McKesson 2011 Annual Report Download - page 69

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
63
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.
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve
estimates are established based on judgment after considering the status of current outstanding claims, historical
experience with the suppliers, the specific incentive programs and any other pertinent information available. We
evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate
based on changes in factual circumstances. As of March 31, 2011 and 2010, supplier reserves were $102 million
and $89 million. The ultimate outcome of any outstanding claim may be different than our estimate. All of the
supplier reserves at March 31, 2011 and 2010 pertain to our Distribution Solutions segment.
Income Taxes: We account for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are
recognized when it is more likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective
settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered
to be permanently reinvested.
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be their
functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at year-
end exchange rates and revenues and expenses are translated at average exchange rates during the year. Cumulative
currency translation adjustments are included in accumulated other comprehensive income or losses in the
stockholders’ equity section of the consolidated balance sheets. Realized gains and losses from currency exchange
transactions are recorded in operating expenses in the consolidated statements of operations and were not material to
our consolidated results of operations in 2011, 2010 or 2009.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of
foreign currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a
derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized as a charge or credit to earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated
other comprehensive income or losses and are recognized in the consolidated statements of operations when the
hedged item affects earnings. We periodically evaluate hedge effectiveness and ineffective portions of changes in
the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not
designated as hedges are marked-to-market at the end of each accounting period with the change included in
earnings. The volume of activity related to derivative financial instruments was not material for 2011, 2010 and
2009.
Accounts Receivable Sales: At March 31, 2011, we had a $1.35 billion accounts receivable sales facility (“the
Facility”). Through this Facility, McKesson Corporation, the parent company, transfers certain U.S. pharmaceutical
trade accounts receivable on a non-recourse basis to a wholly-owned and consolidated subsidiary, which then sells
these receivables to a special purpose entity (“SPE”), which is a wholly-owned, bankruptcy-remote subsidiary of
McKesson Corporation that is consolidated in our financial statements. This SPE then sells undivided interests in
the pool of accounts receivable to third-party purchaser groups, (the “Purchaser Groups”), which include financial
institutions and commercial paper conduits.