McKesson 2014 Annual Report Download - page 45

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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The LIFO method was used to value approximately 67% and 80% of our inventories at March 31, 2014 and 2013. If we had
used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been
approximately $431 million and $120 million higher than the amounts reported at March 31, 2014 and 2013. These amounts are
equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. In
2014, 2013, and 2012, we recognized net LIFO expense of $311 million, $13 million and $11 million within our consolidated
statements of operations. A LIFO expense is recognized when the net effect of price increases on branded pharmaceuticals and
non-pharmaceutical products held in inventory exceeds the impact of price declines and shifts towards generic pharmaceuticals,
including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the
net effect of price declines and shifts towards generic pharmaceuticals exceeds the impact of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of replacing inventory
(i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Primarily due to historical net deflation
in our pharmaceutical inventories, pharmaceutical inventories at LIFO were $60 million higher than market as of March 31, 2013.
As a result, we recorded a LCM credit of $60 million and $16 million in 2014 and 2013 within our consolidated statements of
operations to adjust our LIFO inventories to market.
In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-
moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends
and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the
loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories
which are considered excess and obsolete, as a result of these reviews. These factors could make our estimates of inventory
valuation differ from actual results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that
once control is obtained of a business, 100% of the assets acquired and liabilities assumed, including amounts attributed to
noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price
over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related
restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible
assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each
asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors
associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or
other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset
also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be
considered to have indefinite useful lives. Refer to Financial Note 2, “Business Combinations,” to the consolidated financial
statements appearing in this Annual Report on Form 10-K for additional information regarding our acquisitions.
Goodwill and Intangible Assets: As a result of acquiring businesses, we have $9,927 million and $6,405 million of goodwill
at March 31, 2014 and 2013 and $5,022 million and $2,270 million of intangible assets, net at March 31, 2014 and 2013. We
maintain goodwill assets on our books unless the assets are considered to be impaired. We perform an impairment test on goodwill
balances annually in the fourth quarter or more frequently if indicators for potential impairment exist. Indicators that are considered
include significant changes in performance relative to expected operating results, significant changes in the use of the assets,
significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or market capitalization
for a sustained period of time.
Impairment testing is conducted at the reporting unit level, which is generally defined as a component — one level below our
Distribution Solutions and Technology Solutions operating segments, for which discrete financial information is available and
segment management regularly reviews the operating results of that reporting unit. Components that have essentially similar
operations, products, services, customers and operating margin are aggregated as a single reporting unit. Management judgment
is involved in determining which components may be combined and changes in these combinations could affect the outcome of
the testing.