McKesson 2014 Annual Report Download - page 46

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
43
The first step in goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. This
step may be performed utilizing either a qualitative or quantitative assessment. If the carrying value of the reporting unit is lower
than its estimated fair value, no further evaluation is necessary. If the carrying value of the reporting unit is higher than its estimated
fair value, the second step must be performed to measure the amount of impairment loss. Under the second step, the implied fair
value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting
unit, including any unrecognized intangibles assets, from the fair value of the reporting unit calculated in the first step of the
impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment
charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the income approach.
Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose
securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in which cash
flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value
using an appropriate expected rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market
capitalization as further corroboration of the fair values.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the
market approach include the selection of appropriate guideline companies, the determination of market value multiples for both
the guideline companies and the reporting unit, the determination of applicable premiums and discounts based on any differences
in marketability between the business and the guideline companies and for the income approach, the required rate of return used
in the discounted cash flow method, which reflects capital market conditions and the specific risks associated with the business.
Other estimates inherent in both the market and income approaches include long-term growth rates, projected revenues and earnings
and cash flow forecasts for the reporting units.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on
estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact our
results of operations. The valuations are based on information available as of the impairment review date and are based on
expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including
failure to meet business plans, a further deterioration in the market or other unanticipated events and circumstances, may affect
the accuracy or validity of such estimates and could potentially result in an impairment charge. In 2014 and 2012, we concluded
that there were no impairments of goodwill as the fair value of each reporting unit exceeded its carrying value. In 2013, we
recorded a goodwill impairment charge of $36 million in our Technology Solutions segment. For our newly-acquired Celesio
operations, we determined the preliminary fair value of the assets acquired and liabilities assumed using various methods, including
an overall discounted cash flow analysis performed for all of Celesio’s operations. As of March 31, 2014, the fair value assignments
were preliminary and could change significantly upon finalization of the fair value assignments.
Currently, all of our intangible assets are subject to amortization and are amortized based on the pattern of their economic
consumption or on a over their estimated useful lives, ranging from one to thirty-eight years. We review
intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may
not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash
flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of
the carrying value of the asset over its fair value. Assumptions and estimates about future values and remaining useful lives of
our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors
such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
There were no material impairments of intangibles in 2014, 2013 or 2012. Our ongoing consideration of all the factors described
previously could result in impairment charges in the future, which could adversely affect our net income.