McKesson 2011 Annual Report Download - page 48

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
42
Goodwill: As a result of acquiring businesses, we have $4,364 million and $3,568 million of goodwill at
March 31, 2011 and 2010. 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.
Impairment tests require that we first compare the carrying value of net assets to the estimated fair value of net
assets for the reporting units. If the carrying value exceeds the fair value, a second step would be performed to
calculate the amount of impairment, which would be recorded as a charge in our consolidated statements of
operations. Fair values can be determined using the market, income or cost approach. To estimate the fair value of
our reporting units, we use a combination of the market approach and the income approach. Under the market
approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose
securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model
in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are
discounted to their present value using an appropriate rate of return. In addition, we compare the aggregate fair
value of our reporting units to our market capitalization as further corroboration of the fair value.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process
using the market approach include the selection of appropriate guideline companies, the determination of market
value multiples for both the guideline companies and the reporting unit, the determination of applicable premiums
and discounts based on any differences in marketability between the business and the guideline companies and for
the income approach, the required rate of return used in the discounted cash flow method, which reflects capital
market conditions and the specific risks associated with the business. Other estimates inherent in both the market
and income approaches include long-term growth rates, projected revenues and earnings and cash flow forecasts for
the reporting units.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely
heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair
value may materially impact our results of operations. The valuations are based on information available as of the
impairment review date and are based on expectations and assumptions that have been deemed reasonable by
management. Any changes in key assumptions, including failure to meet business plans, a further deterioration in
the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates
and could potentially result in an impairment charge.
In 2011, 2010 and 2009, we concluded that there were no impairments of goodwill as the fair value of each
reporting unit exceeded its carrying value.
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 and
other incentives to represent product discounts and as a result, the amounts are recorded as a reduction of product
cost and are recognized through cost of goods sold upon the sale of the related inventory.