McKesson 2015 Annual Report Download - page 55

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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, 2015 and 2014, supplier reserves were $167 million
and $181 million. The ultimate outcome of any outstanding claims may be different from our estimate. All of the
supplier reserves at March 31, 2015 and 2014 pertain to our Distribution Solutions segment. An increase or
decrease in the supplier reserve as a hypothetical 0.1% of trade payables at March 31, 2015 would result in an
increase or decrease in the cost of sales of approximately $25 million in 2015. The selected 0.1% hypothetical
change does not reflect what could be considered the best or worst case scenarios.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best
assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and
numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated
income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each
quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition
of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available
positive and negative evidence including our past operating results, the existence of cumulative net operating
losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we
develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future taxable income and are consistent with the
plans and estimates we use to manage the underlying businesses. We had deferred income tax assets (net of
valuation allowances) of $1,189 million and $1,286 million at March 31, 2015 and 2014 and deferred tax
liabilities of $3,791 million and $4,075 million. Deferred tax assets primarily consist of timing differences on our
compensation and benefit related accruals and net operating loss and credit carryforwards. Deferred tax liabilities
primarily consist of basis differences for inventory valuation (including inventory valued at LIFO) and intangible
assets. We established valuation allowances of $229 million and $200 million for 2015 and 2014 against certain
deferred tax assets, which primarily relate to state and foreign net operating loss carryforwards for which the
ultimate realization of future benefits is uncertain. Changes in tax laws and rates could also affect recorded
deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO,
our cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of
complex tax regulations across multiple global jurisdictions where we conduct our operations. We recognize
liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes and related interest will be due. These tax liabilities and related
interest are reflected net of the impact of related tax loss carryforwards, as such tax loss carryforwards will be
applied against these tax liabilities and will reduce the amount of cash tax payments due upon the eventual
settlement with the tax authorities. These estimates may change due to changing facts and circumstances;
however, due to the complexity of these uncertainties, the ultimate resolution may result in a settlement that
differs from our current estimate of tax liabilities and related interest. If our current estimate of tax and interest
liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our
current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax
expense may be recognized.
50