McKesson 2014 Annual Report Download - page 67

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Shipping and Handling Costs: We include costs to warehouse, pick, pack and deliver inventory to our customers in selling,
distribution and administrative expenses.
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them under the straight-
line method at rates designed to distribute the cost of properties over estimated service lives ranging from one to thirty years.
Goodwill: Goodwill is tested for impairment on an annual basis in the fourth quarter or more frequently if indicators for
potential impairment exist. 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 unit. Components that have
essentially similar operations, products, services, customers and operating margins are aggregated as a single reporting unit.
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 intangible 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. The discount rate used for cash flows reflects capital market conditions and the
specific risks associated with the business. In addition, we compare the aggregate of the reporting units’ fair value to the Company’s
market capitalization as a further corroboration of the fair values. The testing requires a complex series of assumptions and
judgment by management in projecting future operating results, selecting guideline companies for comparisons and assessing
risks. The use of alternative assumptions and estimates could affect the fair values and change the impairment determinations.
Intangible Assets: Currently all of our intangible assets are subject to amortization and are amortized based on the pattern of
their economic consumption or on a straight-line basis 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 market value.
Capitalized Software Held for Sale: Development costs for software held for sale, which primarily pertain to our Technology
Solutions segment, are capitalized once a project has reached the point of technological feasibility. Completed projects are amortized
after reaching the point of general availability using the straight-line method based on an estimated useful life of approximately
three years. At each balance sheet date, or earlier if an indicator of an impairment exists, we evaluate the recoverability of
unamortized capitalized software costs based on estimated future undiscounted revenues net of estimated related costs over the
remaining amortization period.
Capitalized Software Held for Internal Use: We capitalize costs of software held for internal use during the application
development stage of a project and amortize those costs over their estimated useful lives ranging from one to ten years. As of
March 31, 2014 and 2013, capitalized software held for internal use was $514 million and $465 million, net of accumulated
amortization of $1,004 million and $1,011 million, and was included in other assets in the consolidated balance sheets.
Insurance Programs: Under our insurance programs, we seek to obtain coverage for catastrophic exposures as well as those
risks required to be insured by law or contract. It is our policy to retain a significant portion of certain losses primarily related to
workers’ compensation and comprehensive general, product and vehicle liability. Provisions for losses expected under these
programs are recorded based upon our estimate of the aggregate liability for claims incurred as well as for claims incurred but not
yet reported. Such estimates utilize certain actuarial assumptions followed in the insurance industry.