McKesson 2015 Annual Report Download - page 76

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to
a limited number of large customers who warehouse their own product. We order bulk product from the
manufacturer, receive and process the product primarily through our central distribution facility and deliver the
bulk product (generally in the same form as received from the manufacturer) directly to our customers’
warehouses. We also record revenues for direct store deliveries from most of these same customers. Direct store
deliveries are shipments from the manufacturer to our customers of a limited category of products that require
special handling. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and
possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of
loss for collection from customers as well as delivery or return of the product, are responsible for fulfillment and
other customer service requirements, or the transactions have several but not all of these indicators.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a
combination of various products and services. Revenue from a multiple-element arrangement 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 vendor-specific objective
evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”), if VSOE of selling price is not
available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is available.
Technology Solutions
Revenues for our Technology Solutions segment are generated primarily by licensing software and software
systems (consisting of software, hardware and maintenance support), providing software as a service or SaaS-
based solutions and providing claims processing, outsourcing and professional services. Revenue for this
segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements.
Perpetual software arrangements are recognized at the time of delivery or under the percentage-of-completion
method if the arrangements require significant production, modification or customization of the software.
Contracts accounted for under the percentage-of-completion method are generally measured based on the ratio of
labor hours incurred to date to total estimated labor hours to be incurred. Changes in estimates to complete and
revisions in overall profit estimates on these contracts are charged to earnings in the period in which they are
determined. We accrue for contract losses if and when the current estimate of total contract costs exceeds total
contract revenue.
Revenue from time-based software license agreements is recognized ratably over the term of the agreement.
Software implementation fees are recognized as the work is performed or under the percentage-of-completion
method. Maintenance and support agreements are marketed under annual or multi-year agreements and are
recognized ratably over the period covered by the agreements. Hardware revenues are generally recognized upon
delivery.
SaaS-based subscription, content and transaction processing fees are generally marketed under annual and
multi-year agreements and are recognized ratably over the contracted terms beginning on the service start date
for fixed fee arrangements and recognized as transactions are performed beginning on the service start date for
per-transaction fee arrangements. Remote processing service fees are recognized monthly as the service is
performed. Outsourcing service revenues are recognized as the service is performed.
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
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