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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
96
19. Share-Based Payment
We provide share-based compensation for our employees, officers and non-employee directors, including stock
options, an employee stock purchase plan, restricted stock (“RS”), restricted stock units (“RSUs”) and performance-
based restricted stock units (“PeRSUs”) (collectively, “share-based awards.”) On April 1, 2006, we adopted SFAS
No. 123(R), as discussed in Financial Note 1, “Significant Accounting Policies.” Accordingly, we began to
recognize compensation expense for the fair value of share-based awards granted, modified, repurchased or
cancelled from April 1, 2006 forward. Compensation expense is recognized for the portion of the awards that is
ultimately expected to vest. For the unvested portion of awards issued prior to and outstanding as of April 1, 2006,
the expense is recognized at the grant-date fair value as the remaining requisite service is rendered. We recognize
compensation expense on a straight-line basis over the requisite service period for those awards with graded vesting
and service conditions. For the awards with performance conditions, we recognize the expense on an accelerated
basis.
We adopted SFAS No. 123(R) using the modified prospective method and therefore have not restated prior
period financial statements. Prior to adopting SFAS No. 123(R), we accounted for our employee share-based
compensation plans using the intrinsic value method under APB Opinion No. 25. This standard generally did not
require recognition of compensation expense for the majority of our share-based awards except for RS and RSUs.
In addition, as required under APB Opinion No. 25, we previously recognized forfeitures as they occurred.
We develop an estimate of the number of share-based awards which will ultimately vest primarily based on
historical experience. The estimated forfeiture rate established upon grant is re-assessed throughout the requisite
service period. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award
vests. The actual forfeitures in the future reporting periods could be materially higher or lower than our current
estimates. The weighted-average forfeiture rate is approximately 6% at March 31, 2008. As a result, the future
share-based compensation expense may differ from the Company’ s historical amounts.
The compensation expense recognized under SFAS No. 123(R) has been classified in the statements of
operations or capitalized on the balance sheets in the same manner as cash compensation paid to our employees.
There was no material share-based compensation expense capitalized as part of the balance sheets at March 31, 2008
and 2007. In addition, SFAS No. 123(R) requires that the benefits of realized tax deductions in excess of previously
recognized tax benefits on compensation expense be reported as a financing cash flow rather than an operating cash
flow, as was done under APB Opinion No. 25.
In conjunction with the adoption of SFAS No. 123(R), in 2007, we elected the “short-cut” method for
calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of
share-based compensation. Under this method, a simplified calculation is applied in establishing the beginning
APIC pool balance as well as determining the future impact on the APIC pool and our consolidated statements of
cash flows relating to the tax effects of share-based compensation. The election of this accounting policy did not
have a material impact on our consolidated financial statements.