McKesson 2014 Annual Report Download - page 44

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
41
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were
uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current
period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact
on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of
our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting
Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty
inherent in such estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers
who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or
their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of
pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based
on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an
allowance in our consolidated financial statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes portfolio and specific reserves, the Company
reviews accounts receivable aging, industry trends, customer financial strength, credit standing, historical write-off trends and
payment history to assess the probability of collection. If the frequency and severity of customer defaults due to our customers’
financial condition or general economic conditions change, our allowance for uncollectible accounts may require adjustment. As
a result, we continuously monitor outstanding receivables and other customer financing and adjust allowances for accounts where
collection may be in doubt. During 2014, sales to our ten largest customers accounted for approximately 48% of our total
consolidated revenues. Sales to our largest customer, CVS Caremark Corporation ("CVS"), accounted for approximately 16% of
our total consolidated revenues. At March 31, 2014, trade accounts receivable from our ten largest customers were approximately
32% of total trade accounts receivable. Accounts receivable from CVS were approximately 12% of total trade accounts receivable.
As a result, our sales and credit concentration is significant. A default in payments, a material reduction in purchases from these,
or any other large customer or the loss of a large customer could have a material adverse impact on our financial condition, results
of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and economic, business and market trends. In addition,
reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We believe the reserves maintained
and expenses recorded in 2014 are appropriate and consistent with historical methodologies employed. At this time, we are not
aware of any internal process or customer issues that might lead to a significant increase in the foreseeable future in our allowance
for doubtful accounts as a percentage of net revenue.
At March 31, 2014, trade and notes receivables were $12,755 million prior to allowances of $113 million. In 2014, 2013 and
2012 our provision for bad debts was $38 million, $28 million and $30 million. At March 31, 2014 and 2013, the allowance as a
percentage of trade and notes receivables was 0.9% and 1.4%. An increase or decrease of a hypothetical 0.1% in the 2014 allowance
as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately
$13 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report
on Form 10-K.
Inventories: We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution Solutions segment
consist of merchandise held for resale. For our Distribution Solutions segment, the majority of the cost of domestic inventories
is determined using the LIFO method. The majority of the cost of inventories held in foreign locations is based on weighted
average purchase price using the first-in, first-out method (“FIFO”). Technology Solutions segment inventories consist of computer
hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts
and other incentives received from vendors relating to the purchase or distribution of inventory are considered as product discounts
and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold. Total inventories were
$13.3 billion and $10.3 billion at March 31, 2014 and 2013.