McKesson 2014 Annual Report Download - page 104

Download and view the complete annual report

Please find page 104 of the 2014 McKesson annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 133

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
101
Assets Measured at Fair Value on a Nonrecurring Basis
We measure certain long-lived assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily
impaired. If the cost of an investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment,
general market conditions, the duration and extent to which the fair value is less than cost and the financial outlook for the industry
and location. An impairment charge is recorded when the cost of the asset exceeds its fair value and this condition is determined
to be other-than-temporary.
Fiscal 2014
Impairment of Our International Technology Business:
As discussed in Financial Note 3, “Discontinued Operations,” during 2014 we recorded an $80 million non-cash pre-tax and
after-tax impairment charge to reduce the carrying value of our International Technology business to its estimated fair value, less
costs to sell. The impairment charge was primarily the result of the terms of the preliminary purchase offers received for this
business during 2014. Accordingly, the fair value measurement is classified as Level 3 in the fair value hierarchy.
Fiscal 2013
For the year ended March 31, 2013, assets measured at fair value on a nonrecurring basis consisted of our investment in
Nadro and goodwill for a reporting unit within our Technology Solutions segment. Both of these assets were measured using
Level 3 inputs.
Impairment of an Equity Investment:
As discussed in Financial Note 5, “Impairment and Sale of an Equity Investment,” during 2013 we committed to a plan to
sell our investment in Nadro and in the fourth quarter of 2013 recorded an impairment charge of $191 million to reduce the carrying
value to fair value. Fair value of our investment in Nadro was determined using income and market valuation approaches. Under
the income approach, we used a discounted cash flow (“DCF”) analysis based on estimated future results. This valuation approach
is considered a Level 3 fair value measurement due to the use of significant unobservable inputs related to the timing and amount
of future cash flows based on projections of revenues and operating costs and discounting those cash flows to their present value.
The key inputs and assumptions of the DCF method are the projected cash flows, the terminal value of the business and the discount
rate. The key inputs for the market valuation approach were Nadro’s fiscal 2012 unaudited earnings before interest, depreciation
and amortization (“EBITDA”) and an EBITDA multiple based on similar guideline U.S. pharmaceutical companies whose securities
are actively traded in public markets. This valuation approach is considered a Level 3 fair value measurement. Finally, we evaluated
the fair values under both valuation methods and concluded on an average of the two methods. In September 2013, we completed
the sale of our 49% interest in Nadro which resulted in no material gain or loss.
Goodwill:
As discussed in Financial Note 4, “Asset Impairments and Product Alignment Charges,” in 2013 we recorded a goodwill
impairment charge of $36 million in one of Technology Solutions segment’s reporting units. The impairment charge was primarily
the result of a significant decrease in estimated revenues for a software product. As required under step two goodwill impairment
testing, we determined the fair value of the reporting unit and the fair value of the reporting units’ net assets, excluding goodwill
but including any unrecognized intangible assets. The implied fair value of goodwill was then calculated on a residual basis – that
is, by subtracting the sum of the fair value of the net assets from the fair value of the reporting unit. The impairment was equal
to the carrying amount of goodwill.
Fair value assessment of the reporting unit as well as the reporting unit’s net assets are considered a Level 3 measurement due
to the significance of unobservable inputs developed using company specific information. We used the market approach and
income approach (DCF model) to determine the fair value of the reporting unit and a DCF model to determine the fair value of
the reporting unit’s most significant assets – intangibles. Additionally, fair values reflect a risk premium to the discount rate due
to the uncertainty in forecasting future cash flows.