McKesson 2009 Annual Report Download - page 79

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
73
Income Taxes: We account for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are
recognized when it is more likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective
settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered
to be permanently reinvested.
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be their
functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at year-
end exchange rates and revenues and expenses are translated at average exchange rates during the year. Cumulative
currency translation adjustments are included in accumulated other comprehensive income or losses in the
stockholders’ equity section of the consolidated balance sheets. Realized gains and losses from currency exchange
transactions are recorded in operating expenses in the consolidated statements of operations and were not material to
our consolidated results of operations in 2009, 2008 or 2007.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of
our foreign currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If
the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized as a charge or credit to earnings. If the derivative is designated as
a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated
other comprehensive income or losses and are recognized in the consolidated statements of operations when the
hedged item affects earnings. We periodically evaluate hedge effectiveness and ineffective portions of changes in
the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not
designated as hedges are marked-to-market at the end of each accounting period with the results included in
earnings.
Accounts Receivable Sales: At March 31, 2009, we had a $1.0 billion revolving receivables sales facility.
Through this facility, McKesson Corporation sells certain U.S. Pharmaceutical trade accounts receivable on a non-
recourse basis to a wholly-owned and consolidated subsidiary which then sells these receivables to a special purpose
entity (“SPE”), which is a wholly-owned, bankruptcy-remote subsidiary of McKesson Corporation that is
consolidated in our financial statements. This SPE then sells undivided interests in the receivables to third-party
purchaser groups, each of which includes commercial paper conduits (“Conduits”), which are special purpose
corporations administered by financial institutions.
Sales of undivided interests in the receivables by the SPE to the Conduits are accounted for as a sale in
accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,” because we have relinquished control of the receivables. Accordingly, accounts receivable sold
under these transactions are excluded from receivables, net in the accompanying consolidated balance sheets.
Receivables sold and receivables retained by the Company are carried at face value, which due to the short-term
nature of our accounts receivable and terms of the facility, approximates fair value. McKesson receives cash in the
amount of the face value for the receivables sold. No gain or loss is recorded upon sale as fee charges from the
Conduits are based upon a floating yield rate and the period the undivided interests remain outstanding. Fee charges
from the Conduits are accrued at the end of each month and are recorded in administrative expenses in the
consolidated statements of operations. Should we default under the accounts receivable sales facility, the Conduits
are entitled to receive only collections on receivables owned by the SPE.