McKesson 2014 Annual Report Download - page 68

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
65
Revenue Recognition:
Distribution Solutions
Revenues for our Distribution Solutions segment are recognized when product is delivered and title passes to the customer
or when services have been rendered and there are no further obligations to the customer.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy generally allows
customers to return products only if they can be resold for value or returned to suppliers for full credit. Sales returns are accrued
based on estimates at the time of sale to the customer. Sales returns from customers were approximately $1.9 billion in 2014,
$1.9 billion in 2013 and $1.6 billion in 2012. Taxes collected from customers and remitted to governmental authorities are
presented on a net basis; that is, they are excluded from revenues.
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to a limited number
of large customers who warehouse their own product. We order bulk product from the manufacturer, receive and process the
product primarily through our central distribution facility and deliver the bulk product (generally in the same form as received
from the manufacturer) directly to our customers’ warehouses. We also record revenues for direct store deliveries from most of
these same customers. Direct store deliveries are shipments from the manufacturer to our customers of a limited category of
products that require special handling. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and possession of the
inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of loss for collection from customers
as well as delivery or return of the product, are responsible for fulfillment and other customer service requirements, or the transactions
have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a combination of
various products and services. Revenue from a multiple element arrangement is allocated to the separate elements based on their
relative selling price and recognized in accordance with the revenue recognition criteria applicable to each element. Relative selling
price is determined based on vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence
(“TPE”), if VSOE of selling price is not available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is
available.
Technology Solutions
Revenues for our Technology Solutions segment are generated primarily by licensing software and software systems (consisting
of software, hardware and maintenance support), and providing claims processing, outsourcing and professional services. Software
and hardware are included in product revenue, while maintenance support among other services are included in service revenue.
Revenue for this segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements. Perpetual software
arrangements are recognized at the time of delivery or under the percentage-of-completion method if the arrangements require
significant production, modification or customization of the software. Contracts accounted for under the percentage-of-completion
method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hours to be incurred.
Changes in estimates to complete and revisions in overall profit estimates on these contracts are charged to earnings in the period
in which they are determined. We accrue for contract losses if and when the current estimate of total contract costs exceeds total
contract revenue.
Revenue from time-based software license agreements is recognized ratably over the term of the agreement. Software
implementation fees are recognized as the work is performed or under the percentage-of-completion method. Maintenance and
support agreements are marketed under annual or multi-year agreements and are recognized ratably over the period covered by
the agreements. Hardware revenues are generally recognized upon delivery.
Subscription, content and transaction processing fees are generally marketed under annual and multi-year agreements and are
recognized ratably over the contracted terms beginning on the service start date for fixed fee arrangements and recognized as
transactions are performed beginning on the service start date for per-transaction fee arrangements. Remote processing service
fees are recognized monthly as the service is performed. Outsourcing service revenues are recognized as the service is performed.