McKesson 2011 Annual Report Download - page 46

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
40
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters
that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could
have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period
to period, could have a material impact on our financial condition or results from operations. Below are the
estimates that we believe are critical to the understanding of our operating results and financial condition. Other
accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated
financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such
estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to
customers who purchase our products and services. Other customer financing primarily relates to guarantees
provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to
certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the
receivables for which we do not expect full collection based on historical collection rates and specific knowledge
regarding the current creditworthiness of our customers and record an allowance in our consolidated financial
statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific reserves,
the Company reviews accounts receivable aging, industry trends, customer financial strength, credit standing,
historical write-off trends and payment history to assess the probability of collection. If the frequency and severity
of customer defaults due to our customers’ financial condition or general economic conditions change, our
allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding
receivables and other customer financing and adjust allowances for accounts where collection may be in doubt.
During 2011, sales to our ten largest customers accounted for approximately 51% of our total consolidated revenues.
Sales to our two largest customers, CVS Caremark Corporation (“CVS”) and Rite Aid Corporation (“Rite Aid”),
accounted for approximately 14% and 11% of our total consolidated revenues. At March 31, 2011, accounts
receivable from our ten largest customers were approximately 43% of total accounts receivable. Accounts
receivable from CVS, Wal-Mart Stores, Inc. (“Walmart”) and Rite Aid were approximately 13%, 10% and 9% of
total accounts receivable. As a result, our sales and credit concentration is significant. A default in payments, a
material reduction in purchases from these, or any other large customer or the loss of a large customer could have a
material adverse impact on our financial condition, results of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and economic, business and market
trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We
believe the reserves maintained and expenses recorded in 2011 are appropriate and consistent with historical
methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead
to a significant increase in the foreseeable future in our allowance for doubtful accounts as a percentage of net
revenue.
At March 31, 2011, trade and notes receivables were $8,108 million prior to allowances of $124 million. In
2011, 2010 and 2009 our provision for bad debts was $18 million, $17 million and $29 million. At March 31, 2011
and 2010, the allowance as a percentage of trade and notes receivables was 1.5% and 1.8%. An increase or decrease
of a hypothetical 0.1% in the 2011 allowance as a percentage of trade and notes receivables would result in an
increase or decrease in the provision for bad debts of approximately $8 million. The selected 0.1% hypothetical
change does not reflect what could be considered the best or worst case scenarios. Additional information
concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on
Form 10-K.