McKesson 2011 Annual Report Download - page 50

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
44
We estimate the grant-date fair value of employee stock options using the Black-Scholes options-pricing model.
We believe that it is difficult to accurately measure the value of an employee stock option. Our estimates of
employee stock option values rely on estimates of factors we input into the model. The key factors involve an
estimate of future uncertain events. The key factors influencing the estimation process, among others, are the
expected life of the option, the expected stock price volatility factor and the expected dividend yield. In determining
the expected life of the option, we primarily use historical experience as our best estimate of future exercise patterns.
We use a combination of historical and implied market volatility to determine the expected stock price volatility
factor. We believe that this market-based input provides a better estimate of our future stock price movements and
is consistent with employee stock option valuation considerations. Once the fair values of employee stock options
are determined, current accounting practices do not permit them to be changed, even if the estimates used are
different from actual experience.
In addition, we develop an estimate of the number of share-based awards, which will ultimately vest primarily
based on historical experience. Changes in the estimated forfeiture rate can have a material effect on share-based
compensation expense. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is
made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the
financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is
made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. We re-assess the estimated forfeiture rate established upon grant periodically throughout the
requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the
forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. The actual forfeitures in future
reporting periods could be materially higher or lower than our current estimates.
Our assessments of estimated share-based compensation charges are affected by our stock price as well as
assumptions regarding a number of complex and subjective variables and the related tax impact. These variables
include the volatility of our stock price, employee stock option exercise behavior, timing, number and types of
annual share-based awards and the attainment of performance goals. As a result, the future share-based
compensation expense may differ from the Company’s historical amounts.
Loss Contingencies: We are subject to various claims, other pending and potential legal actions for damages,
investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of
our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of
our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is
often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable
based on the information available and the potential effect of future events and decisions by third parties that will
determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved
over many years, during which time relevant developments and new information must be reevaluated at least
quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range
of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is
provided.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably
possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly
to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or
range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of
potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties,
such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is
possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations, together with our existing sources of liquidity from
our accounts receivable sales facility and short-term borrowings under the revolving credit facility and commercial
paper, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash
requirements. In addition, from time-to-time, we may access the long-term debt capital markets to discharge our
other liabilities.