McKesson 2006 Annual Report Download - page 64

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them on the straight-line method at rates
designed to distribute the cost of properties over estimated service lives ranging from one to 30 years.
Capitalized Software Held for Sale: Development costs for software held for sale, which primarily pertain to our Provider Technologies
segment, are capitalized once a project has reached the point of technological feasibility. Completed projects are amortized after reaching the
point of general availability using the straight-line method based on an estimated useful life of approximately three years. We monitor the net
realizable value of capitalized software held for sale to ensure that the investment will be recovered through future sales.
Additional information regarding our capitalized software expenditures is as follows:
Long-lived Assets: We assess the recoverability of goodwill on at least an annual basis and other long-lived assets when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of impairment losses for long-lived assets,
including goodwill, which we expect to hold and use, is based on estimated fair values of the assets. Estimates of fair values are based on
quoted market prices, when available, the results of valuation techniques utilizing discounted cash flows (using the lowest level of identifiable
cash flows) or fundamental analysis. Long-lived assets to be disposed of, either by sale or abandonment, are reported at the lower of carrying
amount or fair value less costs to sell.
Capitalized Software Held for Internal Use: We amortize capitalized software held for internal use over the assets’ estimated useful lives
ranging from one to ten years. As of March 31, 2006 and 2005, capitalized software held for internal use was $436 million and $410 million,
net of accumulated amortization of $315 million and $243 million and was included in other assets in the consolidated balance sheets.
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic exposures as well as those risks required
to be insured by law or contract. It is our policy to retain a significant portion of certain losses primarily related to workers’ compensation and
comprehensive general, product, and vehicle liability. Provisions for losses expected under these programs are recorded based upon our
estimate of the aggregate liability for claims incurred as well as for claims incurred but not yet reported. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
Revenue Recognition: Revenues for our Pharmaceutical Solutions and Medical-Surgical Solutions segments are recognized when all of the
following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, product delivery has occurred or
services have been rendered, there are no further obligations to customers, and collectability is probable. Revenues for performance-based
contracts, whereby revenue is dependent upon successful predefined outcomes, are recognized by measuring actual results against the expected
performance criteria.
Revenues are recorded net of sales returns, allowances and rebates. Sales returns are recorded when goods are returned to us and are
generally not accepted unless the inventory can be returned to the manufacturer for credit. Commencing in 2005, the Company changed its
accounting policy for customer sales returns to reflect an accrual for estimated customer returns at the time of sales to the customer in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition when Right of Return Exists.”
Previously, the Company accounted for customer sales returns as a reduction of sales and cost of goods sold at the time of the return. This
change in accounting policy did not have a material impact on our consolidated financial statements. Sales returns were approximately
$974 million, $853 million and $766 million in 2006, 2005 and 2004. Amounts recorded in revenue and cost of sales under our previous
accounting policy approximated what would have been recorded under SFAS No. 48.
59
Years Ended March 31,
(In millions) 2006 2005 2004
Amounts capitalized $61 $50 $58
Amortization expense 51 52 53
Third-party royalty fees paid 33 25 25