McKesson 2008 Annual Report Download - page 74

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Our Technology Solutions segment also includes revenues from disease management programs provided to
various states’ Medicaid programs. These service contracts include provisions for achieving certain cost-savings
and clinical targets. If the targets are not met, a portion, or all, of the revenue must be refunded to the customer. We
recognize revenue during the term of the contract by assessing our actual performance compared to targets and then
determining the amount the customer would be legally obligated to pay if the contract terminated at that point.
These assessments include estimates of medical claims and other data, which could require future adjustment
because there is generally a significant time delay between recording the accrual and the final settlement of the
contract. If data is insufficient to assess performance or we have not met the targets, we defer recognition of the
revenue. As of March 31, 2008 and 2007, we had deferred $81 million and $104 million related to these contracts,
which was included in deferred revenue in the consolidated balance sheets. We generally have been successful in
achieving performance goals under these contracts.
Supplier Incentives: We generally account for fees for service and other incentives received from our suppliers,
relating to the purchase or distribution of inventory, as a reduction to cost of goods sold. We consider these fees to
represent product discounts, and as a result, the fees are recorded as a reduction of product cost and recognized
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. As of March 31, 2008 and 2007, supplier reserves were $82 million and
$100 million.
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 income or
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 2008, 2007 or 2006.
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 sheets 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 income or losses and are recognized in the consolidated statements of operations 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.