McKesson 2016 Annual Report Download - page 58

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 $1,272 million and $1,189 million at March 31, 2016 and 2015 and deferred tax
liabilities of $3,947 million and $3,791 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 $267 million and $229 million for 2016 and 2015 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.
An increase or decrease of a hypothetical 1% in our 2016 effective tax rate as applied to income from
continuing operations would result in an increase or decrease in the provision for income taxes of approximately
$33 million for 2016.
Loss Contingencies: We are subject to various claims, including claims with customers and vendors,
pending and potential legal actions for damages, investigations relating to governmental laws and regulations and
other matters arising out of the normal conduct of our business. When a loss is considered probable and
reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the
likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a
meaningful estimate of the loss or a range of loss may not be practicable based on the information available and
the potential effect of future events and decisions by third parties that will determine the ultimate resolution of
the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which
time relevant developments and new information must be reevaluated at least quarterly to determine both the
likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss
is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is
reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at
least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable
estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate
of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or
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