McKesson 2014 Annual Report Download - page 47

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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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, 2014 and 2013, supplier
reserves were $181 million and $164 million. The ultimate outcome of any outstanding claims may be different from our estimate.
All of the supplier reserves at March 31, 2014 and 2013 pertain to our Distribution Solutions segment. An increase or decrease
in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2014 would result in an increase or decrease in the
cost of sales of approximately $22 million in 2014. The selected 0.1% hypothetical change does not reflect what could be considered
the best or worst case scenarios.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated
current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant
judgments and estimates are required in determining the consolidated income tax provision and in evaluating income tax
uncertainties. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and
expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence
including our past operating results, the existence of cumulative net operating losses in the most recent years and our forecast of
future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state
and foreign pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent
with the plans and estimates we use to manage the underlying businesses. We had deferred income tax assets (net of valuation
allowances) of $1,332 million and $1,247 million at March 31, 2014 and 2013 and deferred tax liabilities of $4,133 million and
$3,114 million. Deferred tax assets primarily consist of timing differences on our compensation and benefit related accruals and
net operating loss and credit carryforwards. Deferred tax liabilities primarily consist of basis differences for inventory valuation
(including inventory valued at LIFO) and intangible assets. We established valuation allowances of $270 million and $118 million
for 2014 and 2013 against certain deferred tax assets, which primarily relate to federal, state and foreign net operating loss
carryforwards for which the ultimate realization of future benefits is uncertain. Changes in tax laws and rates could also affect
recorded deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO, our
cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex tax regulations
across multiple global jurisdictions where we conduct our operations. We recognize liabilities for tax and related interest for issues
in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest
will be due. These tax liabilities and related interest are reflected net of the impact of related tax loss carryforwards, as such tax
loss carryforwards will be applied against these tax liabilities and will reduce the amount of cash tax payments due upon the
eventual settlement with the tax authorities. These estimates may change due to changing facts and circumstances; however, due
to the complexity of these uncertainties, the ultimate resolution may result in a settlement that differs from our current estimate
of tax liabilities and related interest. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an
additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate
settlement, a reduction to income tax expense may be recognized.
If our assumptions and estimates described above were to change, an increase/decrease of 1% in our effective tax rate as
applied to income from continuing operations would have increased/decreased tax expense by approximately $21 million, or $0.09
per diluted share, for 2014.
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.