McKesson 2013 Annual Report Download - page 67

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenue Recognition:
Distribution Solutions
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 $1.9
billion in 2013, $1.6 billion in 2012 and $1.4 billion in 2011. 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 $18.6 billion in 2013,
$20.5 billion in 2012, and $18.6 billion in 2011. 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. For arrangements entered into prior to 2012, 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, we adopted amended accounting
guidance on a prospective basis for multiple-element arrangements entered into or materially modified on or after April 1,
2011. The amended guidance incorporates the use of a vendor's best estimate of selling price, if neither objective evidence nor
third party evidence of selling price exists, to allocate arrangement consideration and eliminates the use of the residual
method. Implementation of this new guidance did not have a material impact on reported net revenues as compared to net
revenues under previous guidance as the incorporation of the use of a vendor's best estimate of selling price and the
elimination of the residual method for the allocation of arrangement consideration did not materially change how we allocate
arrangement consideration to our various products and services or the amount and timing of reported revenues.
Technology Solutions
Revenues for our Technology Solutions segment are generated primarily by licensing software and software systems
(consisting of software, hardware and maintenance support), and providing claims processing, outsourcing and professional
services. Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual software
arrangements are recognized at the time of delivery or under the percentage-of-completion method based on the terms and
conditions in the contract. Contracts accounted for under the percentage-of-completion method are generally measured based
on the ratio of labor hours incurred to date to total estimated labor hours to be incurred. Changes in estimates to complete and
revisions in overall profit estimates on these contracts are charged to earnings in the period in which they are determined. We
accrue for contract losses if and when the current estimate of total contract costs exceeds total contract revenue.