McKesson 2006 Annual Report Download - page 65

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Included in our Pharmaceutical Solutions segment’s revenues are large volume sales of pharmaceuticals to a limited number of large self-
warehousing customers whereby we order bulk product from the manufacturer, receive and process the product through our central distribution
facility and subsequently deliver the bulk product (generally in the same form as received from the manufacturer) directly to our customers’
warehouses. In addition to these revenues, we also record revenues associated with direct store deliveries from most of these same customers.
Sales to customer warehouses amounted to $25.5 billion in 2006, $23.8 billion in 2005, and $21.4 billion in 2004. In addition, we also record
revenues associated with direct store deliveries from the manufacturer to our customer for a limited category of products that require special
handling, where we are the primary obligor.
We evaluate the criteria of Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as
an Agent,” in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as
commissions for our revenues. Based on the gross versus net reporting indicators specified in EITF 99-19, our revenues are recorded gross
when we are the primary party obligated in the transaction, take title to and possession of the inventory, are subject to inventory risk, have
latitude in establishing prices, assume the risk of loss for collection from customers as well as delivery or return of the product, are responsible
for fulfillment and other customer service requirements, or the transactions have several but not all of the these indicators.
Revenues for our Provider Technologies segment are generated primarily by licensing software systems (consisting of software, hardware
and maintenance support), and providing outsourcing and professional services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual software arrangements are
recognized at the time of delivery or under the percentage-of-completion method in accordance with Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,”
based on the terms and conditions in the contract. Contracts accounted for under the percentage-of-completion method are generally measured
based on the ratio of labor costs incurred to date to total estimated labor costs to be incurred. Changes in estimates to complete and revisions in
overall profit estimates on these contracts are charged to earnings in the period in which they are determined. We accrue for contract losses if
and when the current estimate of total contract costs exceeds total contract revenue.
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software license agreements is recognized ratably over
the term of the agreement. Software implementation fees are recognized as the work is performed or under the percentage-of-completion
contract method. Maintenance and support agreements are marketed under annual or multi-year agreements and are recognized ratably over the
period covered by the agreements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing service
revenues are recognized as the service is performed.
We also offer our products on an application service provider (“ASP”) basis, making available our software functionality on a remote
hosting basis from our data centers. The data centers provide system and administrative support as well as hosting services. Revenue on
products sold on an ASP basis is recognized on a monthly basis over the term of the contract starting when the hosting services begin.
This segment also engages in multiple-element arrangements, which may contain any combination of software, hardware, implementation or
consulting services, or maintenance services. When some elements are delivered prior to others in an arrangement and vendor-specific
objective evidence of fair value (“VSOE”) exists for the undelivered elements, revenue for the delivered elements is recognized upon delivery
of such items. The segment establishes VSOE for hardware and implementation and consulting services based on the price charged when sold
separately, and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is recognized under
the residual method only when fair value has been established for all of the undelivered elements in an arrangement. If fair value cannot be
established for any undelivered element, all of the arrangement’s revenue is deferred until the delivery of the last element or until the fair value
of the undelivered element is determinable.
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