McKesson 2005 Annual Report Download - page 63

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
New Accounting Pronouncements. In January 2004, the FASB issued Financial Staff Position (“FSP”) No. FAS 106-1, “Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) allows employers that sponsor a postretirement plan providing a
qualifying or eligible prescription drug benefit to receive a federal subsidy. As permitted by FSP No. FAS 106-1, we elected to defer
recognizing the effects of the Act until authoritative guidance on accounting for the new subsidy was issued. In May 2004, the FASB issued
FSP No. FAS 106-2 which provides accounting guidance for this new subsidy. Management has concluded that the prescription drug benefits
provided to our Medicare-eligible retirees are actuarially equivalent based on the current interpretation of the guidance included in the Act and
accordingly, the Company adopted the provisions of FSP No. FAS 106-2 in the second quarter of 2005. The expected subsidy had the effect of
reducing the Company’s accumulated postretirement benefit obligation by approximately $19 million. This reduction is recognized as an
actuarial gain and is being amortized over three years. The expected subsidy also resulted in a nominal reduction in interest cost in 2005. As
required by this FSP, the Company recognized reductions in postretirement benefit expense of $7.4 million in 2005.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151
clarifies the accounting guidance included in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” related to
abnormal amounts of idle facility expense, freight, handling and spoilage costs. SFAS No. 151 is effective for inventory costs incurred during
2007. We are currently assessing the impact of SFAS No. 151 on our consolidated financial statements; however, we do not believe the
adoption of this standard will have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requires the recognition of cost resulting from
transactions in which the Company acquires goods and services by issuing its shares, share options, or other equity instruments. This standard
requires a fair value-based measurement method in accounting for share-based payment transactions. This standard replaces SFAS No. 123,
and supersedes APB Opinion No. 25. Accordingly, the use of the intrinsic value method as provided under APB Opinion No. 25 will be
eliminated. Based on guidance provided by the SEC in April 2005, SFAS No. 123(R) will become effective for us no later than 2007. The
Company intends to adopt this standard using the modified prospective method of transition. This transition method requires that compensation
cost be recognized for new awards granted and awards modified, repurchased or cancelled after April 1, 2006. This method also requires us to
recognize cost for the unvested portion of all awards issued prior to and outstanding as of April 1, 2006 at the grant-date fair value as the
remaining requisite service is rendered. In addition, under SFAS No. 123(R), we must determine the appropriate fair value model to be used for
valuing share-based payments and the amortization method for compensation cost. We are currently assessing the impact of SFAS No. 123(R)
on our consolidated financial statements, however, we do believe that this standard could have a material impact on our consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,”
which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets that do not culminate an
earning process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 requires that measurement be based
on the recorded amount of the assets relinquished for nonmonetary exchanges that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This
standard is effective for nonmonetary asset exchanges occurring in 2007. We do not believe the adoption of this standard will have a material
impact on our consolidated financial statements.
In December 2004, the FASB issued 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 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. FSP No. 109-1 is effective immediately and clarifies that such deduction should be accounted for as a special deduction, not as a tax
rate reduction, under SFAS No. 109, “Accounting for Income Taxes,” no earlier than the year in which the deduction is reported on the tax
return. We are currently evaluating whether such deduction may be available to us and its impact on our consolidated financial statements. We
will recognize the tax benefit of such deductions, if any, beginning in 2006.
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