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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
to cumulative net price deflation from 2005 to 2013, we had a lower-of-cost or market (“LCM”) reserve of
$60 million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to market. During 2014, the
LCM reserve of $60 million was released, resulting in an increase in gross profit. As of March 31, 2014 and
2015, inventories at LIFO did not exceed market.
In determining whether inventory valuation issues exist, we consider various factors including estimated
quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and
forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction
of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that
could affect the value of our inventories. We write down inventories which are considered excess and obsolete as
a result of these reviews. These factors could make our estimates of inventory valuation differ from actual
results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting,
which requires that once control is obtained of a business, 100% of the assets acquired and liabilities assumed,
including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities
assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of
the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying
an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more
significant estimates and assumptions inherent in the income method or other methods include the amount and
timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash
flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an
intangible asset also requires judgment as different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives. Refer to Financial Note 2, “Business
Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for
additional information regarding our acquisitions.
Goodwill and Intangible Assets: As a result of acquiring businesses, we have $9,817 million and
$9,927 million of goodwill at March 31, 2015 and 2014 and $3,441 million and $4,871 million of intangible
assets, net at March 31, 2015 and 2014. We maintain goodwill assets on our books unless the assets are
considered to be impaired. We perform an impairment test on goodwill balances annually in the fourth quarter or
more frequently if indicators for potential impairment exist. Indicators that are considered include significant
changes in performance relative to expected operating results, significant changes in the use of the assets,
significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or
market capitalization for a sustained period of time.
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
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
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