McKesson 2008 Annual Report Download - page 95

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
88
Warranties
In the normal course of business, we provide certain warranties and indemnification protection for our products
and services. For example, we provide warranties that the pharmaceutical and medical-surgical products we
distribute are in compliance with the Food, Drug and Cosmetic Act and other applicable laws and regulations. We
have received the same warranties from our suppliers, which customarily are the manufacturers of the products. In
addition, we have indemnity obligations to our customers for these products, which have also been provided to us
from our suppliers, either through express agreement or by operation of law.
We also provide warranties regarding the performance of software and automation products we sell. Our
liability under these warranties is to bring the product into compliance with previously agreed upon specifications.
For software products, this may result in additional project costs, which are reflected in our estimates used for the
percentage-of-completion method of accounting for software installation services within these contracts. In
addition, most of our customers who purchase our software and automation products also purchase annual
maintenance agreements. Revenue from these maintenance agreements is recognized on a straight-line basis over
the contract period and the cost of servicing product warranties is charged to expense when claims become
estimable. Accrued warranty costs were not material to the consolidated balance sheets.
17. Other Commitments and Contingent Liabilities
In addition to commitments and obligations in the ordinary course of business, we are subject to various claims,
other pending and potential legal actions for damages, investigations relating to governmental laws and regulations
and other matters arising out of the normal conduct of our business. In accordance with SFAS No. 5, “Accounting
for Contingencies”, we record a provision for a liability when management believes that it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. We believe we have adequate
provisions for any such matters. Management reviews these provisions at least quarterly and adjusts these
provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information
and events pertaining to a particular case. Because litigation outcomes are inherently unpredictable, these
assessments often involve a series of complex assessments by management about future events and can rely heavily
on estimates and assumptions.
We are party to the significant legal proceedings described below. Based on our experience, we believe that
any damage amounts claimed in the specific matters discussed below are not meaningful indicators of our potential
liability. We believe that we have valid defenses to these legal proceedings and are defending the matters
vigorously. Nevertheless, the outcome of any litigation is inherently uncertain. We are currently unable to estimate
the remaining possible losses in the unresolved legal proceedings described below. Should any one of these
proceedings against us, or a combination of more than one, be successful, or should we determine to settle any or a
combination of these matters on unfavorable terms, we may be required to pay substantial sums, become subject to
the entry of an injunction, or be forced to change the manner in which we operate our business, which could have a
material adverse impact on our financial position or results of operations.
I. Accounting Litigation
Following the announcements by McKesson in April, May and July of 1999 that McKesson had determined that
certain software sales transactions in its Information Solutions segment, formerly HBO & Company (“HBOC”) and
now known as McKesson Information Solutions LLC, were improperly recorded as revenue and reversed, ninety-
two lawsuits were filed against McKesson, HBOC, certain of McKesson’ s or HBOC’ s current or former officers or
directors, and other defendants, including Bear Stearns & Co. Inc. (“Bear Stearns”) and Arthur Andersen LLP
(“Andersen”). Although almost all of these cases (collectively “the Securities Litigation”) have now been resolved,
certain matters remain pending as more fully described below.