McKesson 2010 Annual Report Download - page 68

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
62
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be their
functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at year-
end exchange rates and revenues and expenses are translated at average exchange rates during the year. Cumulative
currency translation adjustments are included in accumulated other comprehensive income or losses in the
stockholders’ equity section of the consolidated balance sheets. Realized gains and losses from currency exchange
transactions are recorded in operating expenses in the consolidated statements of operations and were not material to
our consolidated results of operations in 2010, 2009 or 2008.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of
foreign currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a
derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized as a charge or credit to earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated
other comprehensive income or losses and are recognized in the consolidated statements of operations when the
hedged item affects earnings. We periodically evaluate hedge effectiveness and ineffective portions of changes in
the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not
designated as hedges are marked-to-market at the end of each accounting period with the change included in
earnings.
Accounts Receivable Sales: At March 31, 2010, we had a $1.1 billion revolving receivables sales facility.
Through this facility, McKesson Corporation, the parent company, sells certain U.S. pharmaceutical trade accounts
receivable on a non-recourse basis to a wholly-owned and consolidated subsidiary, which then sells these
receivables to a special purpose entity (“SPE”), which is a wholly-owned, bankruptcy-remote subsidiary of
McKesson Corporation that is consolidated in our financial statements. This SPE then sells undivided interests in
the receivables to third-party purchaser groups, each of which includes commercial paper conduits (“Conduits”),
which are special purpose legal entities administered by financial institutions. Sales of undivided interests in the
receivables by the SPE to the Conduits are accounted for as a sale because we have relinquished control of the
receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables, net in
the accompanying consolidated balance sheets. Receivables sold and receivables retained by the Company are
carried at face value, which due to the short-term nature of its accounts receivable and terms of the facility,
approximates fair value. McKesson receives cash in the amount of the face value for the undivided interests in the
receivables sold. No gain or loss is recorded upon sale as fee charges from the Conduits are based upon a floating
yield rate and the period the undivided interests remain outstanding. Fee charges from the Conduits are accrued at
the end of each month and are recorded within administrative expenses in the consolidated statements of operations.
Should we default under the accounts receivable sales facility, the Conduits are entitled to receive only collections
on receivables owned by the SPE.
We continue servicing the receivables sold. No servicing asset is recorded at the time of sale because we do not
receive any servicing fees from third parties or other income related to servicing the receivables. We do not record
any servicing liability at the time of sale as the receivables collection period is relatively short and the costs of
servicing the receivables sold over the servicing period are insignificant. Servicing costs are recognized as incurred
over the servicing period. See Financial Note 12, “Long-Term Debt and Other Financing,” for additional
information.
Share-Based Compensation: We account for all share-based compensation transactions using a fair-value based
measurement method. The share-based compensation expense is recognized, for the portion of the awards that is
ultimately expected to vest, on a straight-line basis over the requisite service period for those awards with graded
vesting and service conditions. For awards with performance conditions and multiple vest dates, we recognize the
expense on a graded vesting basis. For awards with performance conditions and a single vest date, we recognize the
expense on a straight-line basis. The compensation expense recognized has been classified in the consolidated
statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation
paid to our employees.