McKesson 2006 Annual Report Download - page 66

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Manufacturer Incentives: We generally account for fees and other incentives received from our suppliers, relating to the purchase or
distribution of inventory, as a reduction to cost of goods sold, in accordance with EITF Issue No. 02-16, “Accounting by a Customer for
Certain Consideration Received from a Vendor.” We consider these fees to represent product discounts, and as a result, the fees are recorded as
a reduction of product cost and relieved through cost of goods sold upon the sale of the related inventory.
Supplier Reserves: We establish reserves against amounts due from our 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 our judgment after
carefully considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any
other pertinent information available to us. We evaluate the amounts due from our suppliers on a continual basis and adjust the reserve
estimates when appropriate based on changes in factual circumstances. The ultimate outcome of any outstanding claim may be different than
our estimate.
Shipping and Handling Costs: We include all costs to warehouse, pick, pack and deliver inventory to our customers in distribution
expenses.
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 2006, 2005 or 2004.
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.
Concentrations of Credit Risk: Trade receivables subject us to a concentration of credit risk with customers primarily in our Pharmaceutical
Solutions segment. A significant proportion of our revenue growth has been with a limited number of large customers and as a result, our credit
concentration has increased. Accordingly, any defaults in payment by or a reduction in purchases from these large customers could have a
significant negative impact on our financial condition, results of operations and liquidity. At March 31, 2006, revenues and accounts receivable
from our ten largest customers accounted for approximately 53% of consolidated revenues and approximately 48% of accounts receivable.
Fiscal 2006 revenues and March 31, 2006 receivables from our largest customer, Caremark RX, Inc., represented approximately 11% of total
consolidated revenues and 11% of accounts receivable. We have also provided financing arrangements to certain of our customers within our
Pharmaceutical Solutions segment, some of which are on a revolving basis. At March 31, 2006, these customer financing arrangements totaled
approximately $147 million.
Accounts Receivable Sales: At March 31, 2006, we had a $1.4 billion revolving receivables sales facility, which was fully available. The
program qualifies for sale treatment under Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting For Transfers and
Servicing Financial Assets and Extinguishments of Liabilities.” Sales are recorded at the estimated fair values of the receivables sold, reflecting
discounts for the time value of money based on U.S. commercial paper rates and estimated loss provisions. Discounts are recorded in
administrative expenses in the consolidated statements of operations.
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