McKesson 2016 Annual Report Download - page 56

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 associated with 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 $9,786 million and
$9,817 million of goodwill at March 31, 2016 and 2015 and $3,021 million and $3,441 million of intangible
assets, net at March 31, 2016 and 2015. 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.
Goodwill 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
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 intangibles 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. In addition, we compare the aggregate of the reporting units’ fair values to our market
capitalization as further corroboration of the fair values.
Some of the more significant estimates and assumptions inherent in the goodwill impairment estimation
process using the market approach include the selection of appropriate guideline companies, the determination of
market value multiples for both the guideline companies and the reporting unit, the determination of applicable
premiums and discounts based on any differences in marketability between the business and the guideline
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