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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151
clarifies the accounting guidance included in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” related to
abnormal amounts of idle facility expense, freight, handling and spoilage costs. SFAS No. 151 is effective for inventory costs incurred during
2007. We are currently assessing the impact of SFAS No. 151 on our consolidated financial statements; however, we do not believe the
adoption of this standard will have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requires the recognition of cost resulting from
transactions in which the Company acquires goods and services by issuing its shares, share options, or other equity instruments. This standard
requires a fair value-based measurement method in accounting for share-based payment transactions. This standard replaces SFAS No. 123,
and supersedes APB Opinion No. 25. Accordingly, the use of the intrinsic value method as provided under APB Opinion No. 25 will be
eliminated. Based on guidance provided by the Securities and Exchange Commission (“SEC”) in April 2005, SFAS No. 123(R) will become
effective for us no later than 2007. The Company intends to adopt this standard using the modified prospective method of transition. This
transition method requires that compensation cost be recognized for new awards granted and awards modified, repurchased or cancelled after
April 1, 2006. This method also requires us to recognize cost for the unvested portion of all awards issued prior to and outstanding as of
April 1, 2006 at the grant-date fair value as the remaining requisite service is rendered. In addition, under SFAS No. 123(R), we must
determine the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost.
In March 2005, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment”, which provides guidance on the
interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as on the valuation of share-based payments. SAB
No. 107 does not modify any of the requirements under SFAS No. 123(R). SAB No. 107 provides interpretive guidance related to valuation
methods (including assumptions such as expected volatility and expected term), first-time adoption of SFAS No. 123(R) in an interim period,
the classification of compensation expense and disclosures subsequent to adoption of SFAS No. 123(R).
In 2006, 2005 and 2004, we accelerated the vesting of substantially all of the then outstanding stock options. As a result of this acceleration,
approximately $132 million of pro forma SFAS No. 123 compensation expense would not be recognized in earnings in accordance with SFAS
No. 123(R) post April 1, 2006. Total compensation expense related to unvested stock options not yet recognized at March 31, 2006 was
approximately $11 million, which is expected to be recognized on a pro rata basis over the next four years.
As a result of the provisions of SFAS No. 123(R), in 2007, we expect share-based compensation charges to approximate $0.08 to $0.10 per
diluted share, or approximately $0.05 to $0.07 per diluted share more than the share-based compensation expense recognized in our net income
in 2006. 2006 net income includes $0.03 per diluted share of compensation expense associated with restricted stock whose intrinsic value as of
the grant date is being amortized over the vesting period. Looking beyond 2007 through to 2010, we anticipate the impact of SFAS No. 123(R)
to continue to impact net income as future awards of share-based compensation are granted and amortized over the expected vesting period of
four years. Our assessments of estimated compensation charges are affected by our stock price as well as assumptions regarding a number of
complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price,
employee stock option exercise behaviors, timing, level and types of our grants of annual share-based awards, and the attainment of
performance goals.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” which
eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets that do not culminate an earning
process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 requires that that measurement be based on
the recorded amount of the assets relinquished for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This standard is
effective for nonmonetary asset exchanges beginning in 2007. We do not believe the adoption of this standard will have a material impact on
our consolidated financial statements.
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