McKesson 2012 Annual Report Download - page 67

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
63
Supplier Incentives: Fees for service and other incentives received from suppliers, relating to the purchase or
distribution of inventory, are generally reported as a reduction to cost of goods sold. 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 suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve
estimates are established based on judgment after considering the status of current outstanding claims, historical
experience with the suppliers, the specific incentive programs and any other pertinent information available. We
evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate
based on changes in factual circumstances. As of March 31, 2012 and 2011, supplier reserves were $115 million
and $102 million. The ultimate outcome of any outstanding claim may be different than our estimate. All of the
supplier reserves at March 31, 2012 and 2011 pertain to our Distribution Solutions segment.
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 2012, 2011 or 2010.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of
foreign currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a
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 change included in
earnings.
Share-Based Compensation: We account for all share-based compensation transactions using a fair-value based
measurement method. The share-based compensation expense, for the portion of the awards that is ultimately
expected to vest, is recognized 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. The compensation expense recognized has been classified in the consolidated
statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation
paid to our employees.