McKesson 2014 Annual Report Download - page 70

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
67
Derivative Financial Instruments: Derivative financial instruments are used principally in the management of foreign currency
and interest rate exposures and are recorded on the consolidated balance sheets at fair value. If a derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized
as a charge or credit to earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative 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. The cumulative changes
in fair value are reclassed to the consolidated statements of operations when the hedged item affects earnings. We periodically
evaluate hedge effectiveness, and ineffective portions of changes in the fair value of cash flow hedges are recognized as a charge
or credit to earnings. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period
with the change included in earnings.
Comprehensive Income: Comprehensive income consists of two components, net income and other comprehensive income.
Other comprehensive income refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of
shareholders’ equity but are excluded from net income. Our other comprehensive income consists of foreign currency translation
adjustments from those subsidiaries where the local currency is the functional currency, unrealized gains and losses on cash flow
hedges, as well as unrealized gains and losses on retirement-related benefit plans.
Noncontrolling Interests: Noncontrolling interests primarily represent the portion of Celesio’s profit or loss, net assets and
comprehensive income that is not allocable to McKesson Corporation.
Share-Based Compensation: We account for all share-based compensation transactions using a fair-value based measurement
method. The share-based compensation expense, for the portion of the awards that is ultimately expected to vest, is recognized
on a straight-line basis over the requisite service period. The compensation expense recognized has been classified in the
consolidated statements of operations or capitalized on the consolidated balance sheets in the same manner as cash compensation
paid to our employees.
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.
Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that
the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the
likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed
above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent
on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such
factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low
estimate.