McKesson 2005 Annual Report Download - page 40

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We base the discount rate assumption on current investment yields on high quality fixed-income investments. A lower discount rate
increases the present value of benefit obligations and increases pension expense. Long-term return on plan assets is determined based on the
historical experience of our portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income
indices, as well as target asset allocation. Our target asset allocation is determined based on the risk tolerance characteristics of the plan and, at
times, may be adjusted to achieve our overall investment objective. Our medical trend assumptions are developed based on historical cost data,
the near-term outlook and an assessment of likely long-term trend. Actual results in any given year will often differ from actuarial assumptions
because of economic and other factors. The effects of actual results differing from our assumptions are included in unamortized net gain and
loss, which is amortized over future periods.
Sensitivity to changes in the major assumptions for our U.S. pension and postretirement plans are as follows:
Further information on our pension and postretirement benefit plans is provided in Financial Note 15, “Pension Benefits,” and Note 16,
“Other Postretirement Benefits”, to the accompanying consolidated financial statements.
Income Taxes: As discussed in Financial Note 17, “Income Taxes”, we recorded an income tax benefit of $390 million relating to the
Securities Litigation in the third quarter of 2005. We believe the proposed settlement of the consolidated securities class action and the ultimate
resolution of the lawsuits brought independently by other shareholders will be tax deductible. However, the tax attributes of the litigation are
complex and the Company expects challenges from the taxing authorities, and accordingly such deductions will not be finalized until all the
lawsuits are concluded and an examination of the Company’s tax returns is completed. Accordingly, we have provided a reserve of $85 million
for future resolution of these uncertain tax matters. While we believe the tax reserve is adequate, the ultimate resolution of these tax matters
may exceed or be below the reserve.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the
estimated worldwide provision for income taxes. During the ordinary course of business, there are many transactions and calculations for
which the ultimate tax determination is uncertain. We recognize liabilities for anticipated tax audit issues based on estimates of whether
additional amounts will be due. As of March 31, 2005, approximately $242 million has been accrued for such matters. To the extent that the
final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax
provision in the period in which such determination is made.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was signed into law. The AJCA provides a new deduction for
certain qualified domestic production activities. As discussed in Financial Note 1, “New Accounting Pronouncements”, to the accompanying
consolidated financial statements, we are currently evaluating whether a tax deduction on qualified production activities provided by the AJCA
may be available to us and the impact of FSP No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” on our consolidated financial
statements. We will recognize the tax benefit of such deductions, if any, beginning in 2006.
In addition, the AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan
for reinvestment in the United States, provided certain criteria are met. We are also evaluating the effects of the repatriation provision and the
impact of FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004” on our consolidated financial statements. We expect to complete this evaluation before the end of 2006. The range
of possible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500 million. The
related potential range of income tax is between zero and $27.7 million.
40
Pension Plans Other Postretirement
Percentage Projected Projected
Point Benefit Benefit
(In millions) Change Obligation Expense Obligation Expense
Long-term return on assets +/- 1.0 p
t
$
—
$3.2/(3.2) $
—
$
—
Discount rate +/- 1.0 p
t
(35.6)/39.4 (3.2)/ 3.2 (14.8)/15.9 (4.3)/4.5