McKesson 2010 Annual Report Download - page 67

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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We also offer certain products on an application service provider basis, making our software functionality
available 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 application service provider basis is
recognized on a monthly basis over the term of the contract beginning on the service start date of products hosted.
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 for certain of these contracts, a portion, or all, of the revenue must be
refunded to the customer. We recognize revenue during the term of the contract by assessing actual performance
against contractual targets and then determining the amount the customer would be legally obligated to pay if the
contract terminated as of the measurement date. These assessments include estimates of medical claims and other
data in accordance with the contract methodology. Because complete data is unavailable until six to nine months
after the measurement period, 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, 2010 and 2009, we had deferred $26 million and $25 million related to
these types of contracts, which was included in deferred revenue in the consolidated balance sheets. We generally
have been successful in achieving performance targets under these agreements.
Supplier Incentives: Fees for service and other incentives received from suppliers, relating to the purchase or
distribution of inventory, are generally reported 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 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 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. We evaluate the amounts due from 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, 2010 and 2009, supplier reserves were $89 million and $113 million.
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 the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are
recognized when it is more likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective
settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered
to be permanently reinvested.