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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
cost of inventories held in foreign locations is based on weighted average purchase prices using the first-in, first-
out method (“FIFO”). Technology Solutions segment inventories consist of computer hardware with cost
generally determined by the standard cost method, which approximates average cost. Rebates, cash discounts,
and other incentives received from vendors are recognized within cost of sales upon the sale of the related
inventory.
The LIFO method was used to value approximately 74% and 73% of our inventories at March 31, 2016 and
2015. If we had used the FIFO method of inventory valuation, which approximates current replacement costs,
inventories would have been approximately $1,012 million and $768 million higher than the amounts reported at
March 31, 2016 and 2015, respectively. These amounts are equivalent to our LIFO reserves. Our LIFO valuation
amount includes both pharmaceutical and non-pharmaceutical products. In 2016, 2015 and 2014, we recognized
LIFO related expenses of $244 million, $337 million and $311 million in cost of sales within our consolidated
statements of operations. A LIFO expense is recognized when the net effect of price increases on pharmaceutical
and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of
branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net
effect of price declines exceeds the impact of price increases on pharmaceutical 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, 2016 and
2015, inventories at LIFO did not exceed market.
Shipping and Handling Costs: We include costs to pack and deliver inventory to our customers in selling,
distribution and administrative expenses. Shipping and handling costs of $789 million, $819 million,
$535 million were included in our selling, distribution and administrative expenses in 2016, 2015 and 2014.
Property, Plant and Equipment: We state our property, plant and equipment (“PPE”) at cost and depreciate
them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives
ranging from one to thirty years. When certain events or changes in operating conditions occur, an impairment
assessment may be performed on the recoverability of the carrying amounts.
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.
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