McKesson 2013 Annual Report Download - page 48

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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, 2013 and 2012, supplier reserves were $164 million and $115 million. The ultimate outcome of any
outstanding claims may be different from our estimate. All of the supplier reserves at March 31, 2013 and 2012 pertain to our
Distribution Solutions segment. An increase or decrease in the supplier reserve as a hypothetical 0.1% of trade payables at
March 31, 2013 would result in an increase or decrease in the cost of sales of approximately $16 million in 2013. The selected
0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management's best assessment of
estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions.
Significant judgments and estimates are required in determining the consolidated income tax provision and in evaluating
income tax uncertainties. We review our tax positions at the end of each quarter and adjust the balances as new information
becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue
and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative
evidence including our past operating results, the existence of cumulative net operating losses in the most recent years and our
forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of
future federal, state and foreign pre-tax operating income, the reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future
taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. We had deferred
income tax assets (net of valuation allowances) of $1,247 million and $1,335 million at March 31, 2013 and 2012 and
deferred tax liabilities of $3,114 million and $2,495 million. Deferred tax assets primarily consist of timing differences on our
compensation and benefit related accruals and net loss and credit carryforwards. Deferred tax liabilities primarily consist of
basis differences for inventory valuation (including inventory valued at LIFO) and other assets. We established valuation
allowances of $118 million and $101 million for 2013 and 2012 against certain deferred tax assets, which primarily relate to
federal, state and foreign loss carryforwards for which the ultimate realization of future benefits is uncertain. Changes in tax
laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, including
those laws pertaining to LIFO, our cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax
regulations across multiple global jurisdictions where we conduct our operations. We recognize liabilities for tax and related
interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional
taxes and related interest will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss
carryforwards, as such tax loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash
tax payments due upon the eventual settlement with the tax authorities. These estimates may change due to changing facts and
circumstances; however, due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that
differs from our current estimate of tax liabilities and related interest. If our current estimate of tax and interest liabilities is
less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and
interest liabilities is more than the ultimate settlement, income tax benefits may be recognized.
If our assumptions and estimates described above were to change, an increase/decrease of 1% in our effective tax rate as
applied to income from continuing operations would have increased/decreased tax expense by approximately $19 million, or
$0.08 per diluted share, for 2013.
Share-Based Compensation: Our compensation programs include share-based compensation. We account for all share-
based compensation transactions using a fair-value based measurement method. The share-based compensation expense, for
the portion of the awards that is ultimately expected to vest, is recognized on a straight-line basis over the requisite service
period.