McKesson 2012 Annual Report Download - page 65

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Capitalized Software Held for Internal Use: We capitalize costs of software held for internal use during the
application development stage of a project and amortize those costs over the assets’ estimated useful lives ranging
from one to ten years. As of March 31, 2012 and 2011, capitalized software held for internal use was $445 million
and $446 million, net of accumulated amortization of $902 million and $778 million, and was included in other
assets in the consolidated balance sheets.
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic exposures as
well as those risks required to be insured by law or contract. It is our policy to retain a significant portion of certain
losses primarily related to workers’ compensation and comprehensive general, product and vehicle liability.
Provisions for losses expected under these programs are recorded based upon our estimate of the aggregate liability
for claims incurred as well as for claims incurred but not yet reported. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
Revenue Recognition: Revenues for our Distribution Solutions segment are recognized when product is
delivered and title passes to the customer or when services have been rendered and there are no further obligations to
the customer.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy
generally allows customers to return products only if they can be resold for value or returned to suppliers for full
credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from
customers were approximately $1.6 billion in 2012, $1.4 billion in 2011 and $1.2 billion in 2010. Taxes collected
from customers and remitted to governmental authorities are presented on a net basis; that is, they are excluded from
revenues.
The revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals to a limited
number of large customers who warehouse their own product. We order bulk product from the manufacturer,
receive and process the product through our central distribution facility and deliver the bulk product (generally in the
same form as received from the manufacturer) directly to our customers’ warehouses. Sales to customers’
warehouses amounted to $20.5 billion in 2012, $18.6 billion in 2011, and $21.4 billion in 2010. We also record
revenues for direct store deliveries from most of these same customers. Direct store deliveries are shipments from
the manufacturer to our customers of a limited category of products that require special handling. We assume the
primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and
possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of loss
for collection from customers as well as delivery or return of the product, are responsible for fulfillment and other
customer service requirements, or the transactions have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a
combination of various products and services. Revenue from a multiple element arrangement is allocated to the
separate elements based on estimates of fair value and recognized in accordance with the revenue recognition
criteria applicable to each element. If fair value cannot be established for any undelivered element, all of the
arrangement’s revenue is deferred until delivery of the last element has occurred and services have been performed
or until fair value can objectively be determined for any remaining undelivered elements. Effective April 1, 2011,
revenue from a multiple element arrangement is allocated to the separate elements, based on the best estimate of
selling prices if neither objective evidence nor third party evidence of selling prices exists for all new arrangements
or materially modified existing arrangements.
Revenues for our Technology Solutions segment are generated primarily by licensing software and software
systems (consisting of software, hardware and maintenance support), and providing outsourcing and professional
services. Revenue for this segment is recognized as follows: