McKesson 2009 Annual Report Download - page 49

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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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 failure to meet business plans, a further deterioration in
the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates
and could potentially result in an impairment charge.
In 2009 and 2008, we concluded that there was no impairment of our goodwill. In September 2006, we sold our
Distribution Solutions segment’s Acute Care medical-surgical 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.
Supplier Incentives: We receive fees for service and other incentives from our suppliers, such as volume-
related rebates and cash discounts, relating to the purchase or distribution of inventory. We consider these fees and
other incentives to represent product discounts and as a result, the amounts are recorded as a reduction of product
cost and are recognized through cost of goods sold upon the sale of the related inventory.
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 including the vendor’s financial condition. 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, 2009 and 2008, supplier reserves were $113 million and $82 million. All of the supplier reserves at
March 31, 2009 and 2008 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 2009. 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 current and future taxes to be paid. We are subject to income taxes in 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 $1,572 million and
$1,290 million at March 31, 2009 and 2008 and deferred tax liabilities of $1,889 million and $1,555 million.
Deferred tax assets primarily consist of net loss carryforwards and timing differences on our compensation and
benefit related accruals as well as on our AWP Litigation accrual. Deferred tax liabilities primarily consist of basis
differences for inventory valuation (including inventory valued at LIFO) and other assets. We established valuation
allowances of $125 million and $27 million, against certain deferred tax assets, which primarily relates to federal,
state and foreign loss carryforwards 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. Should tax laws change,
including those laws pertaining to LIFO, our cash flows could be materially impacted. Management is currently not
aware of any such changes that could have a material effect on the Company’s results of operations, cash flows or
financial position.