McKesson 2010 Annual Report Download - page 66

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
60
Revenue Recognition: Revenues for our Distribution Solutions segment are recognized when product is
delivered and title passes to the customer or when services have been rendered and there are no further obligations to
customers.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy
generally allows customers to return products only if they can be resold for value or returned to suppliers for full
credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from
customers were approximately $1,233 million, $1,216 million and $1,093 million in 2010, 2009 and 2008. Taxes
collected from customers and remitted to governmental authorities are presented on a net basis; that is, they are
excluded from revenues.
The revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals to a limited
number of large customers who warehouse their own product. We order bulk product from the manufacturer,
receive and process the product through our central distribution facility and deliver the bulk product (generally in the
same form as received from the manufacturer) directly to our customers’ warehouses. Sales to customers’
warehouses amounted to $21.4 billion in 2010, $25.8 billion in 2009 and $27.7 billion in 2008. We also record
revenues for direct store deliveries from most of these same customers. Direct store deliveries are shipments from
the manufacturer to our customers of a limited category of products that require special handling. We assume the
primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and
possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of loss
for collection from customers as well as delivery or return of the product, are responsible for fulfillment and other
customer service requirements, or the transactions have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a
combination of various products and services. Revenue from a multiple element arrangement is allocated to the
separate elements based on estimates of fair value and recognized in accordance with the revenue recognition
criteria applicable to each element. If fair value cannot be established for any undelivered element, all of the
arrangement’s revenue is deferred until delivery of the last element has occurred and services have been performed
or until fair value can objectively be determined for any remaining undelivered elements.
Revenues for our Technology Solutions segment are generated primarily by licensing software and software
systems (consisting of software, hardware and maintenance support), and providing outsourcing and professional
services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual
software arrangements are recognized at the time of delivery or under the percentage-of-completion method based
on the terms and conditions in the contract. Contracts accounted for under the percentage-of-completion method are
generally measured based on the ratio of labor costs incurred to date to total estimated labor costs to be incurred.
Changes in estimates to complete and revisions in overall profit estimates on these contracts are charged to earnings
in the period in which they are determined. We accrue for contract losses if and when the current estimate of total
contract costs exceeds total contract revenue.
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 method. Maintenance and support agreements are
marketed under annual or multi-year agreements and are recognized ratably over the period covered by the
agreements. Subscription, content and transaction processing fees are generally marketed under annual and multi-
year agreements and are recognized ratably over the contracted terms beginning on the service start date for fixed
fee arrangements and recognized as transactions are performed beginning on the service start date for per-transaction
fee arrangements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing
service revenues are recognized as the service is performed.