McKesson 2013 Annual Report Download - page 66

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Goodwill: Goodwill is tested for impairment on an annual basis in the fourth quarter or more frequently if indicators for
potential impairment exist. Impairment testing is conducted at the reporting unit level, which is generally defined as a
component — one level below our Distribution Solutions and Technology Solutions operating segments, for which discrete
financial information is available and segment management regularly reviews the operating results of that unit. Components
that have essentially similar operations, products, services, customers and operating margins are aggregated as a single
reporting unit.
The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value.
This step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit
is lower than its estimated fair value, no further evaluation is necessary. If the carrying value of the reporting unit is higher
than its estimated fair value, the second step must be performed to measure the amount of impairment loss. Under the second
step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and
liabilities of the reporting unit, including any unrecognized intangible assets, from the fair value of the reporting unit
calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied
fair value of goodwill, an impairment charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the income approach.
Under the market approach, we estimate fair value by comparing the business to similar businesses or guideline companies
whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in
which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their
present value using an appropriate expected rate of return. The discount rate used for cash flows reflects capital market
conditions and the specific risks associated with the business. In addition, we compare the aggregate of the reporting units'
fair value to the Company's market capitalization as a further corroboration of the fair values. The testing requires a complex
series of assumptions and judgment by management in projecting future operating results, selecting guideline companies for
comparisons and assessing risks. The use of alternative assumptions and estimates could affect the fair values and change the
impairment determinations.
Intangible Assets: Currently all of our intangible assets are subject to amortization and are generally amortized on a
straight-line basis over their estimated useful lives, ranging from one to twenty years. We review intangible assets for
impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be
recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash
flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess
of the carrying value of the asset over its fair value.
Capitalized Software Held for Sale: Development costs for software held for sale, which primarily pertain to our
Technology Solutions segment, are capitalized once a project has reached the point of technological feasibility. Completed
projects are amortized after reaching the point of general availability using the straight-line method based on an estimated
useful life of approximately three years. At each balance sheet date, or earlier if an indicator of an impairment exists, we
evaluate the recoverability of unamortized capitalized software costs based on estimated future undiscounted revenues net of
estimated related costs over the remaining amortization period.
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 their estimated useful lives ranging from one to ten years. As of
March 31, 2013 and 2012, capitalized software held for internal use was $465 million and $445 million, net of accumulated
amortization of $1,011 million and $902 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.