McKesson 2014 Annual Report Download - page 69

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
66
We also offer certain products on an application service provider basis, making our software functionality available on a
remote hosting basis from our data centers. The data centers provide system and administrative support, as well as hosting services.
Revenue on products sold on an application service provider basis is recognized on a monthly basis over the term of the contract
beginning on the service start date of products hosted.
This segment engages in multiple-element arrangements, which may contain any combination of software, hardware,
implementation or consulting services, or maintenance services. For multiple element arrangements that do not include software,
revenue 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 VSOE of selling price if available,
TPE, if VSOE of selling price is not available, or ESP if neither VSOE of selling price nor TPE is available. For multiple-element
arrangements accounted for in accordance with specific software accounting guidance when some elements are delivered prior to
others in an arrangement and VSOE of fair value exists for the undelivered elements, revenue for the delivered elements is recognized
upon delivery of such items. The segment establishes VSOE for hardware and implementation and consulting services based on
the price charged when sold separately, and for maintenance services, based on renewal rates offered to customers. Revenue for
the software element is recognized under the residual method only when fair value has been established for all of the undelivered
elements in an arrangement. If fair value cannot be established for any undelivered element, all of the arrangement’s revenue is
deferred until the delivery of the last element or until the fair value of the undelivered element is determinable. For multiple-
element arrangements with both software elements and nonsoftware elements, arrangement consideration is allocated between the
software elements as a whole and nonsoftware elements. The segment then further allocates consideration to the individual elements
within the software group, and revenue is recognized for all elements under the applicable accounting guidance and our policies
described above.
Supplier Incentives: Fees for service and other incentives received from suppliers, relating to the purchase or distribution of
inventory, are generally reported as a reduction to cost of goods sold. We consider these fees and other incentives to represent
product discounts and as a result, the amounts are recorded as a reduction of product cost and are recognized through cost of goods
sold upon the sale of the related inventory.
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 than our estimate.
All of the supplier reserves at March 31, 2014 and 2013 pertain to our Distribution Solutions segment.
Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and
the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount
recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective
settlements. Deferred taxes are not provided on undistributed earnings of our foreign operations that are considered to be
permanently reinvested.
Foreign Currency Translation: Our international subsidiaries generally consider their local currency to be their functional
currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at year-end exchange rates and
revenues and expenses are translated at average exchange rates during the year. Currency translation adjustments for the year are
included in other comprehensive income or loss in the statements of consolidated comprehensive income, and the cumulative
effect is included in the stockholders’ equity section of the consolidated balance sheets. When we sell all or substantially all of
an international entity, the related share of the cumulative currency translation adjustment is removed from stockholders’ equity
and is included in the gain or loss on sale in the consolidated statements of operations. Realized gains and losses from currency
exchange transactions are recorded in operating expenses in the consolidated statements of operations and were not material to
our consolidated results of operations in 2014, 2013 or 2012.