McKesson 2011 Annual Report Download - page 66

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
60
Capitalized Software Held for Sale: Development costs for software held for sale, which primarily pertain to
our Technology Solutions segment, are capitalized once a project has reached the point of technological feasibility.
Completed projects are amortized after reaching the point of general availability using the straight-line method
based on an estimated useful life of approximately three years. At each balance sheet date, or earlier if an indicator
of an impairment exists, we evaluate the recoverability of unamortized capitalized software costs based on estimated
future undiscounted revenues net of estimated related costs over the remaining amortization period. At the end of
the second quarter of 2010, our Horizon Enterprise Revenue Management TM
Additional information regarding our capitalized software expenditures is as follows:
(“HzERM”) software product became
generally available. In October 2010, we decreased our estimated revenues over the next 24 months for our HzERM
software product and as a result, concluded that the estimated future revenues, net of estimated related costs, were
insufficient to recover its carrying value. Accordingly, we recorded a $72 million non-cash impairment charge in
the second quarter of 2011 within our Technology Solutions segment’s cost of sales to reduce the carrying value of
the software product to its net realizable value.
Years Ended March 31,
(In millions)
2011
2010
2009
Amounts capitalized
$
64
$
75
$
74
Amortization expense
75
67
50
Impairment charge
72
—
—
Third-party royalty fees paid
72
63
50
Goodwill: Goodwill is tested for impairment on an annual basis or more frequently if indicators for potential
impairment exist. 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.
Impairment tests require that we first compare the carrying value of our reporting units to the estimated fair
value of the reporting units. If the carrying value exceeds the fair value, a second step is performed to calculate the
amount of impairment, which would be recorded as a charge in the consolidated statements of operations. The fair
value of a reporting unit is based upon a number of considerations including projections of revenues, earnings and
discounted cash flows and determination of market value multiples for similar businesses or guideline companies
whose securities are actively traded in public markets. The discount rate used for cash flows reflects capital market
conditions and the specific risks associated with the business. In addition, we compare the aggregate of the
reporting units’ fair value to the Company’s market capitalization as a further corroboration of the fair value. The
testing requires a complex series of assumptions and judgment by management in projecting future operating results,
selecting guideline companies for comparisons and assessing risks. The use of alternative assumptions and
estimates could affect the fair values and change the impairment determinations. There were no goodwill
impairments during 2011, 2010, or 2009.
Intangible assets: Currently all of our intangible assets are subject to amortization and are generally amortized
on a straight line basis over their estimated useful lives, ranging from one to twenty years. We review identifiable
amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of
identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition.
Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value.
There were no material impairments of intangible assets during 2011, 2010 or 2009.