McKesson 2013 Annual Report Download - page 68

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Hardware revenues are generally recognized upon delivery. Revenue from multi-year software license agreements is
recognized ratably over the term of the agreement. Software implementation fees are recognized as the work is performed or
under the percentage-of-completion method. Maintenance and support agreements are marketed under annual or multi-year
agreements and are recognized ratably over the period covered by the agreements. Subscription, content and transaction
processing fees are generally marketed under annual and multi-year agreements and are recognized ratably over the
contracted terms beginning on the service start date for fixed fee arrangements and recognized as transactions are performed
beginning on the service start date for per-transaction fee arrangements. Remote processing service fees are recognized
monthly as the service is performed. Outsourcing service revenues are recognized as the service is performed.
We also offer certain products on an application service provider basis, making our software functionality available on a
remote hosting basis from our data centers. The data centers provide system and administrative support, as well as hosting
services. Revenue on products sold on an application service provider basis is recognized on a monthly basis over the term of
the contract beginning on the service start date of products hosted.
This segment also engages in multiple-element arrangements, which may contain any combination of software,
hardware, implementation or consulting services, or maintenance services. For arrangements entered into prior to 2012, when
some elements are delivered prior to others in an arrangement and vendor-specific objective evidence of fair value (“VSOE”)
exists for the undelivered elements, revenue for the delivered elements is recognized upon delivery of such items. The
segment establishes VSOE for hardware and implementation and consulting services based on the price charged when sold
separately, and for maintenance services, based on renewal rates offered to customers. Revenue for the software element is
recognized under the residual method only when fair value has been established for all of the undelivered elements in an
arrangement. If fair value cannot be established for any undelivered element, all of the arrangement's revenue is deferred until
the delivery of the last element or until the fair value of the undelivered element is determinable. Effective April 1, 2011, we
adopted amended revenue recognition guidance incorporating the use of a vendor's best estimate of selling price, if neither
vendor specific objective evidence nor third party evidence of selling price exists, to allocate arrangement consideration and
eliminating the use of the residual method for non-software components. Also, effective April 1, 2011, we adopted the revised
revenue recognition guidance which removed from the scope of software revenue recognition guidance tangible products
containing software components and non-software components that function together to deliver the product's essential
functionality. This amended accounting guidance was applied prospectively for all arrangements entered into after April 1,
2011 or materially modified after that date. 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.
Our Technology Solutions segment also includes revenues from disease management programs provided to various
states' Medicaid programs. These service contracts include provisions for achieving certain cost-savings and clinical targets. If
the targets are not met for certain of these contracts, a portion, or all, of the revenue must be refunded to the customer. We
recognize revenue during the term of the contract by assessing actual performance against contractual targets and then
determining the amount the customer would be legally obligated to pay if the contract terminated as of the measurement date.
These assessments include estimates of medical claims and other data in accordance with the contract methodology. Because
complete data is unavailable until six to nine months after the measurement period, there is generally a significant time delay
between recording the accrual and the final settlement of the contract. If data is insufficient to assess performance or we have
not met the targets, we defer recognition of the revenue. We generally have been successful in achieving performance targets
under these agreements. As of March 31, 2013 and 2012, amounts deferred related to these types of contracts were not
material.
Supplier Incentives: Fees for service and other incentives received from suppliers, relating to the purchase or distribution
of inventory, are generally reported as a reduction to cost of goods sold. We consider these fees and other incentives to
represent product discounts and as a result, the amounts are recorded as a reduction of product cost and are recognized
through cost of goods sold upon the sale of the related inventory.