McKesson 2008 Annual Report Download - page 73

Download and view the complete annual report

Please find page 73 of the 2008 McKesson annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 119

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
66
The revenues for the Distribution Solutions segment include large volume sales of pharmaceuticals to a limited
number of large customers who warehouse their own product. We order bulk product from the manufacturer,
receive and process the product through our central distribution facility and deliver the bulk product (generally in the
same form as received from the manufacturer) directly to our customers’ warehouses. We also record revenues for
direct store deliveries from most of these same customers. Sales to customer warehouses amounted to $27.7 billion
in 2008, $27.6 billion in 2007 and $25.5 billion in 2006. Direct store deliveries are shipments from the
manufacturer to our customers of a limited category of products that require special handling. We assume the
primary liability to the manufacturer for these products.
Based on the criteria of Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent,” 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
these indicators.
Revenues for our Technology Solutions 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 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.