McKesson 2005 Annual Report Download - page 61

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 in accordance with Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,”
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.
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software license agreements is recognized ratably
over the term of the agreement. Software implementation fees are recognized as the work is performed or under the percentage-of-completion
contract method. Maintenance and support agreements are marketed under annual or multiyear agreements and are recognized ratably over the
period covered by the agreements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing service
revenues are recognized as the service is performed.
We also offer our products on an application service provider (“ASP”) basis, making available our software functionality on a remote
hosting basis from our data centers. The data centers provide system and administrative support as well as hosting services. Revenue on
products sold on an ASP basis is recognized on a monthly basis over the term of the contract starting when the hosting services begin.
This segment also engages in multiple-element arrangements, which may contain any combination of software, hardware, implementation
or consulting services, or maintenance services. When some elements are delivered prior to others in an arrangement and vendor-specific
objective evidence of fair value (“VSOE”) exists for the undelivered elements, revenue for the delivered elements is recognized upon delivery
of such items. The segment establishes VSOE for hardware and implementation and consulting services based on the price charged when sold
separately, and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is recognized under
the residual method only when fair value has been established for all of the undelivered elements in an arrangement. If fair value cannot be
established for any undelivered element, all of the arrangement’s revenue is deferred until the delivery of the last element or until the fair value
of the undelivered element is determinable.
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 tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Foreign Currency Translation. Assets and liabilities of 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 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 2005, 2004 or 2003.
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 balance sheet 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 losses and are recognized in the consolidated statement of earnings when the hedged item affects earnings. 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.
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