McKesson 2009 Annual Report Download - page 50

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
44
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 $11 million, or $0.04 per diluted share, for 2009.
Share-Based Payment: Our compensation programs include share-based payments. We account for all share-
based payment transactions using a fair-value based measurement method. 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 awards with performance
conditions and multiple vest dates, we recognize the expense on a graded vesting basis. For awards with
performance conditions and a single vest date, we recognize the expense on a straight-line basis. We utilize the
“short-cut” method for calculating the tax effects of share-based compensation.
We estimate the grant-date fair value of employee stock options using the Black-Scholes option-pricing model.
We believe that it is difficult to accurately measure the value of an employee stock option. Our estimates of
employee stock option values rely on estimates of factors we input into the model. The key factors involve an
estimate of future uncertain events. The key factors influencing the estimation process, among others, are the
expected life of the option, the expected stock price volatility factor and the expected dividend yield. In determining
the expected life of the option, we primarily use historical experience as our best estimate of future exercise patterns.
We use a combination of historical and implied market volatility to determine the expected stock price volatility
factor. We believe that this market-based input provides a better estimate of our future stock price movements and
is consistent with employee stock option valuation considerations. Once the fair values of employee stock options
are determined, current accounting practices do not permit them to be changed, even if the estimates used are
different from actual.
In addition, we develop an estimate of the number of share-based awards which will ultimately vest primarily
based on historical experience. Changes in the estimated forfeiture rate can have a material effect on share-based
compensation expense. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is
made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the
financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is
made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. We re-assess the estimated forfeiture rate established upon grant periodically throughout the
requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the
forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. The actual forfeitures in future
reporting periods could be materially higher or lower than our current estimates.
Our assessments of estimated share-based compensation charges are affected by our stock price as well as
assumptions regarding a number of complex and subjective variables and the related tax impact. These variables
include, but are not limited to, the volatility of our stock price, employee stock option exercise behavior, timing,
number and types of annual share-based awards and the attainment of performance goals. As a result, the future
share-based compensation expense may differ from the Company’s historical amounts. In 2009, 2008 and 2007,
share-based compensation expense was $0.23, $0.20 and $0.13 per diluted share.
Loss Contingencies: We are subject to various claims, pending and potential legal actions for product liability
and other damages, investigations relating to governmental laws and regulations and other matters arising out of the
normal conduct of business. Each significant matter is regularly reviewed and assessed for potential financial
exposure. If a potential loss is considered probable and can be reasonably estimated, we accrue a liability in the
consolidated financial statements. The assessment of probability and estimation of amount is highly subjective and
requires significant judgment due to uncertainties related to these matters and is based on the best information
available at the time. The accruals are adjusted, as appropriate, as additional information becomes available. We
regularly review contingencies to determine the adequacy of the accruals and related disclosures. The amount of
actual loss may differ significantly from these estimates.