McKesson 2008 Annual Report Download - page 49

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
42
Acquisitions: We account for acquired businesses using the purchase method of accounting which requires that
the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any
excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. The
judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact our results of operations. The valuations are based on
information available near the acquisition date and are based on expectations and assumptions that have been
deemed reasonable by management.
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed.
For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected
future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate
that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and
assumptions inherent in the income method or other methods include the amount and timing of projected future cash
flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the
asset’ s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal,
regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment
as different types of intangible assets will have different useful lives and certain assets may even be considered to
have indefinite useful lives. Refer to Financial Note 2, “Acquisitions and Investments” to the accompanying
consolidated financial statements for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,345 million and $2,975 million of goodwill at March
31, 2008 and 2007. We maintain goodwill assets on our books unless the assets are deemed to be impaired. We
perform an impairment test on goodwill balances annually or when indicators of impairment exist. Such impairment
tests require that we first compare the carrying value of net assets to the estimated fair value of net assets for the
operations in which goodwill is assigned. If carrying value exceeds fair value, a second step would be performed to
calculate the amount of impairment. Fair values can be determined using market, income or cost approaches. To
estimate the fair value of a business using the market approach, we compare the business to similar businesses or
guideline companies whose securities are actively traded in public markets or the income approach, where we use a
discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of
that time horizon, are discounted to their present value using an appropriate rate of return.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process
using the market approach include the selection of appropriate guideline companies, the determination of market
value multiples for the guideline companies, the subsequent selection of an appropriate market value multiple for the
business based on a comparison of the business to the guideline companies, the determination of applicable
premiums and discounts based on any differences in marketability between the business and the guideline
companies and when considering the income approach, include the required rate of return used in the discounted
cash flow method, which reflects capital market conditions and the specific risks associated with the business. Other
estimates inherent in the income approach include long-term growth rates and cash flow forecasts for the business.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely
heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair
value can materially impact our results of operations. The valuations are based on information available as of the
impairment review date and are based on expectations and assumptions that have been deemed reasonable by
management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the
accuracy or validity of such estimates and could potentially result in an impairment charge.
In September 2006, we sold our Distribution Solutions’ Medical-Surgical Acute Care supply business and
allocated $79 million of the segment’ s goodwill to the divested business. The allocation was based on the relative
fair values of the Acute Care business and continuing businesses that were retained by the Company.