McKesson 2009 Annual Report Download - page 78

Download and view the complete annual report

Please find page 78 of the 2009 McKesson annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
72
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software license
agreements is recognized ratably over the term of the agreement. Software implementation fees are recognized as
the work is performed or under the percentage-of-completion contract method. Maintenance and support
agreements are marketed under annual or multi-year agreements and are recognized ratably over the period covered
by the agreements. Remote processing service fees are recognized monthly as the service is performed.
Outsourcing service revenues are recognized as the service is performed.
We also offer our products on an application service provider (“ASP”) basis, making available our software
functionality on a remote hosting basis from our data centers. The data centers provide system and administrative
support, as well as hosting services. Revenue on products sold on an ASP basis is recognized on a monthly basis
over the term of the contract starting when the hosting services begin.
This segment also engages in multiple-element arrangements, which may contain any combination of software,
hardware, implementation or consulting services, or maintenance services. When some elements are delivered prior
to others in an arrangement and vendor-specific objective evidence of fair value (“VSOE”) exists for the undelivered
elements, revenue for the delivered elements is recognized upon delivery of such items. The segment establishes
VSOE for hardware and implementation and consulting services based on the price charged when sold separately,
and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is
recognized under the residual method only when fair value has been established for all of the undelivered elements
in an arrangement. If fair value cannot be established for any undelivered element, all of the arrangement’s revenue
is deferred until the delivery of the last element or until the fair value of the undelivered element is determinable.
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, 2009 and 2008, we had deferred $82 million and $81 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, 2009 and 2008, supplier reserves were $113 million and
$82 million.