McKesson 2011 Annual Report Download - page 68

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
62
Software systems are marketed under information systems agreements as well as service agreements. Perpetual
software arrangements are recognized at the time of delivery or under the percentage-of-completion method based
on the terms and conditions in the contract. Contracts accounted for under the percentage-of-completion method are
generally measured based on the ratio of labor costs incurred to date to total estimated labor costs to be incurred.
Changes in estimates to complete and revisions in overall profit estimates on these contracts are charged to earnings
in the period in which they are determined. We accrue for contract losses if and when the current estimate of total
contract costs exceeds total contract revenue.
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software license
agreements is recognized ratably over the term of the agreement. Software implementation fees are recognized as
the work is performed or under the percentage-of-completion method. Maintenance and support agreements are
marketed under annual or multi-year agreements and are recognized ratably over the period covered by the
agreements. Subscription, content and transaction processing fees are generally marketed under annual and multi-
year agreements and are recognized ratably over the contracted terms beginning on the service start date for fixed
fee arrangements and recognized as transactions are performed beginning on the service start date for per-transaction
fee arrangements. Remote processing service fees are recognized monthly as the service is performed. Outsourcing
service revenues are recognized as the service is performed.
We also offer certain products on an application service provider basis, making our software functionality
available on a remote hosting basis from our data centers. The data centers provide system and administrative
support, as well as hosting services. Revenue on products sold on an application service provider basis is
recognized on a monthly basis over the term of the contract beginning on the service start date of products hosted.
This segment also engages in multiple-element arrangements, which may contain any combination of software,
hardware, implementation or consulting services, or maintenance services. When some elements are delivered prior
to others in an arrangement and vendor-specific objective evidence of fair value (“VSOE”) exists for the undelivered
elements, revenue for the delivered elements is recognized upon delivery of such items. The segment establishes
VSOE for hardware and implementation and consulting services based on the price charged when sold separately,
and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is
recognized under the residual method only when fair value has been established for all of the undelivered elements
in an arrangement. If fair value cannot be established for any undelivered element, all of the arrangement’s revenue
is deferred until the delivery of the last element or until the fair value of the undelivered element is determinable.
Our Technology Solutions segment also includes revenues from disease management programs provided to
various states’ Medicaid programs. These service contracts include provisions for achieving certain cost-savings
and clinical targets. If the targets are not met for certain of these contracts, a portion, or all, of the revenue must be
refunded to the customer. We recognize revenue during the term of the contract by assessing actual performance
against contractual targets and then determining the amount the customer would be legally obligated to pay if the
contract terminated as of the measurement date. These assessments include estimates of medical claims and other
data in accordance with the contract methodology. Because complete data is unavailable until six to nine months
after the measurement period, there is generally a significant time delay between recording the accrual and the final
settlement of the contract. If data is insufficient to assess performance or we have not met the targets, we defer
recognition of the revenue. As of March 31, 2011 and 2010, we had deferred $25 million and $26 million related to
these types of contracts, which was included in deferred revenue in the consolidated balance sheets. We generally
have been successful in achieving performance targets under these agreements.