McKesson 2010 Annual Report Download - page 46

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
40
Business Combinations: We account for acquired businesses using the acquisition 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.
Prior to April 1, 2009, amounts allocated to acquired in-process research and development (“IPR&D”) were
expensed at the date of acquisition. Effective April 1, 2009, acquired IPR&D is measured at fair value using market
participant assumptions and initially capitalized as an indefinite-lived intangible asset. Capitalized IPR&D is
amortized over its estimated useful life once the asset is put in service. Capitalized IPR&D is reviewed for
impairment whenever events or changes in circumstances indicate that we will not be able to recover the asset’s
carrying amount. 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. Effective April 1, 2009, contingent consideration is
measured at its acquisition-date fair value. Contingent consideration classified as a liability is remeasured at fair
value at the end of each subsequent reporting period and changes to the fair value are included in the current
period’s earnings. Contingent consideration classified as equity is not remeasured subsequently.
Several methods may 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 for each asset or liability acquired. 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, “Business
Combinations and Investments,” to the consolidated financial statements appearing in this Annual Report on Form
10-K for additional information regarding our acquisitions.
Goodwill: As a result of acquiring businesses, we have $3,568 million and $3,528 million of goodwill at
March 31, 2010 and 2009. We maintain goodwill assets on our books unless the assets are considered 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 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.