%
Other		1,242		12% - 50%		74		30% - 50%
Total	$	1,242			$	7,410

NA	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 Statements of Earnings. The Company’s investment was recorded as Equity investment in Alliance Boots in the Consolidated 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 $14 million, $41 million and $68 million for fiscal 2015, 2014 and 2013, 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, Summary of Major Accounting Policies). In connection with this transaction as required by ASC Topic 805, Business Combinations, the Company recorded a non-cash gain of $563 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 $310 million of other comprehensive losses and foreign currency translation 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 in Option Care Inc. retained through the sale of Walgreens Infusion Services in April 2015. Also included are additional investments in pharmaceutical wholesaling and distribution, retail pharmacy and the Company’s 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 non-current assets in the Consolidated Balance Sheets. The Company reported $24 million of post-tax equity earnings in other equity method investments for fiscal 2015, in the Consolidated Statements of Earnings. Post-tax equity earnings from the historical Walgreens other equity method investments in fiscal 2014 and fiscal 2013 were immaterial.

Summarized Financial Information

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

Balance Sheets (in millions)

	At August 31,
	2015⁽¹⁾		2014⁽¹⁾
Current assets	$	5,015	$	9,074
Non-current assets		1,548		22,363
Current liabilities		3,936		9,372
Non-current liabilities		837		10,608
Shareholders’ equity ⁽²⁾		1,790		11,457

Statements of Earnings (in millions)

	Year Ended August 31,
	2015⁽³⁾		2014⁽³⁾		2013⁽³⁾

Net sales	$	20,905	$	37,624	$	36,482
Gross Profit		3,794		8,109		7,632
Net Earnings		791		1,446		1,363
Share of earnings from equity method investments⁽³⁾		339		618		496

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

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

⁽³⁾ Earnings in foreign equity method investments are translated at their respective average exchange rates.