McKesson 2013 Annual Report Download - page 46

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
The LIFO method was used to value approximately 80% and 88% of our inventories at March 31, 2013 and 2012. At
March 31, 2013 and 2012, our LIFO reserves, net of LCM adjustments, were $120 million and $107 million. Our LIFO
valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2013, 2012 and 2011, we recognized net
LIFO expense of $13 million, $11 million and $3 million within our consolidated statements of operations, which related to
our non-pharmaceutical products. A LIFO expense is recognized when the net effect of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts towards
generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO
credit is recognized when the net effect of price declines and shifts towards generic pharmaceuticals exceeds the impact of
price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of replacing
inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Primarily due to historical
net deflation in our pharmaceutical inventories, pharmaceutical inventories at LIFO were $60 million and $76 million higher
than market as of March 31, 2013 and 2012. As a result, we recorded a LCM credit of $16 million and $80 million in 2013
and 2012 within our consolidated statements of operations to adjust our LIFO inventories to market. During 2013 and 2012,
we began to experience a modest net inflationary trend in our pharmaceuticals indices, as price increases on branded
pharmaceuticals exceeded the impact of price declines and shifts toward generic pharmaceuticals, including the effect of
branded pharmaceutical products that have lost market exclusivity. In 2014, we expect this trend to continue. As a result, we
may recognize an increase in net LIFO expense in 2014.
In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of
slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in
market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical
products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write
down inventories, which are considered excess and obsolete, as a result of these reviews. These factors could make our
estimates of inventory valuation differ from actual results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires
that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess
of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related
expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For
intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash
flows for each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects
the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the
income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to
measure the risks inherent in the future cash flows and the assessment of the asset's life cycle and the competitive trends
impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the
useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives
and certain assets may even be considered to have indefinite useful lives. Refer to Financial Note 2, “Business
Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional
information regarding our acquisitions.
Goodwill and Intangible Assets: As a result of acquiring businesses, we have $6,405 million and $5,032 million of
goodwill at March 31, 2013 and 2012 and $2,270 million and $1,750 million of intangible assets, net at March 31, 2013 and
2012. We maintain goodwill assets on our books unless the assets are considered to be impaired. We perform an impairment
test on goodwill balances annually in the fourth quarter or more frequently if indicators for potential impairment exist.
Indicators that are considered include significant changes in performance relative to expected operating results, significant
changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company's
stock price and/or market capitalization for a sustained period of time.