McKesson 2016 Annual Report Download - page 57

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
companies and for the income approach, the required rate of return used in the discounted cash flow method,
which reflects capital market conditions and the specific risks associated with the business. Other estimates
inherent in both the market and income approaches include long-term growth rates, projected revenues and
earnings and cash flow forecasts for the reporting units.
Estimates of fair value result from a complex series of judgments about future events and uncertainties and
rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair
value may materially impact our results of operations. The valuations are based on information available as of the
impairment review date and are based on expectations and assumptions that have been deemed reasonable by
management. Any changes in key assumptions, including failure to meet business plans, a further deterioration in
the market or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates
and could potentially result in an impairment charge. In 2016, 2015 and 2014, we concluded that there were no
impairments of goodwill as the fair value of each reporting unit exceeded its carrying value.
Currently, all of our intangible assets are subject to amortization and are amortized based on the pattern of
their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to
thirty-eight years. We review intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on
the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its
eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the
asset over its fair value. Assumptions and estimates about future values and remaining useful lives of our
purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such as changes in our business
strategy and our internal forecasts. There were no material impairments of intangibles in 2016, 2015 or 2014
within our continuing operations. Our ongoing consideration of all the factors described previously could result
in impairment charges in the future, which could adversely affect our net income.
Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve
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, 2016 and 2015, supplier reserves were $144 million
and $167 million. The final outcome of any outstanding claims may differ from our estimate. All of the supplier
reserves at March 31, 2016 and 2015 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, 2016 would result in an increase or
decrease in the cost of sales of approximately $29 million in 2016. 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
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