McKesson 2009 Annual Report Download - page 77

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic exposures as
well as those risks required to be insured by law or contract. It is our policy to retain a significant portion of certain
losses primarily related to workers’ compensation and comprehensive general, product and vehicle liability.
Provisions for losses expected under these programs are recorded based upon our estimate of the aggregate liability
for claims incurred as well as for claims incurred but not yet reported. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
Revenue Recognition: Revenues for our Distribution Solutions segment are recognized when we deliver
product and title passes to the customer or when services have been rendered and there are no further obligations to
customers.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy
generally allows customers to return products only if they can be resold for value or returned to suppliers for full
credit. We accrue sales returns based on estimates at the time of sale to the customer. Sales returns from customers
were approximately $1,216 million, $1,093 million and $1,113 million in 2009, 2008 and 2007. Taxes collected
from customers and remitted to governmental authorities are presented on a net basis; that is, they are excluded from
revenues.
The revenues for our 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. Sales to customers’
warehouses amounted to $25.8 billion in 2009, $27.7 billion in 2008 and $27.6 billion in 2007. We also record
revenues for direct store deliveries from most of these same customers. 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.