McKesson 2006 Annual Report Download - page 67

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Share-based Payment: We account for our employee stock-based compensation plans using the intrinsic value method under Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” We apply the disclosure provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure.” Had compensation cost for our employee stock-based compensation been recognized based on the fair value method, consistent
with the provisions of SFAS No. 123, net income (loss) and earnings (loss) per share would have been as follows:
In 2004, we accelerated vesting of substantially all unvested stock options outstanding whose exercise price was equal to or greater than
$28.20, which was substantially all of the total unvested stock options then outstanding. During the second quarter of 2005, we granted
6 million stock options, substantially all of which vested on or before March 31, 2005. Similarly, during the second quarter of 2006, we granted
5 million stock options, substantially all of which vested on or before March 31, 2006. Prior to 2004, stock options typically vested over a four
year period. These actions were approved by the Compensation Committee of the Company’s Board of Directors for employee retention
purposes and in anticipation of the requirements of SFAS No. 123(R), “Share-Based Payment.” As further discussed in this financial note,
under the caption “New Accounting Pronouncements”, when adopted by us in 2007, SFAS No. 123(R) requires us to recognize the fair value
of the equity awards granted to employees as an expense. In addition, this standard requires that the fair value of the unvested equity awards
outstanding as of April 1, 2006 be recognized at the grant-date fair value as the remaining requisite service is rendered. The pro forma
disclosure under SFAS No. 123 will be prospectively eliminated. Accordingly, SFAS No. 123 compensation expense for the stock option
grants that received accelerated vesting in 2004, as well as the related compensation expense associated with the 2006 and 2005 fully vested
stock options, will not be recognized in our earnings after SFAS No. 123(R) is adopted.
New Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Staff Position
(“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. FAS 109-
1 was effective immediately and clarified 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. This provision of
the AJCA did not have a material impact on our consolidated financial statements.
In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004.” 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, providing certain criteria are met. FSP No. FAS 109-2
was effective immediately and provided accounting and disclosure guidance for the repatriation provision. FSP No. FAS 109-2 allowed
companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the “indefinite reversal
criteria” under APB Opinion No. 23, “Accounting for Income Taxes — Special Areas,” and requires explanatory disclosures from companies
that have not yet completed the evaluation. In 2006, we elected not to repatriate our foreign earnings and as a result, this provision of the AJCA
did not have a material impact on our consolidated financial statements.
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Years Ended March 31,
(In millions, exce
p
t
p
er share amounts) 2006 2005 2004
Net income (loss), as reported $751 $ (157) $ 647
Compensation expense, net of tax:
APB Opinion No. 25 expense included in net income 9 9 5
SFAS No. 123 expense (65) (60) (210)
Pro forma net income (loss) $695 $ (208) $ 442
Earnings (loss) per common share:
Diluted — as reporte
d
$ 2.38 $ (0.53) $ 2.19
Diluted — pro forma 2.20 (0.71) 1.50
Basic — as reporte
d
2.46 (0.53)2.23
Basic — pro forma 2.27 (0.71) 1.52