McKesson 2008 Annual Report Download - page 50

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Goodwill at March 31, 2008 and 2007 was $3,345 million and $2,975 million and we concluded that there was
no impairment of our goodwill. Decreasing the multiple of earnings or multiple of revenues of competitors used for
impairment testing by one point or increasing the discount rate in the discounted cash flow analysis used for
impairment testing by 1% would not have indicated impairment for any of the Company’ s reporting units for 2008
or 2007. Refer to Financial Note 9, “Goodwill and Intangible Assets, net” in the accompanying consolidated
financial statements for additional information regarding goodwill.
Supplier Reserves: We establish reserves against amounts due from our suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them from us. These
reserve estimates are established based on our best judgment after carefully considering the status of current
outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent
information available to us. We evaluate amounts due from our suppliers on a continual basis and adjust the reserve
estimates when appropriate based on changes in factual circumstances. As of March 31, 2008 and 2007, supplier
reserves were $82 million and $100 million. All of the supplier reserves at March 31, 2008 and 2007 pertain to our
Distribution Solutions segment. A hypothetical 0.1% percentage increase or decrease in the supplier reserve as a
percentage of trade payables would have resulted in an increase or decrease in the cost of sales of approximately $11
million in 2008. The ultimate outcome of any amounts due from our suppliers may be different from our estimate.
Income Taxes: Our income tax expense, deferred tax assets and liabilities reflect management’ s best
assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous
foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax
provision and in evaluating income tax uncertainties under Financial Accounting Standards Board Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” We review our tax positions at the end of each
quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of
revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive
and negative evidence including our past operating results, the existence of cumulative net operating losses in the
most recent years and our forecast of future taxable income. In estimating future taxable income, we develop
assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of
temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions
require significant judgment about the forecasts of future taxable income and are consistent with the plans and
estimates we use to manage the underlying businesses. We had deferred income tax assets of $1,290 million and
$1,269 million at March 31, 2008 and 2007 and deferred tax liabilities of $1,555 million and $1,524 million. We
established valuation allowances of $27 million and $25 million, against certain deferred tax assets, which primarily
relates to federal and state loss carry forwards for which the ultimate realization of future benefits is uncertain.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
Management is not aware of any such changes that could have a material effect on the Company’ s results of
operations, cash flows or financial position.
If our assumptions and estimates described above were to change, an increase/decrease of 1% in our effective
tax rate as applied to income from continuing operations would have increased/decreased tax expense by
approximately $15 million, or $0.05 per diluted share, for 2008.
Share-Based Payment: Our compensation programs include share-based payments. Beginning in 2007, we
account for all share-based payment transactions using a fair-value based measurement method required by SFAS
No. 123(R). We adopted SFAS No. 123(R) using the modified prospective method of transition. The share-based
compensation expense is recognized, for the portion of the awards that is ultimately expected to vest, on a straight-
line basis over the requisite service period for those awards with graded vesting and service conditions. For the
awards with performance conditions, we recognize the expense on a straight-line basis, on an accelerated basis.
Upon adoption of SFAS No. 123(R) in 2007, we elected the “short-cut” method for calculating the beginning
balance of the additional paid-in capital pool related to the tax effects of share-based compensation.