McKesson 2013 Annual Report Download - page 69

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McKESSON CORPORATION
FINANCIAL NOTES (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 than our estimate. All of the supplier reserves at March 31, 2013 and 2012 pertain to our
Distribution Solutions segment.
Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial
statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position
will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical
merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being
realized upon effective settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations that
are considered to be permanently reinvested.
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be their
functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at year-end
exchange rates and revenues and expenses are translated at average exchange rates during the year. Currency translation
adjustments for the year are included in other comprehensive income or loss in the statements of consolidated comprehensive
income, and the cumulative effect is included in the stockholders' equity section of the consolidated balance sheets. When we
sell all or a portion of an international entity, the related pro rata share of the cumulative currency translation adjustment is
removed from stockholders' equity and is included in the gain or loss on sale in the consolidated statements of operations.
Realized gains and losses from currency exchange transactions are recorded in operating expenses in the consolidated
statements of operations and were not material to our consolidated results of operations in 2013, 2012 or 2011.
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of foreign
currency and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a derivative is
designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized as a charge or credit to earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are included in other comprehensive income or loss in the statements of
consolidated comprehensive income, and the cumulative effect is included in the stockholders' equity section of the
consolidated balance sheets. The cumulative changes in fair value are reclassed to the consolidated statements of operations
when the hedged item affects earnings. We periodically evaluate hedge effectiveness, and ineffective portions of changes in
the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not designated as
hedges are marked-to-market at the end of each accounting period with the change included in earnings.
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. The compensation expense recognized has been
classified in the consolidated statements of operations or capitalized on the consolidated balance sheets in the same manner as
cash compensation paid to our employees.
Loss Contingencies: We are subject to various claims, other pending and potential legal actions for damages,
investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our
business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best
estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to
predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information
available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of
the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant
developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss
and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate
cannot be made, disclosure of the proceeding is provided.