McKesson 2015 Annual Report Download - page 74

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
The LIFO method was used to value approximately 73% and 67% of our inventories at March 31, 2015 and
2014. If we had used the FIFO method of inventory valuation, which approximates current replacement costs,
inventories would have been approximately $768 million and $431 million higher than the amounts reported at
March 31, 2015 and 2014, respectively. These amounts are equivalent to our LIFO reserves. Our LIFO valuation
amount includes both pharmaceutical and non-pharmaceutical products. In 2015, 2014 and 2013, we recognized
LIFO related expenses of $337 million, $311 million and $13 million in cost of sales within our consolidated
statements of operations. A LIFO expense is recognized when the net effect of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines and
shifts towards generic pharmaceuticals, including the effect of branded pharmaceutical products that have lost
market exclusivity. A LIFO credit is recognized when the net effect of price declines and shifts towards generic
pharmaceuticals exceeds the impact of price increases on branded pharmaceuticals and non-pharmaceutical
products held in inventory.
We believe that the average inventory costing method provides a reasonable estimation of the current cost of
replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. Due
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.
Shipping and Handling Costs: We include costs to warehouse, pick, pack and deliver inventory to our
customers in selling, distribution and administrative expenses.
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them
under the straight-line method at rates designed to distribute the cost of properties over estimated service lives
ranging from one to thirty years.
Goodwill: Goodwill is tested for impairment on an annual basis in the fourth quarter or more frequently if
indicators for potential impairment exist. 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 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
carrying value of the reporting unit is higher than its estimated fair value, the second step must be performed to
measure the amount of impairment loss. Under the second step, the implied fair value of goodwill is calculated in
a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any
unrecognized intangible assets, from the fair value of the reporting unit calculated in the first step of the
impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of
goodwill, an impairment charge is recorded for that excess.
To estimate the fair value of our reporting units, we use a combination of the market approach and the
income approach. Under the market approach, we estimate fair value by comparing the business to similar
businesses or guideline companies whose securities are actively traded in public markets. Under the income
approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a
terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected
rate of return. The discount rate used for cash flows reflects capital market conditions and the specific risks
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