McKesson 2009 Annual Report Download - page 48

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
42
Acquisitions: We account for acquired businesses using the purchase method of accounting which requires that
the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any
excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. The
judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact our results of operations. The valuations are based on
information available near the acquisition date and are based on expectations and assumptions that have been
deemed reasonable by management.
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed.
For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected
future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate
that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and
assumptions inherent in the income method or other methods include the amount and timing of projected future cash
flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the
asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal,
regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as
different types of intangible assets will have different useful lives and certain assets may even be considered to have
indefinite useful lives. Refer to Financial Note 2, “Acquisitions and Investment,” to the accompanying consolidated
financial statements for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,528 million and $3,345 million of goodwill at March
31, 2009 and 2008. We maintain goodwill assets on our books unless the assets are deemed to be impaired. We
perform an impairment test on goodwill balances annually in the fourth quarter or more frequently if indicators for
potential impairment exist. Indicators that are considered include, but are not limited to, significant changes in
performance relative to expected operating results, significant changes in the use of the assets, significant negative
industry or economic trends or a significant decline in the Company’s stock price and/or market capitalization for a
sustained period of time.
Impairment testing is conducted at the reporting unit level, which is generally defined as a component -- one
level below our Distribution Solutions and Technology Solutions operating segments, for which discrete financial
information is available and segment management regularly reviews the operating results of that unit. Components
that have essentially similar operations, products, services and customers are aggregated as a single reporting unit.
Management judgment is involved in determining which components may be combined and changes in these
combinations could affect the outcome of the testing.
Impairment tests require that we first compare the carrying value of net assets to the estimated fair value of net
assets for the reporting units. If carrying value exceeds fair value, a second step would be performed to calculate the
amount of impairment, which would be recorded as a charge in the consolidated statements of operations. Fair
values can be determined using market, income or cost approaches. To estimate the fair value of a business using
the market approach, we compare the business to similar businesses or guideline companies whose securities are
actively traded in public markets or the income approach, where we use a discounted cash flow model in which cash
flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their
present value using an appropriate rate of return.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process
using the market approach include the selection of appropriate guideline companies, the determination of market
value multiples for the guideline companies, the subsequent selection of an appropriate market value multiple for the
business based on a comparison of the business to the guideline companies, the determination of applicable
premiums and discounts based on any differences in marketability between the business and the guideline
companies, projected earnings and revenues for the business and when considering the income approach, include the
required rate of return used in the discounted cash flow method, which reflects capital market conditions and the
specific risks associated with the business. Other estimates inherent in the income approach include long-term
growth rates and cash flow forecasts for the business.