McKesson 2005 Annual Report Download - page 60

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Capitalized Software Held for Internal Use is amortized over estimated useful lives ranging from one to ten years and is included in other
assets in the consolidated balance sheets. As of March 31, 2005 and 2004, capitalized software held for internal use was $410.1 million and
$389.3 million, net of accumulated amortization of $243.0 million and $182.0 million.
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 Pharmaceutical Solutions and Medical-Surgical Solutions segments are recognized when all of the
following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, product delivery has occurred or
services have been rendered, there are no further obligations to customers, and collectability is probable. Revenues for performance-based
contracts, whereby revenue is dependent upon successful predefined outcomes, are recognized by measuring actual results against the expected
performance criteria.
Revenues are recorded net of sales returns, allowances and rebates. Sales returns are recorded when goods are returned to us and are
generally not accepted unless the inventory can be returned to the manufacturer for credit. Commencing in 2005, the Company changed its
accounting policy for customer sales returns to reflect an accrual for estimated customer returns at the time of sales to the customer in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition when Right of Return Exists.”
Previously, the Company accounted for customer sales returns as a reduction of sales and cost of goods sold at the time of the return. This
change in accounting policy did not have a material impact on our consolidated financial statements. Sales returns were approximately
$853 million, $766 million and $755 million in 2005, 2004 and 2003. Amounts recorded in revenue and cost of sales under our previous
accounting policy approximated what would have been recorded under SFAS No. 48.
Included in our Pharmaceutical Solutions segment revenues are large volume sales of pharmaceuticals to a limited number of large self-
warehousing customers whereby we order and subsequently deliver bulk products directly from the manufacturer to the customers’ warehouses
through a central distribution facility. In addition to these revenues, we also record revenues associated with direct store deliveries from most
of these same customers. Sales to customer warehouses amounted to $24.1 billion in 2005, $21.6 billion in 2004, and $14.8 billion in 2003.
These sales are recorded gross as we take title to and possession of the inventory and assume the risk of loss for collection, delivery or return.
We have significantly lower gross margin on these sales as we pass much of the efficiencies of this low cost-to-serve model on to the customer.
These sales do, however, contribute to our gross profit dollars in that the volume allows us to earn incremental product sourcing profits.
Revenues for our Provider Technologies 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:
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